-----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, VRk9Oz2rtk2AJdqLi7DnORDuYGwnmvMtg2QbXZw3ArcxMOab2GV6WdRQP5QFN7HN NBgb5H2z031E02zR/0thYQ== 0001021408-01-511473.txt : 20020413 0001021408-01-511473.hdr.sgml : 20020413 ACCESSION NUMBER: 0001021408-01-511473 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20011031 FILED AS OF DATE: 20011217 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CERTICOM CORP CENTRAL INDEX KEY: 0001075710 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-COMPUTER PROGRAMMING SERVICES [7371] IRS NUMBER: 000000000 STATE OF INCORPORATION: A6 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-15010 FILM NUMBER: 1815992 BUSINESS ADDRESS: STREET 1: 200 MATHESON BOULEVARD WEST CITY: MISSISSAUGA STATE: A6 ZIP: 00000 BUSINESS PHONE: 9055074220 MAIL ADDRESS: STATE: A6 ZIP: 00000 10-Q 1 d10q.txt FORM 10-Q FOR 10/31/01 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 October 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 - ----------------------- ---------------------- (Province or other (I.R.S. Employer jurisdiction of Identification No.) incorporation) 25821 Industrial Boulevard Hayward, California 94545 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (510) 780-5400 ----------------------------------------- (Registrant's telephone number, including area code) 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 November 30, 2001, there were 31,429,557 of registrant's common shares, no par value, 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 ......................................... 13 Factors That May Affect Operating Results ......................... 22 Item 3. Quantitative and Qualitative Disclosure About Market Risk ......... 33 PART II. OTHER INFORMATION Item 1. Legal Proceedings ................................................. 34 Item 4. Submission of matters to a vote of Security Holders ............... 34 Item 6. Exhibits and Reports on Form 8-K .................................. 36 Signatures ................................................................ 37
Unless otherwise indicated, all information in this Form 10-Q gives effect to the 2-for-1 split of the Company's outstanding common shares, which occurred on July 12, 2000. Certicom(R) and Security Builder(R) are our registered trademarks, and certicom encryption(TM), SSL Plus(TM), WTLS Plus(TM), Certilock(TM), Certifax(TM), MobileTrust(TM), Trustpoint(TM), movian(TM), movianVPN(TM) and movianCrypt(TM) are our trademarks. In this Form 10-Q, the terms "Certicom", "the Company", "we", "us", and "our" refer to Certicom Corp., a Yukon Territory, Canada 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 October 31, 2001, the Noon Buying Rate was U.S. $0.6287 per Cdn.$1.00. U.S.$ per Cdn.$ Noon Buying Rate ----------------------------------------------------- Average Low High Period End -------------- ---------- ---------- ------------- Fiscal year ended ----------------- April 30, 2001 0.6616 0.6831 0.6333 0.6510 Six months ended ---------------- October 31, 2000 0.6717 0.6831 0.6531 0.6548 October 31, 2001 0.6468 0.6622 0.6287 0.6287 Three months ended ------------------ October 31, 2000 0.6694 0.6793 0.6531 0.6548 October 31, 2001 0.6411 0.6547 0.6287 0.6287 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Certain statements contained in this Form 10-Q constitute "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995. When used in this document, the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect" and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. 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 22 of this Form 10-Q, in our Annual Report on Form 10-K and in other documents that we file 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 common share amounts)
October 31, April 30, 2001 2001 ----------- ---------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 610 $ 1,942 Marketable securities, available for sale 28,292 50,310 Accounts receivable, net 3,385 7,149 Prepaid expenses and other current assets 1,984 3,428 --------- --------- Total current assets 34,271 62,829 Property and equipment, net 17,991 18,288 Intangibles, net 13,753 26,348 Other assets, net 710 -- Restricted cash 1,956 2,009 --------- --------- Total assets $ 68,681 $ 109,474 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 5,055 $ 9,240 Accrued liabilities 2,455 3,106 Accrued restructuring charges 5,165 -- Deferred revenue 2,736 2,168 --------- --------- Total current liabilities 15,411 14,514 Long term liabilities: Other payables 510 510 Accrued restructuring charges 797 -- Lease inducements and deposits 672 1,093 Convertible debenture 8,488 -- --------- --------- Total liabilities 25,878 16,117 Shareholders' equity: Common shares, no par value; shares authorized: unlimited; shares issued and outstanding: 31,425,000 and 30,542,000, at October 31, 2001 and April 30, 2001, respectively 183,875 175,151 Additional paid-in capital 13,088 19,945 Deferred compensation expense (688) (4,314) Accumulated other comprehensive loss (2,713) (2,460) Retained deficit (150,759) (94,965) --------- --------- Total shareholders' equity 42,803 93,357 --------- --------- Total liabilities and shareholders' equity $ 68,681 $ 109,474 ========= =========
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 per share data) (Unaudited)
Three months ended Six months ended October 31, October 31, 2001 2000 2001 2000 ------------ ---------- ---------- ---------- Revenues: Products $ 1,052 $ 5,052 $ 2,002 $ 9,015 Services 1,656 1,249 3,250 2,339 ------------ ---------- ---------- ---------- Total revenues 2,708 6,301 5,252 11,354 Cost of revenues: Products 557 223 633 455 Services (including deferred compensation amortization expense of $516 and $860 for the three months, respectively, and $1,290 and $860 for the six months, respectively) 2,021 2,341 4,504 3,360 ------------ ---------- ---------- ---------- Total cost of revenues 2,578 2,564 5,137 3,815 ------------ ---------- ---------- ---------- Gross profit 130 3,737 115 7,539 Operating expenses: Sales and marketing 3,546 4,340 9,156 7,479 Product development and engineering 1,888 3,020 4,414 5,448 General and administrative (including stock compensation amortization expense of $0 and $499 for the three months, respectively, a credit of $311 and an expense of $610 for the six months, respectively) 2,673 3,258 5,339 5,840 Depreciation and amortization 3,190 2,986 6,779 5,735 Impairment of goodwill and other intangibles - - 9,352 - Restructuring costs 12,047 - 21,580 - ------------ ---------- ---------- ---------- Total operating expenses 23,344 13,604 56,620 24,502 Loss from operations (23,214) (9,867) (56,505) (16,963) Other income (expense): Interest income 150 833 866 1,785 Interest expense (171) - (171) (423) Other income and expense 61 - 61 - ------------ ---------- ---------- ---------- Total other income 40 833 756 1,362 ------------ ---------- ---------- ---------- Loss before provision for income taxes (23,174) (9,034) (55,749) (15,601) Provision for income taxes 45 55 45 135 ------------ ---------- ---------- ---------- Net loss $ (23,219) $ (9,089) $ (55,794) $ (15,736) ============ ========== ========== ========== Basic and diluted net loss per share $ (0.74) $ (0.35) $ (1.80) $ (0.61) ============ ========== ========== ========== Shares used in basic and diluted net loss per share calculations 31,346 25,974 31,059 25,770 ============ ========== ========== ==========
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)
Six Months Ended October 31, 2001 2000 ------------- ------------- Cash flows from operating activities: Net loss $ (55,794) $ (15,736) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 6,779 5,735 Non-cash restructuring costs 13,141 - Goodwill impairment 9,352 - Stock compensation expense 979 1,629 Non-cash interest expense 42 423 Changes in operating assets and liabilities: Accounts receivable, net 3,764 (790) Prepaid and other assets 438 (159) Account payable (4,188) 1,842 Accrued liabilities (651) 80 Accrued restructuring payable 5,962 - Deferred revenue 568 1,194 --------- --------- Net cash used in operating activities (19,608) (5,782) Cash flows from investing activities: Purchase of property and equipment (13,101) (3,127) Purchase of patents and other long term assets (270) (362) Sales and maturities of investments 175,991 990 Purchase of investments (153,973) (995) --------- --------- Net cash provided by (used) investing activities 8,647 (3,494) Cash flows from financing activities: Proceeds from issuance of common stock, net 2,192 53,525 Leasehold inducements (149) (83) Repayment of notes payable - (10,000) Sale of convertible debt 7,736 - --------- --------- Net cash provided by financing activities 9,779 43,442 Effect of exchange rate on cash and cash equivalents, net (150) - --------- --------- Net increase in cash and cash equivalents (1,332) 34,166 Cash and cash equivalents, beginning of period 1,942 10,508 Cash and cash equivalents, end of period $ 610 $ 44,674 ========= =========
See accompanying notes to condensed consolidated financial statements. 4 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Note 1. Basis of Presentation The accompanying unaudited condensed consolidated financial statements include the accounts of Certicom Corp., and it's wholly owned subsidiaries (Certicom or the Company). Intercompany transactions and balances are eliminated upon consolidation. The condensed consolidated financial statements included in this document are unaudited and reflect all adjustments (consisting only of normal recurring adjustments, except as noted) 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. Certain reclassifications have been made to the prior year consolidated financial statements to conform to the current year's presentation. Such reclassifications had no effect on previously reported results of operations. The accompanying condensed consolidated financial statements have been prepared pursuant to the rules and regulations of Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with our consolidated financial statements and notes thereto, 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, 2001 and Management's Discussion and Analysis of Financial Condition and Results of Operations contained in Item 2 of this Form 10-Q. The results of operations for the three months and six months ended October 31, 2001 are not necessarily indicative of the results expected for the entire fiscal year ending April 30, 2002. 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 by SOP 98-4 and SOP 98-9. Following the requirements of SOP 97-2, we recognize license revenues when all of the following have occurred: . we have signed a non-cancelable license agreement with the customer; . delivery of the software product to the customer has occurred; . the amount of the fees to be paid by the customer are fixed or determinable; and . collection of these fees is probable. If an acceptance period is contractually provided, license revenues are recognized upon the earlier of customer acceptance or the expiration of that period. In instances where delivery is electronic and all other criteria for revenue recognition have been achieved, the product is considered to have been delivered when the customer either takes possession of the software via a download or the access code to download the software from the Internet has been provided to the customer. Our software does not require significant production, customization or modification. SOP 97-2, as modified, generally requires revenue earned on software arrangements involving multiple elements such as software products, upgrades, enhancements, post contract customer support (PCS), or installation and training to be allocated to each element based on the relative fair values of the elements. The fair value of an element must be based on evidence that is specific to the vendor. If evidence of fair value does not exist for all elements of a license agreement and PCS is the only undelivered element, then all revenue for the license arrangement is recognized ratably over the term of the agreement. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred, and the remaining portion of the arrangement fee is recognized as revenue. When arrangements require us to deliver specified additional upgrades the entire fee related to the arrangement is deferred until delivery of the specified upgrade has occurred, unless we have vendor-specific objective evidence of fair value for the upgrade. Fees related 5 to contracts that require us to deliver unspecified additional products are deferred and recognized ratably over the contract term. Revenue from consulting and training services are recognized using the percentage-of-completion method for fixed fee development arrangements or as the services are provided for time-and-materials arrangements. The fair value of professional services, maintenance and support services have been determined using specific objective evidence of fair value based on the price charged when the elements are sold separately. Revenues for maintenance and support services are deferred and recognized ratably over the term of the support period. Revenues from professional services are recognized when the services are performed. In June 2001, we began to offer our enabling technologies products using primarily subscription-based licenses. In addition, our trust services and enterprise application software product lines are accounted for under the subscription model. Subscription licenses provide our customers with rights to use our software for a specified period of time. Customers are entitled to use the license and receive certain customer support services over the license term. In addition, depending on the type of license, our customers have access to unspecified upgrades on an "if and when available" basis. We expect the average duration of the subscription licenses to be between one and two years. Under subscription licenses, we bill our customers for the current year's product and service fees. The billed product and service fees are recognized as revenues ratably over the billed period, generally one year. Deferred revenues generally result from the following: subscription licenses for which we have invoiced our customers and we are recognizing revenue ratably over the license term, deferred maintenance and support services, cash received for professional services not yet rendered and license revenues deferred relating to arrangements where we have received cash and are required to deliver either unspecified additional products or specified upgrades for which we do not have vendor-specific objective evidence of fair value. Impairment of Long-Lived Assets We evaluate the recoverability of our property and equipment and intangible assets when there are indications that the carrying value of those assets may not be recoverable. We recognize impairment of long-lived assets when the net book value of such assets exceeds the future undiscounted cash flows attributable to such assets. Accordingly, we evaluate asset recoverability at each balance sheet date or when an event occurs that may impair recoverability of the asset. 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 costs associated with the filing of approximately sixty patent applications in various jurisdictions. These patent filings relate to Elliptic Curve Cryptography (ECC), various mathematical computational methodologies, security protocols and other cryptographic inventions. After the patent is granted, we amortize the individual patent cost over three years. We capitalize patents not yet granted at their cost less a provision for the possibility of the patent not being granted or abandoned. Reclassifications Certain reclassifications have been made to the fiscal year 2001 financial statement presentation to conform to the fiscal year 2002 presentation. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of 6 revenues and expenses during the reporting period. Actual results could differ materially from those estimates and could materially affect future operating results. Note 2. 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 or conversation of debentures, 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:
Six months ended October 31, ------------------------------ 2001 2000 ----------- ---------- Shares issuable under stock options 2,033,133 5,763,330 Shares of restricted stock subject to repurchase 26,503 198,797 Shares issuable pursuant to warrants 50,000 50,000 Shares issuable upon conversion of debentures 3,506,494 -
The weighted average exercise price of stock options was $1.52 and $10.16 at October 31, 2001 and 2000, respectively. The purchase price of restricted stock was $38.94. The exercise price of outstanding warrants was Cdn.$38.13 per share ($23.97 based on the exchange rate on October 31, 2001). The conversion price of the convertible debentures was Cdn.$3.85 ($2.42 based on the exchange rate on October 31, 2001). The following table sets forth the computation of basic and diluted net loss per common share (in thousands of U.S. dollars except per share data)
Three months ended Six months ended ------------------- ---------------- October 31, October 31, ----------- ----------- 2001 2000 2001 2000 -------- -------- --------- --------- Numerator: Net loss $(23,219) $ (9,089) $ (55,794) $ (15,736) ======== ======== ========= ========= Denominator: Denominator for basic net loss per share - weighted-average shares outstanding 31,346 25,974 31,059 25,770 -------- -------- --------- --------- Effect of dilutive potential common shares -- -- -- -- -------- -------- --------- --------- Denominator for diluted net loss per share 31,346 25,974 31,059 25,770 ======== ======== ========= ========= Basic and diluted net loss per share $ (0.74) $ (0.35) $ (1.80) $ (0.61) ======== ======== ========= =========
Note 3. Comprehensive Income (Loss) Other comprehensive loss refers to revenues, expenses, gains and losses that under generally accepted accounting principles are recorded as an element of shareholders' equity but are excluded from net loss. The following table sets forth the components of comprehensive loss for the three and six month periods ended October 31, 2001 and 2000, respectively (in thousands of U.S. dollars):
Three months ended Six months ended ------------------- ----------------- October 31, October 31, ----------- -----------
7
2001 2000 2001 2000 ----------- ----------- ----------- ----------- (Unaudited) (Unaudited) (Unaudited) (Unaudited) Net loss $ (23,219) $ (9,089) $ (55,794) $ (15,736) Other comprehensive income: Unrealized gain (loss) on marketable securities, (162) 85 (253) 118 available for sale ---------- ---------- --------- ---------- Comprehensive loss $ (23,381) $ (9,004) $ (56,047) $ (15,618) ========== ========== ========= ==========
Note 4. Impairment of Goodwill and Other Intangibles In connection with our restructuring program announced on June 4, 2001, we identified indicators of possible impairment of goodwill and other acquired intangible assets relating to previous acquisitions. These indicators included the deterioration in the business climate, changes in sales and cash flow forecasts, revised strategic plans for certain acquired business and significant declines in the market values of companies in the security, wireless and general technology industries. As a result, we performed an impairment assessment of the identifiable intangible assets and goodwill recorded in connection with the acquisitions of DRG Resources Group, Inc. and Uptronics, Inc. Accordingly, Certicom compared the undiscounted cash flows associated with the acquired intangible assets and goodwill with the respective carrying amounts and determined that an impairment of certain assets existed. As a result, we recorded an impairment of intangible assets and goodwill of $9.4 million, measured as the amount by which the carrying amount exceeded the present value of the estimated future cash flows associated with goodwill and intangible assets. The assumptions supporting the cash flows, including the discount rate, were determined using our best estimates as of June 4, 2001. We will continue to assess the recoverability of the remaining goodwill and intangible assets in accordance with our policy. Note 5. Restructuring Costs On June 4, 2001, we announced a restructuring program to prioritize our initiatives, reduce costs not directly associated with selling and developing product and services, decrease discretionary spending and improve efficiency. This restructuring program includes a reduction of our full-time employee headcount, consolidation of excess facilities and reengineering of certain business functions, including a consolidation of distribution channels and a redeployment of product development to focus on our enabling technologies. On August 16, 2001 and November 9, 2001, we announced additional workforce reductions as part of our restructuring program. As a result of the restructuring program, we recorded restructuring costs of approximately $9.5 million for the three months ended July 31, 2001 and $12.0 million for three months ended October 31, 2001. We recorded restructuring expenses in the following areas: 1) reduction in workforce; 2) consolidation of excess facilities and non-productive property and equipment; and 3) elimination of deferred compensation. In addition, we recorded a non-cash charge of $0.5 million to write-down non-software product inventory related to businesses we are exiting. Since June 4, 2001, we have announced reductions in our work force of approximately 63% across all business functions and geographic regions. During the six months ended October 31, 2001, we recorded an estimated charge of approximately $3.3 million relating primarily to severance and fringe benefits. During the six months ended October 31, 2001, we recorded a restructuring charge of approximately $14.1 million for property and equipment that will be disposed of or removed from operations and excess facilities including computer equipment and software no longer in use due to the reduction in workforce and downsizing of infrastructure, leasehold improvements and lease inducements related to facilities we no longer plan to occupy. Included in the $14.1 million restructuring charge is a $2.8 million accrued restructuring charge for future leasehold improvements that we are contractually obligated to pay. For the six months ended October 31, 2001 we also wrote off $1.1 million of lease inducements related to these leasehold improvements. Lease inducements are reimbursements received from the landlord for certain leasehold improvements. During the six months ended October 31, 2001, we recorded a charge of $4.2 million for non-cancelable lease costs, of which we have paid $0.4 million, under the assumption that we will not be able to sublease certain of our excess facilities in the next two years. The term of this lease extends to April 2011 and the total lease payments for the full term of this lease are approximately $9.5 million based on the exchange rate as of October 31, 2001. During our second fiscal quarter ended October 31, 2001, we made adjustments to our non-cancelable lease estimates made during our first fiscal quarter ended July 31, 2001. We made these adjustments to reflect agreements 8 with certain sub-tenants of our facilities for which agreements were entered into subsequent to July 31, 2001. The restructuring adjustment related to these sub-tenant agreements was a $1.4 million reduction. In connection with the acquisition of DRG Resources Group, Inc., we recorded approximately $7.7 million of deferred compensation expense in connection with shares subject to restriction under employment agreements signed with the former owners of DRG Resources Group, Inc. These amounts are being amortized over an eighteen month period. As a result of the restructuring program announced in June 2001, certain former owners of DRG Resources Group, Inc. left our company. The unvested shares that were restricted under the terms of these employment agreements were immediately vested upon termination of the employees. As a result, approximately $2.3 million of deferred compensation charges were recorded in the first quarter of fiscal 2002. For the three and six months ended October 31, 2001, the Company recorded charges for restructuring activities and the write-down of inventory, goodwill and other intangible assets. There were no such charges for the three and six months ended October 31, 2000. The following table summarizes these charges (in thousands of U.S. dollars):
October 31, 2001 Cumulative Drawdown ------------------------- ------------------- Provision Three months Six months Cash Non-Cash Balance at ended ended Payments Charges October 31, 2001 ------------ ---------- -------- -------- ---------------- Restructuring cost: Severance: $ 1,144 $ 3,266 $ 2,596 $ -- $ 670 Property and equipment: 11,346 14,142 -- 11,318 2,824 Write down of lease Inducements: (1,105) (1,105) -- (1,105) -- Future lease commitments and lease exit costs: 1,872 4,165 359 -- 3,806 Sub tenant lease adjustment: (1,413) (1,413) -- -- (1,413) Deferred compensation: -- 2,322 -- 2,322 -- Other items: 203 203 8 120 75 ----------- --------- --------- -------- ---------------- Total restructing costs 12,047 21,580 2,963 12,655 5,962 ----------- --------- --------- -------- ---------------- Write down of inventory included in cost of products revenue 486 486 -- 486 -- Impairment of goodwill and other intangible assets: -- 9,352 -- 9,352 -- ----------- --------- --------- -------- ---------------- Total charges $ 12,533 $ 31,418 $ 2,963 $ 22,493 $ 5,962 =========== ========= ========= ======== ================
Note 6. Segment Information and Significant Customer We operate in one reportable segment. We are a developer, manufacturer and vendor of digital information security products, technologies and services within the industry segment of electronic commerce. Information about our geographic operations is given below (in thousands of U.S. dollars): Three Months Ended Six months ended October 31, October 31, ---------------------- ----------------------- 2001 2000 2001 2000 -------- --------- ----------------------- U.S. $ 2,312 $ 4,317 $ 4,211 $ 8,706 Canadian 126 730 674 760 International 270 1,254 367 1,888 -------- --------- --------- ---------- Total revenue $ 2,708 $ 6,301 $ 5,252 $ 11,354 ======== ========= ========= ========== 9 For the three months ended October 31, 2001, one of our professional services customers accounted for approximately 12% of our total revenue. For the three months ended October 31, 2000, two customers each accounted for more then 10% of our total revenue. For the six month period ended October 31, 2001, one of our professional services customer accounted for more than 10% of our total revenue. For the six month period ended October 31, 2000, two of our customers each accounted for more than 10% of our total revenue. Note 7. Public Offering and Stock Split In May 2000, we completed a public offering of 2,500,000 of our common shares at a per share price of $23.15 in the United States and Canada for an aggregate offering price of approximately $57.9 million. Our net proceeds from the offering were approximately $51.5 million after deducting underwriting discounts and commissions and offering expenses. In March 2001, we issued 4,000,000 of our common shares in Canada and the United States at a per share price of Cdn.$12.50 (approximately $8.14 based on the exchange rate on April 30, 2001). The common shares have not been registered under the United States Securities Act of 1933, as amended. The gross proceeds of this offering were Cdn.$50.0 million (approximately $32.5 million based on the exchange rate on April 30, 2001). After deducting underwriting discounts and commissions and offering expenses, the net proceeds of this offering were Cdn.$47.2 million (approximately $30.8 million based on the exchange rate on April 30, 2001). On July 12, 2000, we completed a two-for-one split of our outstanding common shares. All share and per share amounts in this document have been adjusted to give effect to this split. 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. Additional compensation cost will be measured for the full amount of any increases in share price after July 1, 2001 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. Stock compensation amortization expense of $499,000 was recorded for the three months ended October 31, 2000. As of July 31, 2001, the price of our common shares was less than the exercise price of the repriced stock options. As a result, a credit of approximately $311,000 was recorded to stock compensation amortization expense in the first quarter of fiscal 2002. Deferred compensation expense related to this repricing of options was $0 for the second quarter of fiscal 2002. As of October 31, 2001, the price of our common shares was less than the exercise price of the repriced options and therefore no compensation expense was recorded during the second quarter of fiscal 2002. On July 6, 2001, we announced a voluntary stock option exchange program to be offered to employees in which employees were able to exchange current outstanding options for new options to be issued no sooner than six months and one day after the end of the exchange period. For existing options with exercise prices over $23.00, program participants received one new option for each two options tendered for exchange. For options with exercise prices between $10.00 and $22.99, program participants received two new options for each three options tendered for exchange. Options with exercise prices below $10.00 could not be voluntarily tendered for exchange under this program. Each of the new options will have a vesting schedule whereby 25% will vest immediately upon issue, and the balance will vest monthly on a prorated basis for 24 months. The new options will be exercisable for a period of 5 years from the date of grant. The stock option exchange period ended on October 25, 2001. Employees tendered approximately 902,346 stock options and, in exchange for such options, Certicom intends to issue approximately 530,900 new stock options no sooner than April 29, 2002. Because no stock options have been issued to these employees since cancellation and the strike price of the stock options issued to these employees in the six months preceding the cancellations are above the fair market value of Certicom's common stock at October 31, 2001, Certicom has not recorded stock compensation expense related to the cancellation of these stock options. 10 Note 9. Convertible Debentures On August 30, 2001, we issued and sold Cdn.$13.5 million (approximately U.S.$8.7 million based on the exchange rate on August 30, 2001) aggregate principal amount of 7.25% senior unsecured convertible notes (the Notes) on a private placement basis. Subsequently, the Notes were converted by the holders thereof, without payment of additional consideration, into an equal principal amount of 7.25% senior convertible unsecured subordinated debentures (the Debentures). The Debentures mature on August 30, 2004 and are convertible into our common shares at the holder's option at any time before the close of business on the earlier of August 30, 2004 and the last business day before the date specified for redemption at a conversion price of Cdn.$3.85 ($2.42 based on the exchange rate at October 31, 2001) per common share. Certicom can redeem the Debentures at any time after August 30, 2003 at a price per Debenture equal to the principal amount thereof to be redeemed, together with accrued and unpaid interest on the principal amount of the Debenture so redeemed if the price of the Company's common shares is not less than 125% of the conversion price. The Debentures provide for semi-annual payments of interest beginning February 28, 2002. The debt issuance costs are being amortized over the term of the Debentures using the interest method. After deducting underwriting commissions and offering expenses, the net proceeds of this offering were Cdn.$12.3 million (approximately $7.7 million based on the exchange rate on October 31, 2001). The net proceeds from the offering will be used for working capital and general corporate purposes. Note 10. Contingencies 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 judgment could have a material adverse impact on our financial condition. In April 2000, we 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 that 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 of Geoworks' purportedly patented technology provided by Geoworks, 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 portions of the SSL standard. After an internal investigation, it is our belief that we do not implement any validly patented technology. We have received a letter on behalf of eSignX (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(TM) PKI product, that our product may be covered by eSignX's patent. We have conducted an initial investigation and due to the vague description of the suggested infringement by our products, we were unable to determine the validity of such suggestions. We requested further elaboration from eSignX, and while a response was recently provided, this matter is complex in nature and we have not had an opportunity to perform an appropriate analysis. Although we intend to 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. On October 18 2001, we were served with a lawsuit commenced by Mr. Leon Stambler against several companies, asserting that Mr. Stambler holds enforceable patents on certain aspects of technology related to online transactions, and seeking unspecified damages (U.S. District Court- Delaware/ Case # 01-0065-SLR). We have retained counsel and filed an answer to that complaint. Although we intend to vigorously defend our right to the use the indicted technology, there can be no assurance that we will be successful in doing so. Continued litigation is likely to be expensive and time-consuming. In general, there can be no assurance that such asserted patents will not have a material adverse impact on us. 11 In addition, one of our former employees retained counsel and demanded payment of approximately $375,000 in settlement of a claim for discrimination and wrongful termination. Although we intend to 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. The Company has not set aside any financial reserves related to the actions discussed above. Note 11. Recent Accounting Pronouncement In July 2001, the FASB issued SFAS No. 141. "Business Combinations". SFAS No. 141 requires that all business combinations be accounted for under the purchase method for business combinations initiated after June 30, 2001 for which the date of acquisition is July 1, 2001 or later. Use of the pooling-of-interest method is no longer permitted. In July 2001 the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 142 requires that goodwill no longer be amortized to earnings, but instead be periodically reviewed for impairment. SFAS No. 142 must be adopted starting with fiscal years beginning after December 15, 2001. The impact of adopting SFAS 141 and SFAS 142 has not been determined. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations". This statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long lived assets and for the associated asset retirement costs. SFAS No. 143 is effective for financial statements issued for fiscal years beginning after June 15, 2002. The impact of adopting SFAS 143 has not been determined. In October, 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets", which addresses financial accounting and reporting for the impairment or disposal of certain long lived assets. This statement is effective for fiscal years beginning after December 15, 2001. The impact of adopting SFAS No. 144 has not been determined. Note 12. Subsequent Events On November 9, 2001, we announced that we would further reduce our workforce by 30% by the end of the third quarter of fiscal 2002 such that total workforce reductions since June 4, 2001 are approximately 63%. As of November 30, 2001 the number of active employees was 194. 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation Certain statements contained in this Form 10-Q constitute "forward-looking statements" within the meaning of the United States Private Securities Litigation Reform Act of 1995. When used in this document, the words "may", "would", "could", "will", "intend", "plan", "anticipate", "believe", "estimate", "expect" and similar expressions, as they relate to us or our management, are intended to identify forward-looking statements. 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 22 of this Form 10-Q, in our Annual Report on Form 10-K and in other documents that we file 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. Overview We are a leading provider of information security software and services, specializing in solutions for mobile e-business and the mobile workforce. Our products and services are specifically designed to address the challenges imposed by a wireless data environment. We offer comprehensive solutions that incorporate our efficient 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 and the mobile workforce. Historically, we have focused on the development and marketing of cryptographic and information security protocol toolkits. Today, our comprehensive product offering includes an enabling technologies suite, which allows original equipment manufacturers, or OEMs, to develop secure e-business applications; our trust services, which provide OEMs and enterprises with the necessary public-key infrastructure, or PKI, management tools and certificate services to authenticate users and servers; and our enterprise application software, which provides virtual private network, or VPN, security and strong personal digital assistant, or PDA, data security for enterprises wanting to enable a mobile workforce. In addition, we provide consulting and systems integration services to assist our customers in designing and implementing efficient security solutions. Our products and services solve difficult security problems for the world's leading providers of computing and communication products. OEM customers integrate our enabling technologies into their hardware and software products, then sell the finished products to consumers or enterprise customers. In addition, we sell our enterprise application software directly to Fortune 100 companies. 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. On January 26, 2000, we acquired all the outstanding shares of common stock of Trustpoint, a corporation based in Mountain View, California. Trustpoint is a private developer of PKI products. OEMs use PKI products to develop authentication and certification applications and services. In connection with this acquisition, we issued 201,120 of our common shares in exchange for all of the outstanding shares of Trustpoint and we also assumed Trustpoint's outstanding employee stock options. The transaction was accounted for as a purchase and, accordingly, the total consideration of approximately $10.5 million has been allocated to the tangible and intangible assets acquired based on their respective fair values on the acquisition date. Trustpoint's results of operations have been included in the consolidated financial statements from the date of acquisition. As a result of our acquisition of Trustpoint, we recorded goodwill and other intangible assets of approximately $10 million. These amounts are being amortized over a three to five year period. As of October 31, 2001, we have approximately $6.2 million of recorded goodwill and other intangible assets. On September 12, 2000, we completed our acquisition of DRG Resources Group, Inc., a corporation based in Redwood City, California. DRG Resources Group, Inc. is an e-commerce security consulting company. In connection with this acquisition, we issued 397,595 of our common shares in exchange for all of the outstanding 13 shares of DRG Resources Group, Inc. and we also assumed DRG Resources Group, Inc.'s outstanding stock options. The transaction was accounted for as a purchase and, accordingly, the total consideration of approximately $18.0 million has been allocated to the tangible and intangible assets acquired based on their respective fair values on the acquisition date. The results of operations of DRG Resources Group, Inc. have been included in the consolidated financial statements from the date of acquisition. As a result of our acquisition of DRG Resources Group, Inc., we recorded goodwill, deferred compensation expense, and other intangible assets of approximately $17.9 million. As a result of our restructuring program in June 2001, certain former owners and employees of DRG Resources Group, Inc. left our company and we wrote-off all goodwill and intangible assets and decreased deferred compensation expense such that, as of October 31, 2001, only $0.7 million remains. 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. Results of Operations We have incurred substantial operating losses since our inception and we expect to continue to incur operating losses in the future and we may never achieve profitability. As of October 31, 2001, we had an accumulated deficit of approximately $151 million as determined in accordance with U.S. GAAP. The following table sets out, for the periods indicated, selected financial information from our consolidated financial statements as a percentage of revenue.
Three months ended Six months ended ------------------ ---------------- October 31, October 31, ---------- ---------- 2001 2000 2001 2000 Consolidated Statement of Operations Data: (%) (%) (%) (%) Revenues: Products 39 80 38 79 Services 61 20 62 21 ------ ------ ------ ------ Total revenues 100 100 100 100 Cost of revenues: Products 20 4 12 4 Services 75 37 86 30 ------ ------ ------ ------ Total cost of revenue 95 41 98 34 Operating expenses: Sales and marketing 131 69 174 66 Product development and engineering 70 48 84 48 General and administrative 99 52 102 51 Depreciation and amortization 117 47 129 50 Goodwill impairment - - 178 - Restructuring costs 445 - 411 - ------ ------ ------ ------ Total operating expenses 862 216 1,078 215 Loss from operations (857) (157) (1,076) (149) Other income: Interest income expense (1) 14 14 16 Other income and expense 2 -- 1 (4) ------ ------ ------ ------ Total other income (expense) 1 14 15 12 Loss before provision for income taxes (856) (143) (1,061) (137) Provision for income taxes 1 1 1 2 ------ ------ ------ ------ Net loss (857) (144) (1,062) (139) ====== ====== ====== ======
14 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 by SOP 98-4 and SOP 98-9. Following the requirements of SOP 97-2, we recognize license revenues when all of the following have occurred: . we have signed a non-cancelable license agreement with the customer; . delivery of the software product to the customer has occurred; . the amount of the fees to be paid by the customer are fixed or determinable; . and collection of these fees is probable. If an acceptance period is contractually provided, license revenues are recognized upon the earlier of customer acceptance or the expiration of that period. In instances where delivery is electronic and all other criteria for revenue recognition has been achieved, the product is considered to have been delivered when the customer either takes possession of the software via a download or the access code to download the software from the Internet has been provided to the customer. Our software does not require significant production, customization or modification. SOP 97-2, as modified, generally requires revenue earned on software arrangements involving multiple elements such as software products, upgrades, enhancements, post contract customer support, or PCS, installation and training to be allocated to each element based on the relative fair values of the elements. The fair value of an element must be based on evidence that is specific to the vendor. If evidence of fair value does not exist for all elements of a license agreement and PCS is the only undelivered element, then all revenue for the license arrangement is recognized ratably over the term of the agreement. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred, and the remaining portion of the arrangement fee is recognized as revenue. When arrangements require us to deliver specified additional upgrades the entire fee related to the arrangement is deferred until delivery of the specified upgrade has occurred, unless we have vendor-specific objective evidence of fair value for the upgrade. Fees related to contracts that require us to deliver unspecified additional products are deferred and recognized ratably over the contract term. Revenue from consulting and training services are recognized using the percentage-of-completion method for fixed fee development arrangements or as the services are provided for time-and-materials arrangements. The fair value of professional services, maintenance and support services have been determined using specific objective evidence of fair value based on the price charged when the elements are sold separately. Revenues for maintenance and support service are deferred and recognized ratably over the term of the support period. Revenues from professional services are recognized when the services are performed. In June 2001, we converted our enabling technologies products primarily to subscription-based licenses. In addition, our trust services and enterprise application software product lines are accounted for under the subscription model. Subscription licenses provide our customers with rights to use our software for a specified period of time. Customers are entitled to use the license and receive certain customer support services over the license term. In addition, depending on the type of license, our customers have access to unspecified upgrades on an "if and when available" basis. We expect the average duration of the subscription licenses to be between one and two years. Under subscription licenses, we bill our customers for the current year's product and service fees. The billed product and service fees are recognized as revenues ratably over the billed period, generally one year. Deferred revenues generally result from the following: deferred maintenance and support service, cash received for professional services not yet rendered and license revenues deferred relating to arrangements where we have 15 received cash and are required to deliver either unspecified additional products or specified upgrades for which we do not have vendor-specific objective evidence of fair value. We operate in one reportable segment. We derive our revenues from a variety of sources that we generally classify as products and services. We earn products revenues from one-time base license fees or technology access fees, royalties, and hardware products. Our hardware products are manufactured by third parties to our specifications and resold by us to our customers. In addition, we earn revenues on a transaction basis through the sale of our authentication service offerings, which are primarily digital certificates. Services revenues are derived from the performance of contracted services for customers, maintenance, and support and training fees. We negotiate most of our customer contracts on a case-by-case basis. Prior to June 2001, most of our contracts (other than our contracts for professional services or hardware sales) include provisions for us to receive an up-front license fee and 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, the customer, the device and the application. In June 2001, we converted our enabling technologies products primarily to subscription-based licenses. In addition, our trust services and enterprise application software product lines are accounted for under the subscription model. Under our subscription license model, we expect a significant percent of customers to renew their licenses upon license expiration. The change from perpetual licenses to subscription licenses has impacted our reported quarterly and annual revenues and will continue to do so on a going-forward basis as subscription license revenue will be amortized over the term of the subscription license. In the past, the majority of our perpetual license revenues have been recognized in the quarter of product delivery. Therefore, a subscription license order will result in substantially less current-quarter revenue than an equal-sized order for a perpetual license. We invoice our customers upfront for the full amount of a twelve-month subscription license period and collect the invoice within our standard payment terms. Although we expect that over the long term our cash flow from operations under the subscription license model will be equal to or greater than under the perpetual license model, in the near term we expect our cash flow from operations to decrease and deferred revenue to increase. The following table sets forth our revenues by category and by geography for the periods indicated: Three months ended Six months ended October 31, October 31, --------------------- ------------------- 2001 2000 2001 2000 ------ -------- -------- -------- Products 39% 80% 38% 79% Services 61 20 62 21 ------ -------- -------- -------- Total revenue 100% 100% 100% 100% ====== ======== ======== ======== U.S. 85% 68% 80% 77% Canadian 5 12 13 7 International 10 20 7 16 ------ -------- -------- -------- Total revenue 100% 100% 100% 100% ====== ======== ======== ======== Total revenues for the three months and six month periods ended October 31, 2001 were $2.7 million and $5.3 million, respectively, a 57% and 54% decrease compared to $6.3 million and $11.4 million for the comparable periods in the prior fiscal year. The decrease in total revenue was primarily attributable to our transition from the perpetual license model to the subscription license model. In addition, due to the economic recession, we experienced a reduction in the total number of deals sold and the number of large deals sold compared to the three and six month periods ended October 31, 2000. For the three months ended October 31, 2001, one of our professional services customers accounted for approximately 12% of our total revenue. For the six month period ended October 31, 2001, one of our professional services customer accounted for more than 10% of our total revenue. For the six month period ended October 31, 2000, two of our customers each accounted for more than 10% of our total revenue. Product revenues were $1.1 million and $2.0 million for the three and six month periods ended October 31, 2001, respectively, a 79% and 78% decrease compared to $5.1 million and $9.0 million for the same periods in the 16 prior fiscal year. The decrease was due to a majority of our new license contracts being recognized using our subscription license. Under our new subscription license, we recognize revenue ratably over the term of the contract whereas under the perpetual license model we recognize revenue when the product is delivered. In addition, the decrease in revenue was due to a reduction in the total number of deals completed including fewer purchases of prepaid royalties and the number of large deals sold compared to the same periods in the prior fiscal year. As a result of the downturn in wireless spending and the high technology sector some Certicom customers have either deferred projects to future dates or have experienced budget constraints which caused a reduction in their purchases of Certicom products. Services revenues were $1.7 million and $3.3 million for the three and six month periods ended October 31, 2001, respectively, a 33% and 39% increase compared to $1.2 million and $2.3 million for the three and six month periods ended October 31, 2000. The increase in services revenue was due to an increase in contract development work by our professional services organization, a larger customer base, and to a lesser extent, increases in maintenance fees. Deferred revenues result primarily from customer prepayments under subscription licenses and software maintenance which are recognized ratably over the life of the agreements; certain royalty agreements which are recognized as royalty license criteria are met; and professional services contracts, which are recognized as the services are performed. Deferred revenue is recognized only when collection of the receivables is reasonably assured. Revenues from international sales for the three and six month periods ended October 31, 2001 were $0.3 million and $0.4 million, respectively compared to $1.3 million and $1.9 million for the same periods in fiscal 2001. International revenue accounted for 10% and 7% of total revenues for the three and six month periods October 31, 2001 compared to 20% and 16% for the same periods in fiscal 2001. Certicom expects international sales to continue to remain constant as a percentage of total revenues in fiscal 2002. We expect to continue to invest in our international operations as we plan for growth in international markets. Cost of Revenues Total cost of revenues increased 1% to $2.6 million and $35% to $5.1 million for the three and six month periods ended October 31, 2001, respectively, compared to $2.6 million and $3.8 million for the same periods in the prior fiscal year. Cost of revenues consists of cost of the products and services. Cost of product revenues was $0.6 million for each of the three and six month periods ended October 31, 2001, respectively, a 150% and 39% increase as compared to $0.2 million and $0.5 million for the same periods of fiscal 2001. Our cost of products consists primarily of the cost of hardware products manufactured by third parties to our specifications as well as the costs of third-party hardware technology. In October 2001, we wrote-down $0.5 million of inventory related to businesses which we exited. Cost of services revenue was $2.0 million and $4.5 million for the three and six month periods ended October 31, 2001 respectively, a 14% decrease and 34% increase compared to $2.3 million and $3.4 million for the same periods in the prior fiscal year. Services costs of revenues consists primarily of personnel related costs associated with providing professional services, customer support and our MobileTrust hosting services to customers and the infrastructure to manage these organizations as well as costs to recruit, develop and retain our services employees. In addition, cost of services revenue includes the amortization of deferred compensation expense in connection with the acquisition of DRG Resources Group, Inc. The decrease for the three months ended October 31, 2001 is primarily due to the decrease in deferred compensation to $516,000 from $860,000, and the reduction in services employees as a result of the June 4, 2001 and August 9, 2001 restructuring programs. The increase for the six months ended October 31, 2001 is primarily due to the increase in services employees for the three months ended July 31, 2001 as compared to the three months ended July 31, 2000. Operating Expenses Our operating expenses consist of sales and marketing, product development and engineering, general and administrative, depreciation and amortization, impairment of goodwill and other intangibles and restructuring costs. Sales and Marketing 17 Sales and marketing expenses consist primarily of employee salaries and commissions, related travel, public relations and corporate communications, trade shows, marketing programs and market research and related infrastructure to manage these operations. Sales and marketing expenses were $3.5 million and $9.2 million for the three and six month periods ended October 31, 2001, respectively, compared to $4.3 million and $7.5 million for the same periods in fiscal 2001, a decrease of 18% and an increase of 22%, respectively. The decrease in sales and marketing expenses for the three months ended October 31, 2001, was primarily due to a decrease in sales and marketing employees and a reduction in trade shows and marketing programs. The increase in sales and marketing for the six months ended October 31, 2001, was primarily due to the increase in sales employees for the three months ended July 31, 2001 as compared to the three months ended July 31, 2000. Product Development and Engineering Product development and engineering 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. We have capitalized certain costs associated with the filing of patent applications in various jurisdictions. These patent filings are in the areas of ECC, various mathematical computational methodologies, security protocols and other cryptographic inventions. Once granted, we amortize the individual patent cost over three years. We capitalize patents not yet granted at their cost less a provision for the possibility of the patent not being granted or abandoned. Product development and engineering expenses were $1.9 million and $4.4 million for the three and six month period ended October 31, 2001, respectively, compared to $3.0 million and $5.4 million for the same periods in fiscal 2001, a decrease of 37% and 19% respectively. The decrease is due to the cost savings related to the Company's restructuring efforts. General and Administrative General and administrative expenses consist primarily of salaries and other personnel-related expenses for executive, financial, legal, information services and administrative functions, amortization of stock compensation expense and bad debt expense. For the three and six month period ended October 31, 2001, general and administrative expenses were $2.7 million and $5.3 million, respectively, a decrease of 18% and 9% compared to $3.3 million and $5.8 million for the same periods in fiscal 2001. The decreases in fiscal 2002, which include $0.4 million for bad debt expense in the three and six month periods ended October 31, 2001, respectively, are the result of the implementation of our restructuring program announced on June 4, 2001. Since that time we have reduced the number of general and administrative employees and the associated costs. Depreciation and Amortization Depreciation and amortization represent the allocation to income of the cost of fixed assets and intangibles including patents cost over their estimated useful lives. Depreciation and amortization were $3.2 million and $6.8 million for the three and six month periods ended October 31, 2001, respectively, an increase of 7% and 18% compared to $3.0 million and $5.7 million for the same periods in fiscal 2001. Impairment of Goodwill and Other Intangibles In connection with our restructuring program announced on June 4, 2001, we identified indicators of possible impairment of goodwill and other acquired intangible assets relating to previous acquisitions. These indicators included the deterioration in the business climate, changes in sales and cash flow forecasts, revised strategic plans for certain acquired business and significant declines in the market values of companies in the security, wireless and general technology industries. As a result, we performed an impairment assessment of the identifiable intangible assets and goodwill recorded in connection with the acquisitions of DRG Resources Group, Inc. and Uptronics, Inc. Accordingly, Certicom compared the undiscounted cash flows associated with the acquired intangible assets and goodwill with the respective carrying amounts and determined that an impairment of certain assets existed. As a result, we recorded an impairment of intangible assets and goodwill of $9.4 million, measured as the amount by which the carrying amount exceeded the present value of the estimated future cash flows associated with goodwill and intangible assets. The assumptions supporting the cash flows, including the discount rate, were determined using our best estimates as of June 4, 2001. We will continue to assess the recoverability of the remaining goodwill and intangible assets in accordance with our policy. 18 Restructuring Costs On June 4, 2001, we announced a restructuring program to prioritize our initiatives, reduce costs not directly associated with selling and developing product and services, decrease discretionary spending and improve efficiency. This restructuring program includes a reduction of our full-time employee headcount, consolidation of excess facilities and reengineering of certain business functions, including a consolidation of distribution channels and a redeployment of product development to focus on our enabling technologies. On August 16, 2001 and November 9, 2001, we announced additional workforce reductions as part of our restructuring program. As a result of the restructuring program, we recorded restructuring costs of approximately $9.5 million for the three months ended July 31, 2001 and $12.0 million for three months ended October, 2001. We recorded restructuring expenses in the following areas: 1) reduction in workforce; 2) consolidation of excess facilities and non-productive property and equipment; and 3) elimination of deferred compensation. In addition, we recorded a non-cash charge of $0.5 million to write-down non-software product inventory related to businesses we are exiting. Since June 4, 2001, we have announced reductions in our workforce of approximately 63% across all business functions and geographic regions. During the six months ended October 31, 2001, we recorded an estimated charge of approximately $3.3 million relating primarily to severance and fringe benefits. During the six months ended October 31, 2001, we recorded a restructuring charge of approximately $13.0 million for property and equipment that will be disposed of or removed from operations and excess facilities including computer equipment and software no longer in use due to the reduction in workforce and downsizing of infrastructure,leasehold improvements related and lease inducements to facilities we no longer plan to occupy. For the six months ended October 31, 2001, we also wrote off $1.1 million of lease inducements related to these leasehold improvements. Lease inducements are reimbursements received from the landlord for certain leasehold improvements. During the six months ended October 31, 2001, we recorded a charge of $4.2 million for non-cancelable lease costs, of which we have paid $0.4 million under the assumption that we will not be able to sublease certain of our excess facilities in the next two years. During our second fiscal quarter ended October 31, 2001, we made adjustments to our non-cancelable lease estimates made during our first fiscal quarter ended July 31, 2001. We made these adjustments to reflect agreements with certain sub-tenants of our facilities for which agreements were entered into subsequent to July 31, 2001. The restructuring adjustment related to these sub tenant agreements was a $1.4 million reduction. In connection with the acquisition of DRG Resources Group, Inc., we recorded approximately $7.7 million of deferred compensation expense in connection with shares subject to restriction under employment agreements signed with the former owners of DRG Resources Group, Inc. These amounts are being amortized over an eighteen month period. As a result of the restructuring program announced in June 2001, certain former owners of DRG Resources Group, Inc. left our company. The unvested shares that were restricted under the terms of these employment agreements were immediately vested upon termination of the employees. As a result, approximately $2.3 million of deferred compensation charges were recorded in the first quarter of fiscal 2002. For the three and six months ended October 31, 2001, the Company recorded charges for restructuring activities and the write-down of inventory, goodwill and other intangible assets. There were no such charges for the three and six months ended October 31, 2000. The following table summarizes these charges (in thousands of U.S. dollars):
OCTOBER 31, 2001 CUMULATIVE DRAWDOWN ---------------------------- --------------------------- PROVISION Three Months Six Months Cash Payments Non-Cash Balance At Ended Ended Charges October 31, 2001 Restructuring cost: Severance: $ 1,144 $ 3,266 $ 2,596 $ - $ 670 Property and equipment: 11,346 14,142 - 11,318 2,824
19 Write down of lease Inducements: (1,105) (1,105) - (1,105) - Future lease commitments and lease exit costs: 1,872 4,165 359 - 3,806 Sub tenant lease adjustment: (1,413) (1,413) - (1,413) Deferred compensation: - 2,322 - 2,322 - Other items: 203 203 8 120 75 -------- -------- -------- -------- -------- 12,047 21,580 2,963 12,655 5,962 -------- -------- -------- -------- -------- Deferred compensation: - 2,322 - 2,322 - Other items: 203 203 8 120 75 -------- -------- -------- -------- -------- 12,047 21,580 2,963 12,655 5,962 -------- -------- -------- -------- -------- Write down of inventory: 486 486 - 486 - Impairment of goodwill and other intangible assets: - 9,352 - 9,352 - -------- -------- -------- -------- -------- Total charges $ 12,533 $ 31,418 $ 2,963 $ 22,493 $ 5,962 ======== ======== ======== ======== ========
As a result of our on-going restructuring program, we expect to realize a total quarterly expense reduction of approximately $9.3 million as compared to the fourth quarter of fiscal year 2001, excluding non-cash related expenses such as depreciation, amortization, and deferred compensation. As discussed above, expenses include both cost of revenues and operating expenses. The expected quarterly expense reduction began in our first quarter of fiscal year 2002; however the full effect will not be realized until our fourth quarter of fiscal year 2002 Interest and Other Income (Expense) For the three and six month periods ended October 31, 2001, interest income was $150,000 and $866,000, respectively, compared to $833,000 and $1.8 million for the same periods in the prior fiscal year. The decline in interest income is the result of a decrease in cash and marketable securities invested and the decline in interest rates on short term investments for the three and six month periods ended October 31, 2001. Interest expense for the three and six months ended October 31, 2001, was $171,000 as compared to no interest expense and $423,000 of interest expense for the three and six months ended October 31, 2000. In August 2001, Certicom issued Cdn $13.5 million aggregate principal amount of 7.25% senior unsecured convertible notes (the Notes) on a private placement basis. The Notes were subsequently converted by the holders thereof, without payment of additional consideration into an equal principal amount of 7.25% senior convertible unsecured subordinated debentures (the Debentures). The Debentures mature on August 30, 2004 and are convertible into our common shares at the holder's option at a conversion price of Cdn $3.85 ($2.42 based on the exchange rate on October 31, 2001) per common share. As of the end of fiscal year 2000, we had borrowed $10 million from Sand Hill Capital II, LP (Sand Hill). In connection with this financing, we issued a warrant which entitles Sand Hill to purchase 50,000 of our common shares at an exercise price of Cdn $38.13 ($23.97 based on the exchange rate on October 31, 2001) per share until April 27, 2005. The warrant was valued at $423,000 at the time of issuance based on the Black-Scholes option valuation model. In the first quarter of fiscal 2001, we recorded a one-time, non-cash interest expense of $0.4 million related to the warrant issued to Sand Hill. The value of the warrant was charged to interest expense in the first quarter of fiscal 2001 as the loan was re-paid with proceeds from our public offering in May 2000. Provision for Income Taxes For each of the three and six month periods ended October 31, 2001, the provision for income taxes was $45,000 as compared to $55,000 and $135,000 for the same periods in the prior fiscal year. 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 significant corporate income taxes in both Canada and the United States in the foreseeable future because we have significant tax credits and net operating loss carry forwards for Canadian, U.S. federal and U.S. state income tax purposes. Financial Condition, Liquidity and Capital Resources In May 2000, we completed a public offering of 2,500,000 common shares at a per share price of $23.15 in the United States and Canada for an aggregate offering price of approximately $57.9 million. Our net proceeds from the offering were approximately $51.5 million after deducting underwriting discounts and commissions and offering expenses. On April 27, 2000, we borrowed $10 million from 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 50,000 of our common shares at an exercise price of Cdn.$38.13 ($23.97 based on the exchange rate on October 31, 2001) per share 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. 20 In March 2001, we issued 4,000,000 of our common shares in Canada and the United States at a per share price of Cdn.$12.50 ($7.86 based on the exchange rate on October 31, 2001). The common shares have not been registered under the United States Securities Act of 1933, as amended. The gross proceeds of this offering were Cdn.$50.0 million ($31.4 million based on the exchange rate on October 31, 2001). After deducting underwriting discounts and commissions and offering expenses, the net proceeds of this offering were Cdn.$47.2 million ($29.7 million based on the exchange rate on October 31, 2001). On August 30, 2001, we issued and sold Cdn.$13.5 million (approximately U.S.$8.7 million based on the exchange rate on August 30, 2001) aggregate principal amount of 7.25% senior unsecured convertible notes (the Notes) on a private placement basis. Subsequently, the Notes were converted by the holders thereof, without payment of additional consideration, into an equal principal amount of 7.25% senior convertible unsecured subordinated debentures (the Debentures). The Debentures mature on August 30, 2004 and are convertible into our common shares at the holder's option at any time before the close of business on the earlier of August 30, 2004 and the last business day before the date specified for redemption at a conversion price of Cdn.$3.85 ($2.42 based on the exchange rate at October 31, 2001) per common share. Certicom can redeem the Debentures at any time after August 30, 2003 at a price per Debenture equal to the principal amount thereof to be redeemed, together with accrued and unpaid interest on the principal amount of the Debenture so redeemed if the price of the Company's common shares is not less than 125% of the conversion price. The Debentures provide for semi-annual payments of interest beginning February 28, 2002. The debt issuance costs are being amortized over the term of the Debentures using the interest method. After deducting underwriting commissions and offering expenses, the net proceeds of this offering were Cdn.$12.3 million (approximately $7.7 million based on the exchange rate on October 31, 2001). The net proceeds from the offering will be used for working capital and general corporate purposes. At October 31, 2001, total cash and available-for-sale marketable securities were $28.9 million, excluding $2.0 million of restricted cash. During the six months ended October 31, 2001, Certicom's operating activities used net cash of $19.6 million. Net cash used in operating activities was primarily due to our net loss of $55.8 million, which was offset by non-cash charges of $30.3 million. The non-cash charges included $6.8 million of depreciation and amortization, $9.4 million of impairment of goodwill and other intangibles, $13.1 million of non-cash restructuring costs, and $1.0 million of stock compensation expense. Net changes in assets and liabilities consisted primarily of an increase in accrued restructuring charges of $6.0 million and a decrease in accounts receivable of $3.8 million, offset by a decrease in accounts payable of $4.2 million. During the six months ended October 31, 2001, Certicom's investing activities provided net cash of $8.6 million. Net cash provided by investing activities was primarily due to $22.0 million of net sales and maturities of marketable securities. The cash generated from sales and maturities of marketable securities was offset by $13.4 million of capital expenditures for property, equipment and patents, net of $0.8 million in lease inducements received. These consisted primarily of $10.9 million of leasehold improvements and related costs and $2.5 million of software and hardware cost. During the six months ended October 31, 2001, Certicom's financing activities provided net cash of $9.8 million. Net cash provided by financing activities was primarily due to the issuance of convertible debentures of $7.7 million and the issuance of common shares, including these related to the exercise of stock options of $2.2 million. We lease premises totaling approximately 111,000 square feet in Hayward, California. These leases expire in July, 2007. Through October 31, 2001, we had capitalized leasehold improvements and related construction costs totaling approximately $11.5 million for our Hayward facilities of which $2.7 million have been written-down due to restructuring initiatives which indicate we will not occupy 43,000 square feet for one of the buildings. We 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. In addition, we have a ten year lease for a building of approximately 130,000 square feet located in Mississauga, Ontario. At this time, the facility is being constructed at our expense and we expect the total construction cost will be approximately $8.1 million. In addition, we anticipate incurring approximately an additional $2.8 million subsequent to October 31, 2001 to complete the build-out of the facility. If the landlord intends to sell the leased premises, we have a right of first refusal with respect of any sale of this property on terms to be negotiated. As a result of our restructuring initiatives, we intend to sublease the entire 21 130,000 square feet or structure a transaction to buy-out the lease. The annual rental fee for the new site varies between approximately Cdn.$10.85 to Cdn.$13.05 per square foot ($6.82 to $8.20 per square foot based on the exchange rate on October 31, 2001) over the life of the lease. We began paying rent on this lease in May 2001. We also have a lease for approximately 6,000 square feet in Herndon, Virginia that expires on October 2007. The total annual base rent for all facilities is approximately $3.1 million. In November 2001, we signed two sublease agreements. One sublease was for one of our buildings in Hayward for approximately 43,000 square feet. The sublease expires in July 2007 and the sublease rent per square foot exceeds the rent per square foot we pay to our landlord under our current lease agreement. The other sublease agreement is for our Herndon facility. The sublease expires in October 2007 and the sublease rent per square foot is less than the rent per square foot we pay to the landlord. In June 2001, we converted our enabling technologies products primarily to subscription-based licenses. Currently, our trust services and enterprise application software product lines are accounted for under the subscription model. Subscription licenses provide our customers with rights to use our software for a specified period of time. Customers are entitled to use the license and receive certain customer support services over the license term. In addition, depending on the type of license, our customers have access to unspecified upgrades on an "if and when available" basis. We expect the average duration of the subscription licenses to be between one and two years. At this time, we expect a significant percent of customers to renew their licenses upon license expiration. The change from perpetual licenses to subscription licenses has impacted our reported quarterly and annual revenues and will continue to do so on a go-forward basis, as subscription license revenue will be amortized over the term of the subscription license. In the past, the majority of our perpetual license revenues have been recognized in the quarter of product delivery. Therefore, a subscription license order will result in substantially less current-quarter revenue than an equal-sized order for a perpetual license. We invoice our customers upfront for the full amount of a twelve-month subscription license period and collect the invoice within our standard payment terms. Although we expect that over the long term our cash flow from operations under the subscription license model will be equal to or greater than under the perpetual license model, in the near term we expect our cash flow from operations to decrease and deferred revenue to increase. We believe our current cash and cash equivalents and marketable securities position will be sufficient to meet our liquidity needs for the near term. In the future, we may need to raise additional funds through public or private financings, strategic partnerships, 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 equity securities, the percentage of our stock owned by our then current shareholders will be reduced. 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, 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. 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. These risks and uncertainties are often worse for a company engaged in new and evolving product markets. 22 Since our inception, we have incurred substantial net losses. As of October 31, 2001, we had an accumulated deficit of approximately $150.8 million (as determined in accordance with U.S. generally accepted accounting principles). We expect to incur additional losses for the foreseeable future and we may never achieve profitability. If we do achieve profitability, we may not be able to sustain it. 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, 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: . our transition to a subscription license business model; . 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 our facilities consolidation; . 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. Because our revenues are difficult to predict, we may not be able to adjust spending in a timely manner to compensate for a shortfall in revenue 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 involve a lengthy education process, along with significant technical evaluation and commitment of capital and other resources by them. This process is also subject to the risk of delays associated with (a) their internal budgeting and other procedures for approving capital expenditures, (b) deploying new technologies and (c) 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. In addition, our customers may defer the purchase of, stop using or not renew the subscription license of 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 existing customer contracts typically provide for base license fees on a subscription or perpetual basis, technology access fees and/or royalties based on a per-unit or per-usage charge or a percentage of revenue from 23 licensees' products containing our technology. In June 2001, we converted our enabling technologies products to primarily subscription-based licenses. 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, a portion of our revenues are not recurring from period to period, which makes them more difficult to predict. 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. The recent introduction of a subscription business model may result in a decrease in our reported revenue and cash flow from operations In June 2001, we converted our enabling technologies products to primarily subscription-based licenses. In addition, our trust services and enterprise application solutions product lines are accounted for under the subscription model. Subscription licenses provide our customers with rights to use our software for a specified period of time. Customers are entitled to use the license and receive certain customer support services over the license term. In addition, depending on the type of license, our customers have access to unspecified upgrades on an "if and when available" basis. We expect the average duration of the subscription licenses to be between one and two years. In addition, we expect a significant percent of our customers to renew their licenses upon license expiration. The change from perpetual licenses to subscription licenses will impact our reported quarterly and annual revenues on a going-forward basis, as subscription license revenue will be amortized over the term of the subscription license. In the past, the majority of our perpetual license revenues have been recognized in the quarter of product delivery. Therefore, a subscription license order will result in substantially less current-quarter revenue than an equal-sized order for a perpetual license. We expect to invoice our customers upfront for the full amount of a twelve-month subscription license period and collect the invoice within our standard payment terms. Although we expect that over the long term our cash flow from operations under the subscription license model will be equal to or greater than under the perpetual license model, in the near term we expect our cash flow from operations to decrease and deferred revenue and backlog to increase. The current economic downturn has reduced demand for our products and services, increased the average length of our sales cycle and may adversely affect future revenue The majority of our revenue has been, and is expected to continue to be, derived from customers in the United States. Recent economic indicators, including decreases in gross domestic product, reflect a recessionary economy in the United States. Some reports have indicated an even more significant decline in spending by corporations in the area of information technology, which includes the encryption technology and wireless communications markets. While we cannot specifically correlate the impact of macro-economic conditions on our sales activities, we believe that the economic conditions in the United States have resulted in decreased demand in our target markets and, in particular, have increased the average length of our sales cycle and reduced the dollar amount of contracts we sign. To the extent that the current downturn continues or increases in severity, or results in a similar downturn worldwide, we believe demand for our products and services, and therefore future revenue, will be reduced. Our restructuring of operations may not achieve the results we intend and may harm our business In June 2001, we announced a restructuring of our business, which included a reduction in our workforce of approximately 30% as well as other steps to reduce expenses. In August 2001 and November 2001, we announced additional workforce reductions, representing a decrease of approximately 63% of our workforce from June 2001 to further reduce costs to a level commensurate with our expected revenues. The planning and implementation of our restructuring has placed, and may continue to place, a significant strain on our managerial, operational, financial and other resources. Additionally, the restructuring may negatively affect our employee turnover, recruiting and retention of important employees. If we are unable to implement our restructuring effectively or if we experience difficulties in effecting the restructuring, our expenses could decrease less quickly than we expect. If we find that our restructuring activities announced in June, August and November do not sufficiently decrease our expenses, we may find it necessary to implement further streamlining of our expenses, to perform further reductions in our workforce or to undertake another restructuring of our business. If our restructuring activities are not successful in effectively reducing our expenses or result in the loss of key personnel or employee morale, our business, financial condition and results of operations would be materially adversely affected. 24 A limited number of customers account for a high percentage of our revenue and the failure to maintain or expand these relationships could harm our business Five customers comprised approximately 42% of our revenue for the fiscal year ended April 30, 2001, and approximately 31% of our revenue for the fiscal year ended April 30, 2000. For the six months ended October 31, 2001, five customers accounted for approximately 31% of our revenue. For the three month ended October, 2001, one of our professional services customers accounted for approximately 12% of our total revenue. For the three months ended October 31, 2000, two customers each accounted for more then 10% of our total revenue. For the six month period ended October 31, 2001, one of our professional services customers accounted for more than 10% of our total revenue. For the six month period ended October 31, 2000, two of our customers each accounted for more than 10% of our total revenue. The loss of one or more of our major customers, the failure to attract new customers on a timely basis, or a reduction in usage and revenue associated with the existing or proposed customers would harm our business and prospects. We are contractually obligated to complete certain leasehold improvements In October 2000 we signed a ten-year lease, effective May 2001, for approximately 130,000 square feet located in Mississauga, Ontario. At this time, the facility is being constructed at our expense and we expect the total cost will be approximately $8.7 million. Through October 31, 2001, we have incurred $5.9 million of the total construction costs. We anticipate incurring approximately $2.8 million in additional construction costs subsequent to October 31, 2001 to complete the build-out of the facility. At this time, we do not plan to occupy the facility. Therefore, we are in the process of subleasing 100% of the facility as well as discussing other alternatives with the landlord to terminate the lease. We may not be able to find suitable sub-tenants to occupy this space in a timely manner in the future, if at all, or otherwise sublease these properties without a loss. If we are unable to find suitable sub-tenants, we may experience greater than anticipated operating expenses in the future, which could materially adversely affect our financial condition and operating results. We may be unable to find sub-tenants to sublease currently leased and vacant space In March 2000, we entered into a lease covering 68,000 square feet of office space adjacent to our then existing 43,000 square foot Hayward facility. This lease expires in July 2007 and has an initial monthly rent of approximately $61,000, with 3% annual increases. The lease on our adjacent Hayward facility expires in July 2007 and has current monthly base rent payments of approximately $54,000, increasing to approximately $57,000 in March 2002 and approximately $60,000 in March 2004. In August 2001, we relocated our Hayward operations to the 68,000 square foot facility and in November 2001, subleased our 43,000 square foot Hayward office space at a rental rate slightly above our rental rate. The sub-tenant is a privately financed medical device manufacturer which was started in 1998. The sub-tenant is not yet profitable and there is no assurance the sub-tenant will become profitable. If the sub-tenants were to discontinue paying rent, we would experience greater than planned operating expenses which could materially adversely affect our financial condition and operating results. We signed in October 2001 a ten-year lease for approximately 130,000 square feet located in Mississauga, Ontario. If the landlord intends to sell the leased premises, we have a right of first refusal with respect of any sale of this property on terms to be negotiated. The annual rental fee for the new site varies between approximately Cdn.$10.85 to Cdn.$13.05 per square foot ($6.82 to $8.20 per square foot based on the exchange rate on October 31, 2001) over the life of the lease. We began paying rent on this lease in May 2001. At this time we do plan to occupy this facility. We are currently searching for tenants to sublease our current Hayward and new Mississauga spaces. We may not be able to find suitable sub-tenants to occupy this space in a timely manner in the future, if at all, or otherwise sublease these properties without a loss. If we are unable to find suitable sub tenants, we may experience greater than anticipated operating expenses in the future, which could materially adversely affect our financial condition and operating results. Our success depends on an increase in the demand for digital signatures in m-business transactions and ECC-based 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. Currently, the vast majority of e-business and m-business transactions do not involve such digital signatures. Participants in mobile e-business have only recently begun to require client digital signatures in some applications, 25 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. In order for our business to be successful, ECC technology must become accepted as an industry standard. This has not happened to date, and 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, which could reduce the demand for some of our products and, consequently, our business, financial condition and results of operations could be materially adversely affected. 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 continue to invest in and develop future versions of these products which add features and functionality and to support our current versions of these products. 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. We have only recently begun to sell directly to enterprise customers, and we may not be successful in developing the products and services necessary to serve this new customer base We have recently started to sell certain products directly to enterprises other than OEMs. The direct-to-enterprise sales efforts will require that we attract, hire, train, manage and adequately compensate a larger group of professionals. We may not be successful in managing our sales effort so 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 may not be successful in developing the products and services necessary to serve this new customer base. Our business depends on continued development of the Internet and the continued growth of m-business Our future success is substantially dependent upon continued growth in Internet usage and the acceptance of mobile and wireless devices and their use for m-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 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. Furthermore, building a wireless-based strategy requires significant investment. Many companies may not have resources and capital to build the infrastructure required to support a wireless-based strategy. If this infrastructure build out does not occur, our revenue 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 m-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. 26 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 and 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. We have recently issued convertible debentures and our increased debt may place restrictions on our operations and limit our growth On August 30, 2001, we issued and sold Cdn.$13.5 million ($8.7 million based on exchange rate on August 30, 2001) aggregate principal amount of 7.25% convertible notes (the Notes) on a private placement basis. The Notes were subsequently converted by the holders thereof, without payment of additional consideration, into an equal principal amount of 7.25% senior convertible unsecured subordinated debentures (the Debentures) mature on August 30, 2004 and are convertible into our common shares at the holder's option at any time before the close of business on the earlier of August 30, 2004 and the last business day before the date specified for redemption at a conversion price of Cdn.$3.85 ($2.42 based on the exchange rate on October 31, 2001) per common share. If all of the Debentures are converted into common shares, holders of our outstanding common shares could have substantial dilution of their interest in the Company. Our total liabilities on a consolidated basis as at October 31, 2001 were approximately $25.9 million. The level of our indebtedness could have important consequences on our ability to operate and grow our business including the following: (i) our ability to obtain additional financing in the future could be restricted: (ii) our cash flow from operations dedicated to the payment of the principal of, an interest on, our indebtedness will not be available for other purpose; (iii) our flexibility in planning for, or reacting to, changes in our business and market conditions could be restricted. In addition, we may be more highly leveraged than certain of our competitors which might place us at a competitive disadvantage, and we could be more vulnerable in the event of further downturns in our business. We may not generate the required cash flow to service our debt We will be required to make our first payment of interest on the Debentures on February 28, 2002. Annual cash interest requirements on the Debentures will be approximately Cdn. $978,750 ($615,340 based on the exchange rate on October 31, 2001) There can be no assurance that we will achieve or sustain profitability or positive cash flow from operating activities, we may not be able to meet our debt service or working capital requirements or to obtain additional capital required in order to execute our business plan. We must manage our growth Despite our recent workforce reductions, we have experienced a period of significant growth in our sales and personnel that has placed strain upon our management systems and resources. Subject to future prevailing economic conditions, we may pursue potential market opportunities. Our growth has placed, and will place, demands on our management and operational resources, particularly with respect to: . training, supervising and retaining skilled technical, marketing and management personnel; . strengthening our financial and management controls in a manner appropriate for a larger enterprise; . maintaining a cutting edge research and development staff; . developing and managing a larger, more complex international organization; 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 and controls. If we 27 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, Inc. 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 may 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. Incurring debt or assuming additional liabilities 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. 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. 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. 28 We face risks related to our international operations For the six months ended October 31, 2001 and the fiscal year ended April 30, 2001, we derived approximately 7% and 10%, respectively, of our revenue from international operations. An important component of our long-term strategy is to further expand into international markets, and we must continue to devote resources to our international operations in order to succeed in these markets. To date, we have limited experience in international operations and may not be able to compete effectively in international markets. This future 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. In addition, 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 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. We occasionally receive communications from third parties alleging patent or copyright infringement, and there is always the chance that third parties may assert infringement claims against us. Currently, we are defending a claim filed against us by Leon Stambler. Any such claims, with our without merit, could result in costly litigation, expense of significant resources to develop non-infringing technology, cause product shipment delays or require us to enter into royalty or licensing agreements. We cannot be certain that the necessary licenses will be available or that they can be obtained on commercially reasonable terms. If we were to fail to obtain such royalty or licensing agreements in a timely manner and on reasonable terms, our business, financial condition and results of operations would 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. At this time, we are defending one of our licensees for a claim filed against them by Leon Stambler. 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. 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. 29 We belong to certain organizations that 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 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 30 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 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 its 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; . 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 as well as a diversion of our management's attention and resources. We have limited financial resources and may require additional financing that may not be available on acceptable terms or at all 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 31 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 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 affected. Our most significant direct competitors include RSA Security, Inc., VeriSign, Inc., Baltimore Technologies plc, and Entrust 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. Both the U.S. and Canadian governments regulate the export of cryptographic equipment and software, including many of our products. 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 affect our business. 32 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 preference 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 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 Disclosure About Market Risk Foreign Exchange Risk Currency fluctuations may materially adversely affect us. In fiscal 2000, approximately 33% of our total operating expenses were paid in currencies other than the U.S. dollars. In fiscal 2001, approximately 29% of our total operating expenses were paid in currencies other than the U.S. dollar In the first six months of fiscal 2002, approximately 30% of our total 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. We currently do not use financial instruments to hedge operating expense in foreign currencies. We intend to assess the need to utilize financial instruments to hedge currency exposures on an ongoing basis. 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. The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. We place our investment with high credit quality issuers and, by policy, limit the amount of the credit exposure to any one issuer. All highly liquid investments with a maturity of less than three months at the date of purchase are considered to be cash equivalent. All investments with maturities of three months or greater are classified as available-for-sale and considered to be short-term investments. Some of the securities that we have invested in may be subject to market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. We believe that an immediate 100 basis point move in interest rates would not materially affect the fair market value of our portfolio. To minimize this risk, we maintain our portfolio of cash equivalent and short-term investments in a variety of securities, including commercial paper, medium-term notes, and corporate bonds. As of October 31, 2001, our interest rate risk was further limited by the fact that approximately 100% of our investments mature in less than one year. We do not use any derivative instruments to reduce our exposure to interest rate fluctuations. 33 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 judgment could have a material adverse impact on our financial condition. In April 2000 we 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 that 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 of Geoworks' purportedly patented technology provided by Geoworks, 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 portions of the SSL standard. After an internal investigation, it is our belief that we do not implement any validly patented technology. We have 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(TM) PKI product, that our product may be covered by eSignX's patent. We have conducted an initial investigation and due to the vague description of the suggested infringement by our products, we were unable to determine the validity of such suggestions. We requested further elaboration from eSignX, and while a response was recently provided, it is complex in nature and we have not had an opportunity to perform an appropriate analysis. Although we intend to 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. On October 18 2001, we were served with a lawsuit commenced by Mr. Leon Stambler against several companies asserting that Mr. Stambler holds enforceable patents on certain aspects of technology related to online transactions, and seeking unspecified damages (U.S. District Court- Delaware/ Case # 01-0065-SLR). We have retained counsel and filed an answer to that complaint. Although we intend to vigorously defend our right to the use the indicted technology, there can be no assurance that we will be successful in doing so. In general, there can be no assurance that such asserted patent will not have a material adverse impact on us. Continued litigation is likely to be expensive and time-consuming. In general, there can be no assurance that such asserted patents will not have a material adverse impact on us. In addition, one of our former employees retained counsel and demanded payment of approximately $375,000 in settlement of a claim for discrimination and wrongful termination. Although we intend to 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. The Company has not set aside any financial reserves related to the actions discussed above. Item 4. Submission of Matters to a Vote of Security Holders At our Annual Meeting of Shareholders held on October 22, 2001, each of Bernard W. Crotty, William T. Dodds, Louis E. Ryan, William J. Stewart, Scott A. Vanstone and Robert P. Wiederhold was elected as a Director by the number of votes set forth in item 1 of the table below. The following proposals were adopted by the margins required under applicable law: 34
Number of shares Votes Votes Votes For Withheld Excluded ----- --------- -------- 1. Election of directors. 12,527,226 37,985 71,343 2. Appointment of KPMG LLP as auditors of the 12,511,979 57,964 66,611 Company to hold office until the next annual meeting of shareholders at a remuneration to be fixed by the Board of Directors of the Company.
35 Item 6. Exhibits and Reports on Form 8-K (a) Index to Exhibits Exhibit Number Description -------------- --------------------------------------------------- 10.1 Sublease Agreement between Certicom Corp. as Sub- landlord, and Guava Technologies Inc. as Subtenant, dated November 1, 2001. 10.2 Trust Indenture - Debentures, dated August 30, 2001 10.3 Trust Indenture - Notes, dated August 30, 2001 10.4 First Supplemental Indenture, dated August 30, 2001 (b) Reports on Form 8-K None 36 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 14th day of December 2001. Certicom Corp. /s/ Gregory M. Capitolo ----------------------- Gregory M. Capitolo Vice President, Finance, Chief Financial Officer and Secretary (Principal Financial and Accounting Officer) 37 EX-10.1 3 dex101.txt SUBLEASE BETWEEN CERTICOM AND GUAVA Exhibit 10.1 SUBLEASE AGREEMENT Between CERTICOM CORP. as Sublandlord, and GUAVA TECHNOLOGIES INC. as Subtenant Dated: November 1, 200l TABLE OF CONTENTS
Page ---- ARTICLE 1 - SUBLEASE ........................................................... 1 1.1 Sublease .................................................................. 1 ARTICLE 2 - HEADLEASE .......................................................... 1 2.1 Subleases Subject to Headlease ............................................ 1 2.2 Compliance with Headlease ................................................. 2 2.3 Services .................................................................. 2 2.4 Exercise of Rights and Remedies Under Headlease ........................... 3 2.5 Exclusion from Headlease .................................................. 3 ARTICLE 3 - SUBLEASE TERM ...................................................... 3 3.1 Sublease Term ............................................................. 3 3.2 Common Area ............................................................... 4 3.3 Surrender of Premises ..................................................... 4 3.4 Holding Over .............................................................. 6 3.5 Subtenant's Letter of Credit .............................................. 6 ARTICLE 4 - RENT ............................................................... 7 4.1 Rent ...................................................................... 7 4.2 Basic Rent ................................................................ 7 4.3 Chattels .................................................................. 7 4.4 Additional Rent ........................................................... 8 4.5 Payments Generally ........................................................ 8 4.6 Net Sublease .............................................................. 9 ARTICLE 5 - DELIVERY OF PREMISES; ALTERATIONS .................................. 9 5.1 Delivery of Premises ...................................................... 9 5.2 Condition ................................................................. 10 5.3 Signs ..................................................................... 10 5.4 Access and Inspection ..................................................... 10 ARTICLE 6 - USE, ASSIGNMENT AND SUBLETTING ..................................... 11 6.1 Use ....................................................................... 11 6.2 Legal Requirements ........................................................ 11 6.3 Assignment and Subletting ................................................. 11 6.4 Hazardous Materials ....................................................... 12
-ii- ARTICLE 7 - MAINTENANCE; UTILITIES ............................................. 12 7.1 Maintenance .............................................................. 12 ARTICLE 8 - INSURANCE .......................................................... 12 8.1 Subtenant's Insurance .................................................... 12 8.2 Indemnification of Sublandlord by Subtenant .............................. 13 8.3 Indemnification of Subtenant by Sublandlord .............................. 13 8.4 Legal Fees ............................................................... 14 ARTICLE 9 - TAXES .............................................................. 14 9.1 Taxes .................................................................... 14 ARTICLE 10 - CASUALTY .......................................................... 14 10.1 Casualty ............................................................... 14 ARTICLE 11 - DEFAULT ........................................................... 15 11.1 Subtenant's Default .................................................... 15 11.2 General Provisions Regarding Default ................................... 16 ARTICLE 12 - GENERAL PROVISIONS ................................................ 17 12.1 Mortgage Subordination ................................................. 17 12.2 Estoppel Certificates and Financial Statements ......................... 17 12.3 Representations and Warranties of Subtenant ............................ 17 12.4 Representation and Warranties of Sublandlord ........................... 17 12.5 Notices; Demands and Other Instruments ................................. 18 12.6 Chattels ............................................................... 18 ARTICLE 13 - MISCELLANEOUS ..................................................... 18 13.1 Severability ........................................................... 18 13.2 Binding Effect ......................................................... 18 13.3 Interpretation ......................................................... 19 13.4 Governing Law .......................................................... 19 13.5 Recitals ............................................................... 19 13.6 Headings and Captions .................................................. 19 13.7 Survival or Representations and Warranties ............................. 19 13.8 Entire Agreement ....................................................... 19 13.9 Amendments ............................................................. 19 13.10 Number, Gender ......................................................... 19 13.11 Brokers ................................................................ 20 13.12 Condition Precedent .................................................... 20 13.13 Facsimile Copies ....................................................... 20
SUBLEASE -------- THIS SUBLEASE is made as of October ___, 2001 between CERTICOM CORP., a Delaware Corporation, having an address at 200 Matheson Blvd. W., Mississauga, Ontario, Canada ("Sublandlord"), and GUAVA TECHNOLOGIES INC., a Delaware corporation having an address at 863 C Mitten Road, Burlingame, California ("Subtenant"). Recitals: -------- A. By a lease dated October 20, 1998 (the "Original Lease") between THE MULTI-EMPLOYER PROPERTY TRUST, A TRUST ORGANIZED UNDER 12 C.F.R. SECTION 9.18 (the "Landlord") and Sublandlord, as amended by an amending agreement dated November 17, 1998 (the "First Amendment to Lease") and an amending agreement dated March 15, 1998 (the "Second Amendment to Lease") (the Original Lease, First Amendment to Lease and Second Amendment to Lease are hereinafter collectively referred to as the "Headlease"), a redacted copy of which is attached hereto as Exhibit C, Sublandlord, as tenant, leases all of the Building --------- located at 25801 Industrial Blvd. (the "Premises"), Mt. Eden Business Park (the "Property") Hayward, California, being approximately 42,855 rentable square feet, the approximate location of which is shown on Exhibit A attached hereto --------- for a term of 8 years 4 months commencing March 1, 1999 and ending July 31, 2007. The entity from time to time holding the Landlord's interest under the Headlease is referred to as "Headlandlord". B. Subtenant desires to sublease from Sublandlord and Sublandlord desires to sublease to Subtenant the Premises upon the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the Premises, the rents reserved herein and the mutual benefits to be derived by Sublandlord and Subtenant, the parties hereby agree as follows: ARTICLE 1 - SUBLEASE -------------------- 1.1 Sublease. -------- Sublandlord hereby subleases to Subtenant and Subtenant hereby subleases from Sublandlord for the term at the rental, and upon all of the conditions set forth herein, the Premises. ARTICLE 2 - HEADLEASE --------------------- 2.1 Sublease Subject to Headlease. ----------------------------- Except as otherwise expressly provided in this Sublease and the Consent to Sublease Agreement the ("Consent") executed by Landlord, Sublandlord and Subtenant following the execution of this Sublease, Sublandlord and Subtenant hereby acknowledge and agree that this Sublease is subject and subordinate to all terms, conditions and covenants of the Headlease. As between Sublandlord and Subtenant, however, subject to any modifications contained in the -2- Consent, the terms of this Sublease shall govern in the event of any inconsistency between the Sublease and the Headlease. 2.2 Compliance with Headlease. ------------------------- (a) For the purposes of this Sublease only, Subtenant covenants and agrees to assume all of the responsibilities and obligations of Sublandlord as the tenant under the Headlease with respect to the Premises for the entire Sublease Term (as hereinafter defined) (other than those provisions specifically excluded or modified in this Sublease, including, but not limited to, the obligations to pay rent which payment obligations are governed by this Sublease). Sublandlord and Subtenant each covenant and agree to deliver promptly to the other copies of any and all notices or other correspondence received by each from the Headlandlord which are applicable to the Premises, and each further agrees, notwithstanding anything contained in Article 12.5 hereof to the contrary, to deliver such notices in the manner most appropriate to insure that the other will be able to respond to any of such notices or other correspondence from the Headlandlord within any time periods set forth in the Headlease. (b) Subtenant covenants and agrees not to do, permit or allow any act which would or might violate or constitute a breach of or a default under any of the terms and conditions of the Headlease, or which would or might render Sublandlord liable for any damage, claim, charge, penalty or expense thereunder. (c) Subtenant agrees that Sublandlord shall not be required to perform any of the covenants, agreements and/or obligations of Headlandlord under the Headlease and, insofar as any of the covenants, agreements and obligations of Sublandlord hereunder are required to be performed under the Headlease by the Headlandlord, Subtenant agrees that Sublandlord shall be entitled to look to Headlandlord for such performance. Notwithstanding the foregoing, Sublandlord shall promptly take such action as may reasonably be indicated, under the circumstances, to secure such performance upon Subtenant's request to Sublandlord to do so and shall thereafter diligently prosecute such performance on the part of Headlandlord. 2.3 Services. -------- Except as otherwise provided in the Consent and as otherwise limited herein, Subtenant hereby acknowledges and agrees that the only services, amenities and rights to the Premises, and to which Subtenant is entitled under this Sublease are those to the Premises to which Sublandlord is entitled under the Headlease, subject to all the provisions, restrictions and conditions set forth in the Headlease and this Sublease. Sublandlord shall not be liable to Subtenant for Headlandlord's failure to provide any such services, amenities and rights, nor shall any such failure be construed as a breach of this Sublease by Sublandlord or an eviction of Subtenant, unless any such failure is the result, directly or indirectly, of Sublandlord's act or failure to act in accordance with the Headlease, during a period when Subtenant is not in default under this Sublease. Further, Headlandlord's failure to provide any such services, amenities and rights shall not entitle Subtenant to an abatement of any of the Basic Rent, Additional Rent (as hereinafter defined) or any other sums payable under this Sublease, except and only to the extent that (a) Sublandlord receives an abatement under the Headlease with respect thereto, or (b) such -3- failure to provide services, amenities or rights is due solely to Sublandlord's uncured default under the Headlease. 2.4 Exercise of Rights and Remedies Under Headlease. ------------------------------------------------ Subtenant shall not have the right to exercise any of Sublandlord's options or elections permitted or authorized under the Headlease, or to institute any action or proceeding against Headlandlord for the enforcement of the Headlease. If Headlandlord shall default in the performance of any of its obligations under the Headlease, Sublandlord shall, upon the written request of Subtenant and at Subtenant's sole cost and expense, use its good faith efforts to enforce the Headlease and obtain Headlandlord's compliance with its obligations thereunder. Sublandlord shall in no event be liable to Subtenant for any default by Headlandlord in the performance of its obligations under the Headlease, nor shall any such default be construed as a breach of this Sublease by Sublandlord or an eviction of Subtenant, or entitle Subtenant to an abatement of any of Basic Rent, Additional Rent or any other sums payable under this Sublease, except and only to the extent that (a) Sublandlord receives an abatement under the Headlease with respect thereto, or (b) such failure to provide services, amenities or rights is due to Sublandlord's uncured default under the Headlease during a period when Subtenant is not in default under this Sublease. 2.5 Exclusion from Headlease ------------------------ Subject to the Consent, the following Articles and Exhibits of the Headlease are, without limitation, expressly excluded from this Sublease and shall not apply to the Subtenant except where expressly identified in this Sublease: Basic Lease Information, Articles 2(a) and 2(b), Article 4, Article 7, Article 9(a) (with respect to "Alteration Fee" only), Article 9(c) (with respect to the second sentence only), Article 9(d), Article 12 (first sentence only), Article 14(a) (clause (i.) of the first subparagraph), Article 14(c), Article 15(a)(v), Article 17, Article 27, Article 36, Article 39(m), Exhibit B, Exhibit C, First Amendment to Lease and Second Amendment to Lease. ARTICLE 3 - SUBLEASE TERM ------------------------- 3.1 Sublease Term. ------------- (a) Sublandlord hereby subleases and demises to Subtenant and Subtenant hereby subleases and takes from Sublandlord the Premises for a term (the "Sublease Term") commencing January 1, 2002 (the "Term Commencement Date") and expiring as providkd in the Headlease on July 30, 2007 (the "Expiration Date"), unless terminated earlier according to the terms hereof or extended according to the terms of Article 3.1(b), for the rent herein reserved and upon and subject to the covenants, agreements, terms, conditions and provisions hereinafter set forth. Except as otherwise provided in the Consent, if the Headlease is terminated in accordance with its terms (whether by expiry, termination or surrender) this Sublease shall be automatically terminated at the same time as the Headlease is terminated. Subtenant agrees to accept possession of the Premises on or after November 12, 200l. -4- (b) Notwithstanding the foregoing provisions of Article 3.1(a), if the Sublandlord exercises the option to renew the Headlease as provided in Article 40 of the Headlease, the Sublandlord, at th.e same time as written notice of such exercise is delivered to the Headlandlord, shall send to Subtenant a copy of said notice. Subtenant shall then have the option to renew this Sublease for an additional term equal to the term set forth in Article 40 of the Headlease. Such renewal option must be exercised, if at all, by written notice given to Sublandlord not later than three (3) months after receipt of a copy of Sublandlord's notice to Headlandlord. Notwithstanding the foregoing provisions of this Article 3.1(b), this renewal option shall be null and void and Subtenant shall have no right to renew this Sublease if, (i) the Sublandlord fails to renew the Headlease, or (ii) on the date Subtenant exercises such renewal option or on the date immediately preceding the commencement of the renewal period Subtenant is in default of any of its obligations under this Sublease. If Subtenant exercises such renewal option, then during the renewal period the Base Rent payable by Subtenant shall be determined as provided in the second paragraph of Article 40(a) of the Headlease; provided, however, that the term "fair market rent" as used in said second paragraph of Article 40(a) of the Headlease shall mean the rental rate for comparable space under a sublease (and not a primary lease) to new subtenants. (c) Subtenant shall throughout the Sublease Term lease the chattels listed or described in Exhibit C attached hereto (collectively, the "Chattels") and shall use the Chattels in connection with the use of the Premises only; provided, however, that Subtenant may remove all or any portion of the Chattels from the Premises and store said Chattels in a commercial facility engaged in the business of storing similar property of its customers. Such storage of the Chattels shall be at the sole cost and expense of Subtenant and shall be in addition to the rent payable by Subtenant for such Chattels pursuant to Article 4.3. In the event that all or any portion of the Chattels are removed from the Premises for storage, Subtenant shall provide to Sublandlord written notice specifying the location of Chattels so removed and a complete inventory of the Chattels removed from the Premises and placed in storage. 3.2 Common Area. ----------- Except as otherwise provided in the Consent, Subtenant's use of the Common Area shall be subject to all restrictions, covenants and rules and regulations of the Headlease, including the CC&R%. Except as otherwise provided in the Consent, Subtenant covenants not to do or permit to be done any act in or on the Common Area which would unreasonably interfere with the use or enjoyment of the Common Area by the other tenants and occupants of other buildings on the Property. 3.3 Surrender of Premises. --------------------- (a) On the Expiration Date or upon the earlier termination of the Sublease or of Subtenant's right to possession of the Premises, Subtenant will at once surrender and deliver up the Premises, together with all improvements thereon, to Sublandlord in good condition and repair, reasonable wear and tear excepted; conditions existing because of Subtenant's failure to perform maintenance, repairs or replacements as required of Subtenant under this Sublease shall not be deemed "reasonable wear and tear." Said improvements shall include all plumbing, lighting, electrical, heating, cooling and ventilating fixtures and equipment and other articles of personal -5- property used in the operation of the Premises (as distinguished from operations incident to the business of Subtenant). Subtenant shall surrender to Sublandlord all keys to the Premises and make known to Sublandlord the combination of all combination locks which Subtenant is permitted to leave on the Premises. (b) All Initial Alterations (as defined in Article 5.1(a)) and Other Subtenant Alterations (as defined in Article 5.l(a))in or upon the Premises made by Subtenant shall become a part of and shall remain upon the Premises upon such termination without compensation, allowance or credit to Subtenant; provided, however, that Sublandlord shall have the right to require Subtenant to remove any Other Subtenant Alterations, or portions thereof unless Consent specifically states that no such removal required. Said right shall be exercisable by Sublandlord's giving written notice thereof to Subtenant not less than sixty (60) days prior to such Expiration Date or more than twenty (20) days after such termination. In addition to the foregoing, Subtenant shall also remove any Other Subtenant Alterations made by Subtenant, or portion thereof, which Headlandlord may require Sublandlord to remove, pursuant to the terms of the Headlease. In any such event, Subtenant shall restore the Premises to their condition prior to the making of such Other Subtenant Alterations, repairing any damage occasioned by such removal or restoration. If Sublandlord or Headlandlord requires removal of any Other Subtenant Alteration, or a portion thereof, and Subtenant does not make such removal in accordance with this Article 3.3, Sublandlord may remove the same (and repair any damage occasioned thereby), and dispose thereof, or at its election, warehouse the same. Subtenant shall pay the costs of such removal, repair and warehousing on demand. (c) As between Sublandlord and Subtenant, Subtenant shall not be required to remove any Alterations performed by Sublandlord prior to the Term Commencement Date or to restore the Premises to their condition prior to the making of such Alterations. If Sublandlord is required under the Headlease to remove any Alterations performed prior to the Commencement Date, Subtenant shall permit Sublandlord to enter the Premises for a reasonable period of time prior to the Expiration Date, subject to such conditions as Subtenant may reasonably impose, for the purpose of removing Sublandlord's Alterations and restoring the Premises as required by the Headlease. (d) On the Expiration Date, or upon the earlier termination of the Sublease or of Subtenant's right to possession of the Premises, Subtenant shall remove Subtenant's articles of personal property incident to Subtenant's business ("Trade Fixtures"); provided, however that Subtenant shall repair any injury or damage to the Premises which may result from such removal, and shall restore the Premises to the same condition as prior to the installation thereof. If Subtenant does not remove Subtenant's Trade Fixtures from the Premises on or before the Expiration Date or the earlier termination of this Sublease, Sublandlord may, at its option, remove the same (and repair any damage occasioned thereby and restore the Premises as aforesaid) and dispose thereof or warehouse the same, and Subtenant shall pay the cost of such removal, repair, restoration or warehousing to Sublandlord on demand, or Sublandlord may treat said Trade Fixtures as having been conveyed to Sublandlord with this Sublease acting as a Bill of Sale therefor, without further payment or credit by Sublandlord to Subtenant shall indemnify, defend and hold harmless from all damages, loss, cost and expense (including reasonable attorneys' fees) arising out of or in -6- connection with Subtenant's failure to surrender the Premises in accordance with this Article 3.3. This Article 3.3 shall survive the termination or expiration of this Sublease. 3.4 Holding Over. ------------ If Subtenant remains in occupancy of the Premises beyond the Expiration Date or earlier termination of the Sublease, it shall remain solely as a subtenant from month-to-month, and all provisions of this Sublease applicable to the Sublease Term shall remain in full force and effect, except that Basic Rent shall be 150% of that in effect upon the expiration or termination date. Nothing in this Article is intended or shall be construed to permit Subtenant to remain in occupancy of the Premises beyond the expiration or termination of the Sublease Term or to waive any right or remedy of Sublandlord as a result thereof. Subtenant shall defend, indemnify and save Sublandlord, its successors and assigns, harmless from any cost, loss, damage or expense, including, without limitation, attorneys' fees, incurred by Sublandlord as a result of any claim, suit, liability or demand arising out of, pertaining to or involving Subtenant's remaining in occupancy of the Premises beyond the expiration or termination of the Sublease Term. 3.5 Subtenant's Letter of Credit. ---------------------------- (a) Concurrently with the execution of this Sublease by Subtenant, Subtenant shall deliver to Headlandlord an unconditional irrevocable letter of credit ("Letter of Credit"), in the form and content required by the Consent, as consideration for Subtenant's execution of this Sublease and as consideration for the granting of an attornment clause to Subtenant by Headlandlord, as provided in the Consent. The Letter of Credit shall be maintained in effect from the date of this Sublease through thirty (30) days after the expiration or earlier termination of the Term, provided, however, that if the term of the Letter of Credit will expire prior to the expiration of such thirty (30) day period, Subtenant shall deliver to Headlandlord, at least fifteen (15) calendar days prior to the expiration date of the Letter of Credit, a renewal of the Letter of Credit or a replacement Letter of Credit which satisfies the conditions of this Article 3.6 and the Consent. Further, Subtenant shall deliver to Headlandlord, during said fifteen (15) day period, a confirmation from the issuer of said extension or replacement Letter of Credit. (b) The Letter of Credit shall be issued, at Subtenant's sole expense, by a Chicago office of UBS Paine Webber, another similarly qualified financial institution or a San Francisco or New York office of a major national bank reasonably satisfactory to Subtenant and Sublandlord (the "Bank"), name the Headlandlord as the beneficiary, in the amount of $600,000.00 from and during the Sublease Term. The Letter of Credit shall be for a one-year term or, at Subtenant's election, longer, and shall not vary materially in form and content from Exhibit E. In the event that the Bank shall fail to notify Headlandlord that the Letter of Credit will be renewed for at least one (1) year beyond the then applicable expiration date, and Subtenant shall not have delivered to Headlandlord, at least fifteen (15) days prior to the relevant annual expiration date, a replacement Letter of Credit in the amount required hereunder and otherwise meeting the requirements set forth above, then Headlandlord shall be entitled to draw on the expiring Letter of Credit, up to the full amount thereof, and shall hold and apply the proceeds of such draw as Letter of Credit Proceeds pursuant to Article 3.5(a) above. -7- ARTICLE 4 - RENT ---------------- 4.1 Rent. ---- The Subtenant acknowledges that it has examined a copy of the Headlease and the covenants and obligations of the Landlord contained therein. The Subtenant shall honor, perform and observe all of the Sublandlord's covenants, obligations, and agreements therein respectively reserved and contained with respect to the Premises, including the payment of all rentals, charges, costs and other expenses of any kind or nature whatsoever to be paid by the Sublandlord under the Headlease, as if the same were a part of this Sublease. 4.2 Basic Rent. ---------- Commencing on January 1, 2002 (the "Rent Commencement Date"), and continuing throughout the Sublease Term, commencing in each year on the anniversary date of the Rent Commencement Date, Subtenant shall pay to Sublandlord or as it may from time to time direct as "Basic Rent", as rent, for the Premises: (i) during Year 1 of the Sublease Term $694,251.00; (ii) during Year 2 of the Sublease Term $715,078.56; (iii) during Year 3 of the Sublease Term $736,530.84; (iv) during Year 4 of the Sublease Term $758,626.80; (v) during Year 5 of the Sublease Term $781,385.52; and (vi) during Year 6 of the Sublease Term $804,827.16; payable in each case in equal monthly installments in advance on the Rent Commencement Date and on the first day of each month thereafter during the Sublease Term. Basic Rent for any broken month shall be pro-rated. 4.3 Chattels. -------- Commencing on the Rent Commencement Date and continuing throughout the Sublease Term, Subtenant shall pay to Sublandlord or as it may from time to time direct, as rent, for the Chattels: (i) during Year 1 of the Sublease Term $150,000.00; (ii) during Year 2 of the Sublease Term $154,500.00; (iii) during Year 3 of the Sublease Term $159,135.00; (iv) during Year 4 of the Sublease Term $163,909.05; -8- (v) during Year 5 of the Sublease Term $168,826.32 and (vi) during Year 6 of the Sublease Term $173,891.10; payable in each case in equal monthly installments in advance on the Rent Commencement Date and on the first day of each month thereafter during the Sublease Term. Rent for any broken month shall be pro-rated. 4.4 Additional Rent. --------------- (a) The Subtenant agrees to pay to the Sublandlord as additional rent in respect of the Premises, commencing on the Rent Commencement Date, all sums which the Sublandlord is from time to time required to pay to the Headlandlord as additional rent under the Headlease, including without limiting the generality of the foregoing the payments for Real Property Taxes, Tenant's Percentage Share of Operating Expenses, payments for taxes, rates, duties and assessments, water, utilities, bulbs, and other amounts due under the Headlease (collectively, "Additional Rent"). Additional Rent may be collected by the Sublandlord as rent, with all rights of distress and otherwise as reserved to the Sublandlord hereunder or at law in respect of rent in arrears. (b) All payments of Additional Rent required to be paid by the Subtenant to the Sublandlord hereunder, shall be paid by the Subtenant to the Sublandlord not later than the times that such are payable by the Sublandlord to the Headlandlord under the Headlease. 4.5 Payments Generally. ------------------ Payments by the Subtenant to the Sublandlord of whatsoever nature required or contemplated by this Sublease shall: (i) be made when due hereunder, without notice or demand therefor and without any abatement, set-off, compensation or deduction whatsoever at the address of the Sublandlord set forth above or at such other place as the Sublandlord may designate from time to time to Subtenant; (ii) be applied towards amounts then outstanding hereunder in such manner as the Sublandlord determines; and (iii) shall be subject to the late payment charges set out in Article 3 of the Headlease. In the event of any non-payment of any amounts required to be paid pursuant to the provisions of this Sublease, or the Headlease, as the case may be, the Sublandlord, in addition to any other rights hereunder or at law, shall have the same remedies and may take the same steps for the recovery of all amounts as the Sublandlord may have for recovery of rent in arrears under the terms of this Sublease or at law. 4.6 Net Sublease. ------------- The Subtenant acknowledges and agrees that it is the intention of the parties that this Sublease shall be a completely carefree net Sublease for the Sublandlord, and that the Sublandlord shall not be responsible during the Sublease Term for any loss, charges, expenses and outlays of any nature or kind whatsoever arising from or relating to the Premises or the contents thereof and the Subtenant shall pay all such charges, impositions and expenses of every kind and nature relating to the Premises, as is required to be paid by the Sublandlord under the terms and provision of the Headlease save such as to be perfomed by the Headlandlord under -9- the Headlease, and covenants with the Sublandlord accordingly. Any amount and any obligation relating to the Premises or this Sublease which is not expressly declared in this Sublease to be the responsibility of the Sublandlord shall be the responsibility of the Subtenant to be paid or performed by or at the Subtenant's expense. ARTICLE 5 - DELIVERY OF PREMISES; ALTERATIONS --------------------------------------------- 5.1 Delivery of Premises. --------------------- (a) Alterations. Sublandlord has reviewed and approved detailed plans and specifications for the initial alterations and additions to the Premises and Common Area listed in Exhibit D (the "Initial Alterations"). Sublandlord hereby approves and consents to the construction by Subtenant of the Initial Alterations, provided that the Consent includes the consent of the Landlord to the construction of the Initial Improvements. Subtenant shall not make any other alterations in or additions to the Premises ("Other Subtenant Alterations"), if to do so would constitute a default under the Headlease (without regard to any requirement of notice or cure period). If Subtenant's proposed Other Subtenant Alterations would not constitute a default under the Headlease, Sublandlord's consent thereto shall nonetheless be required, but Sublandlord's consent to such Other Subtenant Alterations shall not be unreasonably withheld, and if Sublandlord consents thereto, Sublandlord shall use reasonable efforts to obtain the consent of the Headlandlord if such consent is required under the Headlease. If Other Subtenant Alterations are permitted or consented to, Subtenant shall make all Other Subtenant Alterations in accordance with all requirements set forth in the Headlease and this Sublease, and Subtenant shall be responsible to pay, directly to Headlandlord, all sums required to be paid in connection with the making of Alterations under the Headlease. Subtenant shall indemnify, defend and hold harmless Sublandlord against liability, loss, cost, damage, liens and expense imposed on Sublandlord arising out of the performance of Other Subtenant Alterations by Subtenant. (b) Removal of Other Subtenant Alterations. If Subtenant performs any Other Subtenant Alterations, Subtenant shall be obligated to remove such Other Subtenant Alterations and restore the Premises to the condition existing on the Term Commencement Date if the Headlease or the Consent requires such removal and restoration. (c) No Liens. Subtenant shall not do any act which in any way encumbers the title of the Headlandlord in and to the Premises, the Building or the Property (or any part thereof) nor shall the interest or estate of Headlandlord or Sublandlord be in any way subject to any claim by way of lien or encumbrance, whether by operation of law or by virtue of any express or implied contract by Subtenant, or by reason of any other act or omission of Subtenant. Any lien shall, at Subtenant's expense, be discharged within ten (10) days after Notice is hereby given that Sublandlord and Headlandlord will not be liable for any labor, service or material furnished or to be furnished to Subtenant, and that no mechanics or other liens for such labor, services or materials shall attach to or affect the interest of Sublandlord or Headlandlord in and to the Premises or any part thereof. Subtenant shall defend, indemnify and save Sublandlord, Headlandlord and Headlandlord's mortgagee, if any, and their respective successors and assigns, harmless from any cost, loss, damage or expense, including, without limitation, attorneys' fees, incurred as a result of any claim, suit, liability or demand arising out of, pertaining to or -10- involving any mechanics' or other lien or security interest which Subtenant permits to be filed against the Premises. 5.2 Condition. --------- (a) The Premises are subleased and assigned to Subtenant and the rights to the Common Area are granted to Subtenant in their present condition by Sublandlord, without representation or warranty, express or implied, subject and subordinate to the Headlease, all easements, restrictions, agreements and recorded matters, all taxes and Real Property Taxes, not yet due and payable, and all applicable zoning restrictions, regulations and ordinances and building restrictions and governmental regulations now or hereafter in effect. (b) By execution of this Sublease and except as expressly set forth herein, Subtenant acknowledges and agrees that it has inspected the Premises, the Building and the Property and shall accept the Premises and the Common Area on the Term Commencement Date in their then "as is" and "where is" physical and environmental condition. Subtenant acknowledges and agrees that neither Sublandlord nor its agents or employees has made any express warranty or representation regarding the physical or environmental condition of the Premises, the Common Area, the Building or the Property, the quality of material or workmanship of the Premises, the Common Area, the Building or the Property, latent or patent, or the fitness of the Premises, the Common Area, the Building or the Property for any particular use or purpose and that no such representation or warranty shall be implied by law, it being agreed that all such risks are to be borne by Subtenant. (c) Subtenant acknowledges that Exhibit A is an approximation only of the --------- buildings and improvements on the Property and that no representation or warranty, express or implied, is hereby made by Sublandlord, its employees or agents, regarding the existence, location or size of any buildings or improvements in the Property. Subtenant acknowledges that, without Subtenant's consent, the owners, tenants and occupants of the Building or buildings on the Property may have the right to modify the buildings and improvements or construct additions or additional buildings or improvements in the Building or on the Property. (d) The Sublandlord agrees, at its own expense, to deliver the Premises in a broom swept condition. 5.3 Signs. ------ Subtenant acknowledges that any signage shall be subject to the terms of Article 21 of the Headlease, CC&R's, Headlandlord's approval and all Legal Requirements, and at Subtenant's sole expense. 5.4 Access and Inspection. ---------------------- Upon reasonable prior notice to Subtenant (but nothing in the foregoing shall limit any right of Headlandlord to enter the Premises under the Headlease), Sublandlord and Headlandlord, and their respective agents, shall have access to the Premises at all reasonable times to (i) examine and inspect and the Premises; (ii) repair the Premises or any part thereof in accordance -ll- with the Headlease; (iii) show the Premises to prospective mortgagees and purchasers; and (iv) during the last one hundred twenty (120) days of the Sublease Term, to show the Premises to prospective assignees, subtenants. ARTICLE 6 - USE, ASSIGNMENT AND SUBLETTING ------------------------------------------ 6.1 Use. --- The Subtenant shall use and occupy the Premises from and after the Rent Commencement Date and shall thereafter conduct its business therein. The Premises may be used for general office and administrative purposes, including computer hardware and software development, engineering and laboratory facilities for development of scientific instrumentation and chemical reagents, light manufacturing facilities for the assembly of scientific instruments and production of chemical reagents, the development, light manufacturing and marketing of medical instruments or similar products and the storage of materials used in foregoing activities, including, but not limited to, chemicals which are classified by Article 8 of the Headlease as "Hazardous Materials" (the "Permitted Use"), and for no other purpose without the prior written consent of Landlord and Sublandlord; provided that such purpose is not precluded by and is in accordance with Article 8 (as modified by the Consent) and any other provisions of the Headlease and all other Legal Requirements applicable to the Premises and Subtenant's operations therein. 6.2 Legal Requirements. ------------------ Subtenant shall comply with and cause the Premises to comply with: (a) all Legal Requirements and federal laws, orders and regulations now or hereafter applicable to the Premises or the occupancy or use thereof or the health and welfare of Subtenant's employees, invitees, licensees or customers, including, without limitation, Legal Requirements which require unforeseen or structural alterations or repairs to the Premises; (b) the Headlease; and (c) all easements, agreements, restrictions and recorded matters affecting or relating to the Premises, and all agreements entered into by Subtenant and Sublandlord with regard to the Premises, including insurance policies. Subtenant covenants not to do or permit to be done any act in the Premises which would unreasonably interfere with the use or enjoyment of the Premises, the Building or the other buildings on the Property by the occupants of the Premises, the Building or any of the other buildings on the Property. 6.3 Assignment and Subletting. ------------------------- Subtenant may not assign or transfer this Sublease or sublet all or any part of the Premises without Sublandlord's prior written consent, and any assignment or subletting without Sublandlord's consent shall be void and of no effect. If Subtenant assigns this Sublease or sublets all or any part of the Premises, Subtenant shall nevertheless remain primarily liable to Sublandlord for the full payment of Basic Rent, Additional Rent and any other sum due under this Sublease and the observance and performance of all obligations, covenants and agreements under this Sublease as payments and obligations of a principal and not of a guarantor or surety as -12- though no assignment or subletting had been made. Each sublease shall expressly be made subject to the provisions of this Sublease. 6.4 Hazardous Materials. ------------------- Subject to the Consent, Sublandlord acknowledges and agrees that Subtenant, in addition to the Hazardous Materials permitted in, on or about the Premises or Real Property by Article 8 of the Headlease, shall be permitted to store and use in, on or about the Premises or Real Property, in a normal and customary manner for Subtenant's permitted uses of the Premises under this Article 6, the Hazardous Materials listed in Exhibit F attached hereto; provided that the Handling of such Hazardous Materials shall comply at all times with all Legal Requirements, including Hazardous Material Laws (as defined in the Headlease). When applying Article 8(d) of the Headlease as an incorporated provision of this Sublease, the Subtenant's indemnity of the Headlandlord and the Sublandlord shall not apply to the extent the Claim arises by reason of Hazardous Materials conditions existing upon the Premises or the Real Property as of the Term Commencement Date of this Sublease. ARTICLE 7 - MAINTENANCE; UTILITIES ---------------------------------- 7.1 Maintenance. ----------- Subtenant covenants and agrees to comply with Article 10 of the Headlease. During the Sublease Term, Subtenant shall keep fully paid a contract for regular servicing and maintenance (at least once quarterly) of the heating, ventilating and air conditioning systems serving the Premises, which contractor shall be approved by Sublandlord, such approval not to be unreasonably withheld. Sublandlord shall not be required to maintain, repair or rebuild the Premises. Subtenant hereby waives the right to perform maintenance or make repairs at the expense of Sublandlord pursuant to any law at any time in effect. ARTICLE 8 - INSURANCE --------------------- 8.1 Subtenant's Insurance. --------------------- (a) Commencing on the Term Commencement Date, Subtenant shall take out and at all times during the Sublease Term Subtenant shall keep in force such insurance in respect of the Premises as shall comply with the obligations of the Sublandlord pursuant to Article 13 of the Headlease, and shall be subject to the same limitations of liability with respect to damage, loss or injury as are set out in the Headlease. Each policy shall name as additional insureds the Headlandlord, Headlandlord's mortgagee, if any, and Sublandlord. In addition, every policy shall provide that such policy shall not be canceled or materially amended without at least thirty (30) days prior written notice to the named and additional insureds and that it shall not be invalidated or the proceeds not payable by or due to any act or neglect of Subtenant or the additional insureds, occupancy or use of the Premises for purposes more hazardous than permitted by such policy, any foreclosure or other proceedings relating to the Premises or change in title to or ownership of the Premises, or part thereof. Such policies shall not require Subtenant and the additional insureds to pay any portion of any loss, damage or claim prior to payment by the insurer. On the -13- date that this Sublease is executed by Subtenant and thereafter not less than thirty (30) days prior to the expiration of such insurance, Subtenant shall deliver to Sublandlord certificates of such insurance. Subtenant shall not obtain or carry separate insurance concurrent in form or contributing in the event of loss with that required by this Sublease. (b) Sublandlord and Subtenant each hereby waives any and all rights of recovery against the other or against the directors, officers, shareholders, partners, employees, agents and representatives of the other, on account of loss or damage of such waiving party or its property, or the property of others under its control, to the extent that such loss or damage is insured against under any property coverage insurance policy which either may have in force at the time of such loss or damage. Subtenant shall, upon obtaining the policies of property insurance required under this Sublease, give notice to its insurance carrier(s) that the foregoing mutual waiver of subrogation is contained in this Sublease. The waivers set forth herein shall be required to the extent that same are available from each party's insurer without additional premium, if an extra charge is incurred to obtain such waiver, it shall be paid by the party in whose favor the waiver runs within fifteen (15) days after written notice from the other party. 8.2 Indemnification of Sublandlord by Subtenant. ------------------------------------------- Subtenant shall indemnify and hold harmless Sublandlord and the Headlandlord, and each of their agents and employees (collectively the "Indemnified Parties"), from and against any and all claims, suits, demands, damages, judgments, costs and expenses arising from Subtenant's use of the Premises, or from the conduct of Subtenant's business, or from any activity, work, act or omission of Subtenant and its agents, employees, contractors or invitees, or permitted or suffered by Subtenant in or about the Premises or elsewhere unless such claims, suits, demands, damages, judgments, costs and expenses are caused by or arise from the negligence or wilful conduct of any of the Indemnified Parties, and shall further indemnify and hold harmless Sublandlord or the Headlandlord, as the case may be, from and against any and all claims, suits, demands, damages, judgments, costs and expenses arising from any breach or default in the performance of any obligation on Subtenant's part to be performed under the terms of this Sublease, or arising from any negligence of Subtenant or any of Subtenant's agents, invitees, contractors, or employees, and from and against all costs, expenses and liabilities (including, without limitation, reasonable legal fees and disbursements) incurred in the defence of any such claim or any action or proceeding brought thereon. Subtenant agrees that should any action or proceeding be brought against Sublandlord or the Headlandlord by reason of any such claim, upon notice from Sublandlord or the Headlandlord, unless caused by or arising from the negligence or willful conduct of any of the Indemnified Parties, as the case may be, Subtenant shall defend the same at Subtenant's expense by counsel reasonably satisfactory to Sublandlord or the Headlandlord, as the case may be. The indemnifications set forth in this paragraph shall survive the expiration or earlier termination of this Sublease. 8.3 Indemnification of Subtenant by Sublandlord. ------------------------------------------- Sublandlord shall indemnify and hold harmless Subtenant and each of its agents and employees (collectively the "Subtenant Indemnified Parties"), from and against any and all claims, suits, demands, damages, judgments, costs and expenses arising from the use of the -14- Premises by Sublandlord, or from the conduct of Sublandlord's business, or from any activity, work, act or omission of Sublandlord and its agents, employees, contractors or invitees, or permitted or suffered by Sublandlord in or about the Premises or elsewhere unless such claims, suits, demands, damages, judgments, costs and expenses are caused by or arise from the negligence or wilful conduct of any of the Subtenant Indemnified Parties, and shall further indemnify and hold harmless Subtenant from and against any and all claims, suits, demands, damages, judgments, costs and expenses arising from any breach or default in the performance of any obligation on Sublandlord's part to be performed under the terms of this Sublease, or arising from any negligence of Sublandlord or any of Sublandlord's agents, invitees, contractors, or employees, and from and against all costs, expenses and liabilities (including, without limitation, reasonable legal fees and disbursements) incurred in the defence of any such claim or any action or proceeding brought thereon. Sublandlord agrees that should any action or proceeding be brought against Subtenant by reason of any such claim, upon notice from Subtenant, unless caused by or arising from the negligence or willful conduct of any of the Subtenant Indemnified Parties, as the case may be, Sublandlord shall defend the same at Sublandlord's expense by counsel reasonably satisfactory to Subtenant, as the case may be. The indemnifications set forth in this paragraph shall survive the expiration or earlier termination of this Sublease. 8.4 Legal Fees. ----------- In the event a Party to this Sublease, without any fault on its part, is a party to any litigation commenced by or against the other Party, the other Party shall pay all costs including, without limitation, reasonable legal fees incurred by or imposed by or upon the Party in connection with such litigation. ARTICLE 9 - TAXES ----------------- 9.1 Taxes. ------ The Subtenant shall pay all taxes, Real Property Taxes, rates, duties and assessments as may be levied, rated, charged or assessed against or in respect of all improvements, equipment and facilities on or in the Premises and in respect of any business carried on thereon or therein or in respect of the use or occupancy thereof by the Subtenant pursuant to the Headlease, including without limitation all sales, ad Valorem, business transfer, whether imposed on the Sublandlord, the Headlandlord or the Subtenant. ARTICLE 10 - CASUALTY --------------------- 10.1 Casualty. --------- (a) If, during the Sublease Term, the Premises shall be partially or totally damaged or destroyed by fire or other casualty, Subtenant shall immediately notify Sublandlord of the existence and extent of such damage. -15- (b) If Headlandlord would have the right under Article 11 of the Headlease and elects to terminate pursuant to the terms of the Headlease, Sublandlord shall give prompt notice thereof to Subtenant and this Sublease shall terminate as of the same date as the Headlease terminates. ARTICLE 11 - DEFAULT -------------------- 11.1 Subtenant's Default. ------------------- (a) Any one or more of following events shall be considered an "Event of Default" by Subtenant, as such term is used in this Sublease: (i) Subtenant shall be adjudged an involuntary bankrupt, or a decree or order approving, as properly filed, a petition or answer filed against Subtenant asking reorganization of Subtenant under the Federal bankruptcy laws as now or hereafter amended, or under the laws of any state, shall be entered, and any such decree or judgment or order shall not have been vacated or stayed or set aside within sixty (60) days from the date of the entry or granting thereof; or (ii) Subtenant shall file, or admit the jurisdiction of the court and the material allegations contained in, any petition in bankruptcy, or any petition pursuant or purporting to be pursuant to the Federal Bankruptcy laws now or hereafter amended, or Subtenant shall institute any proceedings for relief of Subtenant under any bankruptcy or insolvency laws or any laws relating to the relief of debtors, readjustment of indebtedness, re-organization, arrangements, composition or extension; or (iii) Subtenant shall make any assignment for the benefit of creditors or shall apply for or consent to the appointment of a receiver for Subtenant or any of the property of Subtenant; or (iv) Subtenant shall admit in writing its inability to pay its debts as they become due; or (v) The Premises are levied on by any revenue officer or similar officer; or (vi) A decree or order appointing a receiver of the property of Subtenant shall be made and such decree or order shall not have been vacated, stayed or set aside within thirty (30) days from the date of entry or granting thereof; or (vii) Subtenant shall vacate or abandon the Premises during the Sublease Term or assign this Sublease or further sublet of the Premises other than in strict accordance with Article 6.3; or (viii) Subtenant fails to make any payment of rent required to be made by Subtenant as and when the same is due, notwithstanding the foregoing, Sublandlord shall give Subtenant notice of non-payment and three (3) days from receipt of such notice to -16- cure such non-payment before assessing late fees and/or interest provided that in no event shall Subtenant be late in payment of any rent more than twice during any year of the Sublease Term; or (ix) Subtenant fails to secure insurance or to provide proper evidence of insurance as set forth in Article 8 of this Sublease or fails to keep the Premises, the Building or the Property free of lien claims as set forth in Article 5 of this Sublease and either such failure continues for more than seven (7) days after written notice thereof to Subtenant; or (x) Subtenant, by its act or omission, causes an event or condition under the Headlease which either is an Event of Default or default thereunder; or (xi) Subtenant fails to fulfill, keep, observe or perform any of the other covenants and obligations herein contained to be fulfilled, kept, observed and performed by Subtenant, and such failure continues for more than five (5) days after notice thereof in writing to Subtenant, provided, however, that if Subtenant, upon receipt of said notice, commences action to cure the default within such five (5) day period and diligently pursues such action to completion, such event shall not be considered an "Event of Default". Notwithstanding the foregoing, in the event the default is not cured within thirty (30) days of receipt of the aforesaid notice, such default shall be an "Event of Default". (b) Upon the occurrence of any one or more Events of Defaults, Sublandlord may exercise any remedy against Subtenant which Headlandlord may exercise for Events of Default by Sublandlord under the Headlease. Without limiting the generality of the foregoing, Sublandlord may exercise the damage remedies available under California Civil Code Sections 1951.2 and 1951.4 or any similar or successor statute which provides that a lessor may continue a lease in effect and recover damages as they become due. 11.2 General Provisions Regarding Default. ------------------------------------ No right or remedy under this Sublease or at law or equity shall be exclusive of any other right or remedy but shall be cumulative. Failure to insist upon strict performance of any provision of a this Sublease or to exercise any right or remedy of this Sublease or at law or equity shall not constitute a waiver of any future performance. Receipt by Sublandlord of any Basic Rent, Additional Rent or other sum payable under this Sublease with knowledge of an Event of Default or Subtenant's breach of this Sublease shall not constitute a waiver of such Event of Default or breach. No waiver by either party of any provision of this Sublease shall be deemed to have been made unless made in writing. Each party shall be entitled to injunctive relief in the event of violation or threatened violation of the other party's material obligations hereunder beyond applicable cure periods. Subtenant hereby waives and surrenders for itself and all those claiming under it, including creditors of all kinds, any right and privilege which it or any of them may have to redeem the Premises or to have a continuance of this Sublease after expiration or termination of Subtenant's right of occupancy by order or judgment, any legal process or writ, or under the terms of this Sublease. -17- ARTICLE 12 - GENERAL PROVISIONS ------------------------------- 12.1 Mortgage Subordination. ----------------------- Upon request by Sublandlord or Headlandlord, Subtenant shall execute and deliver an agreement subordinating this Sublease and Subtenant's interest in the Premises to any mortgage upon the Premises, the Building or the Property (or part thereof) or to any mortgage of Sublandlord's leasehold interest under the Headlease; provided that the holder of such mortgage shall agree in writing not to disturb Subtenant's tenancy if there is no Event of Default. 12.2 Estoppel Certificates and Financial Statements. ----------------------------------------------- Subtenant shall, from time to time, upon ten (10) days prior written request from Sublandlord, cause to be executed, acknowledged and delivered a certificate stating that this Sublease is unmodified and in full effect (or, if there have been modifications, that this Sublease is in full effect as modified and setting forth such modifications), the amount of Basic Rent, the dates to which Basic Rent has been paid, and stating that, to the knowledge of Subtenant, either no default exists under this Sublease or specifying each such default of which Subtenant has knowledge. Subtenant shall, from time to time, but not more than once in any calendar year during the Sublease Term, upon ten (10) days prior written request from the Sublandlord, deliver or cause to be delivered to Sublandlord or its designee, then current financial statements (including a statement of cash flows) certified as accurate by a certified public accountant and prepared in conformance with generally accepted accounting principles for (i) Subtenant, (ii) any entity which owns a controlling interest in Subtenant, (iii) any entity the controlling interest of which is owned by Subtenant, and (iv) any successor entity to Subtenant by merger or operation of law. 12.3 Representations and Warranties of Subtenant. -------------------------------------------- Subtenant represents and warrants to Sublandlord that: (i) Subtenant is a corporation, duly organized, validly existing and in good standing under the laws of California and has the power to own its property and assets and carry on its business in California (ii) the execution of this Sublease constitutes the binding obligation of Subtenant and has been authorized by Subtenant's Board of Directors; and (iii) the Sublease of the Premises will not conflict with or result in a breach of Subtenant's Articles of Incorporation or Bylaws or any agreement to which Subtenant is a party or by which it may be bound, or violate any state or federal governmental law, statute, ordinance or regulation. 12.4 Representation and Warranties of Sublandlord. --------------------------------------------- Sublandlord represents and warrants to Subtenant that: (i) the Headlease is valid and subsisting and to the best of Sublandlord's knowledge, there are no and have been no defaults thereunder (ii) all payments of rent and other charges have been paid under the Headlease to the date of this Sublease and will be paid to the Rent Commencement Date. -18- 12.5 Notices; Demands and Other Instruments. --------------------------------------- All notices, demands or other communications given pursuant to this Sublease shall be in writing and shall be deemed given on the date mailed if sent by overnight delivery by nationally recognized overnight courier or by registered or certified mail, return receipt requested, with postage prepaid if: (a) when mailed to Sublandlord, it is addressed to Sublandlord at its address set forth above, marked "Attention: Chief Financial Officer", and (b) when mailed to Subtenant, it is addressed to Subtenant at its address set forth above. The parties may specify any other address in the United States or Canada with not less than fifteen (15) days' written notice to the other party. 12.6 Chattels. --------- The Chattels are made available for Subtenant's use on an "as is" and "with all faults" basis, and Sublandlord shall have no obligation to alter or repair the Chattels in anticipation of Subtenant's use. Such right of use shall end upon the termination of this Sublease. During the Sublease Term, Subtenant shall (a) insure the Chattels against loss, (b) maintain the Chattels in good condition and repair, (c) not remove the Chattels from the Premises except with Sublandlord's consent, and (d) bear all risk of loss to the Chattels. Notwithstanding the foregoing, Subtenant shall be entitled upon the expiration of the Sublease Term by affluxion of time but not otherwise and so long as all rent payable hereunder has been paid to purchase the Chattels from Sublandlord for $1.00. ARTICLE 13 - MISCELLANEOUS -------------------------- 13.1 Severability. ------------- If any provision of this Sublease or its application to any person or circumstance shall be declared invalid or unenforceable, the remaining provisions of this Sublease, or the application of such provision to persons or circumstances other than those to which it is invalid or unenforceable, shall not be affected thereby and each provision shall be valid and enforceable to the extent permitted by law. 13.2 Binding Effect. --------------- Subject to the terms and restrictions of Article 6.3 and this Article all provisions contained in this Sublease shall be binding upon, inure to the benefit of, and be enforceable by, the respective heirs, executors, representatives, successors and assigns of Sublandlord and Subtenant. The covenants and obligations of Sublandlord under this Sublease shall not be binding upon the Sublandlord herein named or any subsequent Sublandlord with respect to any period subsequent to the transfer of all its interests in the Premises, and, in the event of any such transfer, Subtenant agrees to look solely to the transferee for the performance of any term, covenant, obligation, warranty or representation of Sublandlord hereunder, but only with respect to the period beginning with such transfer and ending with a subsequent transfer of such interest. If Sublandlord terminates the Headlease and assigns this Sublease to the Headlandlord, Subtenant hereby agrees to attorn to the Headlandlord as the "Sublandlord" under this Sublease -19- provided that Headlandlord assumes Sublandlord's obligations under this Sublease. If Sublandlord shall acquire a fee interest in the Building or the Property, this Sublease shall continue as a direct lease between. Sublandlord, as landlord, and Subtenant, as tenant. 13.3 Interpretation. -------------- Where used in this Sublease, any word or term which is specifically defined in the Headlease shall have the meaning ascribed to it in the Headlease unless such word or term is otherwise defined in this Sublease. This Sublease is the product of negotiation and the parties agree that it shall be interpreted in accordance with its fair and apparent meaning and not for or against either party. 13.4 Governing Law. ------------- This Sublease shall be interpreted under and is governed by the laws of California. 13.5 Recitals. -------- The recitals to this Sublease are hereby incorporated in this Sublease. 13.6 Headings and Captions. --------------------- The Article and Subarticle captions are for the convenient reference of the parties only and are not intended to and shall not be deemed to modify the interpretation of the Article or subarticle from that which is indicated by the text of the Article or subarticle alone. 13.7 Survival or Representations and Warranties. ------------------------------------------ All of the representations, warranties and indemnities contained in this Sublease shall survive indefinitely the expiration or termination of this Sublease. 13.8 Entire Agreement. ---------------- Sublease contains the entire agreement between the parties with respect to the Premises and all prior negotiations or agreements, whether oral or written, are superseded and merged herein. 13.9 Amendments. ---------- This Sublease may not be changed or amended except by a writing duly authorized and executed by the party against whom enforcement is sought. 13.10 Number, Gender. -------------- Word importing the singular number only include the plural and vice versa, words importing the masculine gender shall include the feminine and neuter gender, and word importing persons shall include firms and corporations, and vice versa. -20- 13.11 Brokers. ------- Except for CB Richard Ellis and Charles E. Smith Commercial Realty, LP, Sublandlord and Subtenant covenant and represent to each other that no parties are entitled to be paid a fee or commission in connection with the transaction contemplated by this Sublease. If any other individual or entity shall assert a claim to a finder's fee or commission as a broker or a finder, then the party who is alleged to have retained such individual or entity or whose acts, omissions or representations are alleged to give rise to such claim shall defend (with counsel reasonably acceptable to the indemnified party), indemnify and hold harmless the other party from and against any such claim and all costs, expenses, liabilities and damages incurred in connection with such claim or any action or proceeding brought thereon. Subtenant agrees and acknowledges that no broker is entitled to any commissions arising from the leasing of the Chattels by the Sublandlord to the Subtenant. Subtenant shall indemnify and hold harmless Sublandlord and its agents and employees, from and against any and all claims, suits, demands, damages, judgments, costs and expenses arising with respect to commissions' claimed by any broker pertaining to the Chattels. 13.12 Condition Precedent. ------------------- This Sublease is subject to the execution of the Consent by the Landlord and delivery of the Consent to the Sublandlord and Subtenant on or before the Term Commencement Date. If the Landlord refuses to consent to this Sublease, then this Sublease shall simultaneously terminate and neither party shall have any further rights or obligations under the Sublease and hereby release any claims against one another, and each party releases the other from any cost, loss, damage, claim, liability, expense, fee or charge related thereto or arising therefrom. 13.13 Facsimile Copies. ---------------- The parties hereto (i) have each agreed to permit the use, from time to time and where appropriate, of telecopied signatures in order to expedite the transaction contemplated by this Agreement, (ii) each intend to be bound by its respective telecopied signature, (iii) are each aware that the other will rely on the telecopied signature, and (iv) each acknowledge such reliance and waive any defenses to the enforcement of the documents effecting the transaction contemplated by this Agreement based on a telecopied signature. 13.14 Counterparts. ------------ This agreement may be executed in any number of counterparts, each of which shall constitute an original hereof and all of which together shall constitute a single instrument. -21- 13.15 Memorandum of Sublease. ---------------------- This Sublease shall not be recorded. If a party records this Sublease, it shall be a default hereunder by such party. IN WITNESS WHEREOF, the parties hereto have caused this Sublease to be executed as of the date first above written. "SUBLANDLORD" CERTICOM CORP., a Delaware Corporation -------------------------------- By: /s/ Gregory M. Capitolo ------------------------------ Name: Gregory M. Capitolo ------------------------ Its: CFO ------------------------ By: ______________________________ Name: ________________________ Its: ________________________ "SUBTENANT" GUAVA TECHNOLOGIES INC., a ________________________________ By: /s/ [SIGNATURE ILLEGIBLE] ------------------------------ Name: [SIGNATURE ILLEGIBLE] ------------------------ Its: President ------------------------ By: /s/ Jack Giroux ------------------------------ Name: Jack Giroux ------------------------ Its: Executive V.P. ------------------------ EXHIBIT A --------- The Premises Exhibit A from Headlease attached EXHIBIT A --------- Mt. Eden Business Park Hayward, CA [DRAWING OF MOUNT EDEN BUSINESS] PREMISES: Building A (Entire Building) EXHIBIT B --------- Chattels INVENTORY LIST FOR BUILDING A Bldg. A Description Qty Teknion 8'xlO' cubes include - 46 (1) worksurface, (1) two drawer with one file cabinet, (1) two drawer file, (1) mobile ped, (1) overhead bin, (1) set of cube access., (1) shelf, (1) corner shelf, (1) chair. Hard wall office furniture includes - 11 (new side of building) (1) desk, (1) return, (1) credenza, (1) credenza hutch, (l) wardrobe, (1) under desk storage, (1) desk chair (2) wood back chairs. Concierge office 1 (1) desk, (1) return, (1) credenza (1) hutch for credenza, (1) 36" round table, (l) ward-robe, (1) desk chair, (3) wood back chairs. Executive office includes - (1) desk, (1) credenza, (1) credenza hutch, (2) wardrobe, (1) round table,(l) desk chair. Workrooms includes - (new side) 4 (1) 48 round table, (4) chairs, corner table Boardroom B includes 1 (1) confer. table, (14) chairs, (1) corner table Main Boardroom includes - 1 (1) conference table (16"x4"), (14) chairs (1) wall white board with wood front (1) retractable ceiling screen Classroom one includes - 1 (8) tables, (14) chairs Classroom two includes - 1 (8) tables, (14) chairs -2- lateral file cabinets with wood tops Three drawer lateral 42" wide file 9 Three drawer lateral 36" wide file 2 Upholstery Brayton sofa (fabric/leather) 1 Brayton sofa * 1 Matching chairs (large) * 2 Brayton chairs(leather) with attached work surface. 3 Dual colored leather chair 2 Other breakout furniture oval wood/glass coffee table 2 round wood/glass coffee table 1 round wood/glass end table 2 Additional furniture wood furniture credenza (122"w X 20d X 26h) 1 Breakout kitchen Refrigerator 1 Microwave 1 Hayworth Workstations (older side) Hayworth 8 x 10 cubes include - 25 (1) worksurface,(1) two drawer lateral file (1) overhead bin and a chair Keyboard trays 11 Hayworth 8 X 8 cubes include - 20 (1) worksurface, (1) 2 drawer lateral file (1) 2 drawer w/file, (1) overhead bin and chair Keyboard trays 5 Hayworth 8 X 7 cubes include - 5 (1) worksurface, (1) 2 drawer narrow file (1) 2 drawer w/file,(l) overhead bin and a chair Keyboard trays 2 Hayworth 7 X 10 cubes include - 3 (1) 2 drawer w/file, overhead bin and chair hard wall offices older side of building offices have one desk, small credenza -3- with hutch top and a chair 6 offices have one desk, small credenza bookcase and a chair 2 Additional furniture whiteboards hung in cubes 27 whiteboards in building not hung 5 file cabinets metal (light gray) 30" file cabinets two drawer 6 36" file cabinet two drawer 1 42" file cabinet two drawer 3 Additional file cabinets metal (dark gray) 30" file cabinets three drawer 7 36" file cabinets three drawer 13 42" file cabinets three drawer 2 30" file cabinets two drawer 3 metal file cabinet (16w X 22d X 23h) 2 metal file cabinet (15w X 24d X 28h) 2 It. Yellow metal bookcase(3lw X 13dx 54h) 1 36" round tables 9 Bookcases with 3 shelves (dark gray) 8 bookcases with 4 shelves (dark gray) 5 mail slot cabinets 37"x13"x60" 2 mail slot cabinets 37"x13"X36" 6 mail slot cabinets 37"xl3"x71" 1 5 drawer tilt lid file cab.(36w X 18d X 64h) 3 metal desk with laminate top and side 3 return with 2 attached files and 2 drawers and a chair metal desk with laminate top, 2 attached 1 drawer w/file and pencil drawer and a chair wood two sided white board with 1 storage at the bottom (45w X 16dX 58h) very large curved whiteboard 1 plastic table (59w X 29d X 28h) 1 plastic table (computer) 1 -4- It. Gray table (48w X 30d X 28h) 1 folding table (72w X 30d X 29h) 1 freestanding millwork - L shape 1 (7 feet long, 38 inches deep, 34 inches high Extra desk chairs not in cubes or offices 23 workrooms on older side of building 2 table, (4) chairs, small phone table Kitchen table and chairs Tall table 8 Barstools 42 Table 4 Chair 12 Refrigerator 3 Microwave 2 large serving table 1 Dishwasher 2 floor mat 2 Phones and equipment M2008 phones, one in every office 126 and one in every cube and workroom paging system 1 alarm system and access control computer 1 EXHIBIT C --------- Headlease Attached NET LEASE BASIC LEASE INFORMATION DATE: October 30, l998 LANDLORD: The Multi-Employer Property Trust, a trust organized under 12 C.F.R. Section 9.18 TENANT: Certicom Corp., a Delaware corporation PREMISES: All of the Building located at 25801 Industrial Blvd., Hayward, California PROPERTY: Mt. Eden Business Park, Hayward, California USE: General Office and Administrative Purposes, including computer hardware and software development TERM: Approximately Seven (7) Years ESTIMATED COMMENCEMENT DATE: January 15, 1999. INITIAL BASE RENT: $53,568.75 TENANT'S PERCENTAGE SHARE: 100% SECURITY DEPOSIT: $75,000 & Letter of Credit described in Section 17 GUARANTOR: Certicom Corp. an Ontario corporation BROKERS: CB Commercial Real Estate Group Inc.; Colliers Parish International Inc; Presco ADDRESS FOR NOTICES: Landlord: The Multi-Employer Property Trust c/o Riggs & Company 808 17th Street N.W. Washington, D.C. 20006 Attn: Patrick O. Mayberry Tenant: Certicom Corp. 200 Matheson Blvd. W Mississauga, Ontario Canada L5R 3L7 After Commencement Date: To Tenant at the Premises LANDLORD'S CONTRIBUTION TO TENANT IMPROVEMENTS: $857,100.00 LANDLORD'S INITIALS: TENANT'S INITIALS: /s/ [SIGNATURE ILLEGIBLE] /s/ [SIGNATURE ILLEGIBLE] - -------------------------------- ------------------------------------ TABLE OF CONTENTS
Page ---- 1. Premises. 1 2. Term. 1 3. Rent. 1 4. Base Rent 2 5. Operating Expenses 2 6. Proration of Rent 4 7. Tenant Improvements 4 8. Use of the Premises 5 9. Alterations 7 1O. Repairs 8 11. Damage or Destruction 8 12. Eminent Domain 9 13. Indemnity and Insurance 10 14. Assignment or Sublet 12 15. Default 15 16. Landlord's Right to Perform Tenant's Covenants 16 17. Security Deposit; Letter of Credit 16 18. Surrender of Premises 18 19. Holding Over 18 20. Access to Premises 19 21. Signs 19 22. Subordination 20 23. Transfer of the Property 20 24. Estoppel Certificates; Financial Statements 21 25. Mortgagee Protection 21 26. Attorneys' Fees 21 27. Brokers 21 28. Parking 22 29. Utilities and Services 22 30. Intentionally Deleted 22 31. Acceptance 22 32. Use of Building Name 22 33. Recording 23 34. Quitclaim 23 35. Notices 23 36. Landlord's Exculpation 23 37. Additional Structures 23 38. Consents and Approvals 24 39. General 24 40. Renewal Option 25
EXHIBIT "A": Premises and Business Park Site Plan EXHIBIT "B": Tenant Improvements EXHIBIT "C": Commencement Date Memorandum EXHIBIT "D": Rules and Regulations EXHIBIT "E": Form of Tenant Estoppel Certificate EXHIBIT "F": Appraisal Procedure NET LEASE THIS LEASE, which is effective as of the date set forth in the Basic Lease Information, is entered by Landlord and Tenant, as set forth in the Basic Lease Information. Terms which are capitalized in this Lease shall have the meanings set forth in the Basic Lease Information. 1. Premises. -------- Landlord leases to Tenant, and Tenant leases from Landlord, the Premises described in the Basic Lease Information (as shown on Exhibit A), together with --------- the right in common to use the Common Areas. The Common Areas shall mean the areas and facilities within the land shown on Exhibit A (the "Land") and within --------- the Building identified in the Basic Lease Information (the "Building") and within all other buildings and improvements now or hereafter located on the Land, provided and designated by Landlord for the general use, convenience or benefit of Tenant and other tenants and occupants of the Property (e.g., --- restrooms; janitorial, telephone and electrical closets; sidewalks; driveways, public lobbies, entrances and stairs; and unreserved parking areas). The Common Areas shall include the Cultural Center delineated on Exhibit A (the "Cultural --------- Center"); provided, however, that Landlord may from time to time prescribe rules and regulations for use of and access to the Cultural Center by Tenant and other tenants of the Property. Without limitation of the provisions of any such rules and regulations, Tenant acknowledges that (i) no tenant of the Property (including Tenant) shall have exclusive rights to use the Cultural Center, (ii) on up to ten (10) occasions each calendar year some or all of the tenants of the Property (including Tenant) may be excluded from use of the Cultural Center, (iii) access to the Cultural Center shall be restricted by means of a locked gate or other apparatus daily from 6:00 p.m. to 8:00 a.m. Landlord reserves the right to make changes to the Common Areas. The Building and such other buildings and improvements now or hereafter located on the Land are collectively referred to in this Lease as the "Buildings". The Land, the Buildings and the Common Areas are collectively referred to in this Lease as the "Property" or the "Real Property". 2. Term. ---- a. Lease Term. The term of this Lease (the "Term") shall commence on the ---------- date the "Commencement Date") which is the later to occur of (x) January 15, 1999, or (y) Substantial Completion of the Tenant Improvements. "Substantial Completion of the Tenant Improvements" shall be deemed to have occurred when the Tenant Improvements (as defined in Exhibit B) have been completed in accordance --------- with Final Plans (as defined in Exhibit B), subject only to the completion or --------- correction of Punch List Items. "Punch List Items" shall mean incomplete or defective work or materials in the Tenant Improvements which do not materially impair Tenant's use of the Premises for the conduct of Tenant's business therein. The Term shall end on the last day of the calendar month in which the seventh (7th) annual anniversary of the Commencement Date occurs (the "Expiration Date"). Notwithstanding the foregoing, if the Commencement Date is delayed due to Tenant Delay (as defined in Exhibit B), then for purposes of --------- determining the commencement of Tenant's obligation to pay Base Rent and Operating Expenses pursuant to Sections 4 and 5 below, the Commencement Date shall be deemed accelerated by the period of Tenant Delay. b. Premises Not Delivered. If, for any reason, the Commencement Date does ---------------------- not occur by the Estimated Commencement Date, the failure shall not affect the validity of this Lease, or the obligations of Tenant under this Lease, and Landlord shall not be subject to any liability. c. Commencement Date Memorandum. When the Commencement Date is determined, ---------------------------- the parties shall execute a Commencement Date Memorandum, in the form attached hereto as Exhibit C, setting forth the Commencement Date and the Expiration --------- Date. d. Early Entry. If Tenant is permitted by Landlord to enter the Premises ----------- prior to the Commencement Date for the purpose of fixturing or any purpose other than the conduct of Tenant's business, the entry shall 1 be subject to all the terms and provisions of this Lease, except that Tenant's obligation to pay Base Rent and Operating Expenses shall not commence until the Commencement Date. Without limitation, in no event will Landlord consent to such early access if Landlord shall reasonably determine that the same might delay or interfere with Landlord's construction of the Tenant Improvements, or increase the cost of the Tenant Improvements. 3. Rent. ---- As used in this Lease, the term "Rent" shall include: (i) the Base Rent; (ii) Operating Expenses payable by Tenant pursuant to Section 5 below; and (iii) all other amounts which Tenant is obligated to pay under the terms of this Lease. All amounts of money payable by Tenant to Landlord shall be paid without prior notice or demand, deduction or offset. If any installment of Base Rent is not paid by Tenant by the fifth (5th) day of the month, or if any payment of Operating Expenses or any other amount payable by Tenant is not paid within five (5) days of the due date thereof, Tenant shall pay to Landlord a late payment charge equal to five percent (5%) of the amount of the delinquent amount, in addition to the amount of Rent then owing, regardless of whether a notice of default or notice of termination has been given by Landlord. In addition to the five percent (5%) late charge, any Base Rent, Operating Expenses or other amounts owing hereunder which are not paid within five (5) days after the date they are due shall thereafter bear interest at the rate ("Interest Rate") which is the lesser of eighteen percent (18%) per annum or the maximum rate permitted by applicable law. Notwithstanding the foregoing, Landlord shall give Tenant notice of non-payment and three (3) days from receipt of such notice to cure such non-payment twice in any calendar year before assessing such late fees and/or interest in such calendar year. 4. Base Rent. --------- a. Initial Base Rent. Commencing on the Commencement Date, and thereafter on ----------------- the first day of each calendar month of the Term, Tenant shall pay Base Rent to Landlord (or other entity designated by Landlord), in advance, at Landlord's address for notices (as set forth in the Basic Lease Information) or at such other address as Landlord may designate. The Initial Base Rent shall be the amount set forth in the Basic Lease Information. Base Rent payable hereunder for the first full calendar month after Tenant's obligation to pay Base Rent commences shall be paid upon Tenant's execution of this Lease. b. Base Rent Adjustment. Commencing on the first day of the 37th full calendar -------------------- month of the Term, the base Rent shall increase to $56,831.09 per month, and shall be payable in such amount through the end of the 60th full calendar month of the Term. Commencing on the first day of the 61st full calendar month of the Term, the Base Rent shall increase to $60,292.10 per month, and shall be payable in such amount through the Expiration Date. 5. Operating Expenses. ------------------ a. Operating Expenses. Tenant shall pay Tenant's Percentage Share of Operating ------------------ Expenses incurred by Landlord during each calendar year falling in whole or in part during the Term. b. Operating Expenses. The term "Operating Expenses" shall include all ------------------ reasonable expenses and costs of every kind and nature, except as provided in the next paragraph, which Landlord shall pay or become obligated to pay because of or in connection with the ownership, management, administration, maintenance, repair and operation of the Premises, the Buildings, the Common Areas and the balance of the Property, to the extent allocable to the Building in which the Premises is located. The allocation of Operating Expenses to the Building shall be made on the same ratio that the rentable square footage of the Building bears to the aggregate rentable square footage of all buildings in the Business Park (assuming for such purpose that all buildings in the Business Park, as shown on Exhibit A, attached hereto, are fully constructed); except where Landlord shall - --------- reasonably determine, for good cause, that the nature of any given 2 Operating Expense requires that it be allocated in another reasonable manner. Operating Expenses shall include, without limitation, the following: (i) all impositions relating to the Real Property, including Real Property Taxes (as defined in Section 5.d.); (ii) premiums for insurance relating to the Real Property, including as set forth in Sections 13.b., 13.d. and 13.i., and insurance deductibles paid by Landlord; (iii) wages, salaries, bonuses and expenses and benefits (including hospitalization, medical, surgical, retirement plan, pension plan, union dues, life insurance, including group life insurance, welfare and other fringe benefits, and vacation, holidays and other paid absence benefits, and costs of uniforms) of all on-site and off-site employees of Landlord or its agents, at the rank of property manager or below, engaged in operation, management, administration, maintenance, repair and security of the Real Property, including, without limitation, administrative, management and accounting personnel and the individual(s) responsible for management of the Property, and payroll, social security, workers' compensation, unemployment and similar taxes with respect to such employees of Landlord or its agents, and the cost of providing disability or other benefits imposed by law or otherwise, with respect to such employees; (iv) costs of all supplies, materials and equipment rentals used in operations; (v) all maintenance, janitorial, security and service costs; (vi) a management fee not to exceed 4% of all gross revenues from the Real Property, including revenues attributable to Tenant's and other tenants' payments of Operating Expenses; (vii) legal and accounting expenses, including the cost of audits by certified public accountants; (viii) all repair, painting and maintenance costs relating to the Real Property and its Common Areas, including sidewalks, landscaping, service areas, mechanical rooms, parking areas, Building exterior and driveways; (ix) all charges for heat, water, gas, steam, fuel, electricity and other utilities used or consumed in the Buildings and Common Areas; (x) costs of repairs, replacements, and general maintenance to and of the Building Systems and the Base Building Components (as such terms are defined in Sections 9.a. and 10.a.; respectively, below); (xi) the costs of capital improvements, capital replacements, capital repairs, capital equipment, and capital tools and devices installed or paid for by Landlord and intended to reduce other Operating Expenses or required to comply with Legal Requirements (as defined in Section 8.c. below) or intended for the protection of the health and safety of the cccupants of the Property; and (xii) Landlord's costs of maintaining the Cultural Center, which costs shall be deemed, for purposes of this Lease, the sum of $60,000.00, as such sum shall be increased on January 30, 1999 and each January 30th thereafter (each, an "Adjustment Date"), by the percentage increase in the Index over the one (1) year period ending on the date on which the Index is published in the month immediately preceding the Adjustment Date. With respect to any costs included in Operating Expenses under clause (x) which are capital expenditures, as determined by Landlord in accordance with generally accepted accounting principles consistently applied, and with respect to the costs of items included in Operating Expenses under clause (xi), such costs shall be amortized over a period determined by Landlord, together with interest on the unamortized balance at a rate per annum equal to three (3) percentage points over the Treasury Rate charged at the time such item is constructed or acquired, or at such higher rate as may have been paid by Landlord on funds borrowed for the purpose of acquiring or constructing such item, but in either case not more than the maximum rate permitted by law at the time such item is acquired or constructed. As used herein, "Treasury Rate" means the six-month United States treaty bill rate in effect from time to time by the San Francisco Main Office of Bank of America, NT&SA (or any successor bank thereto), or if there is no such rate, the rate quoted by such bank in pricing ninety day commercial loans to substantial commercial borrowers. The term "Index" as used herein shall mean the Consumer Price Index for All Urban Consumers (1982-84 = 100) San Francisco-Oakland-San Jose, California, All Items, published by the Bureau of Labor Statistics of the U.S. Department of Labor. If the Bureau of Labor Statistics ceases to publish the above Index, or if the above Index is otherwise renamed, discontinued or superseded, the parties agree that the Bureau of Labor Statistics or any successor governmental agency thereto will be the sole judge of the comparability of successive indexes, but if no succeeding index is published, the calculations under this Lease based on the Index shall be made using the most closely comparable statistics on the purchasing power of the consumer dollar as published by a responsible financial authority and selected by Landlord. 3 Operating Expenses shall not include the following: (i) depreciation on the Buildings or equipment or systems therein; (ii) debt service; (iii) rental under any ground or underlying lease; (iv) attorneys' fees and expenses incurred in connection with lease negotiations or disputes with past, current or prospective Building tenants; (v) the cost of decorating, improving for tenant occupancy, painting or redecorating portions of the Buildings to be demised to tenants; (vi) advertising expenses; (vii) costs reimbursed by insurance proceeds; or (viii) real estate broker's or other leasing commissions. The parties agree that statements in this Lease to the effect that Landlord is to perform certain of its obligations hereunder at its own or sole cost and/or expense shall not be interpreted as excluding any cost from Operating Expenses if such cost is an Operating Expense pursuant to the terms of this Section 5.b. c. Monthly Increments; Adjustment. Promptly following the commencement of ------------------------------ the Term and prior to the commencement of each subsequent calendar year (or as soon thereafter as practicable), Landlord shall estimate the Operating Expenses payable by Tenant for such calendar year pursuant to this Section. Tenant shall pay to Landlord, on the first day of each month, in advance, one-twelfth (l/12) of Landlord's estimated amount. If at any time during the course of the year Landlord determines that the Operating Expenses payable by Tenant will vary from the then estimated amount, by notice to Tenant Landlord may revise the amount payable by Tenant during the balance of the calendar year such that the total estimated additional amount due from Tenant for such calendar year is paid by Tenant during the balance of the calendar year in equal monthly amounts. Within ninety (90) days (or as soon thereafter as practicable) after the close of each calendar year, Landlord shall provide Tenant with a statement to account for any difference between the actual and the estimated Operating Expenses for the previous year. Landlord's annual statement shall be final and binding upon Landlord and Tenant unless, within ninety (90) days after delivery thereof to Tenant, Landlord shall revise or Tenant shall contest any item therein by written notice to the other, specifying each item revised or contested and the reason therefor. Notwithstanding the foregoing, the Real Property Taxes included in any such annual statement may be modified by any subsequent adjustment or retroactive application of Real Property Taxes affecting the calculation of Operating Expenses. If Tenant has overpaid the amount of Operating Expenses owing pursuant to this Section, Landlord shall credit the overpayment against Tenant's next payments due under this Section 5. If Tenant has underpaid the amount of Operating Expenses owing pursuant to this Section, Tenant shall pay the amount of the underpayment to Landlord within thirty (30) days after Tenant's receipt of Landlord's statement. If all of the buildings in the Business Park shown on Exhibit A attached hereto are not fully constructed --------- during any calendar year, or if the rentable area of all such buildings or of the Building is not fully occupied during any calendar year, Operating Expenses for such calendar year shall be adjusted to equal Landlord's reasonable estimate of the Operating Expenses which would have been incurred during such calendar year if all buildings in the Business Park were constructed and the total rentable area of all such buildings and the Building were occupied, and such adjusted Operating Expenses shall be allocated to the Building as provided in Section 5.b. above. d. Definition of Real Property Taxes. The term "Real Property Taxes" shall --------------------------------- mean any ordinary or extraordinary form of assessment or special assessment, license fee, rent tax, levy, penalty (if a result of Tenant's delinquency), or tax (other than net income, estate, succession, inheritance, transfer or franchise taxes), imposed by any authority having the direct or indirect power to tax, or by any city, county, state or federal government for any maintenance or improvement or other district or division thereof. The term shall include all transit charges, housing fund assessments, real estate taxes and all other taxes relating to the Premises, Building and/or Property, all other taxes which may be levied in lieu of real estate taxes, all assessments, assessment bonds, levies, fees, and other governmental charges (including, but not limited to, charges for traffic facilities, improvements, child care, water services studies and improvements, and fire services studies and improvements) for amounts necessary to be expended because of governmental orders, whether general or special, ordinary or extraordinary, unforeseen as well as foreseen, of any kind and nature for public improvement, services, benefits or any other purposes which are assessed, levied, confirmed, imposed or become a lien upon the Premises, Building or Property or become payable during the Term. 4 e. Acknowledgment of Parties. It is acknowledged by Landlord and Tenant that ------------------------- Proposition 13 was adopted by the voters of the State of California in the June, 1978 election, and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such purposes as fire protection, street, sidewalk, road, utility construction and maintenance, refuse removal and for other governmental services which formerly may have been provided without charge to property owners or occupants. It is the intention of the parties that all new and increased assessments, taxes, fees, levies and charges due to Proposition 13 or any other cause are to be included within the definition of Real Property Taxes for purposes of this Lease. f. Taxes on Tenant Improvements and Personal Property. Notwithstanding any -------------------------------------------------- other provision hereof, Tenant shall pay the full amount of any increase in Real Property Taxes during the Term resulting from any and all Alterations (as defined in Section 9.a below) of any kind whatsoever placed in, on or about the Premises for the benefit of, at the request of, or by Tenant. Tenant shall pay, prior to delinquency, all taxes assessed or levied against Tenant's personal property, equipment, furniture or fixtures (collectively, "Personal Property") in, on or about the Premises. When possible, Tenant shall cause its Personal Property to be assessed and billed separately from the real or personal property of Landlord. Tenant recognizes that pursuant to Section 107.6 of the California Revenue and Taxation Code Tenant's possessory interest under this Lease may be subject to property taxation based on the full cash value, as defined in Sections 110 and 110.1 of the California Revenue and Taxation Code. g. Fiscal Year. Landlord shall have the right to account and bill for ----------- Operating Expenses on the basis of a fiscal year, rather than a calendar year as set forth above, and to revise such fiscal year from time to time, provided that Landlord follows generally accepted accounting principles consistently applied in connection therewith. h. Net Lease. This shall be a Net Lease and Base Rent shall be paid to --------- Landlord absolutely net of all costs and expenses except as expressly herein provided. The provisions for Tenant's payment of Tenant's Percentage Share of Operating Expenses are intended to pass on to Tenant and reimburse Landlord for Tenant's Percentage Share of all costs and expenses associated with the Real Property, except as expressly provided in this Lease. 6. Proration of Rent. If the Commencement Date is not the first day of a ----------------- calendar month, or if the end of the Term is not the last day of a calendar month, Base Rent payable by Tenant pursuant to Section 4, and Operating Expenses payable by Tenant pursuant to Section 5, shall be prorated on a daily basis (based upon a thirty (30) day month) for such fractional month. The termination of this Lease shall not affect the obligations of Landlord and Tenant pursuant to Section 5.c. which are to be performed after the termination. 7. Tenant Improvements. Landlord agrees to construct within the Premises ------------------ certain improvements to the Premises ("Tenant Improvements") pursuant to the terms of Exhibit B. Subject to completion of the Tenant Improvements (including, --------- without limitation, the Punch List Items with respect thereto), the Premises shall be delivered to Tenant in its then "as-is" condition, and Landlord shall not have any obligation to make or pay for any alterations, additions, improvements or repairs to prepare the Premises for Tenant's occupancy. The foregoing shall not relieve Landlord from responsibility for correcting any latent defects in the construction of the Tenant Improvements, provided that written notice thereof is given by Tenant to Landlord within one (1) year from the Commencement Date. 8. Use of the Premises. ------------------- a. Use. The Premises shall be used solely for the use set forth in the Basic --- Lease Information and for no other use or purpose. Tenant shall not do or suffer or permit anything to be done in or about the Premises or the Real Property which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or injure or annoy them, or use or suffer or permit the Premises to be used for any immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain, suffer or petit any nuisance 5 in, on or about the Premises or the Real Property. Without limiting the foregoing, Tenant shall not permit any odors, smoke, dust, gas, substances, noise or vibration to emanate from the Premises, and no loudspeakers or other similar device which can be heard outside the Premises shall, without the prior written approval of Landlord, be used in or about the Premises. Tenant shall not commit or suffer to be committed any waste in, to or about the Premises. Tenant agrees not to employ any person, entity or contractor for any work in the Premises (including moving Tenant's equipment and furnishings in, out or around the Premises) whose presence may give rise to a labor or other disturbance in the Building and, if necessary to prevent such a disturbance in a particular situation, Landlord may require Tenant to employ union labor for the work. b. Rules and Regulations: CC&R's. Tenant shall comply with the Rules and ----------------------------- Regulations attached hereto as Exhibit D, as the same may be modified from time --------- to time by Landlord upon prior notice to Tenant (the "Rules"), to the extent Landlord the Rules are not in conflict with the other provisions of this Lease. In addition, Tenant shall comply with any covenants, conditions and restrictions ("CC&R's") applicable to the Real Property, and all rules, regulations and restrictions imposed by any association formed pursuant to the CC&R's, in each case to the extent Landlord has delivered a copy thereof to Tenant and the same are not in conflict with the provisions of this Lease. c. Compliance. Tenant shall not permit the Premises to be used in ---------- violation of or in conflict with, and at its sole cost and expense shall promptly comply with, all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which hereinafter may be in force, with the requirements of any board of fire underwriters or other similar board now or hereafter constituted, with any direction or occupancy certificate issued pursuant to any law by any public officer or officers, as well as the provisions of all recorded documents affecting the Premises (all of the foregoing, collectively, "Legal Requirements"), insofar as any thereof relate to or affect the condition, use or occupancy of the Premises, and Tenant shall perform all work to the Premises and other portions of the Real Property required to effect such compliance (or, at Landlord's election, Landlord may perform such work at Tenant's expense). The judgement of any court of competent jurisdiction or the admission of Tenant in any actions against Tenant, whether Landlord be a party thereto or not, that Tenant has so violated any such law, statute, ordinance, rule, regulation or requirement, shall be conclusive of such violation as between Landlord or Tenant. In no event shall the foregoing, or any other provisions of this Lease, impose any obligation or liability upon Tenant to perform any work or otherwise remedy any non-compliant condition to the extent that such work or condition arises by reason of Landlord's failure to construct the Tenant Improvements and Landlord's Work (as defined in Exhibit B) in compliance with --------- all Legal Requirements. d. Hazardous Materials. Tenant shall not cause or permit the storage, ------------------- use, generation, release, handling or disposal (collectively, "Handling") of any Hazardous Materials (as defined below), in, on, or about the Premises or the Real Property by Tenant or any agents, employees, contractors, licensees, subtenants, customers, guests or invitees of Tenant (collectively with Tenant, "Tenant Parties"), except that Tenant shall be permitted to use in the Premises in a normal and customary manner normal quantities of office supplies or products (such as copier fluids or cleaning supplies) customarily used in the conduct of general business office activities ("Common Office Chemicals"), provided that the Handling of such Common Office Chemicals shall comply at all times with all Legal Requirements, including Hazardous Materials Laws (as defined below). Upon Landlord's request from time to time, Tenant shall provide to Landlord a complete written inventory of all Hazardous Materials which Tenant anticipates using or storing on, or discharging from, the Premises along with copies of all reports, permits and business plans filed with any federal, state, local or other governmental agency. Tenant shall update the inventory as frequently as required to reflect any material changes to the items required to be disclosed therein. Tenant shall be solely responsible for and shall indemnify, defend and hold Landlord and all other Indemnitees (as defined in Section 13.a. below), harmless from and against all Claims (as defined in Section 13.a. below), arising out of or in connection with, or otherwise relating to (i) any Handling of Hazardous Materials by any Tenant Party or Tenant's breach of its obligations hereunder, or (ii) any removal, cleanup, or restoration work and 6 materials necessary to return the Real Property or any other property of whatever nature located on the Real Property to their condition existing prior to the Handling of Hazardous Materials in, on or about the Premises by any Tenant Party. Tenant shall promptly provide Landlord with copies of all notices received by it, including, without limitation, any notice of violations, notice of responsibility or demand for action from any federal, state or local authority or official in connection with the presence of Hazardous Materials in or about the Premises or any other portion of the Property. In the event of any release of Hazardous Materials upon the Premises or any other portion of the Property, or upon adjacent lands, if caused by Tenant or any other Tenant Party, Tenant shall promptly remedy the problem in accordance with all applicable Legal Requirements. For purposes of this Lease, "Hazardous Materials" means any explosive, radioactive materials, hazardous wastes, or hazardous substances, including without limitation asbestos containing materials, PCB's, CFC's, or substances defined as "hazardous substances" in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 961-9657; the Hazardous Materials Transportation Act of 1975, 49 USC. Section 1801-1812; the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901-6987; or any other Legal Requirement regulating, relating to, or imposing liability or standards of conduct concerning any such materials or substances now or at any time hereafter in effect (collectively, "Hazardous Materials Laws"). Tenant's obligations under this Section 8.d. shall survive the expiration or other termination of this Lease. 9. Alterations. ----------- a. Alterations. Tenant shall not make any alteration, addition or improvement in, to or upon the Premises ("Alteration") without the prior written consent of Landlord in each instance, which consent shall not be unreasonably withheld with respect to proposed Alterations which (i) are not structural in nature, (ii) do not affect the Base Building Components, (iii) are, in Landlord's opinion, compatible with the Building and the balance of the Real Property and the Building's mechanical, plumbing, electrical, heating/ventilation/air conditioning, communication, security and fire and other life safety systems (collectively, the "Building Systems"), and (iv) in Landlord's opinion will not interfere with the use and occupancy of any other portion of the Building or the Real Property by any other tenant or permitted * occupant thereof. Tenant shall give Landlord not less than ten (10) days' prior written notice of any Alteration Tenant desires to make. Any Alterations as to which Landlord shall consent shall be made only by contractors approved in advance, in writing by Landlord, which approval shall not be unreasonably withheld; provided, however, that Landlord may, in its sole discretion, specify the engineers and contractors to perform any work relating to or affecting the Building Systems or the Base Building Components. Tenant shall comply with all Legal Requirements applicable to each Alteration and shall deliver to Landlord a complete set of "as built" plans and specifications for each Alteration. Any work to the balance of the Building or Real Property related to or affected or triggered by Tenant's Alterations shall be performed by Tenant at Tenant's expense (or, at Landlord's election, Landlord may perform such work at Tenant's expense). Tenant shall be solely responsible for maintenance and repair of all Alterations made by Tenant. Tenant shall pay Landlord on demand (whether prior to or during the course of construction) an amount (the "Alteration Fee") equal to five percent (5%) of the total cost of each Alteration (and for purposes of calculating the Alteration Fee, such cost shall include architectural and engineering fees, but shall not include permit fees) as compensation to Landlord for miscellaneous costs incurred by Landlord in connection with the Alteration. In addition, Tenant shall reimburse Landlord for all third party fees paid by Landlord in connection with reviewing the proposed Alterations (whether or not the proposed Alterations are ultimately approved by Landlord or made by Tenant), including, without limitation, Landlord's architectural and engineering fees. All Alterations shall be performed diligently and in a first-class workmanlike manner and in accordance with plans and specifications approved by Landlord, and shall comply with Landlord's construction procedures and requirements for the Building (including Landlord's requirements relating to insurance and contractor qualifications and scheduling of the work). b. Liens. If because of any act or omission of Tenant or anyone claiming ----- by, through, or under Tenant, any mechanic's lien or other lien is filed against the Premises or any other portion of the Real 7 Property or against other property of Landlord (whether or not the lien is valid or enforceable), Tenant shall, at its own expense, cause it to be discharged of record within a reasonable time, not to exceed ten (10) days, after the date of the filing. In addition, Tenant shall defend and indemnify Landlord and hold it harmless from any and all Claims resulting from the lien. Without limitation of Landlord's other remedies, Landlord shall have the rights under Section 16 below if any such lien is not timely discharged by Tenant. c. Ownership of Alterations. All Alterations shall immediately become ------------------------ Landlord's property. Except as provided in Section 9.d., Landlord may require Tenant, at Tenant's sole expense and by the end of the Term, to remove any Alterations and to restore the Premises to its condition prior to the Alteration. d. Request Regarding Removal Obligation. At the time that Tenant requests ------------------------------------ Landlord's consent to any Alteration, Tenant may request that Landlord notify Tenant if Landlord will require Tenant, at Tenant's sole expense, to remove any or all of the Alteration by the end of the Term, and to restore the Premises to its condition prior to the Alteration. Unless Landlord shall have expressly agreed in writing not to require such removal and restoration, Landlord's election right under Section 9.c. shall continue through the end of the Term as to such Alterations. 10. Repairs. ------- a. Landlord's Repairs. Landlord shall maintain the roof, foundations, floor ------------------ slabs and exterior walls of the Building (collectively, the "Base Building Components") in good condition and repair, reasonable wear and tear excepted. The term walls as used herein shall not include windows, glass or plate glass, doors, special store fronts or office entries. The term roof as used herein shall not include skylights, smoke hatches or roof vents. Landlord shall also maintain in good condition and repair, reasonable wear and tear excepted, the Common Areas, including, but not limited to, the landscaped areas, parking areas and driveways. Tenant shall reimburse Landlord for Landlord's costs of complying with its obligations under this Section 10 in accordance with Section 5 above, provided, however, that any damage caused by or repairs necessitated by any act of Tenant or any other Tenant Party may be repaired by Landlord at Landlord's option and at Tenant's expense. Tenant shall give Landlord prompt written notice of any repairs required of Landlord pursuant to this Section 10, after which notice Landlord shall have reasonable opportunity to perform the same. b. Tenant's Repairs. Tenant shall, at Tenant's expense, maintain all parts of ---------------- the Premises in a good, clean and secure condition, promptly making all necessary repairs and replacements including, but not limited to, all windows, glass or plate glass, doors and any special store fronts or office entries, walls and wall finishes, floor covering, Building Systems, truck doors, dock bumpers, dock plates and levelers, plumbing work and fixtures, downspouts, skylights, smoke hatches, roof vents and utility equipment, in each case to the extent the same are located within or exclusively serve the Premises. Tenant shall, at Tenant's expense, also perform necessary pest extermination and regular removal of trash and debris. Landlord shall, at Tenant's expense, enter into a regularly scheduled preventive maintenance/service contract with a maintenance contractor for servicing all hot water, heating and air conditioning systems and equipment within or serving the Premises. Tenant shall not damage any demising wall or disturb the integrity and support provided by any demising wall and shall, at its sole expense, immediately repair any damage to any demising wall caused by Tenant or its employees, agents or invitees or any other Tenant Party. Tenant hereby waives all right to make repairs at the expense of Landlord or in lieu thereof to vacate the Premises and its other similar rights as provided in California Civil Code Sections 1932(l), 1941 and 1942 or any other Legal Requirement (whether now or hereafter in effect). 11. Damage or Destruction. --------------------- a. Landlord's Obligation to Rebuild. If the Premises are damaged or -------------------------------- destroyed, Landlord shall promptly and diligently repair the Premises unless Landlord has the option to terminate this Lease as 8 provided herein, and Landlord elects to terminate. b. Right to Terminate. Landlord shall have the option to terminate this ------------------ Lease if the Premises or the building is destroyed or damaged by fire or other casualty, regardless of whether the casualty is insured against under this Lease, if Landlord reasonably estimates that the repair of the Premises or the Building cannot be completed within one hundred eighty (180) days after the casualty. Landlord shall also have the right to terminate this Lease if the repair is not fully covered by insurance maintained (or required to be maintained) by the Landlord pursuant to this Lease other than by reason of the deductible amounts under Landlord's insurance policies. Tenant shall have the option to terminate this Lease if the Premises is damaged or destroyed by fire or other casualty, and Landlord reasonably estimates that the repair of the Premises cannot be completed within one (1) year after the casualty. Landlord shall notify Tenant of Landlord's reasonable repair period estimate within (60) days after the casualty. If a party desires to exercise the right to terminate this Lease as a result of a casualty, the party shall exercise the right by giving the other party written notice of its election to terminate within thirty (30) days after delivery of Landlord's repair period estimate, in which event this Lease shall terminate fifteen (15) days after the date of the terminating party's notice. If neither Landlord nor Tenant exercises the right to terminate this Lease, this Lease shall continue in full force and effect and Landlord shall promptly commence the process of obtaining necessary permits and approvals, and shall commence repair of the Premises or the Building as soon as practicable and thereafter prosecute the repair diligently to completion. c. Limited Obligation to Repair. Landlord's obligation, should Landlord ---------------------------- elect or be obligated to repair or rebuild, shall be limited to the Building shell and any tenant improvements in the Premises which are constructed and paid for by Landlord pursuant to Exhibit B. Tenant, at its option and expense, shall --------- replace or fully repair all trade fixtures, equipment, Alterations and other improvements installed by Tenant and existing at the time of the damage or destruction. d. Abatement of Rent. In the event of any damage or destruction to the ----------------- Premises which does not result in termination of this Lease, the Base Rent shall be temporarily abated proportionately to the degree the Premises are untenantable as a result of the damage or destruction, commencing from the date of the damage or destruction and continuing during the period required by Landlord to substantially complete its repair and restoration of the Premises; provided, however, that nothing herein shall preclude Landlord from being entitled to collect the full amount of any rent loss insurance proceeds. Tenant shall not be entitled to any compensation or damages from Landlord for loss of the use of the Premises, damage to Tenant's Personal Property or any inconvenience occasioned by any damage, repair or restoration. Tenant hereby waives the provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4, and Sections 1941 and 1942 of the California Civil Code, and the provisions of any similar Legal Requirement (whether now or hereafter in effect). e. Insurance Proceeds. If this Lease is terminated, Landlord may keep all ------------------ the insurance proceeds resulting from the damage payable pursuant to insurance coverage maintained by Landlord, and Tenant shall have no claims thereto. 12. Eminent Domain. If all or any material part of the Premises or balance -------------- of the Real Property is taken for public or quasi-public use by a governmental authority under the power of eminent domain or is conveyed to a governmental authority in lieu of such taking (a "taking"), Landlord may terminate this Lease by written notice to Tenant within thirty (30) days after the taking. If all or any material part of the Premises is taken, and if the taking causes the remaining part of the Premises to be untenantable and inadequate for use by Tenant for the purpose for which they were leased, then Tenant, at its option and by giving notice within fifteen (15) days after the taking, may terminate this Lease as of the date Tenant is required to surrender possession of the Premises. If part of the Premises is taken but the remaining part is tenantable and adequate for Tenant's use, then this Lease shall be terminated as to the part taken as of the date Tenant is requited to surrender possession, and, unless Landlord shall have terminated this Lease 9 pursuant to the foregoing provisions, Landlord shall make such repairs, alterations and improvements as may be necessary to render the part not taken tenantable, and the Base Rent shall be reduced in proportion to the part of the Premises taken. All compensation awarded for the taking shall be the property of Landlord without any deduction therefrom for any estate of Tenant, and Tenant hereby assigns to Landlord all its right, title and interest in and to the award. Tenant shall have the right, however, to recover from the governmental authority, but not from Landlord, such compensation as may be awarded to Tenant on account of the interruption of Tenant's business, moving and relocation expenses and removal of Tenant's Personal Property, provided that any such award to Tenant will not reduce the award which would otherwise be made to Landlord. 13. Indemnity and Insurance. ----------------------- a. Indemnity. Tenant shall hold Landlord and its constituent shareholders, --------- partners, members or other owners, and all of their agents, contractors, servants, officers, directors, employees and licensees (collectively with Landlord, the "Indemnitees") harmless from and indemnify the Indemnitees against my and all claims, liabilities, damages, costs and expenses, including reasonable attorneys' fees and costs incurred in defending against the same (collectively, "Claims"), to the extent arising from (a) the acts or omissions of Tenant or any other Tenant Party in, on or about the Real Property, or (b) any construction or other work undertaken by or on behalf of Tenant in, on or about the Premises, whether prior to or during the Term, or (c) any accident, injury or damage, howsoever and by whomsoever caused, to any person or property, occurring in, on or about the Premises; except to the extent such Claims are caused by the negligence or willful misconduct of Landlord or its authorized representatives. In case any action or proceeding be brought against any of the Indemnitees by reason of any such Claim, Tenant, upon notice from Landlord, covenants to resist and defend at Tenant's sole expense such action or proceeding by counsel reasonably satisfactory to Landlord. The provisions of this Section 13.a. shall survive the expiration or earlier termination of this Lease with respect to any injury, illness, death or damage occurring prior to such expiration or termination. b. Fire and Extended Coverage. Landlord shall procure and maintain in full -------------------------- force and effect with respect to the Building (including any tenant improvements in the Premises constructed and paid for by Landlord pursuant to Exhibit B) a --------- policy or policies of all risk insurance (including sprinkler, vandalism and malicious mischief coverage, and any other endorsements desired by the Landlord or required by the holder of any fee or leasehold mortgage on the Real Property, but excluding, at Landlord's option, the insurance described in Section 13.i. below) in such amount as Landlord shall determine, but in an amount at least equal to eighty percent (80%) (or such greater percentage as shall be required to preclude Landlord from being deemed a coinsurer)) of the full replacement cost (including debris removal, and demolition, but excluding the land and the footings, foundations and installations below the basement level) thereof. Such insurance, and all other insurance maintained by Landlord under this Lease, shall be for the sole benefit of Landlord, and the proceeds therefrom shall be under Landlord's sole control. c. Public Liability. Tenant, at its own cost and expense, shall keep and ---------------- maintain in full force and effect during the Term the following insurance coverages, written by an insurance company licensed by and admitted to issue insurance in the State of California, with a general policyholders' rating of "A" or better and a financial size ranking of "Class X" or higher, in the most recent edition of Best's Insurance Guide, in the form customary to the locality, (i) commercial general liability insurance, including contractual liability coverage, insuring Tenant's activities with respect to the Premises and/or the Building against loss, damage or liability for personal injury or death of any person or loss or damage to property occurring in, upon or about the Premises, with a minimum coverage of One Million Dollars ($1,000,000) per occurrence/Two Million Dollars ($2,000,000) general aggregate, plus a Five Million Dollar ($5,000,000) per occurrence/general aggregate umbrella, (ii) fire damage legal liability insurance and personal/advertising injury insurance (which shall not be subject to the contractual liability exclusion), each in the minimum amount of One Million Dollars ($1,000,000), (iii) medical payments insurance in the minimum amount of 10 Five Thousand Dollars ($5,000), (iv) worker's compensation insurance in statutory amounts, and (v) if Tenant operates owned, leased or non-owned vehicles on the Property, comprehensive automobile liability insurance with a minimum coverage of $1,000,000 per occurrence/Two Million Dollars ($2,000,000) general aggregate; provided, however, that if, at any time during the Term, Tenant shall have in full force and effect a blanket policy of public liability insurance with the same coverage for the Premises as described above, as well as coverage of other premises and properties of Tenant, or in which Tenant has some interest, the blanket insurance shall satisfy the requirement hereof and be endorsed to separately apply to the Premises. d. Rental Abatement Insurance. Landlord may keep and maintain in full force -------------------------- and effect during the Term rental abatement insurance against abatement or loss of rents with respect to the Real Property in such amount as determined by Landlord. e. Insurance Certificates. Tenant shall furnish to Landlord, on or before ---------------------- the Commencement Date and thereafter within thirty (30) days prior to the expiration of each policy, an original certificate of insurance issued by the insurance carrier of each policy of insurance carried by Tenant pursuant to this Section 13. The certificates shall expressly provide that the policies shall not be cancelable or subject to reduction of coverage or otherwise be subject to modification except after thirty (30) days' prior written notice to the parties named as insureds. Landlord, its successors and assigns, and any nominee of Landlord holding any interest in the Premises, including, without limitation, any ground lessor or the holder of any fee or leasehold mortgage, shall be named as an additional insured under each policy of insurance maintained by Tenant pursuant to this Lease. The policies and certificates shall further provide that the coverage shall be primary, and that any coverage carried by Landlord shall be secondary and noncontributory with respect to Tenant's policy. f. Tenant's Failure. If Tenant fails to maintain any insurance required by ---------------- this Lease, Tenant shall be liable for any loss or cost resulting from the failure. This Section shall not be deemed to be a waiver of any of Landlord's rights and remedies under any other provision of this Lease. g. Waiver of Subrogation. Any policy or policies of fire, extended coverage --------------------- or similar casualty insurance which either party obtains in connection with the Building, the Premises, or Tenant's Personal Property shall include a clause or endorsement denying the insurer any rights of subrogation against the other party (and the other parties named as additional insureds pursuant to Section 13.e. above) to the extent rights have been waived by the insured prior to the occurrence of injury or loss. Landlord and Tenant each waives any rights of recovery against the other (and the other parties named as additional insureds pursuant to Section 13.e. above) for injury or loss due to hazards insurable by policies of fire, extended coverage or similar casualty insurance, regardless of whether such insurance policies or coverage shall actually have been obtained by the party granting such waiver, and regardless of the cause of such fire or casualty, including the negligence of the party benefiting from such waiver. Because this Section 13.g will preclude the assignment of any claim mentioned in it by way of subrogation or otherwise to an insurance company or any other person, each party to this Lease agrees immediately to give to each of its insurance companies written notice of the terms of the mutual waivers contained in this Section 13.g and to have the insurance policies properly endorsed, if necessary, to prevent the invalidation of the insurance coverages by reason of the mutual waivers contained in this Section 13.g. h. Tenant's Property and Fixtures. Tenant shall assume the risk of damage ------------------------------ to any of Tenant's furniture, equipment, machinery, goods, supplies or fixtures or other Personal Property, and to any Alterations which Tenant may make to the Premises, and shall insure the same throughout the Term, for their full replacement cost, under insurance policies reasonably satisfactory to Landlord (certificates of which shall be delivered to Landlord as set forth above in Section 13.e). Tenant hereby releases Landlord from any obligation to insure the foregoing items and from any liability for loss of or damage to such items, regardless of cause. 11 i. Earthquake and Flood Insurance. In addition to any other insurance ------------------------------ policies carried by Landlord in connection with the Building, Landlord may elect to procure and maintain in full force and effect during the Term with respect to the Building a policy of earthquake/volcanic action and flood and/or surface water insurance, including rental value insurance against abatement or loss of rent in the case of damage or loss covered under the earthquake/volcanic and flood and/or surface water insurance, in an amount up to one hundred percent (100%) of the full replacement cost (including debris removal and demolition) of the Building. 14. Assignment or Sublet. -------------------- a. Tenant shall not assign this Lease or sublet the Premises or any portion thereof without the prior written consent of Landlord in each instance, which consent shall not, subject to Landlord's rights under clause (i) below, be unreasonably withheld. If Tenant desires to assign this Lease or to sublet the Premises, or any part thereof, Tenant shall give to Landlord written notice of its intent at least sixty (60) days in advance of the date on which Tenant desires to assign or sublet the Premises, which notice shall designate the terms of the proposed assignment or sublet, the identity of the proposed assignee or sublessee, and shall be accompanied by financial statements of such proposed assignee or sublessee and such other information regarding such party and its business and reputation as shall be required by Landlord to evaluate the proposed assignment or sublet. Landlord shall have thirty (30) days after receipt of Tenant's written notice and the above specified information within which to notify Tenant in writing that Landlord elects to (i) terminate this Lease, in the case of a proposed assignment, or to terminate this Lease as to that portion of the Premises to be sublet, in the case of a proposed sublet, (ii) consent to the proposed assignment or sublet as described in Tenant's notice, or (iii) reasonably refuse to consent to Tenant's proposed assignment or sublet, stating the reasons for such refusal. If Landlord fails to notify Tenant in writing of its election within the thirty (30) day period, Landlord shall be deemed to have made the election in clause (iii) above. No consent by Landlord to any assignment or sublet shall be deemed to be a consent to a use not permitted under this Lease, to any act in violation of this Lease or to any subsequent assignment or sublet. No assignment or sublet by Tenant shall relieve Tenant of any liability theretofore or thereafter arising under this Lease. Any attempted assignment or sublet by Tenant in violation of the terms and covenants of this Section shall be void. During the first six (6) months of the Term, the sixty (60) and thirty (30) day periods in the preceding paragraph shall each be reduced to ten (10) days. Notwithstanding the provisions of the foregoing paragraph, Landlord shall not have the termination option described in clause (i) of the preceding paragraph as to any sublease proposed by Tenant which will terminate three (3) years or earlier from the Commencement Date, unless the space subject to such sublease, taken together with all other portions of the Premises subject to any sublease, would exceed fifty percent (50%) of the total Premises then demised under this Lease. In addition, Landlord shall not have the termination option described in clause (i) of the preceding paragraph as to any sublease proposed by Tenant if, within ten (10) days after Tenant's receipt of notice from Landlord that Landlord is exercising such termination right, Tenant withdraws its request for Landlord's consent to such sublease. If Tenant shall propose to assign this Lease effective as of a date which is during the first two (2) years of the Term, or if Tenant shall propose to sublease any portion of the Premises effective as of a date which is during the first two (2) years of the Term and the term of such sublease is for more than three (3) years, due to the potential material adverse affect such proposed transaction would have on Landlord's ability to lease the balance of the Real Property, Landlord's refusal to consent to any such proposed transaction shall be deemed reasonable (without limitation of any other reasonable grounds Landlord may have for refusing to consent to any assignment or subletting). b. Processing Expenses. Tenant shall pay to Landlord, as Landlord's cost of ------------------- processing each 12 proposed assignment or subletting (whether or not the same is ultimately approved by Landlord or consummated by Tenant), an amount equal to the sum of (i) Landlord's reasonable attorneys' and other professional fees, plus (ii) the sum of $1000.00 for the cost of Landlord's administrative, accounting and clerical time (collectively, "Processing Costs"). Notwithstanding anything to the contrary herein, Landlord shall not be required to process any request for Landlord's consent to an assignment or subletting until Tenant has paid to Landlord the amount of Landlord's estimate of the Processing Costs. When the actual mount of the Processing Costs is determined, it shall be reconciled with Landlord's estimate, and any payments or refunds required as a result thereof shall promptly thereafter be made by the parties. c. Consideration to Landlord. In the event of any assignment or sublease, ------------------------- whether or not requiring Landlord's consent, Landlord shall be entitled to receive, as additional rent hereunder, seventy-five percent (75%) of any consideration (including, without limitation, payment for leasehold improvements and any "Leasehold Profit" as defined below) paid by the assignee or subtenant for the assignment or sublease and, in the case of a sublease, the excess of the amount of rent paid for the sublet space by the subtenant over the amount of Monthly Base Rent under Section 4 above and Operating Expenses under Section 5 above attributable to the sublet space for the corresponding month; except that Tenant may recapture, on an amortized basis over the term of the sublease or assignment, any brokerage commissions paid by Tenant in connection with the subletting or assignment (not to exceed commissions typically paid in the market at the time of such subletting or assignment), Tenant's reasonable costs of advertising the space for sublease or assignment, any improvement allowance paid by Tenant to the subtenant or assignee, and any improvement costs paid by Tenant solely to prepare the space for the assignment or sublet.. "Leasehold Profit" shall be the value allocated to the leasehold between the parties to the assignment or sublease, but in no event less than the excess of the present value of the fair market rent of the Premises for the remaining term of this Lease after such assignment or sublease, over the Base Rent payable hereunder for such remaining term, as reasonably determined by Landlord. Upon Landlord's request, Tenant shall direct any subtenant or assignee to pay the directly to Landlord the amounts due to it pursuant to this Section 14.c. on account of such sublease or assignment. If there is more than one sublease under this Lease, the amounts (if any) to be paid by Tenant to Landlord pursuant to this Section 14.c. shall be separately calculated for each sublease and amounts due Landlord with regard to any one sublease may not be offset against rental and other consideration pertaining to or due under any other sublease. d. Documentation. No permitted assignment or subletting by Tenant shall be ------------- effective until there has been delivered to Landlord a fully executed counterpart of the assignment or sublease which expressly provides that (i) in the case of a sublease, the subtenant may not assign its sublease or further sublet the sublet space without Landlord's prior written consent, (ii) in the case of an assignment, the assignee assumes all of Tenant's obligations under this Lease arising on or after the date of the assignment, and (iii) in the case of a sublease, the subtenant agrees to be and remain jointly and severally liable with Tenant to Landlord for the payment of Rent pertaining to the sublet space in the amount set forth in the sublease, and for the performance of all of the terms and provisions of this Lease pertaining to the sublet space. In addition to the foregoing, no assignment or sublease by Tenant shall be effective until there has been delivered to Landlord a fully executed counterpart of Landlord's consent to assignment or sublease form, as applicable. The failure or refusal of a subtenant or assignee to execute any such instrument shall not release or discharge the subtenant or assignee from its liability as set forth above. Notwithstanding the foregoing, no subtenant or assignee shall be permitted to occupy the Premises unless and until such subtenant or assignee provides Landlord with certificates evidencing that such subtenant or assignee is carrying all insurance coverage required of it under this Lease. e. No Merger. Without limiting any of the provisions of this Section 14, --------- the voluntary or other surrender of this Lease by Tenant, or a mutual cancellation by Landlord and Tenant, shall not work a merger, and shall, at the option of Landlord, terminate all or any existing subleases or subtenancies or, at the option of Landlord, operate as an assignment to Landlord of any or all such subleases or subtenancies. If Landlord does elect that such surrender or cancellation operate as an assignment of such subleases or subtenancies, 13 Landlord shall in no way be liable for any previous act or omission by Tenant under the subleases or for the return of any deposit(s) under the subleases that have not been actually delivered to Landlord, nor shall Landlord be bound by any sublease modification(s) executed without Landlord's consent or for any advance rental payment by the subtenant in excess of one month's rent. f. Indirect Assignments. For purposes of this Section 14, the following -------------------- events shall be deemed an assignment or sublease, as appropriate: (i) the issuance of equity interests (whether stock, partnership interests or otherwise) in Tenant or any subtenant or assignee, or any entity controlling any of them, to any person or group of related persons, in a single transaction or a series of related or unrelated transactions, such that, following such issuance, such person or group shall have Control (as defined below) of Tenant or any subtenant or assignee; (ii) a transfer of Control of Tenant or any subtenant or assignee, or any entity controlling any of them, in a single transaction or a series of related or unrelated transactions (including, without limitation, by consolidation, merger, acquisition or reorganization), except that the transfer of outstanding capital stock or other listed equity interests by persons or parties other than "insiders" within the meaning of the Securities Exchange Act of 1934, as amended, through the "over-the-counter" market or any recognized national or international securities exchange, shall not be included in determining whether Control has been transferred; (iii) a reduction of Tenant's assets to the point that this Lease and/or other leases are substantially Tenant's only asset(s); or (iv) a change or conversion in the form of entity of Tenant, any subtenant or assignee, or any entity controlling any of them, which has the effect of limiting the liability of any of the partners, members or other owners of such entity. "Control" shall mean direct or indirect ownership of 50% or more of all of the voting stock of a corporation or 50% or more of the voting legal or equitable interest in any other business entity, or the power to direct the management and operations of any entity (by equity ownership, contract or otherwise). g. Affiliates: Successors. Notwithstanding anything to the contrary in ---------------------- Section 14.a or Section 14.c., but subject to the other provisions of this Section 14, Tenant may assign this Lease or sublet the Premises or any portion thereof, without Landlord's consent, to any partnership, corporation or other entity which controls, is controlled by, or is under common control with Tenant (control being defined for such purposes as ownership of 50% or more of all of the voting stock of a corporation or 50% or more of the voting legal or equitable interest in any other business entity, and the power to direct the management and operations of, the relevant entity) (an "Affiliate") or to any partnership, corporation or other entity resulting from a merger or consolidation with Tenant or which acquires all or substantially all of Tenant's assets (through a transfer of assets or equity interests in Tenant) as a going concern and such assets include substantial assets other than this Lease (a "Successor'), provided that (i) Landlord receives at least ten (10) days' prior written notice of the assignment or subletting, in which Tenant shall expressly confirm that Tenant remains primarily liable (together with the assignee in the event of an assignment) for all of the obligations of the Tenant under this Lease, (ii) in the case of an assignment to a Successor, the Successor's net worth is not less than Tenant's net worth immediately prior to such assignment (or series of transactions of which such assignment is a part), (iii) in the case of a subletting or assignment to an Affiliate, the Affiliate remains an Affiliate for the duration of the subletting or the balance of the term in the event of an assignment, (iv) Landlord receives a fully executed copy of the assignment or sublease agreement between Tenant and the Affiliate or Successor at least ten (10) days prior to the effective date of such assignment or sublease, in which the Affiliate or Successor, as the case may be, assumes (in the event of an assignment) all of Tenant's obligations under this Lease, and agrees (in the event of a sublease) that such subtenant will, at Landlord's election, attorn directly to Landlord in the event that this Lease is terminated for any reason, and (v) in the case of an assignment, the essential purpose of such assignment is to transfer an active, ongoing business with substantial assets in addition to this Lease, and in the case of an assignment or sublease the transaction is for legitimate business purposes unrelated to this lease and the transaction is not a subterfuge by Tenant to avoid it obligations under this Lease or the restrictions on assignment and subletting contained herein. 14 15. Default. ------- a. Tenant's Default. A material breach of this Lease by Tenant shall exist ---------------- if any of the following events (severally, "Event of Default"; collectively, "Events of Default") shall occur: (i) if Tenant shall have failed to pay Base Rent, Tenant's Percentage Share of increased Operating Expenses, or any other sum required to be paid hereunder when due, including any interest due under Section 3; (ii) if Tenant shall have failed to perform any term, covenant or condition of this Lease except those requiring the payment of money, and Tenant shall have failed to cure the breach within fifteen (15) days after written notice from Landlord if the breach could reasonably be cured within the fifteen (15) day period; provided, however, if the failure could not reasonably be cured within the fifteen (15) day period, then Tenant shall not be in default unless it has failed to promptly commence and thereafter continue to make diligent and reasonable efforts to cure the failure as soon as practicable as reasonably determined by Landlord; (iii) if Tenant shall have assigned its assets for the benefit of its creditors; (iv) if the sequestration of, attachment of, or execution on, any material part of the property of Tenant or on any property essential to the conduct of Tenant's business shall have occurred, and Tenant shall have failed to obtain a return or release of the property within thirty (30) days thereafter, or prior to sale pursuant to any sequestration, attachment or levy, whichever is earlier; (v) if Tenant shall have failed to continuously and uninterruptedly conduct its business in the Premises, or shall have abandoned or vacated the Premises; (vi) if a court shall have made or entered any decree or order adjudging Tenant to be insolvent, or approving as properly filed a petition seeking reorganization of Tenant, or directing the winding up or liquidation of Tenant, and the decree or order shall have continued for a period of thirty (30) days; (vii) if Tenant shall make or suffer any transfer which constitutes a fraudulent or otherwise avoidable transfer under any provision of the federal Bankruptcy Laws or any applicable state law; or (viii) if Tenant shall have failed to comply with the provisions of Sections 23 or 25 of this Lease within the time periods stated therein. An Event of Default shall constitute a default under this Lease. b. Remedies Upon Tenant's Default. Upon an Event of Default, Landlord shall ------------------------------ have the following remedies, in addition to all other rights and remedies provided by law, equity, statute or otherwise provided in this Lease, to which Landlord may resort cumulatively or in the alternative: (i) Landlord has the remedy described in California Civil Code Section 1951.4 (a landlord may continue the lease in effect after the tenant's breach and abandonment and recover rent as it becomes due, if the tenant has the right to sublet and assign subject only to reasonable limitations), and may continue this Lease in full force and effect, and this Lease shall continue in full force and effect as long as Landlord does not terminate Tenant's right to possession, and Landlord shall have the right to collect Rent when due. During the period Tenant is in default, Landlord may enter the Premises and relet it, or any part of it, to third parties for Tenant's account, provided that any Rent in excess of the Rent due hereunder shall be payable to Landlord. Tenant shall be liable immediately to Landlord for all costs Landlord incurs in reletting the Premises, including, without limitation, brokers' commissions, expenses of cleaning and redecorating the Premises required by the reletting and like costs. Reletting may be for a period shorter or longer than the remaining Term of this Lease. Tenant shall pay to Landlord the Rent and other sums due under this Lease on the dates the Rent is due, less the Rent and other sums Landlord receives from any reletting. No act by Landlord allowed by this Subsection (i) shall terminate this Lease unless Landlord notifies Tenant in writing that Landlord elects to terminate this Lease. (ii) Landlord may terminate Tenant's right to possession of the Premises at any time by giving written notice to that effect. No act by Landlord other than giving written notice to Tenant of such termination shall terminate this Lease. Acts of maintenance, efforts to relet the Premises or the appointment of a receiver on Landlord's initiative to protect Landlord's interest under this Lease shall not constitute a termination of Tenant's right to possession. On termination, Landlord shall have the right to remove all personal property of Tenant and store it at Tenant's cost and to recover from Tenant as damages: (a) the worth at the time of award of unpaid Rent and other sums due and payable which had been earned at the 15 time of termination; plus (b) the worth at the time of award of the amount by which the unpaid Rent and other sums due and payable which would have been payable after termination until the time of award exceeds the amount of the Rent loss that Tenant proves could have been reasonably avoided; plus (c) the worth at the time of award of the amount by which the unpaid Rent and other sums due and payable for the balance of the Term after the time of award exceeds the amount of the Rent loss that Tenant proves could be reasonably avoided; plus (d) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which, in the ordinary course of things, would be likely to result therefrom, including, without limitation, any costs or expenses incurred by Landlord: (1) in retaking possession of the Premises, including reasonable attorneys' fees and costs therefor; (2) maintaining or preserving the Premises for reletting to a new tenant, including repairs or alterations to the Premises for the reletting; (3) leasing commissions; (4) any other costs necessary or appropriate to relet the Premises; and (5) at Landlord's election, such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by California Civil Code Section 1951.2 or any other laws of the State of California. The "worth at the time of award" of the amounts referred to in Subsections (ii)(a) and (ii)(b) is computed by allowing interest at the lesser of eighteen percent (18%) per annum or the maximum rate permitted by law, on the unpaid Rent and other sums due and payable from the date due through the date of award. The "worth at the time of award" of the amount referred to in Subsection (ii)(c) is computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award, plus one percent (1%). Tenant waives redemption or relief from forfeiture under California Code of Civil Procdure Sections 1174 and 1179, or under any other present or future law, if Tenant is evicted or Landlord takes possession of the Premises by reason of any default of Tenant hereunder. c. Landlord's Default. Landlord shall not be deemed to be in default in the ------------------ performance of any obligation required to be performed by Landlord hereunder unless and until Landlord has failed to perform the obligation within thirty (30) days after receipt of written notice by Tenant to Landlord specifying the obligation Landlord has failed to perform; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be deemed to be in default if Landlord shall commence the performance of such obligation within the thirty (30) day period and thereafter shall diligently prosecute the same to completion. 16. Landlord's Right to Perform Tenant's Covenants. ---------------------------------------------- If Tenant shall at any time fail to make any payment or perform any other act on its part to be made or performed under this Lease, Landlord may, but shall not be obligated to, make the payment or perform any other act to the extent Landlord may deem desirable and, in connection therewith, pay expenses and employ counsel. Any payment or performance by Landlord shall not waive or release Tenant from any obligations of Tenant under this Lease. All sums so paid by Landlord, and all penalties, interest and costs in connection therewith, shall be due and payable by Tenant on the next day after any payment by Landlord, together with interest thereon at the Interest Rate, from that date to the date of payment thereof by Tenant to Landlord, plus collection costs and attorneys' fees. Landlord shall have the same rights and remedies for the nonpayment thereof as in the case of default in the payment of Base Rent. 17. Security Deposit: Letter of Credit. ---------------------------------- a. Security Deposit. Tenant has deposited with Landlord the Security ---------------- Deposit, in the amount specified in the Basic Lease Information, as security for the full and faithful performance of every provision of this Lease to be performed by Tenant. If Tenant defaults with respect to any proviSion of this Lease, Landlord may use, apply or retain all or any part of the Security Deposit for the payment of any Rent or other sum in default, for the payment of any amount which Landlord may expend or become obligated to expend by reason of Tenant's default, or for any loss or damage which Landlord may suffer by reason of Tenant's default; provided, however, that the Security Deposit shall not be deemed an advance rent deposit or an advance payment of any kind, or a measure or limitation of Landlord's damages or constitute a bar or defense to any of the Landlord's other remedies under this Lease or at law upon Tenant's default. If any portion of the Security Deposit is used or applied, Tenant shall deposit with Landlord, within ten (10) days after written demand therefor, cash in an amount sufficient to restore the Security Deposit to its original amount. Landlord shall not be required to keep the Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on the Security Deposit. Upon the expiration or earlier termination of this Lease, and Tenant's fulfillment of all of its obligations hereunder (including any obligations which survive such expiration or earlier termination), Landlord shall return the Security Deposit (or the balance thereof after application as aforesaid) to Tenant. b. Letter of Credit. In addition to the Security Deposit made by Tenant ---------------- pursuant to Section 17.a., concurrently with Tenant's execution and delivery of this Lease to Landlord, Tenant has delivered to Landlord the Letter of Credit described below as security for Tenant's performance of all of Tenant's covenants and obligations under this Lease; provided, however, that neither the Letter of Credit nor any proceeds therefrom (the "Letter of Credit Proceeds") shall be deemed an advance rent deposit or an advance payment of any other kind, or a measure or limitation of Landlord's damages or constitute a bar or defense to any of the Landlord's other remedies under this Lease or at law upon Tenant's default. The Letter of Credit shall be maintained in effect from the date of this Lease through ninety (90) days after the expiration or earlier termination of the Term, and on or prior to the expiration of such ninety (90) day period, Landlord shall return to Tenant the Letter of Credit (unless presented for payment as provided herein) and any Letter of Credit Proceeds then held by Landlord (other than those held for application by Landlord as provided below, including application to cure any failure by Tenant to restore the Premises as required by this Lease upon the surrender thereof); provided, however, that in no event shall any such return be construed as an admission by Landlord that Tenant has performed all of its obligations hereunder. Landlord shall not be required to segregate the Letter of Credit Proceeds from its other funds and no interest shall accrue or be payable to Tenant with respect thereto. Landlord may (but shall not be required to) draw upon the Letter of Credit and use the Letter of Credit Proceeds or any portion thereof to cure any Event of Default by Tenant under this Lease or to compensate Landlord for any damage Landlord incurs as a result of Tenant's failure to perform any of its obligations hereunder, it being understood that any use of the Letter of Credit Proceeds shall not constitute a bar or defense to any of Landlord's other remedies under this Lease. In such event and upon written notice from Landlord to Tenant specifying the amount of the Letter of Credit Proceeds so utilized by Landlord and the particular purpose for which such amount was applied, Tenant shall immediately deliver to Landlord an amendment to the Letter of Credit or a replacement thereof in an amount equal to one hundred percent (100%) of the amount specified below for the applicable period. Tenant's failure to deliver such amendment or replacement to Landlord within five (5) days of Landlord's notice shall constitute an Event of Default hereunder. No lessor under any ground or underlying lease or holder of or beneficiary under a mortgage or deed of trust, nor any purchaser at any judicial or private foreclosure sale of the Property or any portion thereof, shall be responsible to Tenant for such Letter of Credit or any Letter of Credit Proceeds unless such lessor, holder or purchaser shall have actually received the same. C. As used herein, Letter of Credit shall mean an unconditional, irrevocable letter of credit (hereinafter referred to as the "Letter of Credit") issued at Tenant's sole expense by the San Francisco or New York office of a major national bank satisfactory to Landlord (the "Bank"), naming Landlord as beneficiary, and in form and substance satisfactory to Landlord, in the amount of One Million Dollars ($1,000,000.00) (subject to increase by the amount of the Improvement Advance as described below) for the during the period from the date of this Lease through the first annual anniversary of the Commencement Date, and reducing in amount on the first annual anniversary of the Commencement Date and on each subsequent annual anniversary of the Commencement Date by twenty percent (20%) of the original amount of the Letter of Credit; provided, however, that if on the date the Letter of Credit amount would otherwise reduce, an Event of Default, or default that with notice or the passage of time or both could mature into an Event of Default, shall have occurred and be continuing, the Letter of Credit amount shall not reduce on such date and shall not thereafter 17 reduce until the later of the next scheduled reduction date or the date such Event of Default or default shall have been cured. The Letter of Credit shall be for a one-year or, at Tenant's election, longer, term and shall provide: (i) that Landlord may make partial and multiple draws thereunder, up to the face amount thereof, (ii) that Landlord may draw upon the Letter of Credit up to the full amount thereof, as determined by Landlord, and the Bank will pay to Landlord the amount of such draw upon receipt by the Bank of a sight draft signed by Landlord and accompanied by a written certification from Landlord to the Bank stating either: (a) that an Event of Default has occurred and is continuing under this Lease, or (b) that Landlord has not received notice from the Bank that the Letter of Credit will be renewed by the Bank for at least one (1) year beyond the then relevant expiration date and Tenant has not furnished Landlord with a replacement Letter of Credit as hereinafter provided, or (c) that Bank no longer meets the requirements set forth above and Tenant has not furnished Landlord with a replacement Letter of Credit as required hereunder from a Bank meeting such requirements; and (iii) that, in the event of Landlord's assignment or other transfer of its interest in this Lease, the Letter of Credit shall be freely transferable by Landlord, without charge and without recourse, to the assignee or transferee of such interest and the Bank shall confirm the same to Landlord and such assignee or transferee. The Letter of Credit shall further provide that a draw thereon pursuant to clause (ii)(b) above may only be made during the thirty (30) day period preceding the then applicable expiration date of the Letter of Credit. In the event that the Bank shall fail to notify Landlord that the Letter of Credit will be renewed for at least one (1) year beyond the then applicable expiration date, and Tenant shall not have delivered to Landlord, at least thirty (30) days prior to the relevant annual expiration date, a replacement Letter of Credit in the amount required hereunder and otherwise meeting the requirements set forth above, then Landlord shall be entitled to draw on the Letter of Credit as provided above, and shall hold and apply the proceeds of such draw as Letter of Credit Proceeds pursuant to Paragraph 17.b above. Notwithstanding the foregoing, in the event that Landlord shall make an Improvement Advance as described in Exhibit B attached hereto, within thirty --------- (30) days of the determination of the total amount of the Improvement Advance Tenant shall increase the initial amount of the Letter of Credit by the amount of the Improvement Advance. 18. Surrender of Premises. --------------------- By taking possession of the Premises, Tenant shall be deemed to have accepted the Premises and the Property in good, clean and completed condition and repair, subject to all applicable laws, codes and ordinances. On the Expiration Date or earlier termination of this Lease, Tenant shall surrender the Premises to Landlord in its condition as of the Commencement Date, normal wear and tear excepted. Tenant shall remove from the Premises all of Tenant's Personal Property and any Alterations required to be removed pursuant to Section 9 of this Lease. Tenant shall repair any damage or perform any restoration work required by the removal. If Tenant fails to timely remove any Personal Property or Alterations as aforesaid, Landlord may remove the property and store and/or dispose of the same at Tenant's expense, including interest at the Interest Rate. If the Premises are not so surrendered at the termination of this Lease, Tenant shall indemnify Landlord against all Claims resulting from delay by Tenant in so surrendering the Premises, including, without limitation, any claims made by any succeeding tenant, losses to Landlord due to lost opportunities to lease to succeeding tenants, and attorneys' fees and costs. Tenant shall give written notice to Landlord at least thirty (30) days prior to vacating the Premises and shall meet with Landlord for a joint inspection of the Premises at the time of vacating. In the event of Tenant's failure to give such notice or participate in such joint inspection, Landlord's inspection at or after Tenant's vacating the Premises shall conclusively be deemed correct for purposes of determining Tenant's responsibility for removal of Alterations and repairs and restoration of the Premises. 19. Holding Over. ------------ If Tenant remains in possession of all or any part of the Premises after the expiration of the Term or the 18 earlier termination of this Lease without Landlord's prior written consent, the tenancy shall be a tenancy at sufferance only and shall not constitute a renewal or extension for any further term, regardless of whether Landlord shall accept Rent for any such period. In such event, Base Rent shall be increased in an amount equal to two hundred percent (200%) of the Base Rent during the last month of the Tern (including any extensions), and any other sums due under this Lease shall be payable in the amount, and at the times, specified in this Lease. The tenancy shall be subject to every other term, condition, covenant and agreement contained in this Lease, except that any renewal or extension option in favor of Tenant shall not be applicable. No such increase shall impair Landlord's other rights and remedies against Tenant by reason of such holding over by Tenant, and Tenant shall vacate the Premises immediately upon Landlord's request. 20. Access to Premises. ------------------ Tenant shall permit Landlord and its agents to enter the Premises at all reasonable times upon reasonable notice, except in the case of an emergency (in which event entry may be made when necessary and without notice), to inspect the Premises, to post Notices of Nonresponsibility and similar notices, to show the Premises to interested parties such as prospective mortgagees, purchasers and tenants to provide any services required of Landlord hereunder, to make necessary alterations, additions, improvements or repairs either to the Premises, the Building, or other premises within the Building, and to discharge Tenant's obligations hereunder when Tenant has failed to do so within a reasonable time after written notice from Landlord. No such entry shall constitute a constructive eviction or give rise to an abatement of Rent hereunder, constitute a constructive eviction, or otherwise diminish Tenant's obligations under this Lease. In exercising its rights under this Section 20, Landlord shall at all times endeavor to minimize interference with Tenant's operations, to the extent practicable. During the last year of the Term, Landlord shall have the right to erect on the exterior of the Premises and/or on the exterior or in the Common Areas of the Building and the Property suitable signs indicating that the Premises are available for lease. 21. Signs. ----- a. The size, design, color, location and other physical aspects of any sign in or on the Premises shall be subject to the CC&R's, Rules, Landlord's approval prior to installation, and to all Legal Requirements. The costs of any permitted sign, and the costs of its installation, maintenance and removal, shall be at Tenant's sole expense and shall be paid within ten (10) days of Tenant's receipt of a bill from Landlord for the costs. In no event shall Tenant be permitted to place any sign, logo or other identification on the exterior of the Building, in the Building's Common Areas (other than on a Building directory maintained to identify the Building's tenants), or upon the Property, or which is inside the Premises but visible from outside of the Premises (other than upon the door(s) to the Premises). b. Exterior Building Signage. Notwithstanding Section 21.a., so long as ------------------------- the Tenant under this Lease (i) is the Tenant originally named under this Lease in the Basic Lease Information, or any Affiliate or Successor of such original Tenant, (ii) is in occupancy pursuant to this Lease of at least seventy-five percent (75%) of the entire Premises originally demised under this Lease, and (iii) is not in default of any of its obligations hereunder beyond the expiration of any applicable grace or cure period, Tenant shall be permitted to maintain identification signage at the top of one exterior side of the Building in a location reasonably approved by Landlord. The installation, maintenance and removal of Tenant's signage pursuant to this Section 21.b. shall be performed by Tenant at Tenant's expense, but in coordination with Landlord and its reasonable installation procedures and requirements, or at Landlord's option, by Landlord at Tenant's expense. Such signage of Tenant shall be subject to Landlord's prior approval and all Legal Requirements, and shall be limited to Tenant's name and/or logo. If Tenant shall fail to meet the signage conditions specified herein, Landlord may immediately remove Tenant's signage at Tenant's expense, and Tenant's signage rights pursuant to this Section 21.b. shall thereafter forever cease and terminate; provided, however, that if applicable Legal ----------------- Requirements do not require removal of such signage prior to the expiration of the thirty (30) day period hereinafter provided, Landlord shall not remove such signage unless it shall have 19 given Tenant thirty (30) days' prior notice of the signage conditions Tenant has failed to meet, and such failure continues after the expiration of such thirty (30) day period. Upon the expiration or earlier termination of this Lease, Tenant shall, at Tenant's expense, or at Landlord's option Landlord shall, at Tenant's expense, remove Tenant's signage and repair any damage to the Building caused by such removal. 22. Subordination. ------------- a. Subordinate Nature. Except as provided in Subsections b. and c., this ------------------ Lease is subject and subordinate to all ground and underlying leases, mortgages and deeds of trust which now or may hereafter affect the Real Property or any portion thereof, to the CC&R's, and to all renewals, modifications, consolidations, replacements and extensions of the foregoing, without the necessity of any further documentation evidencing such subordination. Notwithstanding such self-operative subordination, within ten (10) days after Landlord's written request therefor, Tenant shall execute any and all documents required by Landlord, the lessor under any ground or underlying lease ("Ground Lessor"), or the holder or holders of any mortgage or deed of trust ("Holder"), evidencing this Lease to be subordinate to the lien of any such lease, mortgage or deed of trust, as the case may be. Tenant hereby irrevocably appoints Landlord as Tenant's attorney-in-fact to execute and deliver any such instrument in the name of Tenant if Tenant fails to do so within such time. If the interest of Landlord in the Real Property or the Building is transferred to any Ground Lessor or Holder pursuant to or in lieu of proceedings for enforcement of any such lease, mortgage, or deed of trust, Tenant shall immediately and automatically attorn to the Ground Lessor or Holder, and this Lease shall continue in full force and effect as a direct lease between the Ground Lessor or Holder and Tenant on the terms and conditions set forth herein. b. Possible Priority of Lease. If a Ground Lessor or a Holder advises -------------------------- Landlord that it desires or requires this Lease to be prior and superior to a lease, mortgage or deed of trust, Landlord may notify Tenant. Within seven (7) days of Landlord's notice, Tenant shall execute, have acknowledged and deliver to Landlord any and all documents or instruments, in the reasonable form presented to Tenant, which Landlord, Ground Lessor or Holder deems necessary or desirable to make this Lease prior and superior to the lease, mortgage or deed of trust. c. Lease Modification. If, in connection with obtaining financing for the ------------------ Real Property or any portion thereof, any Holder or Ground Lessor shall request reasonable modification to this Lease as a condition to such ground lease or financing, Tenant shall execute and deliver to Landlord, within ten (10) days of Landlord's request, any such modification agreement so requested, provided such modifications do not adversely affect Tenant's rights or increase Tenant's obligations hereunder (other than additional obligations requiring Tenant to send such Holder or Ground Lessor copies of notices given to Landlord). d. Nondisturbance Agreement. It shall be a condition to the subordination ------------------------ of this Lease to any Superior Interest created after the date of this Lease (as distinguished from any Superior Interest in effect as of the date of this Lease, or any amendment or modification thereto), that Tenant shall receive from the Ground Lessor or Holder, as applicable, of such Superior Interest a so-called non-disturbance agreement in the form reasonably required by such Ground Lessor or Holder. 23. Transfer of the Property. ------------------------ Upon transfer of the Real Property and assignment of this Lease, Landlord shall be entirely freed and relieved of all liability under any and all of its covenants and obligations contained in or derived from this Lease occurring after the consummation of the transfer and assignment, and if Landlord shall transfer the Security Deposit to the transferee of Landlord's interest in the Real Property, Landlord shall be released from all liability for the Security Deposit. Tenant shall attorn to any entity purchasing or otherwise acquiring the Premises at any sale or other proceeding. 20 24. Estoppel Certificates: Financial Statements. ------------------------------------------- Within ten (10) days following written request by Landlord from time to time throughout the Term, Tenant shall execute and deliver to Landlord an estoppel certificate in the form attached hereto as Exhibit E, duly completed by Tenant. --------- At the request of Landlord from time to time during the Term, Tenant shall provide to Landlord its current financial statements or other information setting forth Tenant's financial condition and net worth. Landlord shall use such documentation solely for purposes of this Lease and in connection with the ownership, financing, management and disposition of the Real Property. 25. Mortgagee Protection. -------------------- In the event of any default on the part of Landlord, Tenant will give notice by registered or certified mail to each Ground Lessor and Holder whose identity has been disclosed to Tenant, and shall offer the Ground Lessor or Holder a reasonable opportunity after such notice (but in no event less than thirty (30) days) to cure the default, including time to obtain possession of the Property or the Premises by lease termination, power of sale or a judicial foreclosure (as applicable), if such should prove necessary to effect a cure. In no event shall any Ground Lessor or Holder in any way or to any extent be: (a) liable for any act or omission of any prior Landlord in contravention of any provision of this Lease; or (b) subject to any offsets, claims or defenses which Tenant might have against any prior Landlord; or (c) bound by any Rent which Tenant might have paid for more than thirty (30) days in advance to any prior Landlord; or (d) bound by any agreement or modification of this Lease made without such Ground Lessor's or Holder's written consent. Tenant agrees that if any Ground Lessor or Holder acquires possession of the Premises or title to the Real Property as a result of termination of its ground lease or foreclosure of such Holder's deed of trust or other security instrument, as applicable, the acceptance of a lease surrender or deed in lieu of such foreclosure, or otherwise, the provisions of Section 36 below shall be applicable to liability of such Ground Lessor or Holder as successor Landlord under this Lease. 26. Attorneys' Fees. --------------- If either party shall bring any action or legal proceeding for damages for an alleged breach of any provision of this Lease, to recover rent or other sums due, to terminate the tenancy of the Premises or to enforce, protect or establish any term, condition or covenant of this Lease or right of either party, the prevailing party shall be entitled to recover, as a part of the action or proceedings, or in a separate action brought for that purpose, reasonable attorneys' fees and court costs as may be fixed by the court or jury. The prevailing party shall be the party which secures a final judgment in its favor, provided that if the party bringing any action shall dismiss the same without the consent of the other party, the other party shall be deemed the prevailing party. 27. Brokers. ------- Tenant warrants and represents that it has had no dealings with any real estate broker or agent in connection with the negotiation of this Lease, except for the brokers(s) specified in the Basic Lease Information (the "Brokers"), and that it knows of no other real estate broker or agent who is or might be entitled to a fee, commission or other compensation in connection with this Lease. Tenant shall indemnify and hold harmless Landlord from and against any and all liabilities or expenses (including reasonable attorneys' fees and costs) arising out of claims made by any broker or individual (other than the Brokers) for a fee, commission or other compensation resulting from this Lease. Pursuant to the terms of separate agreement(s) between Landlord and the Brokers, Landlord shall pay the Brokers any fee, commission or other compensation to which they are entitled from Landlord by reason of this Lease. Tenant shall have no liability to the Brokers for any fee, commission or other compensation. 21 28. Parking. ------- Tenant shall have the right to park in the Building's parking facilities, in common with other tenants of the Building, upon such terms and conditions as may from time to time be established by Landlord. There shall be no charge for any portion of the parking facilities which is not reserved. Tenant agrees not to use in excess of its proportionate share (i.e. the rentable square footage of the Premises in proportion to the rentable square footage of the Building or Buildings served by such parking facilities) of parking facilities and agrees to cooperate with Landlord and other tenants in the use of the parking facilities. Landlord reserves the right, in its absolute discretion, to determine whether the parking facilities are becoming crowded and to allocate and assign parking spaces among Tenant and the other tenants. Landlord shall not be liable to Tenant, nor shall this Lease be affected, if any parking is impaired by moratorium, initiative, referendum, law, ordinance, regulation or order passed, issued or made by any governmental or quasi-governmental body or by fire or other casualty. 29. Utilities and Services. ---------------------- Tenant shall arrange for all telephone, water, gas, electricity and other power and utilities which it shall require in connection with its use or occupancy of the Premises and shall pay for the same, together with any taxes, penalties, surcharges or the like pertaining thereto. Landlord shall have no obligation to furnish any utilities or services to the Premises or any equipment providing for the same. Without limitation, Tenant shall be solely responsible for providing such heating, ventilation and air conditioning ("HVAC") to the Premises as Tenant shall require for the comfortable occupancy thereof. Any equipment or systems which Tenant shall require in order to supply HVAC shall be subject to the provisions of Section 9 above. Tenant shall obtain, at its expense all electric light bulbs, ballasts and tubes as it shall require for the Premises. If any of the foregoing utilities or services are not separately metered to Tenant, Tenant shall pay a reasonable proportion, as determined by Landlord, of all charges jointly serving the Premises and other premises. Landlord shall not be liable for any damages directly or indirectly resulting from nor shall the Base Rent, Operating Expenses or any other monies owed by Tenant to Landlord under this Lease be abated or reduced by reason of (a) the installation, use or interruption of use of any equipment used in connection with the furnishing of any of the foregoing utilities and services, (b) failure to furnish or delay in furnishing any such utilities or services for any reason whatsoever, or (c) the limitation, curtailment, rationing or restriction on use of water, electricity, gas or any other form of energy or any other service or utility whatsoever serving the Premises or the Real Property. Landlord shall be entitled to cooperate voluntarily and in a reasonable manner with the efforts of national, state or local government agencies or utility suppliers in reducing energy or other resource consumption. The obligation to make services available hereunder shall be subject to the limitations of any such voluntary, reasonable program. 30. Intentionally Deleted. ---------------------- 31. Acceptance. ---------- Delivery of this Lease, duly executed by Tenant, constitutes Tenant's offer to lease the Premises as set forth herein, and under no circumstances shall such delivery be deemed to create an option or reservation to lease the Premises for the benefit of Tenant. This Lease shall become effective and binding only upon execution hereof by Landlord and delivery of a signed copy to Tenant. If Landlord does not accept the Tenant's offer, any sums delivered by Tenant with its offer shall be returned to Tenant. 32. Use of Building Name. -------------------- Tenant shall not employ the name of the Building in the name or title of its business or occupation, or for my other purpose, except to identify the address of the Building, without Landlord's prior written consent, which consent Landlord may withhold in its sole discretion. Landlord reserves the right to change the name 22 of the Building without Tenant's consent and without any liability to Tenant. 33. Recording. --------- Neither Landlord nor Tenant shall record this Lease, nor a short form memorandum of this Lease, without the prior written consent of the other. 34. Quitclaim. --------- Upon any termination or expiration of this Lease pursuant to its terms, Tenant, at Landlord's request, shall execute, have acknowledged and deliver to Landlord a quitclaim deed of all Tenant's interest in the Premises, Building and Property created by this Lease. 35. Notices. ------- Any notice, demand or request required or desired to be given under this Lease shall be in writing sent to the address of the party specified in this Lease, and shall be given by hand delivery, electronic mail (e.g., telecopy), --- overnight courier service (e.g. Federal Express), or the United States mail, registered or certified, the postage prepaid. All notices shall be deemed to have been given when received at the address of the party to which it has been sent (or when such receipt is refused). As of the date of execution of this Lease, the addresses of Landlord and Tenant are as specified in the Basic Lease Information. Either party may change its address by giving notice of the change in accordance this Section. 36. Landlord's Exculpation. ---------------------- The term "Landlord," as used in this Lease, shall mean only the owner or owners of the Real Property at the time in question. Notwithstanding any other provision of this Lease, the liability of Landlord for its obligations under this Lease is limited solely to Landlord's interest in the Real Property as the same may from time to time be encumbered, and no personal liability shall at any time be asserted or enforceable against any other assets of Landlord or against the constituent shareholders, partners or other owners of Landlord, or the directors, officers, employees and agents of Landlord or such constituent shareholder, partner or other owner, on account of any of Landlord's obligations or actions under this Lease. Notwithstanding any other provision of this Lease, Landlord shall not be liable for any consequential damages or interruption or loss of business, income or profits, nor shall Landlord be liable for loss of or damage to artwork, currency, jewelry, bullion, unique or valuable documents, securities or other valuables, or for other property not in the nature of ordinary fixtures, furnishings and equipment. Wherever in this Lease Tenant (a) releases Landlord from any claim or liability, (b) waives or limits any right of Tenant to assert any claim against Landlord or to seek recourse against any property of Landlord or (c) agrees to indemnify Landlord against any matters, the relevant release, waiver, limitation or indemnity shall run in favor of and apply to Landlord, the constituent shareholders, partners or other owners of Landlord, and the directors, officers, employees and agents of Landlord and each such constituent shareholder, partner or other owner. In no event shall any shareholder, partner, member, officer, director or other constituent of Landlord or its direct or indirect constituents ever be personally liable for Landlord's obligations or liability under this Lease. 37. Additional Structures. --------------------- Any diminution or interference with light, air or view by any structure which may be erected on land adjacent to the Building shall in no way alter this Lease or impose any liability on Landlord. 23 38. Consents and Approvals. ---------------------- Wherever the consent, approval, judgment or determination of Landlord is required or permitted under this Lease, except as expressly provided herein Landlord may exercise its sole discretion in granting or withholding such consent or approval or in making such judgment or determination. Whenever Tenant requests Landlord to take any action or give any consent or approval, Tenant shall reimburse Landlord for all of Landlord's costs incurred in reviewing the proposed action or consent (whether or not Landlord consents to any such proposed action), including, without limitation, reasonable attorneys' or consultants' fees and expenses, within ten (10) days after Landlord's delivery to Tenant of a statement of such costs. If it is determined that Landlord failed to give its consent or approval where it was required to do so under this Lease, Tenant's sole remedy will be an order of specific performance or mandatory injunction of the Landlord's agreement to give its consent or approval. The review and/or approval by Landlord of any item shall not impose upon Landlord any liability for accuracy or sufficiency of any such item or the quality or suitability of such item for its intended use. Any such review or approval is for the sole purpose of protecting Landlord's interest in the Real Property, and neither Tenant nor any Tenant Party nor any person or entity claiming by, through or under Tenant, nor any other third party shall have any rights hereunder by virtue of such review and/or approval by Landlord. 39. General. ------- a. Captions. The captions and headings used in this Lease are for the -------- purpose of convenience only and shall not be construed to limit or extend the meaning of any part of this Lease. b. Time. Time is of the essence for the performance of each term, condition ---- and covenant of this Lease. c. Severability. If any provision of this Lease is held to be invalid; ------------ illegal or inenforceable, the invalidity, illegality, or unenforceability shall not affect any other provision of this Lease, but this Lease shall be construed as if the invalid, illegal or unenforceable provision had not been contained herein. d. Choice of Law: Construction. This Lease shall be construed and enforced --------------------------- in accordance with the laws of the State of California. The language in all parts of this Lease shall in all cases be construed as a whole according to its fair meaning and not strictly for or against either Landlord or Tenant. e. Gender: Singular. Plural. When the context of this Lease requires, the ------------------------ neuter gender includes the masculine, the feminine, a partnership or corporation or joint venture, and the singular includes the plural. f. Binding Effect. The covenants and agreements contained in this Lease -------------- shall be binding on the parties hereto and, subject to Section 14 above, on their respective successors and assigns. g. Waiver. The waiver of Landlord of any breach of any term, condition or ------ covenant of this Lease shall not be deemed to be a waiver of the provision or any subsequent breach of the same or any other term, condition or covenant of this Lease. The subsequent acceptance of Rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach at the time of acceptance of the payment. No covenant, term or condition of this Lease shall be deemed to have been waived by Landlord unless the waiver is in writing signed by Landlord. h. Entire Agreement. This Lease is the entire agreement between the ---------------- parties, and supersedes all prior agreements, including letters of intent, between them, and there are no agreements or representations between the parties except as expressly set forth herein. Except as otherwise provided herein, no subsequent change or addition to this Lease shall be binding unless in writing and signed by the parties hereto. 24 i. Waiver of Jury. Tenant hereby waives any right it may have to a jury trial -------------- in the event of litigation between Tenant and Landlord pertaining to this Lease. Landlord and Tenant agree that this paragraph constitutes a written consent to waiver of trial by jury within the meaning of California Code of Civil Procedure Section 631(a)(2), and Tenant does hereby authorize and empower Landlord to file this paragraph and or this Lease, as required, with the clerk or judge of any court of competent jurisdiction as a written consent to waiver of jury trial. j. Counterparts. This Lease may be executed in counterparts, each of which ------------ shall be an original, and all of which together shall constitute but one instrument. k. Exhibits. The Basic Lease Information and all exhibits attached -------- hereto are hereby incorporated herein and made an integral part hereof. l. Addendum. The Addendum, if any, attached hereto is hereby incorporated -------- herein and made an integral part hereof. m. Other Leases. Tenant represents and warrants to Landlord that, with the ------------ exception of this Lease, neither Tenant nor any affiliate of Tenant is a tenant under a lease or any other tenancy agreement (1) with (a) Riggs & Company; a division of Riggs Bank NA., as trustee of the Multi-Employer Property Trust, (b) Riggs Bank N.A., as trustee of the Multi-Employer Property Trust, (c) the Multi-Employer Property Trust, (d) the National Bank of Washington Multi-Employer Property Trust, the previous name of the Multi-Employer Property Trust, (e) The Riggs National Bank of Washington, DC., as trustee of the Multi- Employer Property Trust, (f) Northridge Business Center LLC, (g) the Corporate Drive Corporation, as trustee of the Corporate Drive Nominee Realty Trust, (h) Arboretum Lakes-I, L,L.C., a Delaware limited liability company, (i) Village Green at Seven Bridges, L.L.C., (j) Pine Street Development, L.L.C., (k) MEPT Realty LLC, a New York limited liability company, (1) MEPT, L.L.C., a Delaware 1imited liability company, (m) Cabrillo Properties LLC, (n) Valencia LLC, (o) Mission Trails LLC, or (p) Centrepointe Distribution Center LLC, or (2) involving any property in which any one or more of the entities named in clauses (l)(a) through (e) are known by Tenant to have an ownership interest. 40. Renewal Option. -------------- a. Tenant shall have the option to renew this Lease for one (1) additional term of five (5) years, commencing upon expiration of the initial Term. Such renewal option must be exercised, if at all, by written notice given by Tenant to Landlord not later than nine (9) months prior to expiration of the initial Term. Notwithstanding the foregoing, this renewal option shall be null and void and Tenant shall have no right to renew this Lease if (i) as of the date immediately preceding the commencement of the renewal period the original Tenant named under this Lease in the Basic Lease Information is not in occupancy of the entire Premises then demised hereunder or such Tenant does not intend to continue to occupy the entire Premises then demised hereunder (but intends to assign this Lease or sublet the Premises in whole or in part), or (ii) on the date Tenant exercises such renewal option or on the date immediately preceding the commencement date of the renewal period Tenant is in default of any of its obligations under this Lease. If Tenant exercises such renewal option, then during the renewal period the Base Rent payable by Tenant shall be the then fair market rent for the Premises based upon the terms of this Lease, as renewed. For purposes of this Section 40, the term "fair market rent" shall mean the rental rate for comparable space under primary lease (and not sublease) to new tenants, taking into consideration such amenities as existing improvements, view, floor on which the Premises are situated and the like, situated in comparable first-class office buildings in comparable business parks in a fifteen (15) mile radius of the Property, taking into consideration the then-prevailing ordinary rental market practices with respect to tenant concessions (if any) (e.g. not offering extraordinary rental, promotional deals and other concessions to tenants which deviate from what is the then-prevailing ordinary practice in an effort to alleviate cash flow problems, difficulties 25 in meeting loan obligations or other financial distress, or in response to a greater than average vacancy rate). Fair market rent shall include the periodic rental increases, if any, that would be included for space leased for the renewal period. The fair market rent shall be mutually agreed upon by Landlord and Tenant in writing within the thirty (30) calendar day period commencing three (3) months prior to commencement of the renewal period. If Landlord and Tenant do not agree upon the fair market rent within said thirty (30) day period, then the fair market rent shall be established by appraisal in accordance with the procedures set forth in Exhibit F attached hereto. --------- b. Notwithstanding anything in the foregoing or in Exhibit F to the contrary, --------- in no event shall the Base Rent during the renewal period be less than the Base Rent payable by Tenant for the month immediately preceding the commencement of the renewal period (without regard to any temporary abatement of rental then in effect pursuant to the provisions of this Lease). IN WITNESS WHEREOF, the parties have executed this Lease on the dates set forth below, effective as of the date first above written. Landlord: Tenant: THE MULTI-EMPLOYER CERTICOM CORP., PROPERTY TRUST, A TRUST a Delaware corporation ORGANIZED UNDER 12 C.F.R SECTION 9.18, by its trustee Riggs & Company, a division of BY: /s/ [ILLEGIBLE] ---------------------------- Riggs Bank N.A. Its: CHAIRMAN & CEO --------------------------- By: /s/ Maryanne Martins By: /s/ [ILLEGIBLE] ---------------------------------- ---------------------------- MARY ANNE MARTINS Its: Managing Director Its: VICE PRESIDENT & CEO --------------------------------- --------------------------- 26 EXHIBIT A Mt. Eden Business Park Hayward, CA [DRAWING OF MT. EDEN BUSINESS PARK] PREMISES: Building A (Entire Building) EXHIBIT B TENANT IMPROVEMENTS ------------------- 1. Tenant Improvements. ------------------- a. Plans. Improvements shall be constructed in the Premises in ----- accordance with this Paragraph 1. On or before October 27, 1998, Tenant shall furnish to Landlord for Landlord's review and approval (which approval shall not be unreasonably withheld) detailed layout plans and finish specifications (the "Space Plans") prepared by an architect approved by Landlord. The Space Plans shall show all of the improvements which Tenant desires to be constructed in the Premises, and all such improvements shall comply with all applicable building codes and other Legal Requirements. The Space Plans shall separately note any proposed structural work or extraordinary or supplemental electrical, plumbing or HVAC requirements, and shall contain such detail and specifications as would permit a general contractor to obtain preliminary estimates of the cost of performing all work shown thereon. Tenant shall respond promptly to any reasonable objections of Landlord to the Space Plans and shall resubmit appropriately revised Space Plans prepared by Tenant's architect within three (3) Business Days of Tenant's receipt of Landlord's objections. The Space Plans, as finally approved in writing by Landlord, shall be referred to herein as the "Final Space Plans." Landlord shall furnish to Tenant for Tenant's written approval (which shall not be unreasonably withheld) working plans and specifications (the "Working Drawings") prepared by Landlord's architect for the improvements which Tenant desires to be constructed in the Premises. The Working Drawings shall show improvements that conform to the Final Space Plans (except to the extent specifically noted therein or in accompanying specifications). Tenant shall respond to the Working Drawings within three (3) Business Days of its receipt thereof. Landlord shall respond promptly to any reasonable objections of Tenant to the Working Drawings and shall resubmit to Tenant for Tenant's approval (which shall not be unreasonably withheld) appropriately revised Working Drawings prepared by Landlord's architect. Tenant shall respond to the revised Working Drawings within three (3) Business Days of its receipt thereof. If Tenant fails to respond to the Working Drawings or the revised Working Drawings within the periods described above, Tenant shall be deemed to have approved the Working Drawings or revised Working Drawings, as applicable. The Working Drawings, as approved in writing by Landlord and Tenant, as revised in accordance with the following provisions of this Paragraph 1, are hereinafter called the "Final Plans", and the improvements to be performed in accordance with the Final Plans are hereinafter called the "Tenant Improvements". Any delay in Substantial Completion of the Tenant Improvements or increased cost of the Tenant Improvements caused directly or indirectly by any revision to the Space Plans or the Working Drawings requested by Tenant shall constitute a Tenant Delay under Paragraph 1.e. below. b. Construction. Upon approval of the Final Plans, Landlord shall ----------- submit the same for pricing to a contractor selected by Landlord ("Landlord's Contractor"), and thereafter provide Tenant with an estimated budget for the Tenant Improvements, including Landlord's Construction Operations Fee (as defined in Paragraph 1.f.iii.B. below). Tenant shall have five (5) Business Days after the receipt of Landlord's estimated budget to approve or reasonably disapprove of the same. If Tenant disapproves of the budget within such five (5) Business Day period, Tenant shall so notify Landlord and the Final Plans shall promptly be modified by Landlord's architect in order to satisfactorily reduce the amount of the estimated budget, as requested by Tenant. Any and all revisions to the Final Plans shall be subject to Landlord's and Tenant's reasonable approval. Upon Landlord's revision of the Final Plans, Landlord shall cause Landlord's Contractor to promptly issue new pricing and upon receipt of such pricing Landlord shall prepare and submit to Tenant a revised estimated budget. Tenant shall respond to the revised estimated budget in the manner described above. Any delay in Substantial Completion of the Tenant Improvements or increased cost of the 1 Tenant Improvements caused directly or indirectly by any revision to the Final Plans or the estimated budget to address Tenant's disapproval of the estimated budget shall constitute a Tenant Delay under Paragraph 1.e. below. If Tenant fails to raise any objections to the budget within the five (5) Business Day period(s) described above, Tenant shall be deemed to have approved Landlord's proposed budget. Landlord shall commence construction of the Tenant Improvements promptly after approval of the Final Plans, and thereafter diligently pursue such construction to completion (but in no event shall Landlord be required to pursue a construction schedule which would cause Substantial Completion to occur prior to January 15, 1999). Landlord shall use reasonable care in preparing the budget, but it shall be good faith estimate only and will not limit Tenant's obligation to pay for its share of the costs of the Tenant Improvements as set forth below in this Paragraph 1. c. Changes. In the event that Tenant shall request any change in or ------- to the Final Plans (a "Change"), Landlord's architect shall prepare for Landlord's and Tenant's review and written approval a change order with respect to such Change (the "Change Order"), together with, if appropriate, revised Working Drawings incorporating the requested Change and clearly identifying the same as such on the revised Working Drawings. Landlord shall not unreasonably withhold or delay its approval of the Change Order or revised Working Drawings, provided, however, that Landlord shall have at least three (3) Business Days after receipt thereof to review any proposed Change. In the event that Landlord shall approve any proposed Change, together with such approval, if practicable, and if not practicable as soon thereafter as is practicable, Landlord shall give Tenant Landlord's estimated increase or decrease in the cost of the Tenant Improvements which would result from incorporating such Change and Landlord's estimate of the delay, if any, in the commencement or completion of the Tenant Improvements which would result from incorporating such Change. Landlord will use reasonable care in preparing the estimates, but they shall be good faith estimates only and will not limit Tenant's obligation to pay for the actual increase in the cost of the Tenant Improvements or Tenant's responsibility for the actual construction delay resulting from the Change. Within two (2) Business Days after receipt of such cost and delay estimates, Tenant shall notify Landlord in writing whether Tenant approves the Change. If Tenant fails to approve the change within such two (2) Business Day period, construction of the Tenant Improvements shall proceed as provided in accordance with the Final Plans as they existed prior to the requested Change. If, following Tenant's review of the estimated costs and delays, Tenant desires Landlord to incorporate the Change into the Tenant Improvements, then Tenant and Landlord shall execute a change order for such Change on Landlord's standard form therefor, and the term "Final Plans" shall thereafter be deemed to refer to the Working Drawings as so revised and approved. d. Landlord's Work. In addition to construction of the Tenant --------------- Improvements, Landlord shall construct the Building as a watertight shell, with all utilities brought to the Building, in accordance with plans prepared by Landlord's architect and previously delivered to Tenant (collectively, "Landlord's Work"). Landlord's Work shall be performed at Landlord's sole cost and expense (except for any costs resulting from Tenant Delays, including any Changes) by such general contractor as Landlord shall determine. e. Tenant Delays. Tenant shall be responsible for, and shall pay to ------------- Landlord, any and all costs and expenses (including lost rent) incurred by Landlord in connection with the following, or by reason of any delay in the commencement or completion of Landlord's Work or the Tenant Improvements or in Landlord's timely delivery of the Premises caused by the following: (i) the failure of Tenant to submit the Space Plans or Final Space Plans to Landlord by the dates or within the time periods set forth in Paragraph 1.a. above, or the failure of the Space Plans or Final Space Plans to meet the applicable requirements of Paragraph 1.a. above, (ii) Tenant's failure to respond to the Working Drawings within the time period(s) set forth in Paragraph 1.a above, (iii) any changes in the Space Plans requested by Tenant, or any changes in the Working Drawings requested by Tenant (including any costs or delays resulting from proposed changes that are not ultimately 2 made), (iv) any failure by Tenant to promptly respond to inquiries regarding the construction of the Tenant Improvements or Landlord's Work or to promptly grant Tenant's approval of materials or finishes for the Tenant Improvements or Landlord's Work, (v) any failure by Tenant to timely pay any amounts due from Tenant hereunder (it being acknowledged that if Tenant fails to make or otherwise delays making such payments, Landlord may stop Landlord's Work rather than incur costs which Tenant is obligated to fund but has not yet done so and any delay from such a work stoppage will be a Tenant Delay), (vi) any interference by Tenant with the construction of the Tenant Improvements or Landlord's Work, or (vii) any other delay requested or caused by Tenant, including, without limitation, any delay caused by Tenant's early entry into any portion of the Premises pursuant to Section 2.d. of the Lease. Each of the foregoing is referred to herein and in the Lease as a "Tenant Delay". Landlord shall notify Tenant in writing of any Tenant Delay (identifying the nature of the Tenant Delay) as soon as reasonably practicable after Landlord becomes actually aware of such Tenant Delay, together with Landlord's then good faith estimate of the probable duration of such Tenant Delay. Without limitation, Landlord will use its good faith efforts to notify Tenant of "long lead item" as soon as reasonably practicable after actually being advised of the delay by the suppliers involved, or otherwise actually becoming aware of the delay. Landlord will suggest alternative products to alleviate the delay, if possible, and may substitute reasonably equivalent products as deemed reasonably necessary by Landlord. f. Cost of Improvements. The cost of the construction and -------------------- installation of the Tenant Improvements shall be borne as follows: i. Landlord shall pay the entire cost of Landlord's Work (as described in Paragraph 1.d. above), including costs of obtaining permits for the same. ii. Landlord's architectural, engineering and other consultant fees in connection with the design and construction of the Tenant Improvements, including the costs of producing the Working Drawings and Final Plans, shall be paid by Tenant upon Landlord's demand, subject to Tenant's right to use a portion of Landlord's Contribution towards the amount of such costs as provided below. iii. Landlord shall contribute toward the cost of the construction and installation of the Tenant Improvements an amount not to exceed $857,100.00 (which is the product of $20.00 times the stipulated number of rentable square feet of the Premises as set forth in the Basic Lease Information) ("Landlord's Contribution"). The following provisions shall govern the payment of Landlord's Contribution: A. Excess Cost: Shares of Costs. If the total cost of ---------------------------- construction of the Tenant Improvements (including the Construction Operations Fee described below and the City of Hayward Interim Supplemental Building Construction and Improvement Tax) exceeds the funds available therefor from Landlord's Contribution, then tenant shall pay all such excess (the "Excess Cost"). Based on the estimated cost (the "Estimated Costs") of the construction of the Tenant Improvements, the prorata share of the Estimated Costs payable by Landlord and Tenant shall be determined and an appropriate percentage share established for each (a "Share of Costs"). Tenant and Landlord shall fund the cost of such work as the same is performed, in accordance with their respective Share of Costs for such work. At such time as Landlord's Contribution has been entirely disbursed, Tenant shall pay the remaining Excess Cost, if any, which payments shall be made in installments as 3 construction progresses in the same manner as Tenant's payments of Tenant's Share of Costs were paid. B. Construction Operations Fee. Landlord shall retain from the amount --------------------------- of Landlord's Contribution, in the manner described below, an aggregate sum equal to four percent (4%) of the total cost of the construction and installation of the Tenant Improvements (which cost of the construction and installation shall include architectural and engineering fees but shall not include permit fees) (the "Construction Operations Fee") as compensation to Landlord for review of plans, specifications and budgets, coordinating the schedule for construction of the Tenant Improvements, and for other miscellaneous costs incurred by Landlord as a result of the construction work. At the time Landlord makes any disbursement of Landlord's Contribution, Landlord shall retain from Landlord's Contribution, as a partial payment of the Construction Operations Fee, a proportionate amount of the Construction Operations Fee based upon Landlord's reasonable estimate of the amount required to be withheld from such disbursement in order to ensure that the entire Construction Operations Fee is retained over the course of construction on a prorata basis. At such time as Landlord's Contribution has been entirely disbursed, if the entire Construction Operations Fee has not yet been paid to Landlord, Tenant shall pay to Landlord a prorata portion of each payment made by Tenant on account of the Tenant Improvements in order to ensure that the balance of the Construction Operations Fee is paid to Landlord over the course of construction on a prorata basis. C. Certain Costs. Portions of Landlord's Contribution may, at ------------- Tenant's election, be applied toward Tenant's architectural fees in connection with the production of the Space Plans and Final Space Plans, and Landlord's architectural, engineering and other consultant fees in connection with the design and construction of the Tenant Improvements, including the costs of producing the Working Drawings and Final Plans; provided, however, that the portion of Landlord's Contribution applied to such fees may not exceed One Dollar ($1.00) per rentable square foot of the Premises and any excess shall be paid directly by Tenant to Landlord from Tenant's own funds. In no event may any portions of Landlord's Contribution be applied towards the costs of Tenant's engineering fees (if any), trade fixtures, personal property, equipment or furniture, or towards rent due under this Lease. D. Entire Premises to be Improved. Tenant acknowledges that ------------------------------ Landlord's Contribution is to be applied to the Tenant Improvements (and the costs permitted under Paragraph l.f.iii.C. above) covering the entire Premises. If Tenant does not improve the entire Premises, then, without limitation of any other rights or remedies of Landlord hereunder, Landlord's Contribution shall be adjusted on a prorata per rentable square foot basis to reflect the number of rentable square feet actually being improved. E. Provisions Applicable to Phases. Landlord and Tenant acknowledge ------------------------------- that the Premises may be improved by Tenant in two phases based on Tenant's anticipated occupancy schedule for the Premises. Accordingly, the foregoing provisions shall apply separately as to each phase of the Premises, and where the foregoing provisions refer to the "Premises", such reference shall be deemed a reference to the applicable phase of the Premises. iv. Improvement Advance. Notwithstanding the foregoing provisions, if the ------------------- cost of the Tenant Improvements shall exceed Landlord's Contribution, upon Tenant's request Landlord shall advance to Tenant the Excess Cost, up to a total 4 advance of $299,985.00 (which is $7.00 per rentable square foot of the Premises). The amount of the total Excess Cost advanced by Landlord (the "Improvement Advance") shall be repaid by Tenant, together with interest on amounts thereof from time to time unpaid at the rate of eleven percent (11%) per annum, in equal monthly installments of principal and interest, as additional rent hereunder, payable with the monthly Basic Rent. Such installments shall be in such amount as will fully amortize the amount of the Improvement Advance, together with such interest, over the initial Term. Upon the determination of the amount of the Improvement Advance, Landlord and Tenant shall promptly execute a written memorandum of the amount of such installments. Notwithstanding anything in the foregoing to the contrary, in the event this Lease is terminated prior to the originally scheduled Expiration Date, for any reason whatsoever, the then-outstanding balance of Improvement Advance, together with accrued and unpaid interest thereon, but without any prepayment penalty, shall become immediately due and payable in full by Tenant. 5 EXHIBIT C --------- COMMENCEMENT DATE MEMORANDUM ---------------------------- LANDLORD: ________________________________ ________________________________ TENANT: ________________________________ ________________________________ LEASE DATE: ________________________________ PREMISES: ________________________________ ________________________________ ________________________________ Pursuant to Section 2.d. of the above-referenced Lease, the Commencement Date hereby is established as ___________________, and the Expiration Date hereby is established as _______________. LANDLORD: ______________________________ a_____________________________ By____________________________ Its_________________________ TENANT: ______________________________ a_____________________________ BY____________________________ Its_________________________ EXHIBIT D --------- RULES AND REGULATIONS --------------------- 1. No sign, placard, picture, advertisement, name or notice shall be installed or displayed on any part of the outside or inside of the Building without the prior written consent of Landlord. Landlord shall have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors, windows and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a person chosen by Landlord, using materials of Landlord's choice and in a style and format approved by Landlord. 2. The directory of the Building will be provided exclusively for the display of the name and location of tenants, and Landlord reserves the right to exclude any other names therefrom. Tenant shall pay Landlord's standard charge for Tenant's listing thereon and for any changes by Tenant. 3. Except as consented to in writing by Landlord or in accordance with Building standard improvements, no draperies, curtains, blinds, shades, screens or other devices shall be hung at or used in connection with any window or exterior door or doors of the Premises. No awning shall be permitted on any part of the Premises. Tenant shall not place anything against or near glass partitions or doors or windows which may appear unsightly from outside the Premises. 4. Tenant shall not obstruct any sidewalks, halls, lobbies, passages, exits, entrances, elevators or stairways of the Building. No tenant and no employee or invitee of any tenant shall go upon the roof of the Building or make any roof or terrace penetrations. Tenant shall not allow anything to be placed on the outside terraces or balconies without the prior written consent of Landlord. 5. No Tenant shall invite to the Premises, or permit the visit of, persons in such numbers or under such conditions as to interfere with the use and enjoyment of the Common Areas of the Building by other tenants. 6. Intentionally Deleted. 7. Landlord will furnish Tenant, free of charge, two (2) keys to Tenant's suite entrance. Landlord may make a reasonable charge for any additional keys and for having any locks changed. Tenant shall not make or have made additional keys without Landlord's prior written consent, and Tenant shall not alter any lock or install a new additional lock or bolt on any door of its Premises without Landlord's prior written consent. Tenant shall deliver to Landlord, upon the termination of its tenancy, the keys to all locks for doors on the Premises. If Tenant loses any keys furnished by Landlord, Tenant shall pay Landlord the cost of rekeying the Premises. Landlord will furnish Tenant, free of charge, two (2) building access cards. A reasonable charge will be assessed for any additional cards and lost or stolen cards. Tenant shall deliver to Landlord, upon the termination of its tenancy, all access cards. 8. If Tenant requires telegraphic, telephonic, burglar alarm or similar services, it shall first obtain, and comply with, Landlord's instructions for their installation. 9. Intentionally Deleted. 10. Tenant shall not place a load upon any floor of the Premises which exceeds the maximum load per square foot which the floor was designed to carry and which is allowed by law. Tenant's business machines and mechanical equipment which cause noise or vibration which may be transmitted to the structure of the Building or to any space therein, and which is objectionable to Landlord or to any tenants in the Building, shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration. 11. Tenant shall not use or keep in the Premises any toxic or hazardous materials or any kerosene gasoline or inflammable or combustible fluid or material other than those limited quantities necessary for the operation or maintenance of office equipment. Tenant shall not use or permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors or vibrations. No animal, except seeing eye dogs when in the company of their masters, may be brought into or kept in the Building. 12. Tenant shall not use any method of heating or air-conditioning other than that supplied by Landlord, unless Tenant receives the prior written consent of Landlord. 13. Tenant shall cooperate fully with Landlord to assure the most effective operation of the Building's heating and air-conditioning and to comply with any governmental energy-saving rules, laws or regulations of which Tenant has actual notice. Tenant shall refrain from attempting to adjust controls other than room thermostats installed for Tenant's use. 14. All entrance doors to the Premises shall be left locked when the Premises are not in use, and all doors opening to public corridors shall be kept closed except for normal ingress and egress to and from the Premises. 15. Landlord reserves the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building. 16. Landlord reserves the right to prevent access to the Building by closing the doors or by other appropriate action in case of invasion, mob, riot, public excitement or other commotion. 17. Tenant shall close and lock the doors of its Premises, shut off all water faucets or other water apparatus and turn off all lights and other equipment which is not required to be continuously run. Tenant shall be responsible for any damage or injuries sustained by other tenants or occupants of the Building or Landlord for noncompliance with this Rule. 18. The toilet rooms, toilets, urinals wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed, and no foreign substance of any kind whatsoever shall be placed therein. The expense of any breakage, stoppage or damage resulting from any violation of this rule shall be borne, by the tenant who, or whose employees or invitees; shall have caused it. 19. Tenant shall not install any radio or television antenna, loudspeaker or other device on the roof or exterior walls of the Building, except as part of Alterations approved by Landlord pursuant to Section 9 of the Lease. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building or elsewhere. 20. Intentionally Deleted. 21. Tenant shall not install, maintain or operate upon the Premises any vending machine (other than vending machines for use by Tenant's employees) without the prior written consent of Landlord. 22. Canvassing, soliciting and distributing handbills or any other written material and peddling in the Building are prohibited, and each tenant shall cooperate to prevent these activities. 23. Landlord reserves the right to exclude or expel from the Building any person who, in Landlord's judgment, is intoxicated or under the influence of liquor or drugs, or who is in violation of any of the Rules and Regulations of the Building. 24. Tenant shall store all its trash and garbage within its Premises. Tenant shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal within the Building. All garbage and refuse disposal shall be made in accordance with directions issued from time to time by Landlord. 25. Use by Tenant of Underwriters' Laboratory approved equipment for brewing coffee, tea, hot chocolate and similar beverages and microwaving food shall be permitted, provided that the equipment and use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations. 26. Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant, except as Tenant's address, without the written consent of Landlord. 27. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. Tenant shall be responsible for any increased insurance premiums attributable to Tenant's use of the Premises, Building or Property. 28. Tenant assumes any and all responsibility for protecting its Premises from theft and robbery, which responsibility includes keeping doors locked and other means of entry to the Premises closed. 29. Tenant shall not use the Premises, or suffer or permit anything to be done on, in or about the Premises, which may result in an increase to Landlord in the cost of insurance maintained by Landlord on the Building and Common Areas. 30. Tenant's requests for assistance will be attended to only upon appropriate application to the office of the Building by an authorized individual. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employee of Landlord will admit any person (Tenant or otherwise) to any office without specific instructions from Landlord. 31. Tenant shall not park its vehicles in any parking areas designated by Landlord as areas for parking by visitors to the Building or other reserved parking spaces. Tenant shall not leave vehicles in the Building parking areas overnight, nor park any vehicles in the Building parking areas other than automobiles, motorcycles, motor driven or non-motor driven bicycles or four-wheeled trucks. Tenant, its agents, employees and invitees shall not park any one (1) vehicle in more than one (1) parking space. 32. The scheduling and manner of all Tenant move-ins and move-outs shall be subject to the discretion and approval of Landlord, and move-ins and move-outs shall take place only after 6:00 p.m. on weekdays, on weekends, or at other times as Landlord may designate. Landlord shall have the right to approve or disapprove the movers or moving company employed by Tenant, and Tenant shall cause the movers to use only the entry doors and elevators designated by Landlord. If Tenant's movers damage the elevator or any other part of the Property, Tenant shall pay to Landlord the amount required to repair the damage. 33. No cooking shall be permitted on the Premises, except with a microwave oven or using facilities constructed as Alterations approved by Landlord pursuant to Section 9 of the Lease, nor shall the Premises be used for washing clothes, for lodging or for any improper, objectionable or immoral purpose. 34. Tenant shall not use in any space or in the public halls of the Building, any hand trucks except those equipped with rubber tires and side guards or such other material-handling equipment as Landlord may approve. Tenant shall not bring any bicycles or other vehicles of any kind into the building. 35. Landlord shall have the right to control and operate the public portions of the Building and the public facilities, heating and air conditioning, as well as facilities furnished for the common use of the tenants, in such manner as it deems best for the benefit of the tenants generally. 36. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other tenant, but no waiver by Landlord shall be construed as a waiver of the Rules and Regulations in favor of Tenant or any other tenant, nor prevent Landlord from thereafter enforcing the Rules and Regulations against any or all of the tenants of the Building. 37. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of premises in the Building. 38. Landlord reserves the right to make other reasonable Rules and Regulations as, in its judgment, may from time to time be needed for safety and security, for care and cleanliness of the Building and for the preservation of good order therein. Tenant agrees to abide by all Rules and Regulations hereinabove stated and any additional rules and regulations which are adopted. 39. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees and guests. EXHIBIT E TO DEVELOPMENT SERVICES AGREEMENT Tenant Estoppel Certificate --------------------------- TO: The Multi-Employer Property Trust, a trust organized under 12 C.F.R. Section 9.18 ("Landlord") c/o Kennedy Associates Real Estate Counsel, Inc. 2400 Financial Center Building 1215 Fourth Avenue Seattle, Washington 98161 THIS IS TO CERTIFY: 1. That the undersigned is the Tenant under that certain Lease dated ___________, and, if applicable, amended on ______________, by and between The Multi-Employer Property Trust by its trustee Riggs & Company, a division of Riggs Bank N.A. ("Landlord"), and the undersigned ("Tenant") covering those certain premises located as shown on the drawing made part of the Lease (the "Premises"). 2. That said Lease is in full force and effect and, except as noted in paragraph 1 above, has not been modified, changed, altered or amended in any respect, and is the only lease or agreement between the Tenant and the Landlord affecting the Premises. 3. To the best of Tenant's knowledge, the information set forth below is true and correct: 3.1 Square footage of the Premises:_________________________________ 3.2 Annual rent as of the commencement of Lease:$___________________ 3.3 Current annual rent (if different than at commencement):$_______ 3.4 Commencement date of Lease:_____________________________________ 3.5 Lease termination date:_________________________________________ 3.6 Rent paid to and including:_____________________________________ 3.7 Security deposit:_______________________________________________ 3.8 Prepaid rent for and in amount of:$_____________________________ 3.9 Free Rent Period:______________________ to _____________________ 3.10 Amount of current monthly escrow payment obligations with respect to taxes, insurance, and Common Area Maintenance charges under the Lease: Taxes: $__________________ Insurance: $__________________ Common Area Maintenance Charges: $__________________ 3.11 Dates through which Tenant has paid monthly escrow payments and Common Area Maintenance charges: Escrow Payment for Taxes: ________________ Escrow Payment for Insurance: ________________ Common Area Maintenance charge: ________________ 3.12 Base Amounts (stops) established in leases for monthly escrow payments: Base Amount Taxes: $_______________ Base Amount Insurance: $_______________ Base Amount Maintenance Charge: $_______________ 4. Tenant now occupies the Premises, accepts the Premises in their current condition subject only to those punch list items listed in Exhibit A, if --------- any, and is not aware of any defect in the Premises except as described in Exhibit A, if any. - --------- 5. No rent has been paid in the current month other than as disclosed in paragraph 3. No free rent or other concessions, benefits, or inducements other than as specified in the Lease have been granted to Tenant or undertaken by the Landlord. 6. Tenant has not been granted any renewal, expansion or purchase options and has not been granted any rights of first refusal except as disclosed in writing in the Lease. 7. Neither Tenant nor to the best of Tenant's knowledge, Landlord is in breach of the Lease and there has not occurred any event, act, omission or condition which by notice or lapse of time or both or otherwise, will result in any breach by Tenant or to the best of Tenant's knowledge, by Landlord. As of the date hereof, and except as set forth in the Lease, the undersigned is entitled to no credit, offset or deduction in rent. Tenant knows of no liabilities or obligations of Landlord which have accrued but are unsatisfied under the Lease as of the date of this Certificate. 8. To the best of Tenant's knowledge, there are no actions, whether voluntary or otherwise, pending against the undersigned under the bankruptcy laws or other laws for the relief of debtors of the United States or any state thereof. 9. With the exception of this Lease, neither the Tenant nor any affiliate of the Tenant is a tenant under a lease or any other tenancy arrangement (1) with (a) Riggs & Company, a division of Riggs Bank N.A., as trustee of the Multi-Employer Property Trust; (b) Riggs Bank N.A., as trustee of the Multi-Employer Property Trust, (c) the Multi-Employer Property Trust; (d) the National Bank of Washington Multi-Employer Property Trust, the previous name of the Multi-Employer Property Trust; (e) The Riggs National Bank of Washington, D.C., as trustee of the Multi-Employer Property Trust; (f) the Corporate Drive Corporation as trustee of the Corporate Drive Nominee Realty Trust; (g) -2- Arboretum Lakes-l, L.L.C., a Delaware limited liability company; (h) Village Green at Seven Bridges, L.L.C.; (i) Pine Street Development, L.L.C.; (j) MEPT Realty LLC; (k) MEPT, L.L.C.; (l) Cabrillo Properties LLC; (m) Valencia LLC; (n) Centrepointe Distribution Center LLC; (o) Mission Trails LLC; or (p) Northridge Business Center LLC; or (2) involving any property in which any one or more of the entities named in clauses (i) (a) through (e) are known by the Tenant to have an ownership interest. [This paragraph will be updated from time to time.] DATED this ___ day of _____, 19__. TENANT: ------ ______________________________________ a ____________________________________ By: __________________________________ Name: ________________________ Its: _________________________ -3- EXHIBIT A to Tenant Estoppel Certificate List of Defects --------------- FIRST AMENDMENT TO LEASE THIS FIRST AMENDMENT TO LEASE (this "Amendment"), is made as of the 17th day of November, 1998, by and between THE MULTI-EMPLOYER PROPERTY TRUST, A TRUST ORGANIZED UNDER 12 C.F.R. SECTION 9.18 ("Landlord"), and CERTICOM CORP., a Delaware corporation ("Tenant"). WHEREAS, Landlord and Tenant entered into that certain lease dated October 30, 1998 (the "Lease"), with respect to certain premises (the "Premises") located at 25801 Industrial Blvd. in the Mt. Eden Business Park in Hayward, California; WHEREAS, the lease incorrectly sets forth the agreement of Landlord and Tenant regarding Base Rent adjustments, and the parties desire to amend the Lease to correct such error. Unless otherwise defined herein, capitalized terms are used herein as defined in the Lease. NOW, THEREFORE, the parties hereto do hereby agree as follows: 1. Base Rent Adjustment. Section 4.b. of the Lease is hereby -------------------- amended to read in its entirety as follows: "b. Base Rent Adjustment. Commencing on the first day of the 37th full calendar -------------------- month of the Term, the Base Rent shall increase to $58,536.00 per month, and shall be payable in such amount through the end of the 72nd full calendar month of the Term. Commencing on the first day of the 73rd full calendar month of the Term, the Base Rent shall increase to $63,964.00 per month, and shall be payable in such amount through the Expiration Date." 2. Ratification. Except as amended hereby, the Lease remains ------------ unmodified and in full force and effect. 3. Entire Understanding. This Amendment represents the entire -------------------- understanding between of the parties concerning the subject matter hereof, and there are no understandings or agreements between them relating to the Lease or the leased premises not set forth in writing and signed by the parties hereto. No party hereto has relied upon any representation, warranty or understanding not set forth herein, either oral or written, as an inducement to enter into this Amendment. 4. Counterparts. This Amendment may be executed in any number ------------ of counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. 1 IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written. Landlord: Tenant: THE MULTI-EMPLOYER CERTICOM CORP., PROPERTY TRUST, A TRUST a Delaware corporation ORGANIZED UNDER 12 C.F.R. SECTION 9.18, by its trustee Riggs & Company, a division of By: /s/ [ILLEGIBLE] Riggs Bank N.A. ---------------------------- Its: CHAIRMAN & CEO --------------------------- By: /s/ [ILLEGIBLE] By: /s/ BRUCE MACINNIS ------------------------------- ---------------------------- Its: Managing Director Its: VP FINANCE & CEO ------------------------------ --------------------------- The undersigned, as Guarantor of the Lease pursuant to that certain Continuing Guaranty of Lease dated as of October 30, 1998 (the "Guaranty"), hereby consents to the foregoing Amendment and agrees that the Guaranty shall remain in full force and effect arid shall apply to the foregoing Amendment and to the Lease as amended thereby. Guarantor CERTICOM CORP., an Ontario corporation, By: /s/ BRUCE MACINNIS ------------------------------- Name: BRUCE MACINNIS ----------------------- Title: VP FINANCE & CEO ---------------------- 2 SECOND AMENDMENT TO LEASE THIS SECOND AMENDMENT TO LEASE (this "Amendment") is made as of the 15 day of March, 2000, by and between THE MULTI-EMPLOYER PROPERTY TRUST, A TRUST ORGANIZED UNDER 12 C.F.R. SECTION 9.18 ("Landlord"), and CERTICOM CORP., a Delaware corporation ("Tenant"). WHEREAS, Landlord and Tenant entered into that certain lease dated October 30,1998, as amended by First Amendment to Lease dated as of November 17,1998 (as so amended, the "Lease"), with respect to certain premises (the "Original Premises") located at 25801 Industrial Blvd. in the Mt. Eden Business Park in Hayward, California (the "Business Park"); WHEREAS, the parties desire to amend the Lease to add additional space in the Business Park to the premises demised thereunder and to make certain changes to the Lease in connection therewith. Unless otherwise defined herein, capitalized terms are used herein as defined in the Lease. NOW, THEREFORE, the parties hereto do hereby agree as follows: 1. Additional Premises. ------------------- a. Effective as of April 1, 2000 (the "Additional Premises Commencement Date"), the Additional Premises shall be added to the premises demised to Tenant under the Lease. The term of the Lease, as applicable to the Additional Premises, shall expire on the date (the "Additional Premises Expiration Date") that is seven (7) years from the Additional Premises Rent Commencement Date (as defined in Paragraph 3 below). The "Additional Premises' shall mean that portion of the building known as 25821 Industrial Boulevard, located in the Business Park, as shown on Exhibit A attached hereto. The --------- parties hereby stipulate that for all purposes of this Amendment and the Lease, the Additional Premises consist of 68,182 rentable square feet. From and after the Additional Premises Commencement Date, the term "Premises" used in the Lease shall be deemed to refer to the Original Premises and the Additional Premises, and all of the terms, covenants and conditions of the Lease applicable to the Original Premises shall be applicable to the Additional Premises, except as hereinafter set forth or to the extent in conflict with the provisions of this Amendment. b. The Additional Premises shall be delivered to Tenant in their then "as-is" condition, and Landlord shall not have any obligation to make or, except as provided in Paragraph 2 below, pay for any alterations, additions or improvements to prepare the Additional Premises for Tenant's occupancy. c. If, for any reason, Landlord cannot deliver possession of the Additional Premises to Tenant on the Additional Premises Commencement Date, (i) Tenant's obligations hereunder with respect to the Additional Premises shall not commence, and the Additional Premises Commencement Date shall not be deemed to have occurred, until possession of the Additional Premises is delivered to Tenant, (ii) the failure shall not affect the validity of this Amendment or the Lease, or, except as provided in clause (i), the obligations of Tenant 1 hereunder or under the Lease, (ii) such failure shall not serve to extend the Additional Premises Expiration Date, and (iii) Landlord shall not be subject to any liability. 2. Tenant Improvements. Any alterations, additions or improvements which ------------------- Tenant desires to make to the Additional Premises to prepare the same for Tenant's initial occupancy (the "Tenant Improvements") shall be performed in accordance with, and be subject to all provisions of, Section 9 of the Lease. Landlord shall contribute toward the cost of the construction of the Tenant Improvements an amount not to exceed $681,820.00 (which is the product of $10.00 times the stipulated number of rentable square feet of the Additional Premises)("Landlord's Contribution"). The following provisions shall govern the payment of Landlord's Contribution: A. Excess Cost: Share of Costs. If the total cost of construction of the --------------------------- Tenant Improvements (including the Alteration Fee described in Section 9 of the Lease and the City of Hayward Interim Supplemental Building Construction and Improvement Tax) exceeds the funds available therefor from Landlord's Contribution, then Tenant shall pay all such excess (the "Excess Cost"). Based on the estimated cost (the "Estimated Costs") of the construction of the Tenant Improvements, the prorata share of the Estimated Costs payable by Landlord and Tenant shall be determined and an appropriate percentage share established for each (a "Share of Costs"). Tenant and Landlord shall fund the cost of such work as the same is performed, in accordance with their respective Share of Costs for such work. At such time as Landlord's Contribution has been entirely disbursed, Tenant shall pay the remaining Excess Cost, if any, which payments shall be made in installments as construction progresses in the same manner as Tenant's payments of Tenant's Share of Costs were paid. At the time Landlord makes any disbursement of Landlord's Contribution, Landlord shall retain from Landlord's Contribution, as a partial payment of the Alteration Fee, a proportionate amount of the Alteration Fee based upon Landlord's reasonable estimate of the amount required to be withheld from such disbursement in order to ensure that the entire Alteration Fee is retained over the course of construction on a prorata basis. At such time as Landlord's Contribution has been entirely disbursed, if the entire Alteration Fee has not yet been paid to Landlord, Tenant shall pay to Landlord a prorata portion of each payment made by Tenant on account of the Tenant Improvements in order to ensure that the balance of the Alteration Fee is paid to Landlord over the course of construction on a prorata basis. Notwithstanding anything to the contrary in this Paragraph 2, Landlord's Contribution shall be available for disbursement pursuant to the terms hereof only during the calendar year 2000. Accordingly, if any portion of Landlord's Contribution is not utilized prior to December 31, 2000, such unused potion shall be forfeited by Tenant. B. Certain Costs. Portions of Landlord's Contribution may, at ------------- Tenant's election, be applied toward Tenant's architectural fees in connection with the design and construction of the Tenant Improvements; provided, however, that the portion of Landlord's Contribution applied to such fees may not exceed One Dollar ($1.00) per rentable square foot of the Additional Premises and any excess shall be paid directly by Tenant to Landlord from Tenant's own funds. In no event may any portions of Landlord's Contribution be applied towards the costs of Tenant's engineering fees (if any), trade fixtures, personal property, equipment or furniture, or towards rent due under this Lease. C. Entire Additional Premises to be Improved. Tenant acknowledges that ----------------------------------------- Landlord's Contribution is to be applied to the Tenant Improvements (and the costs permitted under Paragraph 2.B. above) covering the entire Additional Premises. If Tenant does not 2 improve the entire Additional Premises, then, without limitation of any other rights or remedies of Landlord hereunder, Landlord's Contribution shall be adjusted on a prorata per rentable square foot basis to reflect the number of rentable square feet actually being improved. 3. Base Rent. Commencing as of the date (the "Additional --------- Premises Rent Commencement Date") that is the earlier of (i) one-hundred twenty (120) days after the Additional Premises Commencement Date, or (ii) Tenant's occupancy of the Additional Premises or any portion thereof for the conduct of business, and thereafter on the first day of each calendar month of the Term, Tenant shall pay to Landlord (or other entity designated by Landlord) Base Rent for the Additional Premises, in advance, at Landlord's address for notices (as set forth in the Basic Lease Information in the Lease) or at such other address as Landlord may designate. The initial Base Rent for the Additional Premises shall be Sixty-One Thousand Three Hundred Sixty-Four Dollars ($61,364.00). Effective as of each annual anniversary of the Additional Premises Rent Commencement Date, the Base Rent payable by Tenant for the Additional Premises shall increase to one-hundred three percent (103%) of the Base Rent then in effect for the Additional Premises. From and after the Additional Premises Rent Commencement Date, the term "Base Rent" as used in the Lease shall mean the Base Rent payable for the Original Premises and the Base Rent payable for the Additional Premises, collectively. The Base Rent for the Additional Premises shall be payable by Tenant in addition to the Base Rent payable by Tenant for the Original Premises, as set for the in the Lease. 4 Operating Expenses. Commencing as of the Additional Premises ------------------ Rent Commencement Date, and continuing thereafter during the balance of the Term, the provisions of Section 5 of the Lease shall be applicable to the Additional Premises. As so applied to the Additional Premises, the term "Tenant's Percentage Share" shall mean seventy-five percent (75%), and the term "Building" shall mean the building in which the Additional Premises are located The Operating Expenses for the Additional Premises shall be payable by Tenant in addition to the Operating Expenses payable by Tenant for the Original Premises, as set forth in the Lease. 5. Security Deposit:Letter of Credit. --------------------------------- a. Concurrently with Tenant's execution and delivery of this Amendment to Landlord, Tenant shall increase the Security Deposit delivered to Landlord pursuant to Section 17 of the Lease to the amount of One Hundred Fifty Thousand Dollars ($150,000.00), and the term "Security Deposit", as used in the Lease, shall thereafter refer to the Security Deposit in such amount. b. In addition to the increase in the Security Deposit required pursuant to Paragraph 5.a. above, and in addition to the Letter of Credit previously delivered by Tenant pursuant to the Lease (the "Original Letter of Credit"), on or prior to the Additional Premises Commencement Date, Tenant shall deliver an additional Letter of Credit to Landlord as further security for Tenant's performance of all of Tenant's covenants and obligations under the Lease. Such additional Letter of Credit (the "Additional Letter of Credit"), and any proceeds therefrom, shall be subject to all of the terms, covenants and conditions applicable to the Original Letter of Credit, as set forth in Section 17 of the Lease, except that the Additional Letter of Credit shall be in the original amount of One Million Two Hundred Thousand Dollars ($1,200,000.00) during the period from the Additional Premises Commencement Date through the third annual anniversary of the Additional Premises Rent Commencement Date, and reducing in amount on 3 the third annual anniversary of the Additional Premises Rent Commencement Date and on each subsequent annual anniversary of the Additional Premises Rent Commencement Date by twenty percent (20%) of the original amount of the Additional Letter of Credit; provided, however, that if on the date the Additional Letter of Credit amount would otherwise reduce, an Event of Default, or default that with notice or the passage of time or both could mature into an Event of Default, shall have occurred and be continuing, the Additional Letter of Credit amount shall not reduce on such date and shall not thereafter reduce until the later of the next scheduled reduction date or the date such Event of Default or default shall have been cured. Where reference is made in Section 17 of the Lease to the Term of the Lease (for purposes of determining the period during which the Original Letter of Credit or the Additional Letter of Credit, as applicable, must be maintained in effect), as respects the Original Letter of Credit such reference shall mean the Term of the Lease as respects the Original Premises, and as respects the Additional Letter of Credit such reference shall mean the Term of the Lease as respects the Additional Premises. 6. Lease Term. Effective as of the Additional Premises ---------- Commencement Date, the expiration date of the term of the Lease, as applicable to the Original Premises, shall be deemed extended from February 28, 2006 (which the parties acknowledge to be the current expiration date of the term of the Lease as respects the Original Premises) to the Additional Premises Expiration Date. All of the terms, covenants and conditions of the Lease shall apply during such extension period (the "Extension Period"), except the Base Rent payable by Tenant for the Original Premises shall be the "fair market rent" for the Original Premises for the Extension Period. "Fair market rent" shall have the meaning given in Section 40 of the Lease, with all references to the "renewal period" being deemed references to the "Extension Period". The "rent floor" specified in Section 40.b. of the Lease shall be fully applicable as respects the Extension Period. 7. Renewal Option. Pursuant to Section 40 of the Lease, as of -------------- the date of this Amendment Tenant has the option to renew the Lease for one (1) additional term of five (5) years. In the event that Tenant validly exercises its option to renew the Lease for such additional five (5) year term, the parties hereby agree that such exercise shall apply to the entire premises then demised hereunder (i.e. both the Original Premises and the Additional Premises), and such option may not be exercised as to less than all of the premises then demised hereunder. The "rent floor" specified in Section 40.b. of the Lease shall be determined, for purposes of such renewal, by reference to the average Base Rent, per rentable square foot, payable by Tenant for all of the premises then demised hereunder. 8. Building Definition. The definition of the "Building" ------------------- contained in the Lease is hereby modified to mean, collectively, the buildings in which the Original Premises and the Additional Premises are located, unless the context expressly requires otherwise. As used in Section 11 and Section 12 of the Lease, the term "Building" means only the building in which the Original Premises or Additional Premises are located which has been damaged or destroyed or the subject of the taking by eminent domain (or conveyance in lieu thereof), as applicable, and notwithstanding anything to the contrary contained in Section 11 or Section 12 of the Lease, where Landlord or Tenant is granted in any such Section a right or option to terminate this Lease by reason of damage or destruction to, or a taking by eminent domain (or conveyance in lieu thereof), of the Premises or the Building, such right or option shall only permit termination of the Lease as to the space demised thereunder in the building which has been damaged or destroyed or subject to the taking by eminent domain (or conveyance in lieu thereof). 4 9. Ratification. Except as amended hereby, the Lease remains ------------ unmodified and in full force and effect. 10. Brokers. Each party hereto represents and warrants to ------- the other party hereto that it has dealt with no broker or finder who can properly claim a commission, fee or other compensation by reason of this Amendment or Tenant's lease of the Additional Premises, except that Landlord acknowledges that it has dealt with Colliers Parish International, Inc. ("Landlord's Broker") in connection with this Amendment. Each party hereto shall indemnify, protect and hold harmless the other party hereto from and against any and all loss, cost, damage, liability and expense (including attorneys' fees and costs) arising out of my breach or alleged breach of its foregoing representation and warranty. In addition, Landlord shall pay any commission due to Landlord's Broker by reason of this Amendment pursuant to the terms of a separate agreement. 11. Entire Understanding. This Amendment represents the -------------------- entire understanding between of the parties concerning the subject matter hereof, and there are no understandings or agreements between them relating to the Lease or the leased premises not set forth in writing and signed by the parties hereto. No party hereto has relied upon any representation, warranty or understanding not set forth herein, either oral or written, as an inducement to enter into this Amendment. 12. Counterparts. This Amendment may be executed in any ------------ number of counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written. Landlord: Tenant: THE MULTI-EMPLOYER CERTICOM CORP., PROPERTY TRUST, A TRUST a Delaware corporation ORGANIZED UNDER 12 C.F.R. SECTION 9.18, by its trustee Riggs & Company, a division of By: /s/ Richard P. Dalmazzi Riggs Bank N.A. ---------------------------- Richard P. Dalmazzi President and CEO By: /s/ [ILLEGIBLE] By: /s/ Richard D. Brounstein ------------------------------ ----------------------------- Richard D. Brounstein Its: Managing Director Chief Financial Officer ------------------------------ The undersigned, as Guarantor of the Lease pursuant to that certain Continuing Guaranty of Lease dated as of October 30, 1998 (the "Guaranty"), hereby consents to the foregoing Amendment and agrees that the Guaranty shall remain in full force and effect and shall apply to the foregoing Amendment and to the Lease as amended thereby. The undersigned represents and warrants to Landlord that it is the successor entity to the entity which originally executed the Guaranty and the confirmation of the Guaranty contained at the end of the First Amendment to the Lease. Guarantor: CERTICOM CORP., A Yukon corporation By: /s/ Richard P. Dalmazzi --------------------------------- Richard P. Dalmazzi President and CEO By: /s/ Richard D. Brounstein --------------------------------- Richard D. Brounstein Chief Financial Officer 6 EXHIBIT A --------- Floor Plan - Building D - ----------------------- MT EDEN LOGO [DRAWING OF FLOOR PLAN OF MT EDEN] EXHIBIT D --------- Initial Alterations Plans and specifications dated 9/28/01, prepared by Weske + Associates, pages PP-1 and PP-2 and the demolition plans dated 9/20/01 prepared by Weske + Associates, page PP-1 only. EXHIBIT E --------- Letter of Credit Attached [LETTERHEAD OF PAINEWEBBER] Beneficiary: Irrevocable Standby Riggs & Company, a division of Riggs Letter of Credit No. RA09Al Bank N.A., as trustee of the Issuance Date: November 4, 2001 Multi-Employer Property Trust Expiration Date: November 5, 2002 Attention Patrick O. Maybery 808 17th Street, NW, 7th Floor Applicant: Guava Technologies Inc. Washington, DC 20006 Ladies and Gentlemen: We hereby establish our Irrevocable Standby Letter of Credit in your favor for the account of Guava Technologies Inc. for a maximum amount of US$600,000.00 (six hundred thousand and 00/100 USD) available for payment at sight by your draft(s) drawn on us when accompanied by the following document: Beneficiary's dated statement purportedly signed by one of its officers reading: "This draw in the amount of ______________ USD ($__________) [not to exceed $600,000.00] under UBS PaineWebber Inc. Irrevocable Standby Letter of Credit No. RA09A1 represents funds due and owing to us as a result of Guava Technologies Inc. default beyond applicable notice and cure periods under one or more of the terms of that certain Sublease dated as of November 1, 2001 by and between Certicom as landlord with Beneficiary as master landlord, and Guava Technologies Inc. as subtenant" or under the Consent dated as of November __, 2001 by and among Certicom, Guava Technologies, Inc. and Beneficiary. It is a condition of this Irrevocable Standby Letter of Credit that it will be considered automatically renewed without amendment for a one year period upon the expiration date set forth above and upon each anniversary of such date, unless at least 60 (sixty) days prior to such expiration date or applicable anniversary thereof, we notify you in writing by certified mail, return receipt requested, that we elect not to so renew this Irrevocable Standby Letter of Credit. This Letter of Credit cannot be modified or revoked without Beneficiary's written consent. Multiple and partial draws are allowed under this Letter of Credit. This Letter of Credit is transferable in its entirety and not in part. We shall not recognize any transfer of this Letter of Credit until an executed transfer form satisfactory to us is filed with us. The form required is attached as Exhibit A. Our transfer fee of $75.00 is for the account of Guava Technologies Inc. It shall not be a condition of transfer that such fee accompanies the transfer request. Payment of the transfer fee is not required prior to our completing the transfer. Continued on Page Two ORIGINAL [lETTERHEAD OF UBS PAINEWEBBER] Page Two L/C No.RA09A1 Drafts and Documents must be presented for payment at our office located at 1200 Harbor Blvd., 4th Floor, Weehawken, NJ 07086 to the attention of the Letter of Credit Dept. on or before expiration date described herein. The date of presentment of any draw shall be the date a copy of the sight draft and draw statement are faxed from Beneficiary to UBS PaineWebber Inc. at 201-352-7622, followed by originals sent by overnight courier to the address stated below. This credit is subject to the Uniform Customs and Practice for Documentary Credits (1993 revision) International Chamber of Commerce Publication No. 500, and to the extent not inconsistent therewith, the law of the State of California, including Article 5 of the California Uniform Commercial Code. We hereby engage with you to honor drafts and documents drawn under and in compliance with the terms of this credit. All communications to us with respect to this L/C must be addressed to our office located at 1200 Harbor Blvd., 4th Floor, Weehawken, NJ 07086 to the attention of the Letter of Credit Dept. Very Truly Yours, /s/ [ILLEGIBLE] /s/ [ILLEGIBLE] Authorized Signature Authorized Signature ORIGINAL EXHIBIT A [LETTERHEAD OF UBS PAINEWEBBER] THIS FORM TO BE USED WHERE A LETTER OF CREDIT IS TRANSFERRED IN ITS ENTIRETY Date: ___________________ Re: Letter of Credit Number: ____________________ issued by UBS PaineWebber Inc. Gentlemen: For value received, the undersigned beneficiary hereby irrevocable transfers to: ________________________________________________________________________________ (Name of Transferee) ________________________________________________________________________________ (Address) all rights of the undersigned beneficiary to draw under the above Letter of Credit in its entirety. By this transfer, all rights of the undersigned beneficiary in such Letter of Credit are transferred to the transferee and the transferee shall have the sole rights as beneficiary thereof, including sole rights relating to any amendments whether increases or extensions or other amendments and whether now existing or hereafter made. All amendments are to be advised direct to the transferee without necessity of any consent of or notice to the undersigned beneficiary. The original advice of such Letter of Credit is returned herewith together with any and all amendments, and we ask you to endorse the transfer on the reverse of the original advice, and forward it to the transferee with your customary notice of transfer. Yours very truly, SIGNATURE GUARANTEED _______________________________ _______________________________ Name of Bank Name of Beneficiary _______________________________ _______________________________ Authorized Signature Authorized Signature EXHIBIT F --------- Permitted Hazardous Substances To: City of Hayward, Planning Department - Submission pending Re: Guava Technology Control Zone Total by UBC ranking 3-D, 3-E Industrial Road, Hayward, CA Control zone I Proposed Chemical List Date: 8/23/01 Chemical List by UBC ranking 3-D, 3-E No category total exceeds the amount permitted (exempt quantities) per control zone. Units are shown in gallons (gal), pounds(lb) or cubic feet (cu ft)
Category Storage Use-closed Use-open Total Combustible Liquid 0 0 0 Combustible Fiber 0 0 0 Cryogenic Flammable or oxidizing 0 0 0 Explosives 0 0 0 Flammable Solid 0 0 0 Flammable Gas 0 0 0 Flammable Liquid Combination 233.0gal 6gal 1.0gal 240gal I-A 26gal lgal .5gal 27.5gal I-B 140 3 .5gal 143.5gal I-C 67 1 .5gal 68.5 Organic Peroxide-unclassified, detonable 0 0 0 - Organic Peroxide I-V 0 0 0 Oxidizer 4-1 1 .25 .25 Oxidizer- gas 0 0 0 Pyrophoric 0 0 0 Unstable 4-1 0 0 0 Water Reactive 3-l 0 0 0 Carcinogen .125lb 0 .125lb .1l lb corrosives 20lb 3.25lb .0125lb 23.375lb 5gal .25gal .25gal 7.5 gal Highly toxics 0 .0 .0125lb .0125lb Irritants 1lb .0125lb .0125lb 1.025lb
-2-
Category Storage Use-closed Use-open Total Radioactives 0 0 0 Sensitizers 0 0 0 Other Health Hazards *are listed in carcinogens irritants, and toxics lists Toxics .25lb 0 .25 .25lb 15. gal 3 1.0 gal Non Flammable Gas 13900cu ft Non regulated materials - media, buffers
EX-10.2 4 dex102.txt TRUST INDENTURE - NOTES EXHIBIT 10.2 DRAFT: August 30, 2001 CERTICOM CORP. and COMPUTERSHARE TRUST COMPANY OF CANADA AS TRUSTEE ================================================================= TRUST INDENTURE ================================================================= $13,500,000 aggregate principal amount of 7.25% Senior Convertible Unsecured Subordinated Debentures Due August 30, 2004 August 30, 2001 THIS TRUST INDENTURE is made as of August 30, 2001 B E T W E E N: CERTICOM CORP., a corporation existing under the laws of the Yukon Territory, (hereinafter referred to as the "Corporation") - and - COMPUTERSHARE TRUST COMPANY OF CANADA, a trust company existing under the laws of Canada and duly authorized to carry on the business of a trust company in each province of Canada (hereinafter referred to as the "Trustee") WHEREAS the Corporation is desirous of creating and issuing Debentures, as defined in, and the issuance of which is provided for by, this trust indenture; AND WHEREAS the Corporation, under the laws relating thereto, is duly authorized to create and issue the Debentures to be issued as herein provided to evidence indebtedness of the Corporation existing on the date hereof or incurred by the Corporation at any time hereafter; AND WHEREAS all necessary resolutions of the directors of the Corporation have been duly passed and other proceedings taken and conditions complied with to make the creation and issue of the Debentures proposed to be issued hereunder and this trust indenture and the execution thereof and hereof legal, valid and effective; AND WHEREAS the foregoing recitals are made as representations and statements of fact by the Corporation and not by the Trustee; NOW THEREFORE THIS INDENTURE WITNESSETH and it is hereby covenanted, agreed and declared as follows: -2- ARTICLE 1 INTERPRETATION 1.1 Definitions In this Trust Indenture, unless there is something in the subject matter context inconsistent therewith: "Affiliate" has the meaning ascribed to such term in the Business Corporations Act (Ontario); "Associate" has the meaning ascribed to such term in the Business Corporations Act (Ontario); "Authorized Investments" means short-term interest bearing or discount debt obligations issued or guaranteed by the Government of Canada or a Province or a Canadian chartered bank (which may include an affiliate or related party of the Trustee) provided that each such obligation is rated at least R-1 (middle) by Dominion Bond Rating Service Limited or any equivalent rating by CBRS Inc.; "Business Day" means any Monday, Tuesday, Wednesday, Thursday or Friday which is a day on which banking institutions in Toronto, Ontario and Hayward, California are generally open for business and are not authorized or obligated by law to close; "Capital Reorganization" has the meaning attributed to such term in subsection 4.3(e); "Capital Stock" means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designed, whether voting or non-voting) in the equity of such Person, whether now outstanding or issued after the date of this Indenture; "Certificate of the Corporation" means an instrument signed in the name of the Corporation by any one of the Chief Executive Officer, the Chief Financial Officer or any Vice President of the Corporation certifying the matters specified therein; "Change of Control" means the occurrence of (i) a Person, including the Person's Affiliates and Associates, becoming the beneficial owner of directly or indirectly, or, exercising control or direction over, Common Shares carrying in excess of 50.1% of the total voting rights attached to the Common Shares; or (ii) the Corporation consolidating or amalgamating with, or merging with or into, another Person or selling, assigning, conveying, transferring, leasing or otherwise disposing of all or substantially all of its assets to any Person, or any Person consolidating or amalgamating with, or merging with or into, the Corporation, in any such event pursuant to a transaction in which any of the outstanding Common Shares are converted into or exchanged for cash, securities or other property, other than any such transaction in which the outstanding Common Shares are converted into or exchanged for, or the assets of the Corporation are exchanged for, voting securities or securities exchangeable at the option of the holder into voting securities of the surviving or transferee Person constituting a majority of such voting securities (giving effect to such issuance and the exercise of any rights to exchange such securities into voting securities); "Change of Control Date" means the date on which a Change of Control occurs; -3- "Common Shares" means the common shares in the capital of the Corporation, as such shares exist at the close of business on the date of execution and delivery of this Indenture; provided that, in the event of a subdivision, redivision, reduction, combination or consolidation thereof, or successive such subdivisions, redivisions, reductions, combinations or consolidations, then, subject to adjustments, if any, having been made in accordance with section 4.3, "Common Shares" shall thereafter mean the shares resulting from such subdivision, redivision, reduction, combination or consolidation; "Common Share Reorganization" has the meaning attributed to such term in subsection 4.3 (b); "Contingent Obligation" shall mean, as to any Person, any obligation, whether secured or unsecured, of such Person guaranteeing or indemnifying, or in effect guaranteeing or indemnifying, for any indebtedness, leases, dividends, letters of credit or other monetary obligations (the "primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including any obligation of such Person as an account party in respect of a letter of credit or letter of guarantee issued to assure payment by the primary obligor of any such primary obligation and any obligation of such Person, whether or not contingent, (a) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or supply funds for the purchase or payment of any such primary obligation or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the obligee under any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (d) otherwise to assure or hold harmless the obligee under such primary obligation against loss in respect of such primary obligation; provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business; "Conversion Price" means the dollar amount for which each Common Share may be issued from time to time upon the conversion of Debentures in accordance with Article 4; "Convertible Notes" means the 7.25% convertible notes of the Corporation issued pursuant to the convertible note trust indenture dated as of August 30, 2001 between the Corporation and Computershare Trust Company of Canada; "Corporation" means Certicom Corp., until a successor shall have become such pursuant to Article 9, and thereafter "Corporation" shall mean such successor (or any successor thereto which shall have become such pursuant to Article 9); "Counsel" means a barrister or solicitor or firm of barristers and solicitors retained by the Trustee, who may be counsel to the Corporation, or retained by the Corporation and acceptable to the Trustee; "Credit Document" has the meaning attributed to such term in section 5.6; "Current Market Price" at any date means the weighted average trading price per share of the Common Shares during the 20 consecutive trading days ending five trading days before such -4- date on the TSE, or, if the Common Shares are not listed thereon, on such stock exchange or quotation system on which the shares are listed or quoted as may be selected for such purpose by the Directors or, if the Common Shares are not listed on any stock exchange or quoted on any quotation system, then on the over-the-counter market selected for such purpose by the Directors; "Date of Conversion" has the meaning attributed to such term in subsection 4.2(b); "Debentures" means the 7.25% Senior Convertible Unsecured Subordinated Debentures due August 30, 2004 issued hereunder; "Debentureholders" or "Holders" means the Persons for the time being entered in the registers hereinafter mentioned as holders of Debentures; "Debentureholders' Request" means an instrument signed in one or more counterparts by the Holders of not less than 25% in principal amount of the outstanding Debentures requesting the Trustee to take or refrain from taking the action or proceeding specified therein; "Debt" shall mean, at any time: (a) all items which would then be classified as a liability on a consolidated balance sheet of the Corporation or in the notes thereto; and (b) to the extent not otherwise included as Debt pursuant to the provisions of paragraph (a) of this definition, without duplication, any item which is (i) an obligation of the Corporation or any of its Subsidiaries in respect of borrowed money or for the deferred purchase price of property or services or an obligation of the Corporation which is evidenced by a note, bond, debenture or other similar instrument, (ii) a transfer with recourse or with an obligation to repurchase, to the extent of the liability of the Corporation or any of its Subsidiaries with respect thereto, (iii) an obligation secured by any Lien on any property of the Corporation or any of its Subsidiaries to the extent attributable to its respective interest in such property, even though it has not assumed or become liable for the payment thereof, (iv) an obligation of the Corporation or any of its Subsidiaries arising in connection with an acceptance facility or letter of credit or letter of guarantee issued by or for the account of the Corporation or any of its Subsidiaries, or (v) a Contingent Obligation of the Corporation or any of its Subsidiaries to the extent that the primary obligation so guaranteed is not otherwise classified as a liability on the consolidated balance sheet of the Corporation, -5- provided, however, that there shall not be included for the purpose of this definition any item which is on account of (w) issued share capital or surplus, (x) reserves for deferred income taxes or general contingencies, (y) minority interests in Subsidiaries, or (z) trade debt; "Director" means a director of the Corporation for the time being and "Directors" means the board of directors of the Corporation or, whenever duly empowered, the executive committee (if any) of the board of directors of the Corporation or the managing director of the Corporation for the time being, and reference to action by the Directors means action by the directors as a board or action by the executive committee of the board as a committee or action by the managing director as the case may be; "Dividends Paid in the Ordinary Course" means dividends paid on the Common Shares in any financial year of the Corporation, whether in (i) cash, (ii) shares of the Corporation, (iii) rights, options or warrants to purchase any shares, property or other assets of the Corporation (but excluding rights, options or warrants referred to in subsection 4.3(b)(i) or (ii)), or (iv) property or other assets of the Corporation, in each case to the extent that the amount or value of such dividends in the aggregate does not exceed the greater of: (c) 150% of the aggregate amount or value of dividends paid by the Corporation on the Common Shares in its immediately preceding financial year; or (d) 100% of the consolidated net income of the Corporation (before extraordinary items but after dividends payable on all shares ranking prior to or on a parity with the Common Shares with respect to the payment of dividends) for its immediately preceding financial year, determined in accordance with generally accepted accounting principles; and for the purpose of the foregoing where any dividend is paid, otherwise than in cash, any securities, property or other assets so distributed by way of dividend shall be valued at the fair market value of such securities, property or other assets, as the case may be, as determined by the Directors, which determination shall be conclusive; "dollars" or "$" shall mean references to Canadian dollars; "Event of Default" has the meaning attributed to such term in section 7.1; "Extraordinary Resolution" has the meaning attributed to such terms in sections 10.12 and 10.15; "Foregone Interest" means, in respect of a Debenture, an amount per Debenture equal to the interest payable on the Debenture that would have accrued to the Holder of such Debenture without giving effect to the provisions of subsection 2.6(b) from and including the Change of Control Date to but not including August 30, 2003; "generally accepted accounting principles" means generally accepted accounting principles in effect from time to time in Canada as applied by the Corporation in the preparation of its consolidated financial statements; "Indenture Legislation" has the meaning attributed to such term in such subsection 12.1(a); -6- "Lien" means any lien, encumbrance, mortgage, pledge, charge, security interest or other encumbrance; "Maturity Date" means August 30, 2004; "NASDAQ" means the Nasdaq National Market; "Offer to Purchase" means an offer to purchase Debentures by the Corporation from the Holders in accordance with section 3.16 hereof; "Offer to Purchase Price" has the meaning attributed to such term in section 3.16; "Payment Date" has the meaning attributed to such term in subsection 3.16(c); "Permitted Secured Debt" means, with respect to the Corporation or any of its Subsidiaries: (i) indebtedness (other than trade debt) created, incurred, assumed or guaranteed, for moneys borrowed or raised by whatever means (including, without limitation, by means of commercial paper, bankers' acceptances, debt instruments, bank debt and financial leases, and any liability evidenced by bonds, debentures, notes or similar instruments); (ii) indebtedness created, incurred, assumed or guaranteed after the date of this Indenture to finance the cost of the acquisition by the Corporation or any of its Subsidiaries of any assets or services; (iii) any guarantee of any indebtedness of a type described in clause (i) or (ii); and (iv) renewals, extensions or refunds of any indebtedness or guarantee referred to in clauses (i), (ii) or (iii); provided that, in each case, such indebtedness or guarantee is secured by a Lien and such Lien has been created or granted for bona fide purposes of the Corporation or any of its Subsidiaries and not for the purpose of avoiding the Corporation's obligations under section 6.9; "Person" means any individual, partnership, limited partnership, joint venture, syndicate, sole proprietorship, company or corporation with or without share capital, unincorporated association, trust, trustee, executor, administrator or other legal personal representative, government or governmental authority or entity, however designated or constituted; "Redemption Price" has the meaning attributed to such term in section 3.1; "Restricted Debenture" has the meaning attributed to such term in section 2.12; "Rights Offering" and "Rights Period" have the meanings attributed to such terms in subsection 4.3(c); "Rights Offering Price" has the meaning attributed to such term in subsection 4.3(f); -7- "Special Distribution" has the meaning attributed to such term in subsection 4.3(d); "Subsidiary" means, with respect to any Person, (i) a corporation of which such Person and its other Subsidiaries or any of them own an aggregate number of the Voting Stock of such corporation sufficient to enable them to elect a majority of the directors (or other Persons performing similar functions) of such corporation regardless of the manner in which the other Voting Stock are voted, (ii) a corporation of which a Person and its other Subsidiaries or any of them have, through the operation of any agreement or otherwise, the ability to elect or cause the election of a majority of the directors (or other Persons performing similar functions) or otherwise who exercise control over the management and policies of such corporation; provided however, that in the case of the Corporation and its Subsidiaries, the definition of "Subsidiary" shall include corporations in which the Corporation and/or its Subsidiaries own, directly or indirectly, 50% or more of the Voting Stock of such corporation. "Successor Person" has the meaning attributed to such term in subsection 9.1(a); "this Indenture", "this Trust Indenture", "hereto", "hereby", "hereunder", "hereof", "herein" and similar expressions refer to this indenture and not to any particular Article, section, subsection, paragraph, clause or other portion hereof, and include any and every supplemental indenture; and "supplemental indenture" and "indenture supplemental hereto" include any and every instrument which amends this indenture or is supplemental or ancillary hereto or in implementation hereof; "Time of Expiry" has the meaning attributed to such term in section 4.1(a); "trade debt" means all unsecured debt of the Corporation incurred in connection with the purchase of goods or services in the ordinary course of business; "Trading Day" means a day on which the facilities of the TSE are available for trading of securities listed on the TSE; "Trustee" means Computershare Trust Company of Canada and its successors for the time being in the trusts hereby created; "TSE" means The Toronto Stock Exchange; "U.S. Person" means a U.S. Person as that term is defined in Regulation S of the U.S. Securities Act; "U.S. Securities Act" means the United States Securities Act of 1933, as amended; "Voting Stock" means, with respect to any Person, Capital Stock of any class or kind ordinarily having the power to vote for the election of voting members of the governing body of such Person; and "Written Order of the Corporation", "Written Request of the Corporation" and "Written Direction of the Corporation" mean, respectively, an order, a request or a direction signed in -8- the name of the Corporation by the Chief Executive Officer, Chief Financial Officer or any Vice President of the Corporation, and may consist of one or more instruments so executed. Words importing the singular include the plural and vice versa and words importing the masculine gender include the feminine gender and vice versa. 1.2 Meaning of "outstanding" for Certain Purposes --------------------------------------------- Every Debenture certified and delivered by the Trustee hereunder shall be deemed to be outstanding until it shall be cancelled or delivered to the Trustee for cancellation, or a new Debenture shall be issued in substitution therefor in accordance with the provisions hereof, or moneys for the payment thereof shall be set aside under Article 8, provided that: (a) where a new Debenture has been issued in substitution for a Debenture which has been lost, stolen or destroyed, only one of such Debentures shall be counted for the purpose of determining the aggregate principal amount of Debentures outstanding; (b) Debentures which have been partially redeemed or purchased shall be deemed to be outstanding only to the extent of the unredeemed or unpurchased part of the principal amount thereof; (c) Debentures in respect of which a notice of redemption has been given in accordance with Article 3, in whole or in part, shall to such extent, not be considered to be outstanding from and after the date fixed for redemption in such notice unless the Corporation shall fail to deposit with the Trustee the Redemption Price in respect thereof as provided in section 3.6; and (d) for the purpose of any provision of this Indenture entitling Holders of outstanding Debentures to vote, sign consents, requests or other instruments or take other action under this Indenture, Debentures owned legally or equitably by the Corporation or any Subsidiary shall be disregarded, except that: (i) for the purpose of determining whether the Trustee shall be protected in relying on any such vote, consent, request or other instrument or action, only the Debentures of which the Trustee has received actual written notice that they are so owned shall be so disregarded; and (ii) Debentures so owned which have been pledged in good faith other than to the Corporation or a Subsidiary shall not be so disregarded if the pledgee shall establish, to the satisfaction of the Trustee, the pledgee's right to vote such Debentures in his discretion free from the control of the Corporation or such Subsidiary. 1.3 Interpretation Not Affected by Headings, etc. -------------------------------------------- The division of this Indenture into Articles, sections, subsections and paragraphs, the provision of a table of contents and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this Indenture. -9- 1.4 Statute References ------------------ Any reference in this Indenture to a statute shall be deemed to be a reference to such statute as amended, re-enacted or replaced from time to time. 1.5 Non-Business Days ----------------- Whenever any payment to be made hereunder shall be due, any period of time would begin or end, any calculation is to be made or any other action is to be taken, on or as of a day other than a Business Day, such payment shall be made, such period of time shall begin or end, such calculation shall be made and such other actions shall be taken, as the case may be, unless otherwise specifically provided for herein, on or as of the next succeeding Business Day. 1.6 Invalidity of Provisions ------------------------ Each of the provisions contained in this Indenture or the Debentures is distinct and severable and a declaration of invalidity or unenforceability of any such provision by a court of competent jurisdiction shall not affect the validity or enforceability of any other provision hereof or thereof. 1.7 Governing Law ------------- This Indenture and the Debentures shall be governed by and construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein and shall be treated in all respects as Ontario contracts. 1.8 Paramountcy ----------- In the event of any inconsistency between the provisions of any section of this Indenture and the provisions of Schedule "A" which forms a part hereof, the provisions of this Indenture shall prevail. ARTICLE 2 THE DEBENTURES 2.1 Limitation on Issue and Designation ----------------------------------- The aggregate principal amount of Debentures which may be issued and certified hereunder shall consist of and be limited to $13,500,000 in lawful money of Canada and such Debentures are hereby designated 7.25% Senior Convertible Unsecured Subordinated Debentures due August 30, 2004. 2.2 Terms of Debentures ------------------- (a) The Debentures shall be dated August 30, 2001, regardless of their actual date of issue, shall mature and become due and payable on the Maturity Date and shall bear interest (subject to section 2.6) from and including August 30, 2001 at the rate of 7.25% per annum (after -10- as well as before default or judgment, with interest on amounts in default at the same rate) payable in arrears in equal semi-annual instalments on February 28 and August 30 in each year, the first such payment to be made on February 28, 2002 for the period from and including August 30, 2001 to but excluding February 28, 2002. (b) As interest becomes due on the Debentures (except interest payable at maturity or on redemption or purchase pursuant to an Offer to Purchase or conversion which shall be paid upon surrender of a Debenture for payment), the Corporation shall, at least three Business Days prior to each date on which interest becomes due, forward or cause to be forwarded by first class mail, postage prepaid, to the registered address of each registered Holder for the time being, or in the case of joint registered Holders to the registered address of one of the joint Holders, a cheque for such interest (less any tax required by law to be deducted) payable to or to the order of such Holder or Holders and negotiable at par at any branch in Canada of such Canadian chartered bank as may be designated by the Corporation. The Corporation may make provision for the making of any such payment in such other manner as is acceptable to the Trustee. Subject to the provisions of this Indenture, the mailing of such cheque or the making of such payment in such other manner shall satisfy and discharge all liability for interest on the Debentures to the extent of the sum represented thereby (plus the amount of any tax so deducted from such interest payment) unless such cheque shall not be paid upon presentation to any such branch. (c) Interest for any period other than a semi-annual period on the Debentures shall accrue from day to day and shall be calculated on the basis of the actual number of days elapsed and on the basis of a year of 365 days or 366 days in a leap year. (d) Subject to sections 3.9 and 3.18, the principal amount, interest and Foregone Interest, if any, due and evidenced by the Debentures on maturity, redemption, purchase pursuant to an Offer to Purchase or conversion, as the case may be, will be made payable in lawful money of Canada, against surrender of such Debentures by the respective Holders thereof at any of the places at which a register is maintained pursuant to section 2.8. 2.3 Form and Execution of Debentures -------------------------------- (a) The Debentures shall be issued only as fully registered Debentures in denominations of $1,000 and integral multiples of $1,000. (b) The Debentures and the certificate of the Trustee endorsed thereon shall be substantially in the form set out in Schedule "A" to this Indenture with such appropriate additions, deletions, substitutions and variations as the Trustee may approve and shall bear such distinguishing letters and numbers as the Trustee may approve, such approval of the Trustee to be conclusively evidenced by its certification of the Debentures. (c) The Debentures may be engraved, printed or lithographed, or partly in one form and partly in another, as the Corporation may determine. (d) The Debentures shall be signed (either manually or by facsimile signature) by any two (2) directors or officers of the Corporation. A signature upon any of the Debentures shall for all purposes of this Indenture be deemed to be the signature of the individual whose signature it purports to be and to have been signed at the time such signature (either manual or in facsimile) -11- may appear on the Debentures and notwithstanding that any individual whose signature (either manual or in facsimile) may appear on the Debenture is not, at the date of this Indenture or at the date of the Debentures or at the date of the certifying and delivery thereof, the Chief Executive Officer, the Chief Financial Officer, a Vice-President or the Secretary, as the case may be, of the Corporation, such Debentures shall be valid and binding upon the Corporation and entitled to the benefits of this Indenture. 2.4 Issue of Debentures ------------------- (a) Debentures in the aggregate principal amount of $13,500,000 in lawful money of Canada may forthwith and from time to time be executed by the Corporation and delivered to the Trustee and shall be certified by the Trustee and delivered to or to the order of the Corporation pursuant to a Written Order of the Corporation, without the Trustee receiving any consideration therefor. (b) Where Debentures are registered in more than one name, the principal amount, interest and Foregone Interest, if any, from time to time payable in respect thereof shall be paid by cheque payable to the order of all such Holders (unless the Corporation has elected to satisfy such amounts in any other manner permitted under this Indenture), unless the Corporation has received written instructions from them to the contrary, and the receipt of any one of such Holders therefor shall be a complete discharge to the Trustee, any registrar of Debentures and the Corporation. 2.5 Certification ------------- (a) No Debenture shall be issued or, if issued, shall be obligatory or shall entitle the Holder thereof to the benefits of this Indenture until it has been certified by manual signature by or on behalf of the Trustee substantially in the form set out in Schedule "A" hereto or in some other form approved by the Trustee, whose approval shall be conclusively evidenced by the certification thereof. Such certificate on any Debenture shall be conclusive evidence that such Debenture is duly issued and is a valid obligation of the Corporation and that the Holder is entitled to the benefits of this Indenture. (b) The certificate of the Trustee on any Debenture issued hereunder shall not be construed as a representation or warranty by the Trustee as to the validity of this Indenture or of the Debentures (except the due certification thereof and any other warranties implied by law) or as to the performance by the Corporation of its obligations under this Indenture and the Trustee shall in no respect be liable or answerable for the use made of the Debentures or any of them or the proceeds thereof -12- 2.6 Concerning Interest ------------------- (a) Every Debenture, whether issued originally or in exchange for other Debentures, shall bear interest from and including August 30, 2001 or from and including the last interest payment date to which interest shall have been paid or made available for payment on the Debentures, whichever shall be later. (b) Interest on each Debenture shall cease to accrue from the earliest of (i) the Maturity Date; or (ii) if such Debenture is called for redemption, the date fixed for redemption; or (iii) if such Debenture is converted, the date stipulated in subsection 4.2(d); or (iv) if a Change of Control occurs prior to August 30, 2003, the Change of Control Date; or (v) if a Change of Control occurs on or after August 30, 2003, the date of purchase pursuant to an Offer to Purchase, unless, upon due presentation and surrender thereof for payment on or after the Maturity Date, the date of redemption or the date of conversion or the date of purchase pursuant to an Offer to Purchase, as the case may be, such payment is improperly withheld or refused by or on behalf of the Corporation. (c) Wherever in this Indenture or the Debentures there is mention, in any context, of the payment of interest, such mention shall be deemed to include the payment of interest on amounts in default to the extent that, in such context, such interest is, was or would be payable pursuant to section 2.2, and express mention of interest on amounts in default in any of the provisions hereof shall not be construed as excluding such interest in those provisions hereof where such express mention is not made. (d) All interest accrued and not paid on a Convertible Note exercised into a Debenture shall be paid in the manner specified herein as if such interest had accrued and was payable on such Debenture on the first interest payment date following the exercise of such Convertible Note to the person entitled to interest on such Debenture on such date. 2.7 Debentures to Rank Equally -------------------------- The Debentures may be issued in such amounts, to such Persons and on such terms not inconsistent with the provisions of this Indenture as the Directors may determine. Each Debenture as soon as issued or negotiated shall, subject to the terms hereof, be equally and rateably entitled to the benefits hereof as if all the Debentures had been issued and negotiated simultaneously. 2.8 Registration of Debentures -------------------------- (a) The Corporation shall, at all times while any Debentures are outstanding, cause to be kept by and at the principal office of the Trustee in the City of Toronto, Ontario a central register, and in such other place or places, by the Trustee or by such other registrar or registrars, if any, as the Corporation with the approval of the Trustee may designate, branch registers in which shall be entered the names and latest known addresses of the Holders of Debentures and the other particulars, as prescribed by law, of the Debentures held by them respectively and of all transfers of Debentures. Such registration shall be noted on the Debentures by the Trustee or other registrar. No transfer of a Debenture shall be effective as against the Corporation unless made on one of the appropriate registers by the Debentureholder or his executors or -13- administrators or other legal representatives or his or their attorney duly appointed by an instrument in form and execution satisfactory to the Trustee or other registrar and upon compliance with such reasonable requirements as the Trustee or other registrar may prescribe, and unless the name of the transferee shall have been duly noted on such register by the Trustee or other registrar. (b) The registers referred to in this section shall at all reasonable times, during the regular business hours of the offices of the Trustee or other registrar, as applicable, be open for inspection by the Corporation, the Trustee and any Debentureholder. (c) A Debentureholder may at any time and from time to time have a Debenture transferred at any of the places at which a register is kept pursuant to the provisions of this section 2.8 upon surrender of such Debenture to the Trustee at its principal stock transfer office in the City of Toronto, together with the assignment form annexed to such Debenture or any other written notice in form and substance satisfactory to the Trustee, in either case duly executed by the Holder or the Holder's executors or administrators or other legal representatives or his or her attorney duly appointed by an instrument in writing and in form and substance satisfactory to the Trustee, exercising the Holder's right to transfer such Debenture in accordance with the provisions of this Article 2, and in accordance with such reasonable regulations as the Trustee may prescribe. A Debentureholder may at any time and from time to time have the registration of a Debenture transferred from the register in which the registration thereof appears to another register maintained in another place authorized for that purpose under the provisions of this Indenture upon payment of a reasonable fee to be fixed by the Trustee. (d) Neither the Corporation nor the Trustee nor any registrar shall be required to transfer or exchange any Debentures (i) on any date on which interest is payable on the Debentures or during the 15 Business Days immediately preceding any such date; or (ii) on the date of redemption fixed in accordance with the terms of this Indenture or during the 15 Business Days immediately preceding any such date; or (iii) on any Payment Date or during the 5 Business Days immediately preceding the Payment Date; or (iv) selected or called for redemption in whole or in part thereof. (e) None of the Trustee, any registrar for any of the Debentures or the Corporation shall be charged with notice of or be bound to see the execution of any trust, whether express, implied or constructive, in respect of any Debenture and may transfer any Debenture on the direction of the Holder thereof, whether named as trustee or otherwise, as though that Person were the beneficial owner thereof. (f) Except in the case of the central register required to be kept at the City of Toronto, the Corporation shall have power at any time to close any branch register and in that event it shall transfer the records thereof to another existing register or to a new register and thereafter such Debentures shall be deemed to be registered on such existing or new register, as the case may be. In the event that the register in any place is closed and the records transferred to a register in another place, notice of such change shall be given to the Debentureholders registered in the register so closed and the particulars of such change shall be recorded in the central register required to be kept in the City of Toronto. -14- (g) Every registrar shall, when requested to do so in writing by the Corporation or the Trustee, furnish the Corporation or the Trustee, as the case may be, with a list of the names and addresses of the Holders of Debentures entered on the registers maintained by such registrar and showing the principal amounts and serial numbers of the Debentures held by each such Holder. 2.9 Ownership of Debentures ----------------------- (a) The person in whose name any Debenture shall be registered shall be deemed to be the absolute owner thereof for all purposes of this Indenture and payment of or on account of the principal amount, interest and Foregone Interest, if any, evidenced by such Debenture shall be made only to or upon the order in writing of the Holder thereof and such payment shall be a complete discharge to the Trustee, any registrar of Debentures and the Corporation for the amounts so paid. (b) The Holder for the time being of any Debenture shall be entitled to the principal amount, interest and Foregone Interest, if any, evidenced by such Debenture, free from all equities or rights of set-off or counterclaim between the Corporation and the original or any intermediate Holder thereof (except any equities of which the Corporation is required to take notice by law or by order of a court of competent jurisdiction) and all Persons may act accordingly and a transferee of a Debenture shall, after the appropriate form of transfer is lodged with the Trustee or other registrar of Debentures and upon compliance with all other conditions in that behalf required by this Indenture or by any conditions contained in such Debenture or by law, be entitled to be entered on the appropriate register or on any one of the appropriate registers as the owner of such Debenture free from all equities or rights of set-off or counterclaim between the Corporation and the transferor or any previous Holder thereof, save in respect of equities of which the Corporation is required to take notice by law or by order of a court of competent jurisdiction. 2.10 Exchange of Debentures ---------------------- (a) Subject to Section 2.8(d), Debentures of any denomination may be exchanged for Debentures of any other authorized denomination or denominations, any such exchange to be for Debentures of an equivalent aggregate principal amount, and at the expense of the Debentureholder. Exchanges of Debentures may be made at the principal offices of the Trustee in the City of Toronto and at such other locations where registers for the Debentures are maintained. Any Debentures tendered for exchange shall be surrendered to the Trustee and shall be cancelled. The Corporation shall execute, and the Trustee shall certify, all Debentures necessary to carry out such exchanges. (b) Debentures issued in exchange for Debentures which at the time of such issue have been selected or called for redemption at a later date shall be deemed to have been selected or called for redemption in the same manner and shall have noted thereon a statement to such effect (which statement shall be provided by counsel to the Corporation upon the request of the Trustee). (c) Except as otherwise provided herein, upon any exchange of Debentures of any denomination for Debentures of any other authorized denominations and upon any transfer of -15- Debentures, the Trustee or other registrar of Debentures may make a sufficient charge to reimburse it for any stamp tax, security transfer tax or other governmental charge required to be paid, and in addition a reasonable charge for its services for each Debenture exchanged or transferred, and payment of such charge shall be made by the party requesting such exchange or transfer as a condition precedent thereto. 2.11 Replacement of Debentures ------------------------- If any Debenture shall become mutilated or be lost, stolen or destroyed and in the absence of notice that such Debenture has been acquired by a good faith purchaser within the meaning of the Business Corporations Act (Ontario), the Corporation shall, subject to the applicant for a new Debenture complying with the provisions of this section 2.12, issue, and thereupon the Trustee shall certify and deliver to such applicant, a new Debenture upon surrender and cancellation of the mutilated Debenture, or, in the case of a lost, stolen or destroyed Debenture, in lieu of and in substitution for the same, and the new Debenture shall be in a form approved by the Trustee and shall be entitled to the benefits of this Indenture equally with all other Debentures issued or to be issued hereunder. In cases of loss, theft or destruction, the applicant for a new Debenture shall furnish to the Corporation and to the Trustee such evidence of such loss, theft or destruction as shall be satisfactory to them in their discretion and shall also furnish an indemnity in amount and form satisfactory to them in their discretion. The applicant shall pay all expenses incidental to the issuance of any such new Debenture. 2.12 U.S. Legend ----------- (a) The Debentures have not been and will not be registered under the U.S. Securities Act and may not be sold or otherwise transferred except pursuant to sales or other transfers that satisfy the requirements of Rule 904 of Regulation S under the U.S. Securities Act. Each Debenture certificate originally issued in the United States or to, or for the account of, a U.S. Person, and each Debenture certificate issued in exchange therefor or in substitution thereof (each a "Restricted Debenture") shall bear the following legend: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "U.S. SECURITIES ACT") OR UNDER ANY STATE SECURITIES LAWS. THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES, AGREES FOR THE BENEFIT OF CERTICOM CORP. THAT SUCH SECURITIES MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED ONLY (A) TO CERTICOM CORP., (B) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE U.S. SECURITIES ACT, (C) PURSUANT TO THE EXEMPTION FROM REGISTRATION UNDER THE U.S. SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER, IF AVAILABLE, OR (D) IN COMPLIANCE WITH CERTAIN OTHER PROCEDURES SATISFACTORY TO CERTICOM CORP. DELIVERY OF THIS CERTIFICATE MAY NOT CONSTITUTE "GOOD DELIVERY" IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN CANADA. A NEW CERTIFICATE, BEARING NO LEGEND, DELIVERY OF WHICH WILL CONSTITUTE "GOOD DELIVERY" MAY BE OBTAINED FROM COMPUTERSHARE TRUST COMPANY OF CANADA UPON -16- DELIVERY OF THIS CERTIFICATE AND A DULY EXECUTED DECLARATION, IN A FORM SATISFACTORY TO COMPUTERSHARE TRUST COMPANY OF CANADA AND THE CORPORATION TO THE EFFECT THAT THE SALE OF THE SECURITIES REPRESENTED HEREBY IS BEING MADE IN COMPLIANCE WITH RULE 904 OF REGULATION S UNDER THE U.S. SECURITIES ACT;" provided, that if the Securities are being sold in compliance with the requirements of Rule 904 of Regulation S under the U.S. Securities Act and in compliance with Canadian local laws and regulations, the legend may be removed by providing a declaration to Computershare Trust Company of Canada, as registrar and transfer agent for the Securities, to the following effect (or as the Corporation may prescribe from time to time): The undersigned (A) acknowledges that the sale of the Securities to which this declaration relates is being made in reliance on Rule 904 of Regulation S under the United States Securities Act of 1933, as amended (the "U.S. Securities Act"), and (B) certifies that (1) it is not an "affiliate" (as defined in Rule 405 under the U.S. Securities Act) of Certicom Corp., (2) the offer of such Securities was not made to a person in the United States and either (a) at the time the buy order was originated, the buyer was outside the United States, or the seller and any person acting on its behalf reasonably believed that the buyer was outside the United States or (b) the transaction was executed on or through the facilities of The Toronto Stock Exchange and neither the seller nor any person acting on its behalf knows that the transaction has been prearranged with a buyer in the United States and (3) neither the seller nor any person acting on its behalf engaged in any directed selling efforts in connection with the offer and sale of such Securities. Terms used herein have the meanings given to them by Regulation S; provided, further, that, if any such Securities are being sold pursuant to Rule 144 of the U.S. Securities Act, the legend may be removed by delivery to Computershare Trust Company of Canada of an opinion of counsel, of recognized standing reasonably satisfactory to the Corporation, to the effect that such legend is no longer required under applicable requirements of the U.S. Securities Act or state securities laws. (b) Notwithstanding any other provisions of this Indenture, in processing and registering transfers of Debentures, no duty or responsibility whatsoever shall rest upon the Trustee to determine the compliance by any transferor or transferee with the terms of the legend contained in subsection 2.12(a), or with the relevant securities laws or regulations, including, without limitation, Regulation S and the Trustee shall be entitled to assume that all transfers are legal and proper. ARTICLE 3 REDEMPTION AND PURCHASE FOR CANCELLATION OF DEBENTURES 3.1 Redemption of Debentures ------------------------ Subject to the provisions of section 3.2, the Debentures shall be redeemable prior to maturity in whole at any time or in part from time to time, at the option of the Corporation (in the manner hereinafter provided and in accordance with and subject to the provisions hereinafter -17- set forth) on the date fixed for redemption at a price per Debenture equal to the principal amount thereof to be redeemed, together with accrued and unpaid interest on the principal amount of the Debenture so redeemed to but not including the date fixed for redemption (such price, including accrued and unpaid interest, at which Debentures may be redeemed being herein referred to as the "Redemption Price"). 3.2 Limitation on Redemption ------------------------ Notwithstanding the provisions of section 3.1, the Debentures shall not be redeemable prior to August 30, 2003. On and after August 30, 2003, the Debentures shall not be redeemable unless the Corporation shall have filed with the Trustee, on the day that notice of redemption of such Debentures is first given pursuant to section 3.4, a Certificate of the Corporation certifying that the Current Market Price of the Common Shares on the date on which such notice of redemption is first given was not less than 125% of the Conversion Price in effect on such date. 3.3 Partial Redemption of Debentures -------------------------------- (a) If less than all the outstanding Debentures are to be redeemed, the Corporation shall in each such case, at least 15 days before the date upon which notice of redemption is to be given, notify the Trustee by Written Direction of the Corporation of its intention to redeem such Debentures and of the aggregate principal amount of Debentures to be redeemed. At any time prior to the date upon which the notice of redemption is to be given, the Corporation may revoke such Written Direction of the Corporation by delivering a second Written Direction of the Corporation to the Trustee stating that the Corporation no longer intends to make a partial redemption of the Debentures. (b) The Debentures to be redeemed may be selected on a pro rata basis (to the nearest multiple of $1,000) in accordance with the principal amount of Debentures registered in the name of each Holder or may be selected in such other manner as the Trustee may consider equitable, subject to approval or consent of the TSE and any other applicable regulatory approval or consent. For this purpose, the Trustee may make, and from time to time amend, regulations with regard to the manner in which such Debentures may be so selected and regulations so made shall be valid and binding upon the Debentureholders, notwithstanding the fact that, as a result thereof, one or more of such Debentures becomes subject to redemption in part only. (c) Debentures in denominations in excess of $1,000 may be selected and called for redemption in part only (such part being $1,000 or an integral multiple thereof) and, unless the context otherwise requires, references to Debentures in this Article 3 shall be deemed to include any such part of the principal amount of Debentures which shall have been so selected and called for redemption. The Holder of any Debenture called for redemption in part only, upon surrender of such Debenture for payment shall be entitled to receive, without expense to such Holder, a new Debenture for the unredeemed part of the Debenture so surrendered, and the Corporation shall execute and the Trustee shall certify and deliver, at the expense of the Corporation, such new Debenture upon receipt of the Debenture so surrendered. -18- 3.4 Notice of Redemption -------------------- Notice of intention to redeem any Debentures shall be given by or on behalf of the Corporation to the Holders of the Debentures which are to be redeemed, not more than 60 days and not less than 30 days prior to the date fixed for redemption in the manner provided in section 11.2. The notice of redemption shall, unless all the Debentures then outstanding are to be redeemed, specify the distinguishing letters and number of the Debentures which are to be redeemed and, if a Debenture is to be redeemed in part only, shall specify that part of the principal amount thereof to be redeemed, and shall specify the redemption date, the Redemption Price and places of payment and shall state that all interest on the Debentures called for redemption shall cease from and after such redemption date. 3.5 Debentures Due on Redemption Dates ---------------------------------- (a) Subject to section 3.6, upon notice having been given as aforesaid, each of the Debentures so called for redemption shall thereupon become due and payable at the Redemption Price and on the redemption date specified in such notice, in the same manner and with the same effect as if it were the Maturity Date, notwithstanding anything contained therein or herein to the contrary, and from and after such redemption date, if the moneys or Common Shares necessary to redeem such Debentures shall have been deposited as hereinafter provided and affidavits or other proof satisfactory to the Trustee as to the mailing of such notices shall have been delivered to it, such Debentures shall not be considered as outstanding hereunder and interest upon such Debentures shall cease to accrue after such date. (b) If any question shall arise as to whether notice of redemption or deposit of the redemption moneys or Common Shares has been given or made as provided herein, such question shall be decided by the Trustee whose decision shall be final and binding upon all parties in interest. 3.6 Deposit of Redemption Moneys ---------------------------- (a) Subject to section 3.9, upon Debentures having been called for redemption, the Corporation shall deposit with the Trustee, on or before the redemption date fixed in the relevant notice of redemption, such sums as may be sufficient to pay the Redemption Price of each of the Debentures to be redeemed, together with the estimated charges and expenses to be incurred in connection with such redemption. From the sums so deposited, the Trustee shall pay or cause to be paid to the Holders of the Debentures called for redemption, upon surrender of such Debentures, the Redemption Price to which they are respectively entitled on redemption. (b) Any moneys deposited under this section 3.6 and not claimed by and paid to Holders of Debentures within six years after the date of such setting aside shall, subject to applicable law, be repaid to the Corporation by the Trustee on demand, and thereupon the Trustee shall be released from all further liability with respect to such moneys and thereafter the Holders of the Debentures in respect of which such moneys were so repaid to the Corporation shall have no rights in respect thereof except to obtain payment of such moneys without interest thereon from the Corporation. -19- 3.7 Failure to Surrender Debentures Called for Redemption ----------------------------------------------------- If the Holder of any Debentures called for redemption shall, within 30 days from the date fixed for redemption, fail to surrender any of such Debentures or shall not within such time accept payment of the Redemption Price payable in respect thereof, including certificates representing Common Shares issuable to such Holder, as the case may be, or give such receipt therefor, if any, as the Trustee may require, such Redemption Price shall be set aside in trust for such Holder, in accordance with section 12.10; and such setting aside shall for all purposes be deemed a payment to the Debentureholder of the sum so set aside, and to that extent such Debentures shall on and after the redemption date thereafter not be considered as outstanding hereunder and the Debentureholder shall have no right except to receive payment out of the moneys so paid and deposited, upon surrender of his Debentures, of the Redemption Price of such Debentures without interest thereon. 3.8 Surrender of Debentures for Cancellation ---------------------------------------- If the principal moneys due upon any Debenture shall become payable by redemption or purchase pursuant to an Offer to Purchase or otherwise before the Maturity Date, the Person presenting such Debentures for payment must surrender the same for cancellation, the Corporation nevertheless, subject to section 2.7, paying or causing to be paid the interest accrued and unpaid thereon (computed on a per diem basis if the date fixed for payment is not a date when interest is payable on the Debentures). 3.9 Payment in Common Shares on Redemption of Debentures ---------------------------------------------------- Subject to section 3.10 and applicable law and regulatory approval, and notwithstanding any other provision of this Indenture, the Corporation may, at its option, in the case of redemption on notice given contemporaneously with the notice of redemption pursuant to section 3.4 to the Trustee and the Holders of the Debentures and in accordance with subsection 3.12 and Article 11, elect to satisfy and discharge its obligation hereunder and under the Debentures to pay all or any part of the aggregate principal amount payable to the Holders of Debentures on redemption by the issue and delivery to such holders of that number of freely tradeable, fully paid and non-assessable Common Shares obtained by dividing such aggregate principal amount by 95% of the Current Market Price of the Common Shares as at the redemption date. The Corporation may not exercise the right conferred by this section 3.9 if an Event of Default hereunder has occurred and is continuing at the date of the notice referred to in this section 3.9. 3.10 Issue of Common Shares on Redemption of Debentures -------------------------------------------------- (a) If the Corporation elects under section 3.9 to satisfy its obligation to pay all or any part of the principal amount of Debentures on the redemption date by the issue of Common Shares and if otherwise permitted to do so by law, the Corporation will issue that number of Common Shares determined under section 3.9, and will deliver to the Trustee the following: (i) a Certificate of the Corporation certifying that no Event of Default hereunder has occurred and is continuing as at the date of the notice referred to in section 3.9; and -20- (ii) an opinion of Counsel that (i) all requirements imposed by this Indenture or by the laws of Canada and any applicable province thereof (based on the addresses of Holders set forth in the general register kept by the Corporation pursuant to section 2.8 as at the redemption date) in connection with the proposed issue of Common Shares have been complied with including that no prospectus or similar document is required to be filed or authorizations of regulatory authorities required to be obtained under applicable, legislation of any province of Canada (other than as may have been filed or obtained) before such Common Shares may properly and legally be issued and, once issued, traded without being subject to any general restriction as to the resale thereof provided such Common Shares are traded through persons registered, if required, under applicable laws, (ii) on the redemption date the Common Shares will have been validly issued and upon such issue in satisfaction of the Corporation's obligation to pay the principal amount upon redemption will be outstanding as fully paid and non-assessable shares and (iii) if the Common Shares are then quoted on NASDAQ and/or listed on the TSE, application to quote the Common Shares so issued has been made to NASDAQ and the Common Shares so issued have been conditionally approved for listing on the TSE (or on such other principal quotation system or exchange as the Common Shares may then be quoted or listed), subject to compliance with the requirements of such quotation system or exchange. (b) If any order, ruling, registration, notice or filing pursuant to any securities laws of Canada or any province thereof is required to ensure that any Common Shares issuable on the redemption date are issued in compliance with all such laws or to ensure that any such Common Shares, once issued, are not subject to any general restriction as to the resale thereof, the Corporation covenants that it will take all action as may be necessary to make or obtain such order, ruling, registration or filing, or give such notice, as the case may be. (c) If the provisions of subsections 3.10(a)(i) and (ii) are not complied with, the principal amount of the Debentures together with accrued and unpaid interest, if any, payable on the redemption date will be payable in lawful money of Canada as otherwise provided hereunder. If such provisions are complied with, the issue by the Corporation of that number of Common Shares determined under section 3.9 shall fully satisfy and discharge the obligation of the Corporation to pay the principal amount of such Debentures on the redemption date. 3.11 Restricted Debentures --------------------- The Debentures and Common Shares issuable upon conversion or redemption of the Debentures have not been and will not be registered under the U.S. Securities Act and Debentures and Common Shares issuable upon conversion or redemption of Debentures may not be offered, sold, pledged or transferred within the United States or to, or for the account or benefit of, a U.S. Person and may be offered, sold, pledged or otherwise transferred only outside the United States in accordance with the U.S. Securities Act. -21- 3.12 General Requirements -------------------- (a) The notice to the Trustee and Holders of Debentures to be given by the Corporation pursuant to section 3.9 must: (i) state that the Corporation has exercised its option to pay all or any part of the aggregate principal amount payable to the Holders of Debentures on the date of redemption by the issue of Common Shares to the Holders of Debentures; (ii) state that to receive a certificate for Common Shares on the redemption date the Holders of Debentures must surrender their Debentures to the Trustee at its principal stock transfer offices in the City of Toronto; (iii) advise each Holder of Debentures that the Common Shares to be issued in respect of such Holder's Debentures will be registered in the name of the Holder unless the Trustee receives from such Holder, on or before the fifth Business Day prior to the redemption date at its principal stock transfer office in the City of Toronto written notice in form and substance satisfactory to the Trustee directing the Corporation to register such Common Shares in some other name or names and stating the name or names (with addresses), accompanied by payment to the Trustee of any transfer tax which may be payable by reason thereof; and (iv) advise each Holder that such Holder may, on or after the redemption date and on proof of identity satisfactory to the Trustee, take personal delivery of the share certificates representing that Holder's Common Shares so issued, at the principal stock transfer office of the Trustee in the City of Toronto if the Trustee receives from such Holder at such principal stock transfer office, in addition to any other notice or delivery required by this subsection and on or before the tenth Business Day prior to the redemption date written notice in form and substance satisfactory to the Trustee, stating that such Holder wishes to take personal delivery of the Common Shares issued hereunder at the principal stock transfer office of the Trustee in the City of Toronto; and (b) On the redemption date the Corporation will, subject to subsections 3.12(a)(iii) and (iv), cause to be sent by prepaid ordinary mail (or, in the event of mail service interruption, by such other means as the Trustee and the Corporation determine to be appropriate), share certificates for Common Shares issued pursuant to section 3.10 to each Holder of Common Shares in respect of which Debentures have been surrendered in accordance with the requirements of the notice, given pursuant to subsection 3.12(a), at their addresses as shown on the records of the Corporation. (c) On or after the redemption date the Corporation will deliver share certificates representing the Common Shares issued pursuant to section 3.10 to any other registered Holder -22- thereof, upon presentation and surrender of the Debentures in respect of which such shares were issued. (d) Each share certificate delivered pursuant to this section 3.12 will be for that number of Common Shares that is the Holder's proportionate share of the number of Common Shares determined in accordance with section 3.9. (e) Interest accrued and unpaid on the Debentures on the redemption date will be paid to the Holders of Debentures in the manner contemplated in Article 2 except that the Corporation may, at its option, forward payment of interest contemporaneously with the sending of Common Shares under subsection 3.12(b). 3.13 No Requirement to Issue Fractional Shares ----------------------------------------- The Corporation shall not be required to issue fractional Common Shares upon the issue of Common Shares pursuant to section 3.10. If any fractional interest in a Common Share would, except for the provisions of this section, be deliverable upon the issue of any Common Shares pursuant to section 3.10, the Corporation shall, in lieu of delivering any certificate representing such fractional interest, satisfy such fractional interest by paying to the registered holder of such shares an amount in lawful money of Canada equal (computed to the nearest cent) to the appropriate fraction of the Current Market Price of the Common Shares as at the redemption date. 3.14 Purchase of Debentures for Cancellation --------------------------------------- (a) Subject to any required regulatory approval, the Corporation may at any time and at any price purchase all or any of the Debentures in the market (which shall include purchase from or through an investment dealer or a firm holding membership on a recognized stock exchange) or by invitation for tenders or by private contract. The Corporation may not exercise this right if an Event of Default hereunder has occurred and is continuing at the date of purchase. (b) If, upon an invitation for tenders, more Debentures than the Corporation is prepared to accept are tendered at the same lowest price that the Corporation is prepared to accept, the Debentures to be purchased by the Corporation shall be selected by the Trustee by lot, or in such other manner as the Trustee may consider equitable, from the Debentures tendered by each Debentureholder who tendered at such lowest price. For this purpose, the Trustee may make, and from time to time amend, regulations with respect to the manner in which Debentures may be so selected and regulations so made shall be valid and binding upon all Debentureholders, notwithstanding the fact that, as a result thereof, one or more of such Debentures become subject to purchase in part only. The Holder of any Debenture of which a part only is purchased, upon surrender of such Debenture for payment, shall be entitled to receive, without expense to such Holder, one or more new Debentures for the unpurchased part so surrendered and the Trustee shall certify and deliver such new Debenture or Debentures upon receipt of the Debenture so surrendered. -23- 3.15 Cancellation of Debentures -------------------------- All Debentures redeemed and all Debentures purchased under this Article 3 shall forthwith be delivered to the Trustee and shall be cancelled by it and no Debentures shall be issued in substitution therefor. 3.16 Repurchase of Debentures upon a Change of Control ------------------------------------------------- (a) Subject to subsection 3.16(b), if a Change of Control occurs (i) prior to August 30, 2003, the Corporation must commence, within 45 days of the Change of Control Date, and consummate an Offer to Purchase for all Debentures outstanding immediately prior to the date of the Offer to Purchase, at a purchase price per Debenture equal to the sum of (A) the principal amount thereof purchased, plus (B) accrued and unpaid interest on the principal amount of the Debenture so purchased to but not including the Change of Control Date, plus (C) a bonus in an amount equal to the Foregone Interest, or (ii) on or after August 30, 2003 but prior to the Maturity Date, the Corporation must commence, within 45 days of the Change of Control Date, and consummate an Offer to Purchase for all Debentures outstanding immediately prior to the date of the Offer to Purchase, at a purchase price equal to the principal amount thereof purchased, together with accrued and unpaid interest on the principal amount of the Debenture so purchased to but not including the date fixed for purchase (such price, as applicable, at which Debentures shall be purchased pursuant to an Offer to Purchase being herein referred to as the "Offer to Purchase Price"). (b) Notwithstanding the provisions of subsection 3.16(a), the Corporation shall not be required to commence and consummate an Offer to Purchase pursuant to subsection 3.16(a) if notice of redemption of all outstanding Debentures has been given by or on behalf of the Corporation in accordance with the provisions of section 3.4. (c) An Offer to Purchase shall be commenced by mailing a notice to the Trustee and each Holder stating: (i) the covenant contained herein pursuant to which the offer is being made and that all Debentures validly tendered will be accepted for payment; (ii) the Offer to Purchase Price and the related payment date (the "Payment Date"); (iii) that a holder of Debentures may tender to the Offer to Purchase all or part of the Debentures held; (iv) that any Debenture not tendered will continue to accrue interest pursuant to its terms; (v) that, unless the Corporation defaults in the payment of the Offer to Purchase Price, any Debenture accepted for payment pursuant to the Offer to Purchase shall cease to accrue interest on and after the Payment Date; (vi) that Holders electing to have a Debenture purchased pursuant to the Offer to Purchase will be required to surrender the Debenture to the Paying Agent at the address specified in the notice prior to 5:00 p.m. (Toronto time) on the Business Day immediately preceding the Payment Date; (vii) that Holders will be entitled to withdraw their election if the Paying Agent receives, not later than 5:00 p.m. (Toronto time) on the third Business Day immediately preceding the Payment Date, a facsimile transmission or letter setting forth the name of such Holder, the principal amount of Debentures delivered for purchase and a statement that such Holder is withdrawing his election to have such Debentures purchased; and (viii) that Holders whose Debentures are being purchased only in part will be issued replacement Debentures equal in principal amount to and as evidence of the same underlying indebtedness as was evidenced by the unpurchased portion of the Debentures surrendered; provided that each Debenture purchased -24- and each replacement Debenture issued shall be in a principal amount of $1,000 or integral multiples thereof. (d) On the Payment Date, the Corporation shall (i) accept for payment Debentures or portions thereof tendered pursuant to an Offer to Purchase; (ii) deposit with the Paying Agent money and/or securities sufficient to pay the purchase price of all Debentures or portions thereof so accepted; and (iii) deliver, or cause to be delivered, to the Trustee all Debentures or portions thereof so accepted together with a Certificate of the Corporation specifying the Debentures or portions thereof accepted for payment by the Corporation. (e) The Paying Agent shall promptly mail to the Holders of Debentures so accepted payment in an amount equal to the purchase price, and the Trustee shall promptly certify and mail to such Holders a replacement Debenture equal in principal amount to any unpurchased portion of the Debenture surrendered; provided that each Debenture purchased and each new Debenture issued shall be in a principal amount of $1,000 or integral multiples thereof. (f) The Corporation will publicly announce the results of an Offer to Purchase as soon as practicable after the Payment Date. (g) The Trustee shall act as the Paying Agent for an Offer to Purchase. (h) The Corporation will comply with all applicable securities laws in the event that the Corporation is required to repurchase Debentures pursuant to an Offer to Purchase. (i) The provisions of sections 3.7, 3.8, 3.9, 3.10, 3.11, 3.12, 3.13 and 3.15 apply mutatis mutandis to the Corporation's obligation to satisfy the purchase price under an Offer to Purchase except that: (i) the Corporation must deliver the notice contemplated by section 3.9 not less than five Trading Days preceding the Change of Control Date; (ii) reference to the Redemption Price in such sections shall be deemed to be a reference to the Offer to Purchase Price for the purpose of this section 3.16; (iii) the Corporation shall have the option to elect to satisfy all or any part of the Offer to Purchase Price by paying (A) cash, (B) issuing and delivering freely tradeable, fully paid and non-assessable Common Shares or freely tradeable, fully paid and non-assessable securities of the successor Person resulting from the Change of Control or of the Person that made the offer to purchase Common Shares resulting in the Change of Control or such Person's Affiliate, provided in each case that such securities were issued to holders of Common Shares in connection with the Change of Control or (C) any combination of cash, Common Shares or such securities; and (iv) the satisfaction of the Offer to Purchase Price payable to a Holder shall occur by the delivery to the Holder of cash and/or securities (or securities that are convertible thereinto or exchangeable therefor) as provided under -25- this section 3.16, such securities being valued at 95% of the weighted average trading price of such securities on the principal stock exchange, quotation system or market on which such securities are traded or quoted for the period of five consecutive trading days on such exchange, quotation system or market ending five trading days preceding the Change of Control Date. 3.17 Notice of Proposed Change of Control ------------------------------------ Notice of a proposed Change of Control shall be given by or on behalf of the Corporation to the Holders of Debentures and the TSE in written form and in the manner specified in section 11.2 no later than one Business Day following the public announcement of the proposed Change of Control made by or on behalf of the Corporation in accordance with the requirements of the Securities Act (Ontario) and the regulations thereunder. Such notice shall, to the extent known by the Corporation at the time of the notice, set out the expected Change of Control Date and describe the proposed Change of Control in substantially the same detail as the aforementioned public announcement, such notice shall state that the Corporation must commence an Offer to Purchase within 45 days of the Change of Control Date. ARTICLE 4 CONVERSION 4.1 Conversion Privilege -------------------- (a) Subject to and upon compliance with the provisions of section 3.16 and this Article 4, the Holder of each Debenture shall have the right at his or her option, at any time prior to the close of business on the Maturity Date, or if such Debenture shall have been called for redemption prior to such date, then up to, but not after, the close of business on the last Business Day immediately preceding the date fixed for redemption (such time and date being referred to as the "Time of Expiry") to convert such Debenture or any portion of the principal amount thereof which is $1,000 or an integral multiple of $1,000 into fully paid and non-assessable Common Shares at the Conversion Price in effect on the Date of Conversion (as defined in subsection 4.2(b) below). (b) The Conversion Price in effect on the date hereof is $3.85 for each Common Share to be issued upon the conversion of the Debentures, being a conversion rate on the date hereof of 259.740 Common Shares for each $1,000 principal amount of Debentures. (c) The term "close of business" as used in this Article 4 shall mean the normal closing hour of the office of the Trustee referred to in section 4.2 at which such conversion right is being exercised. 4.2 Manner of Exercise of Right to Convert -------------------------------------- (a) The Holder of a Debenture wishing to convert such Debenture in whole or in part into Common Shares shall surrender such Debenture prior to the Time of Expiry, to the Trustee at its principal stock transfer office in the City of Toronto, together with the conversion form on -26- the back of such Debenture or any other written notice in form and substance satisfactory to the Trustee, in either case duly executed by the Holder or the Holder's executors or administrators or other legal representatives or his or her attorney duly appointed by an instrument in writing and in form and substance satisfactory to the Trustee, exercising the Holder's right to convert such Debenture in accordance with the provisions of this Article 4. Thereupon such Debentureholder or, subject to payment of all applicable stamp taxes, security transfer taxes, withholding taxes or other governmental charges and compliance with all reasonable requirements of the Trustee, such Debentureholder's nominee or assignee shall be entitled to be entered in the books of the Corporation as at the Date of Conversion (as defined in subsection 4.2(b) below) (or such later date as is specified in subsection 4.2(b)) as the holder of the number of Common Shares into which such Debenture is convertible in accordance with the provisions hereof and, as soon as practicable thereafter, the Corporation shall deliver to such Debentureholder or, subject as aforesaid, his or her nominee or assignee, a certificate for such Common Shares and, if applicable, a cheque for any amount payable under subsection 4.2(d) or section 4.6. Each Common Share certificate originally issued in the United States or to, or for the account or benefit of, a U.S. Person, and each Common Share certificate issued in exchange therefor or in substitution thereof, shall bear the legend set forth in section 2.12. (b) For the purposes hereof, a Debenture shall be deemed to be surrendered for conversion on the date (the "Date of Conversion") on which it is so surrendered in accordance with the provisions hereof and, in the case of a Debenture so surrendered by mail or other means of delivery, on the date on which it is physically received by the Trustee at its office specified in subsection 4.2(a), provided that if a Debenture is surrendered for conversion on a day on which the register of Common Shares is closed, the Person entitled to receive Common Shares shall become the holder of record of such Common Shares as at the date on which such register is next reopened and provided that if a Debenture is surrendered for conversion on any interest payment date or the day of selection by the Trustee of any Debentures for redemption, or in either case during the 15 preceding Business Days, such Debenture shall be deemed to be surrendered for conversion on the Business Day immediately following such interest payment date or date on which Debentures are selected for redemption. (c) Any part, being $1,000 or an integral multiple thereof, of a Debenture of a denomination in excess of $1,000 may be converted as provided herein and all references in this Indenture to conversion of Debentures shall be deemed to include conversion of such parts. The Holder of any Debenture of which part only is converted shall upon the exercise of his right of conversion, surrender such Debenture to the Trustee, and the Trustee shall cancel the same and shall without charge to the Holder, forthwith certify and deliver to the Holder a new Debenture or Debentures in an aggregate principal amount equal to the unconverted part of the principal amount of the Debenture so surrendered. (d) Subject to subsection 4.2(e), the Holder of a Debenture surrendered for conversion in accordance with this section 4.2 shall be entitled, subject to withholding taxes, to receive accrued and unpaid interest in respect thereof for the period up to the Date of Conversion from the date of the latest interest payment date. The Common Shares issued upon conversion shall rank only in respect of dividends declared in favour of holders of record of Common Shares on and after the Date of Conversion or such later date as such Holder shall become the holder of record of such Common Shares pursuant to subsection 4.2(b), from which applicable date they -27- will for all purposes be and be deemed to be issued and outstanding as fully paid and non-assessable Common Shares. For greater certainty, a Holder of a Debenture surrendering his or her Debenture for conversion will be entitled to payment of interest under either subsection 4.2(d) or subsection 4.2(e) and not both such sections. (e) (i) In the case of a Change of Control occurring prior to June 30, 2003, the Holder of record of a Debenture wishing to convert such Debenture with effect immediately prior to the occurrence of the Change of Control shall surrender such Debenture for conversion to the Trustee with effect immediately prior to, and conditional upon completion of, a Change of Control together with the conversion form on the back of such Debenture or any other written notice in form and substance satisfactory to the Trustee, in either case duly executed by the Holder or the Holder's executors or administrators or other legal representatives or his or her attorney duly appointed by an instrument in writing and in form and substance satisfactory to the Trustee, exercising the Holder's right to convert such Debenture in accordance with the provisions of this subsection 4(e) and in accordance with such reasonable requirements as may be prescribed by the Trustee and the Corporation to enable such Holder's participation as a holder of Common Shares in the transaction resulting in the Change of Control (which requirements may differ from those that would otherwise apply under this Article 4), together with a letter of transmittal and/or such other documents, including, without limitation, a notice of guaranteed delivery (other than certificates or other documents evidencing ownership of the Common Shares underlying the surrendered Debentures) as may be required of holders of Common Shares to be deposited in order to participate in the transaction resulting in the Change of Control. For greater certainty, such Debentureholder will be regarded as a Holder of record immediately prior to the Change of Control. Such Debentureholder, upon the occurrence of the Change of Control, provided that the Debenture and other instruments surrendered or deposited with the Trustee have not been withdrawn prior to the occurrence of the Change of Control, shall be entitled, subject to withholding taxes, to receive accrued and unpaid interest in respect thereof for the period up to but excluding the Change of Control Date from the date of the latest interest payment date in respect thereof. The Common Shares issued upon conversion shall rank only in respect of dividends declared in favour of holders of record of Common Shares on and after the date as such Holder shall become the holder of record of such Common Shares, from which applicable date they will for all purposes be and be deemed to be issued and outstanding as fully paid and non-assessable Common Shares. (ii) The Corporation shall do all commercially reasonable things within its control as may be necessary to enable a Holder to participate to the same extent as a holder of Common Shares in a transaction resulting in a Change of Control in the circumstances described in subsection 4.2(e)(i). -28- (iii) Unless the Holder of record of a Debenture surrendered for conversion in accordance with subsection 4.2(e)(i) irrevocably instructs the Trustee otherwise in writing, a Debenture surrendered for conversion with effect immediately prior to a Change of Control in the circumstances described in subsection 4.2(e)(i) shall be deemed to have been withdrawn and the Debenture shall not be converted if the Change of Control has not occurred prior to the forty-fifth day following its surrender. The Debenture and all accompanying documents surrendered or deposited with the Debenture shall be returned to the Holder and any right to convert such Debenture as provided in this Article 4 shall revive and continue. 4.3 Adjustment of Conversion Price ------------------------------ (a) The Conversion Price in effect at any date will be subject to adjustment from time to time in the events and in the manner provided as follows. (b) If and whenever at any time after the date hereof and prior to the Time of Expiry, the Corporation: (i) issues Common Shares or securities exchangeable for or convertible into Common Shares to the holders of all or substantially all of the outstanding Common Shares as a stock dividend (other than an issue of Common Shares to holders of Common Shares pursuant to a right granted to such holders to receive such Common Shares in lieu of Dividends Paid in the Ordinary Course); (ii) makes a distribution on its outstanding Common Shares to the holders of all or substantially all of the, outstanding Common Shares payable in Common Shares or securities exchangeable for or convertible into Common Shares (other than an issue of Common Shares to holders of Common Shares pursuant to a right granted to such holders to receive such Common Shares in lieu of Dividends Paid in the Ordinary Course); (iii) subdivides or redivides its outstanding Common Shares into a greater number of Common Shares; or (iv) reduces, combines or consolidates its outstanding Common Shares into a smaller number of Common Shares, (any of such events in subsections (i), (ii), (iii) and (iv) being called a "Common Share Reorganization") then the Conversion Price then in effect will be adjusted effective immediately on the effective date or record date for the happening of a Common Share Reorganization, as the case may be, at which the holders of Common Shares are determined for the purpose of the Common Share Reorganization, so that it shall equal the price determined by multiplying the Conversion Price in effect immediately prior to such effective date or record date by a fraction, the numerator of which will be the total number of Common Shares outstanding on such effective date or record date before giving effect to such Common Share Reorganization and the denominator of which will be the total number of Common Shares outstanding immediately after -29- giving effect to such Common Share Reorganization (including, in the case where securities exchangeable for or convertible into Common Shares are distributed, the number of Common Shares that would have been outstanding had all such securities been exchanged for or converted into Common Shares on such effective date or record date). (c) If and whenever at any time after the date hereof and prior to the Time of Expiry the Corporation fixes a record date for the issue of rights, options or warrants to the holders of all or substantially all of the Common Shares under which such holders are entitled, during a period expiring not more than 45 days after the date of such issue (the "Rights Period"), to subscribe for or purchase Common Shares or securities exchangeable for or convertible into Common Shares at a price per share to the holder (or at an exchange or conversion price per share during the Rights Period to the holder in the case of securities exchangeable for or convertible into Common Shares) of less than 95% of the Current Market Price for the Common Shares on such record date (any of such events being called a "`Rights Offering"), then the Conversion Price will be adjusted effective immediately after the end of the Rights Period so that it shall equal the price determined by multiplying the Conversion Price in effect immediately prior to the end of the Rights Period by a fraction: (i) the numerator of which will be the aggregate of: (A) the total number of Common Shares outstanding as of the record date for the Rights Offering, and (B) a number determined by dividing (I) either (x) the product of the number of Common Shares issued or subscribed for during the Rights Period upon the exercise of the rights, warrants or options under the Rights Offering and the price at which such Common Shares are offered, or, as the case may be, (y) the product of the exchange or conversion price of such securities exchangeable for or convertible into Common Shares and the number of Common Shares for or into which the securities so offered pursuant to the Rights Offering could have been exchanged or converted during the Rights Period, by (II) the Current Market Price of the Common Shares as of the record date for the Rights Offering, and (ii) the denominator of which will be the number of Common Shares outstanding, or the number of Common Shares which would be outstanding if all the exchangeable or convertible securities were exchanged for or converted into Common Shares during the Rights Period, after giving effect to the Rights Offering and including the number of Common Shares actually issued or subscribed for during the Rights Period upon exercise of the rights, warrants or options under the Rights Offering. Any Debentureholder who has exercised the right to convert to Common Shares in accordance with this Article 4 during the period beginning immediately after the record date for a Rights Offering and ending on the last day of the Rights Period for the Rights Offering will, in addition to the Common Shares to which that holder would otherwise be entitled upon such conversion, -30- be entitled to that number of additional Common Shares equal to the result obtained when the difference, if any, between the Conversion Price in effect immediately prior to the end of such Rights Offering and the Conversion Price as adjusted for such Rights Offering pursuant to this subsection is multiplied by the number of Common Shares received upon the conversion of the Debentures held by such Holder during such period, and the resulting product is divided by the Conversion Price as adjusted for such Rights Offering pursuant to this subsection; provided that the provisions of section 4.6 will be applicable to any fractional interest in a Common Share to which such Holder might otherwise be entitled under the foregoing provisions of this subsection. Such additional Common Shares will be deemed to have been issued to the Debentureholder immediately following the end of the Rights Period and a certificate for such additional Common Shares will be delivered to such Holder within 15 Business Days following the end of the Rights Period. To the extent that any such rights, options or warrants are not so exercised on or before the expiry thereof, the Conversion Price will be readjusted to the Conversion Price which would then be in effect based on the number of Common Shares (or the securities convertible into or exchangeable for Common Shares) actually delivered on the exercise of such rights, options or warrants. (d) If and whenever at any time after the date hereof and prior to the Time of Expiry, the Corporation fixes a record date for the issue or the distribution to the holders of all or substantially all of the Common Shares of (i) securities of the Corporation, including rights, options or warrants to acquire securities of the Corporation or any of its property or assets and including evidences of indebtedness, or (ii) any property or other assets, including evidences of indebtedness, and if such issuance or distribution does not constitute a Dividend Paid in the Ordinary Course, a Common Share Reorganization or a Rights Offering (any of such non-excluded events being called a "Special Distribution"), the Conversion Price will be adjusted effective immediately after such record date to a price determined by multiplying the Conversion Price in effect on such record date by a fraction: (i) the numerator of which will be: (A) the product of the number of Common Shares outstanding on such record date and the Current Market Price of the Common Shares on such record date; less (B) the fair market value, as determined by action by the Directors (whose determination, subject to applicable regulatory approval or consent, will be conclusive), to the holders of Common Shares of such securities or property or other assets so issued or distributed in the Special Distribution; and (ii) the denominator of which will be the product of the number of Common Shares outstanding on such record date and the Current Market Price of the Common Shares on such record date. To the extent that any Special Distribution is not so made, the Conversion Price will be readjusted effective immediately to the Conversion Price which would then be in effect based -31- upon such securities or property or other assets as actually distributed. (e) If and whenever at any time after the date hereof and prior to the Time of Expiry, there is a reclassification of the Common Shares at any time outstanding or change of the Common Shares into other shares or into other securities or other capital reorganization (other than a Common Share Reorganization), or a consolidation, amalgamation or merger of the Corporation with or into any other corporation or other entity (other than a vertical short-form amalgamation with one or more of its wholly-owned Subsidiaries pursuant to the Business Corporations Act (Ontario)), or a transfer of the undertaking or assets of the Corporation as an entirety or substantially as an entirety to another corporation or other entity in which the holders of Common Shares are entitled to receive shares, other securities or other property (any of such events being called a "Capital Reorganization"), any Holder of Debentures who exercises the right to convert Debentures into Common Shares pursuant to Debentures then held after the effective date of such Capital Reorganization will be entitled to receive, and will accept for the same aggregate consideration in lieu of the number of Common Shares to which such Holder was previously entitled upon such conversion, the aggregate number of shares, other securities or other property which such holder would have been entitled to receive as a result of such Capital Reorganization if, on the effective date thereof, the holder had been the registered holder of the number of Common Shares to which such holder was previously entitled upon conversion. The Corporation will take all steps necessary to ensure that, on a Capital Reorganization, the Holders of Debentures will receive the aggregate number of shares, other securities or other property to which they are entitled as a result of the Capital Reorganization. Appropriate adjustments will be made as a result of any such Capital Reorganization in the application of the provisions set forth in this Article 4 with respect to the rights and interests thereafter of holders of Debentures to the end that the provisions set forth in this Article 4 will thereafter correspondingly be made applicable as nearly as may reasonably be in relation to any shares, other securities or other property thereafter deliverable upon the conversion of any Debenture. Notwithstanding the foregoing, the Corporation shall not effect any Capital Reorganization unless, prior to or concurrent therewith, an appropriate adjustment to give effect to this subsection is made by and set forth in an indenture supplemental hereto approved by action of the Directors and by the Trustee and entered into pursuant to the provisions of Article 13, in which event such adjustment will for all purposes be conclusively deemed to be an appropriate adjustment, subject to the prior written consent of the TSE and any other applicable regulatory approval or consent. (f) If the purchase price provided for in any rights, options or warrants (the "Rights Offering Price") referred to in subsections 4.3(c) or (d) is decreased, the Conversion Price will forthwith be changed so as to decrease the Conversion Price to the Conversion Price that would have been obtained if the adjustment to the Conversion Price made under subsection 4.3(c) or (d), as the case may be, with respect to such rights, options or warrants had been made on the basis of the Rights Offering Price as so decreased, provided that the terms of this subsection will not apply to any decrease in the Rights Offering Price resulting from terms in any such rights, options or warrants designed to prevent dilution except to the extent that the resulting decrease in the Conversion Price under this subsection would be greater than the decrease, if any, in the Conversion Price to be made under the terms of this section by virtue of the occurrence of the event giving rise to such decrease in the Rights Offering Price. -32- (g) In any case in which this section 4.3 shall require that an adjustment shall become effective immediately after a record date for an event referred to herein, the Corporation may defer, until the occurrence of such event, issuing to the Holder of any Debenture converted after such record date and before the occurrence of such event the additional Common Shares issuable upon such conversion by reason of the adjustment required by such event, provided, however, that the Corporation shall deliver to such Holder an appropriate instrument evidencing such Holder's right to receive such additional Common Shares upon the occurrence of such event and the right to receive any distributions made on such additional Common Shares declared in favour of holders of record of Common Shares on and after the Date of Conversion or such later date on which such Holder would, but for the provisions of this subsection 4.3(g), have become the holder of record of such additional Common Shares pursuant to subsection 4.2(b). 4.4 Other Adjustment of Conversion Price ------------------------------------ If the Corporation shall take any action affecting the Common Shares, other than an action described in subsections 4.3(b), (c), (d) or (f), but including an action under section 4.3(e) which results in a Holder of Debentures being unable, for any period of time, to exercise conversion privileges that it would otherwise be permitted to exercise due to requirements necessary to ensure that the Debentures will be and will remain exempt from Canadian withholding tax, which in the opinion of the Directors would have a material adverse effect upon the rights of Debentureholders, the Conversion Price shall be adjusted in such manner and at such time, or such other adjustment to the conversion privilege shall be made, as the Directors determine to be equitable in the circumstances, subject to the approval of the TSE and any other applicable regulatory approval or consent. Failure of the Directors to take any such action shall be conclusive evidence that the Directors have determined that it is equitable to make no adjustment in the circumstances. 4.5 Rules Regarding Calculation of Adjustment of Conversion Price ------------------------------------------------------------- For the purposes of sections 4.3 and 4.4: (a) The adjustments provided for in sections 4.3 and 4.4 are cumulative and will be computed to the nearest one-tenth of one cent and will be made successively whenever an event referred to therein occurs, subject to the following subsections of this section. (b) No adjustment in the Conversion Price will be required unless such adjustment would result in a change of at least 1% in the prevailing Conversion Price; provided, however, that any adjustments which, except for the provisions of this subsection would otherwise have been required to be made, will be carried forward and taken into account in any subsequent adjustment. (c) No adjustment in the Conversion Price will be required upon the issuance from time to time of Common Shares pursuant to the Corporation's stock option plan or any dividend reinvestment plan, as such plans may be replaced, supplemented or further amended from time to time, including without limitation an amendment to the Corporation's stock option plan approved by the holders of Common Shares at a meeting of holders of Common Shares held on -33- June 21, 2000, or upon exercise of outstanding rights or agreements, including options, warrants and other convertible securities including any rights which have been granted or issued by the Corporation. (d) No adjustment in the Conversion Price will be made in respect of any event described in section 4.3, other than the events referred to in subsections 4.3(b)(iii) and (iv), or section 4.4, if Debentureholders are entitled to participate in such event on the same terms, mutatis mutandis, as if they had converted their Debentures prior to or on the effective date or record date of such event. Any such participation will be subject to the prior consent of the TSE and any other applicable regulatory consent or approval. (e) If at any time a dispute arises with respect to adjustments provided for in section 4.3, such dispute will be conclusively determined, subject to the TSE's consent and any other applicable regulatory approval or consent, by the Corporation's auditors, or if they are unable or unwilling to act, by such other firm of independent chartered accountants as may be selected by action of the Directors and any such determination will be binding upon the Corporation, the Trustee, the Debentureholders and shareholders of the Corporation; such auditors or accountants will be given access to all necessary records of the Corporation. If any such determination is made, the Corporation will deliver a Certificate of the Corporation to the Trustee describing such determination and the Trustee shall be entitled to act and rely upon such Certificate of the Corporation. (f) If the Corporation sets a record date to determine the holders of Common Shares for the purpose of entitling them to receive any dividend or distribution or sets a record date to take any other action and thereafter and before the distribution to such shareholders of any such dividend or distribution or the taking of any other action, legally abandons its plan to pay or deliver such dividend or distribution or take such other action, then no adjustment in the Conversion Price shall be made. (g) In the absence of a resolution of the Directors fixing a record date for a Special Distribution or Rights Offering, the Corporation will be deemed to have fixed as the record date therefor the date on which the Special Distribution or Rights Offering is effected. (h) For greater certainty, Debentureholders shall have no right to convert Debentures into any security other than Common Shares unless an appropriate adjustment is made by and set forth in an indenture supplemental hereto. 4.6 No Requirement to Issue Fractional Shares ----------------------------------------- The Corporation shall not be required to issue fractional Common Shares upon the conversion of Debentures. If more than one Debenture shall be surrendered for conversion at one time by the same Holder, the number of whole Common Shares issuable upon conversion thereof shall be computed on the basis of the aggregate principal amount of the Debentures to be converted. If any fractional interest in a Common Share would, except for the provisions of this section, be deliverable upon the conversion of any principal amount of Debentures, the Corporation may, at its option, in lieu of delivering any certificate of such fractional interest, satisfy such fractional interest by paying to the Holder of such surrendered Debentures an -34- amount in lawful money of Canada equal (computed to the nearest cent) to such fractional interest multiplied by the Current Market Price of the Common Shares on the Date of Conversion. 4.7 Corporation to Reserve Shares ----------------------------- The Corporation covenants that it will at all times reserve and keep available out of its authorized Common Shares (if the number thereof is or becomes limited) solely for the purpose of issue upon conversion of Debentures as provided herein, and allot for issue to Debentureholders who may exercise their conversion rights hereunder, such number of Common Shares as shall then be issuable upon the conversion of all outstanding Debentures. All Common Shares which shall be so issuable shall be duly and validly issued as fully paid and non-assessable. 4.8 Corporation to Qualify Shares ----------------------------- If at any time any order, ruling, registration, notice or filing pursuant to any securities laws of Canada or any province thereof is required to ensure that any Common Shares issuable upon the conversion of the Debentures are issued in compliance with all such laws or to ensure that any such Common Shares, once issued, are not subject to any general restriction as to the resale thereof under the securities laws of Canada or any province thereof, the Corporation covenants that it will take all such action as may be necessary to make or obtain such order, ruling, registration or filing, or give such notice as the case may be. 4.9 Taxes and Charges on Conversion ------------------------------- The Corporation will from time to time promptly pay or make provision satisfactory to the Trustee for the payment of all taxes and charges which may be imposed by the laws of Canada or any province thereof (except income tax or security transfer tax, if any) which shall be payable with respect to the issuance or delivery of Common Shares to the Holders of Debentures upon the exercise of their right of conversion pursuant to the terms of the Debentures and of this Indenture. 4.10 Cancellation of Converted Debentures ------------------------------------ All Debentures converted in whole or in part shall be forthwith delivered to and cancelled by the Trustee and, subject to subsection 4.2(c), no Debentures shall be issued in substitution therefor. 4.11 Certificate as to Adjustment ---------------------------- The Corporation shall from time to time, immediately after the occurrence of any event which requires an adjustment or readjustment as provided in section 4.3 or 4.4, deliver a Certificate of the Corporation to the Trustee specifying the nature of the event requiring the same and the amount of the adjustment or readjustment necessitated thereby and setting forth in reasonable detail the method of calculation and the facts upon which such calculation is based, and the Trustee shall be entitled to act and rely upon such Certificate of the Corporation. Such Certificate of the Corporation and the amount of the adjustment specified therein shall be -35- conclusive and binding on all parties in interest. Until such Certificate of the Corporation is received by the Trustee, the Trustee may act and be protected in acting on the presumption that no adjustment has been made or is required. Except in respect of any subdivision, redivision, reduction, combination or consolidation of the Common Shares, the Corporation shall forthwith give notice to the Debentureholders specifying the event requiring such adjustment or readjustment and the amount thereof, including the resulting Conversion Price; provided that if the Corporation has given notice under section 4.12 covering all the relevant facts in respect of such event, no such notice need be given under this section 4.11. 4.12 Notice of Special Matters ------------------------- (a) Subject to subsection 4.12(b), the Corporation covenants that, so long as any Debentures remain outstanding, it will give notice to the Trustee and to the Debentureholders of its intention to fix a record date for any event referred to in subsections 4.3(b), (c), (d) or (e) (other than the subdivision, redivision, reduction, combination or consolidation of Common Shares) or a cash dividend (other than a Dividend Paid in the Ordinary Course) which may give rise to an adjustment in the Conversion Price, or other adjustment, and such notice shall specify the particulars of such event and the record date and the effective date for such event; provided that the Corporation shall only be required to specify in such notice such particulars of such event as shall have been fixed and determined on the date on which such notice is given. Such notice shall be given not less than 14 days prior to the applicable record date in the case of an event referred to in subsections 4.3(b), (c) or (d) and 30 days prior to the applicable record date in the case of an event referred to in subsection 4.3(e). (b) Notwithstanding the provisions of subsection 4.12(a), the Corporation shall not be required to give the notice referred to in subsection 4.12(a) if the Corporation has given notice of a proposed Change of Control in accordance with the provisions of section 3.19. 4.13 Expiry or Termination of Conversion Right ----------------------------------------- The Corporation covenants that, so long as any Debentures remain outstanding, it will give notice to the Trustee and the Debentureholders in the manner provided in Article 11, not less than 21 days prior to the Time of Expiry, of the expiry of the right of the Holders of the Debentures to convert their Debentures. 4.14 Revival of Right to Convert --------------------------- If the Corporation shall fail to redeem any Debenture which has been called for redemption upon due surrender of such Debenture, any right to convert such Debenture as provided in this Article 4 shall revive and continue as if such Debenture had not been called for redemption. 4.15 Protection of Trustee --------------------- The Trustee shall not at any time be under any duty or responsibility to any Debentureholder to determine whether any facts exist which may require any adjustment in the Conversion Price, or with respect to the nature or extent of any such adjustment when made, or with respect to the method employed in making the same; and shall not be accountable with -36- respect to the validity or value (or the kind or amount) of any Common Shares or of any shares or other securities or other property which may at any time be issued or delivered upon the conversion of any Debenture; and the Trustee, except to the extent that there has been a failure by the Trustee or its employees or agents to act honestly and in good faith or where the Trustee or its employees or agents have acted negligently or in wilful disregard of their obligations hereunder or shall not have complied with subsection 12.3(a), shall not be responsible for any failure of the Corporation to make any cash payment or to issue, transfer or deliver Common Shares or share certificates upon the surrender of any Debenture for the purpose of conversion, or to comply with any of the covenants contained in this Article 4. ARTICLE 5 SUBORDINATION OF DEBENTURES 5.1 Agreement to Subordinate ------------------------ The Corporation covenants and agrees, and each Holder of a Debenture, by his or her acceptance thereof, likewise agrees, that the payment of the principal amount, interest, Redemption Price, Offer to Purchase Price and Foregone Interest evidenced by the Debentures is hereby expressly subordinated, to the extent and in the manner hereinafter set forth, in right of payment to the prior payment in full of all Permitted Secured Debt. 5.2 Distribution on Insolvency or Winding-up ---------------------------------------- In the event of any insolvency or bankruptcy proceedings, or any receivership, liquidation, reorganization or other similar proceedings relative to the Corporation, or to its property or assets, or in the event of any proceedings for voluntary liquidation, dissolution or other winding-up of the Corporation, whether or not involving insolvency or bankruptcy, or any marshalling of the assets and liabilities of the Corporation, the holders of Permitted Secured Debt shall be entitled to receive payment in full of all the Permitted Secured Debt before the Trustee shall be entitled to receive any payment or distribution of any kind or character, whether in cash, property or securities, which may be payable or deliverable in any such event in respect of the Debentures. Upon any payment or distribution of assets of the Corporation referred to in this Article 5, the Trustee and the Debentureholders shall be entitled to call for and rely upon a certificate, addressed to the Trustee or to the Debentureholders, of the Person making any such payment or distribution for the purpose of ascertaining the Persons entitled to participate in such distribution, the holders of the Permitted Secured Debt and other indebtedness of the Corporation, the amount thereof or payable thereon, the amount or amounts paid or distributed thereon and all other facts pertinent thereto or to this Article 5. 5.3 Subrogation of Debentures ------------------------- Subject to the payment in full of all Permitted Secured Debt, to the extent that any payment or distribution of assets of the Corporation otherwise payable to the Trustee on account of the Debentureholders is made on account of the Permitted Secured Debt pursuant to the application of Section 5.2, the Debentureholders shall be subrogated to the rights of the holders -37- of Permitted Secured Debt to receive payments and distributions of assets of the Corporation made in respect of or on account of Permitted Secured Debt, until all payments of any kind or character, whether in cash or securities, which may be payable to Holders under this Indenture and the Debentures shall be paid in full. No payment or distribution of assets of the Corporation to the Debentureholders which would be payable or distributable to the holders of Permitted Secured Debt pursuant to this Article 5 shall, as between the Corporation, its creditors (other than the holders of Permitted Secured Debt) and the Debentureholders, be deemed to be a payment by the Corporation to or on account of the Debentureholders, it being understood that the provisions of this Article 5 are, and are intended, solely for the purpose of defining the relative rights of the Debentureholders, on the one hand, and the holders of the Permitted Secured Debt, on the other hand. Nothing contained in this Article 5 or elsewhere in this Indenture or in the Debentures is intended to or shall impair, as between the Corporation and its creditors (other than the holders of Permitted Secured Debt and the Debentureholders), the obligation of the Corporation, which is unconditional and absolute, to pay to the Debentureholders the payments of any kind or character, whether in cash, securities or other property which may be payable to Holders on the Debentures as and when the same shall become due and payable in accordance with their terms, or to affect the relative rights of the Debentureholders and creditors of the Corporation other than the holders of the Permitted Secured Debt, nor shall anything herein or therein prevent the Trustee or the holder of any Debenture from exercising all remedies otherwise permitted by applicable law upon default under this Indenture, subject to the rights, if any, under this Article 5, of the holders of Permitted Secured Debt upon the exercise of any such remedy. 5.4 No Payment to Debentureholders if Permitted Secured Debt in Default ------------------------------------------------------------------- (a) The Corporation shall not make any payment, and the Trustee and the holders of Debentures shall not be entitled to demand, institute proceedings for the collection of, or receive any payment or benefit (including without limitation by set-off, combination of accounts or otherwise in any manner whatsoever) on account of the Debentures (i) in a manner inconsistent with the terms (as they exist on the date hereof) of the Debentures, or (ii) at any time when an event of default, as defined in any Permitted Secured Debt or any instrument evidencing the same, has occurred and is continuing and notice of such event of default has been given by or on behalf of the holders of Permitted Secured Debt to the Corporation and the Trustee, unless the Permitted Secured Debt have been repaid in full. (b) The fact that any payment which is required to be made pursuant to this Indenture or the Debentures is prohibited by this section 5.4 shall not prevent the failure to make such payment from being an Event of Default hereunder. 5.5 Payment of Debentures Permitted ------------------------------- (a) For greater certainty, this Article 5 shall not be construed so as to prevent the Trustee from receiving and retaining any payments on account of the Debentures which are made (i) in a manner that is consistent with the terms of this Indenture or the Debentures, and (ii) at any time when no event of default, as defined in any Permitted Secured Debt or the instrument creating the same, has occurred and is continuing in respect of which notice has been given by or on behalf of the holders of Permitted Secured Debt to the Corporation and the Trustee. -38- (b) Until written notice shall be given to the Trustee by or on behalf of any holder of any Permitted Secured Debt of the occurrence of any default with respect to such Permitted Secured Debt or of the existence of any other facts which would have the result that any payment with respect to the Debentures would be in contravention of the provisions of this Article 5, the Trustee shall be entitled to assume that no such default has occurred, or that no such facts exist, and nothing in this Indenture shall prevent the Trustee from applying any moneys received by it pursuant to this Indenture prior to the receipt by it of such written notice, to the purposes for which the same were received, notwithstanding the occurrence or continuance of a default with respect to, or the existence of such facts with respect to, such Permitted Secured Debt. 5.6 Subordination Not to be Impaired -------------------------------- (a) The subordination provided for in this Article 5 shall remain in full force and effect until the entire amount of the Permitted Secured Debt has been paid and satisfied in full without regard to, and such subordination shall not be released, discharged, limited or in any way affected or impaired by: (i) any lack of validity or enforceability of or any limitation of liability under any agreement, document or instalment now or hereafter given in connection with the Permitted Secured Debt (including without limitation any security and guarantees, and for greater certainty including this Indenture; and such agreements, documents and instruments are hereinafter collectively referred to as the "Credit Documents"); (ii) any irregularity, defect, informality, lack of power or due authorization relating to any Credit Document; (iii) any amendment, modification, addition or supplement to any Credit Document; (iv) any extension, renewal, indulgence, compromise, or any other action or inaction, relating to any Credit Document or any person or property; (v) any taking or abstention from taking of any security for, or any guarantee of, any of the obligations and liabilities of any person arising under any Credit Document whether or not such security or guarantee is given in connection with a Credit Document; (vi) any release, loss, exchange, amendment modification, addition or supplement to or of any Credit Document or any collateral thereunder (with or without consideration); (vii) any default under, or any lack of due execution, validity or enforceability of, or any irregularity or other defect in, or any failure to perfect, register or file notice of, any Credit Document; (viii) any waiver of or consent to a departure from any requirement or condition precedent contained in any Credit Document; -39- (ix) any exercise or non-exercise, negligent or otherwise, of any right, remedy, power or privilege in respect of any Credit Document; (x) any change in the parties to, or in the interest of any party in, any Credit Document, including without limitation any change resulting from an assignment of the interest of a party under any Credit Document; (xi) any method or sequence of application (or subsequent change thereof) at any time or from time to time used by any holder of Permitted Secured Debt or the Trustee to apply any proceeds received from any source to the Permitted Secured Debt; (xii) any sale, lease, transfer or other disposition by the Corporation or the Trustee or any other Person of any property; (xiii) any amalgamation, consolidation or merger of the Corporation or the Trustee or any other Person with or into any Person; (xiv) any manner of dealing by any holder of Permitted Secured Debt with the Corporation or the Trustee or any other Person; (xv) any bankruptcy, insolvency, reorganization, arrangement or similar proceedings involving or affecting the Corporation or the Trustee or any other Person; (xvi) any other circumstances of any nature whatsoever which might otherwise constitute a legal or equitable discharge of or defence against the obligations of the Corporation or the Trustee hereunder (except satisfaction in full of the obligations of the Corporation and the Trustee hereunder); or (xvii) any other circumstances (except satisfaction in full of the obligations of the Corporation and the Trustee hereunder); in each case, whether or not the Corporation, the Trustee, any holder of Permitted Secured Debt or any other Person shall have notice or knowledge of any of the foregoing and whether or not any of the holders of Permitted Secured Debt, the Corporation or the Trustee shall have consented thereto. (b) With respect to the subordination contemplated by this Article 5, the Trustee, and by acceptance of Debentures, each of the Debentureholders, absolutely and unconditionally waives: (i) notice of any of the matters referred to in subsection 5.6(a); (ii) all notices which may be required by statute, rule of law or otherwise to preserve any rights of any holder of Permitted Secured Debt, other than notice of an event of default as provided for in section 5.4; -40- (iii) any right to require the exercise by any holder of Permitted Secured Debt of any right, remedy, power or privilege in connection with any Credit Document (including without limitation any right to require any holder of Permitted Secured Debt to take or exhaust any recourse against the Corporation or any other person or under the Credit Documents); and (iv) any requirement of diligence or care on the part of any holder of Permitted Secured Debt, or the Trustee. The subordination provided for in this Article 5 shall be continuing and shall continue irrespective of any one or more demands which may be made hereunder by any holder of Permitted Secured Debt, and irrespective of any statute of limitations otherwise applicable. If at any time a payment on account of the Permitted Secured Debt is rescinded or avoided upon the insolvency, bankruptcy or reorganization of the Corporation or any other Person or for whatever reason, the subordination provided for in this Article 5 shall be continuing or be reinstated, as applicable, (irrespective of any statute of limitations otherwise applicable) and shall cover and include each such rescinded or avoided payment, all as though such payment had not been made. 5.7 Authorization of Debentureholders to Trustee to Effect Subordination -------------------------------------------------------------------- Each Holder of a Debenture, by his acceptance thereof, authorizes and directs the Trustee on his behalf to take such action as may be necessary or appropriate to effect the subordination provided for in this Article 5 and appoints the Trustee his attorney-in-fact for any and all such purposes. 5.8 Knowledge of Trustee -------------------- Notwithstanding the provisions of this Article 5, the Trustee will not be charged with knowledge of the existence of any facts that would prohibit the making of any payment of monies to or by the Trustee, or the taking of any other action by the Trustee, unless and until the Trustee has received written notice thereof from the Corporation, any Debentureholder or representative of any class of Permitted Secured Debt. 5.9 Certain Rights of Trustee ------------------------- The Trustee is entitled to all the rights set forth in this Article 5 with respect to any Permitted Secured Debt at any time held by it, to the same extent as any other holder of Permitted Secured Debt, and nothing in this Indenture deprives the Trustee of any of its rights as such holder. -41- ARTICLE 6 COVENANTS OF THE CORPORATION 6.1 General Covenants ----------------- The Corporation covenants with the Trustee for the benefit of the Trustee and the Debentureholders as follows: (a) the Corporation will duly and punctually pay or cause to be paid to every Debentureholder the principal amount, interest and Foregone Interest, if any, evidenced by such Holder's Debentures (including, in the case of default, interest on the amount in default) on the dates, at the places, in the money or securities, and in the manner mentioned herein and in the Debentures; (b) except as herein otherwise expressly provided, the Corporation will at all times maintain its corporate existence and will keep proper books of account in accordance with generally accepted accounting practices. Upon written notice from the Trustee stating that it has reasonable grounds to believe that an Event of Default has occurred or may occur, the Corporation will furnish or cause to be furnished to the Trustee or its duly authorized agent or attorney such information relating to its business as the Trustee may reasonably require and the books of account will be made available for inspection by the Trustee or such agent or attorney; (c) the Corporation will furnish to the Trustee a copy of all financial statements, whether annual or interim, of the Corporation and the report, if any, of the Corporation's auditors thereon and of all annual and other periodic reports of the Corporation furnished to its shareholders at the same time as they are furnished to such shareholders. No obligation shall rest with the Trustee to analyze such statements or evaluate the performance of the Corporation in any manner whatsoever; (d) the Corporation will duty and punctually perform and carry out all of the acts or things to be done by it as provided in this Indenture; (e) the Corporation shall promptly notify the Trustee in writing of the details of the occurrence of any Event of Default; (f) the Corporation will not directly or indirectly, declare or pay any dividends on account of any shares or any class of its shares now or hereafter outstanding or redeem, retire, defease, purchase or otherwise acquire any shares of any class of capital stock (or set aside or otherwise deposit or invest any sums for any of the foregoing purposes) or apply or set apart any sum, or make any other distribution (by reduction of capital or otherwise) in respect of any such shares or agree to do any of the foregoing; (g) if the closing price of the Common Shares on NASDAQ is less than U.S.$1.00 for any period of 10 consecutive trading days, the Corporation will consider calling a special meeting of its shareholders for the purpose of approving a consolidation of the Common Shares on such terms as the directors of the Corporation may approve; -42- (h) the Corporation will reserve and authorize the issuance of a sufficient number of Common Shares for the purpose of enabling it to satisfy its obligations to issue Common Shares in accordance with the terms of the Debentures; (i) the Corporation will cause the Common Shares and the certificates representing the Common Shares from time to time issued in accordance with the terms of the Debentures to be duly issued and delivered in accordance with the Debentures and the terms of the Trust Indenture; and (j) the Corporation shall, within three Business Days of a written request by the Trustee, furnish to the Trustee, or to such other Person as the Trustee may direct, a true copy of this Indenture. 6.2 Not to Extend Time for Payment of Interest or Principal Amount -------------------------------------------------------------- (a) The Corporation covenants that, in order to prevent any accumulation after maturity of unpaid interest on, or of unpaid principal amount of, any Debentures, the Corporation will not directly or indirectly extend or assent to the extension of time for payment of any interest upon any Debentures or of any principal amount payable in respect of any Debentures and that it will not directly or indirectly be or become a party to or approve any such arrangement by purchasing or funding any interest on the Debentures or any principal amount thereof or in any other manner and that the Corporation will deliver to the Trustee all Debentures when paid as evidence of such payment. (b) If the time for the payment of any interest or principal amount shall be so extended, whether or not such extension is by or with the consent of the Corporation, notwithstanding anything herein or in the Debentures contained, such interest or principal amount shall not be entitled, in case of default hereunder, to the benefit of this Indenture except subject to the prior payment in full of the principal amount of all the Debentures then outstanding and of all matured interest on such Debentures the payment of which has not been so extended. 6.3 To Provide Annual Certificate of Compliance ------------------------------------------- The Corporation covenants that, on or before August 30, 2002 and on or before August 30 in each subsequent year and at any other reasonable time if requested by the Trustee, the Corporation will furnish to the Trustee a Certificate of the Corporation stating that the Corporation has complied with all covenants, conditions and other requirements contained in this Indenture, non-compliance with which would constitute an Event of Default hereunder or, if such is not the case, specifying the covenant, condition or other requirement which has not been complied with and giving particulars of such non-compliance and the action, if any, the Corporation proposes to take with respect thereto. 6.4 Continued Listing ----------------- The Corporation will take all commercially reasonable steps and actions and do all such acts and things as may be required to: (i) as long as it meets the minimum listing requirements of such institutions, maintain the listing and posting for trading on the TSE of the Common Shares or, in the event of a Change of Control, on the TSE, NASDAQ or the New -43- York Stock Exchange of the securities for or into which the Common Shares were exchangeable or converted in connection with the Change of Control, and (ii) maintain its status as a reporting issuer not in default of the requirements of applicable securities legislation of the provinces of Canada or have outstanding securities registered under the U.S. Securities Exchange Act of 1934, as amended, or in the event of a Change of Control, maintain the status of the Person whose securities were exchanged or converted for Common Shares as part of such Change of Control as a reporting issuer not in default of the requirements of applicable securities legislation of the provinces of Canada or have outstanding securities registered under the U.S. Securities Exchange Act of 1934, as amended. 6.5 To Pay Trustee's Remuneration ----------------------------- (a) The Corporation covenants that it will pay to the Trustee reasonable remuneration for its services as Trustee and will pay all costs, charges and expenses (including reasonable fees and disbursements of its Counsel and all other advisors not regularly in its employ) properly incurred by the Trustee in connection with the trusts hereof, on demand by the Trustee and also (in addition to any right of indemnity given to the Trustee by law) will at all times keep indemnified the Trustee against all liabilities, losses, damages, actions proceedings, costs, claims, expenses and demands in respect of any matter or thing done or omitted by the Trustee (other than through the gross negligence of or misconduct by the Trustee) in any way relating to this Indenture. The said remuneration shall continue to be payable until the trusts hereof be finally wound up and whether or not the trusts of this Indenture shall be in the course of administration by or under the direction of the court. (b) Any amount due under this section 6.5 and unpaid 30 days after demand for such payment shall bear interest from the expiration of such 30 day period at a rate per annum equal to the rate generally charged by the Corporate Trust Department of the Trustee from time to time on overdue accounts. After default all amounts so payable and the interest thereon shall be payable out of any funds coming into possession of the Trustee in priority to any payment of the principal amount of, or any interest on the Debentures. 6.6 Trustee May Perform Covenants ----------------------------- If the Corporation shall fail to perform any of its covenants contained herein, the Trustee may in its discretion, but (subject to section 7.2) need not, notify the Debentureholders of such failure or may itself perform any such covenants capable of being performed by it and, if any such covenant requires the payment of money, it may make such payment with its own funds, or with money borrowed by it for such purpose, but shall be under no obligation to do so; and all sums so paid shall be payable by the Corporation in accordance with the provisions of section 6.5. No such performance by the Trustee of any covenant contained herein or payment by the Corporation of any sums advanced or borrowed by the Trustee pursuant to the foregoing provisions shall be deemed to relieve the Corporation from any default hereunder or its continuing obligations hereunder. -44- 6.7 Request for Trust Indenture --------------------------- The Corporation shall, within three Business Days of a written request by the Trustee, furnish to the Trustee, or to such other Person as the Trustee may direct, a true copy of this Trust Indenture. 6.8 Covenant to Notify Trustee of Change of Name -------------------------------------------- The Corporation shall not change its name or amalgamate with another corporation under a different name without giving at least ten days' prior notice to the Trustee of the new name and the date upon which such change of name or amalgamation is to take effect and, within five Business Days of the change of name or amalgamation, the Corporation shall provide the Trustee with: (a) a notarial or certified copy of the articles of amendment or articles of amalgamation effecting the change of name; and (b) an opinion from legal counsel satisfactory to the Trustee as to the correct name of the Corporation and confirming that all appropriate registrations, filings or recordings have been made to ensure the continued validity and enforceability of this Indenture and the Debentures. 6.9 Limitation on Certain Additional Debt ------------------------------------- The Corporation represents and warrants to the Trustee that there is no (i) Permitted Secured Debt or (ii) Debt ranking senior to, or pari passu, with the Debentures outstanding or in effect on the date of this Indenture, except such Permitted Secured Debt as has been incurred to finance the cost of acquisition by the Corporation or any of its Subsidiaries of any assets or services in the ordinary course of their respective businesses. The Corporation will not, and will not permit any of its Subsidiaries to, create, incur, assume, suffer, permit to exist or guarantee, directly or indirectly, any Debt that ranks senior to, or pari passu, with the Debentures other than Permitted Secured Debt. Nothing in this section 6.9 will prevent or be deemed to prevent the Corporation or any of its Subsidiaries from creating, incurring, assuming, suffering, permitting to exist or guaranteeing trade debt. ARTICLE 7 DEFAULT AND ENFORCEMENT 7.1 Events of Default ----------------- "Event of Default", wherever used herein, means any one of the following events: (a) failure to pay any principal amount of any Debenture when due; or (b) failure to pay any interest on any Debenture when due, continued for a period of five days; or -45- (c) default in the performance, or breach, of any covenant or agreement of the Corporation in this Indenture or the Debentures, continued for a period of 30 days after there has been given notice, by registered or certified mail, to the Corporation by the Trustee or by Holders of not less than 25% of the principal amount of Debentures then outstanding specifying such default or breach and requiring it to be remedied, unless the Trustee (having regard to the subject matter of the default) shall have agreed to a longer period and, in such event, for the period agreed to by the Trustee; or (d) the institution by the Corporation of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable federal, provincial or state law relating to bankruptcy, insolvency, reorganization or relief of debtors, or the consent by it to the filing of any such petition or to the appointment under any such law of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Corporation or of substantially all of its property, or the making by it of a general assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due; or (e) the entry of a decree or order by a court having jurisdiction in the premises adjudging the Corporation a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement or adjustment of or in respect of the Corporation under any applicable law relating to bankruptcy, insolvency, reorganization or relief of debtors, or appointing under any such law a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Corporation or of substantially all of its property, or ordering pursuant to any such law the winding-up or liquidation of its affairs, and the continuance of any such decree, petition, appointment or order unstayed and in effect for a period of 90 consecutive days; or (f) if an encumbrancer takes possession of, or appoints a receiver in respect of, all or substantially all of the property of the Corporation, or if any process or execution is levied or enforced upon or gains all or substantially all of the property of the Corporation and remains unsatisfied for such period as would permit any such property to be sold thereunder, unless the Corporation actively and diligently contests in good faith such process, but in that event the Corporation shall, if the Trustee so requires, give security which, in the discretion of the Trustee, is sufficient to pay in full the amount thereby claimed in case the claim is held to be valid. 7.2 Notice of Event of Default -------------------------- (a) If an Event of Default shall occur and is continuing the Trustee shall, within 15 days after it becomes aware of the occurrence of such Event of Default, give notice thereof to the Debentureholders, provided that, notwithstanding the foregoing, the Trustee shall not be required to give such notice if the Trustee in good faith shall have decided that the withholding of such notice is in the best interests of the Debentureholders and shall have so advised the Corporation in writing. (b) Where notice of the occurrence of an Event of Default has been given and the Event of Default is thereafter cured, notice that the Event of Default is no longer continuing shall -46- be given by the Trustee to the Debentureholders within 15 days after the Trustee becomes aware that the Event of Default has been cured. 7.3 Acceleration on Default ----------------------- If any Event of Default has occurred and is continuing, the Trustee may in its discretion, and shall upon receipt of a Debentureholders' Request, subject to sections 7.4 and 10.11(d), by notice in writing to the Corporation declare the principal amount of and interest on the Debentures then outstanding and any other moneys payable hereunder to be due and payable and the same shall forthwith become immediately due and payable to the Trustee, notwithstanding anything contained therein or herein to the contrary, and the Corporation shall pay forthwith to the Trustee for the benefit of the Debentureholders the principal amount of and accrued and unpaid interest (including interest on amounts in default) on such Debentures and all other moneys payable hereunder, together with subsequent interest thereon at the rate borne by the Debentures from the date of such declaration until payment is received by the Trustee. Such payment when made shall be deemed to have been made in discharge of the Corporation's obligations hereunder and any moneys so received by the Trustee shall be applied as provided in section 7.7. 7.4 Waiver of Default ----------------- If an Event of Default shall have occurred: (a) the Holders of a majority (i.e. greater than 50%) of the principal amount of the Debentures then outstanding shall have the power (in addition to the other powers exercisable by Extraordinary Resolution as hereinafter provided) by instrument signed by such Holders to instruct the Trustee to waive any Event of Default hereunder and/or to cancel any declaration made by the Trustee pursuant to section 7.3 and the Trustee shall thereupon waive the Event of Default and/or cancel such declaration upon such terms and conditions as such Debentureholders shall prescribe; and (b) the Trustee, so long as it has not become bound to institute any proceedings hereunder, shall have the power to waive any Event of Default hereunder if in the Trustee's opinion, the same shall have been cured or adequate satisfaction made therefor, and in such event to cancel any such declaration theretofore made by the Trustee in the exercise of its discretion, upon such terms and conditions as the Trustee may consider advisable; provided that no delay or omission of the Trustee or of the Debentureholders to exercise any right or power accruing upon any Event of Default shall impair any such right or power or shall be construed to be a waiver of any such Event of Default or acquiescence therein and provided further that no act or omission either of the Trustee or of the Debentureholders shall extend to or be taken in any manner whatsoever to affect any subsequent Event of Default hereunder or the rights resulting therefrom. -47- 7.5 Enforcement by the Trustee -------------------------- If an Event of Default shall have occurred, but subject to sections 7.4 and 12.3 and to the provisions of any Extraordinary Resolution that may be passed by the Debentureholders as provided: (a) the Trustee may in its discretion proceed to enforce the rights of the Trustee and of the Debentureholders by any action, suit, remedy or proceeding authorized or permitted by this Indenture or by law or equity; and may file such proof of debt, amendment of proof of debt, claim, petition or other papers or documents as may be necessary or advisable in order to have the claims of the Trustee and of the Debentureholders filed in any bankruptcy, insolvency, winding-up or other judicial proceedings relating to the Corporation or its creditors or relating to or affecting its property; (b) no such remedy for the enforcement of the rights of the Trustee or the Debentureholders shall be exclusive of or dependent on any other such remedy but any one or more of such remedies may from time to time be exercised independently or in combination; (c) all rights of action hereunder may be enforced by the Trustee without the possession of any of the Debentures or to the production thereof on the trial or other proceedings relating thereto; and (d) upon receipt of a Debentureholders' Request and upon receiving sufficient funds and being indemnified to its satisfaction as provided in subsection 12.3(b), the Trustee shall exercise or take such one or more of such remedies as the Debentureholders' Request may direct, provided that if any such Debentureholders' Request directs the Trustee to take proceedings out of court the Trustee may in its discretion take judicial proceedings in lieu thereof 7.6 Limitation on Suits ------------------- No Holder of any Debentures shall have any right to institute any action, suit or proceeding, judicial or otherwise, with respect to this Indenture or for the appointment of a receiver or trustee, or for any other remedy authorized or permitted by this Indenture or by law or by equity hereunder, unless: (a) such Holder has previously given written notice to the Trustee, or vice-versa, of a continuing Event of Default; (b) the Trustee shall have received a Debentureholders' Request requesting the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder and the Trustee shall have been offered a reasonable opportunity either itself to proceed to exercise the powers hereinbefore granted or to institute an action, suit or proceeding in its name for such purpose; (c) the Holder or Holders executing such Debentureholders' Request have provided to the Trustee sufficient funds and/or indemnity against the costs, expenses and liabilities to be incurred in compliance with such request in accordance with subsection 12.3(b); -48- (d) the Trustee, for 60 days after its receipt of such notice, Debentureholders' Request and provision of funds and/or indemnity, has failed to institute any such proceeding; and (e) no direction inconsistent with such written request has been given to the Trustee during such 60 day period by the Holders of a majority or more in principal amount of the outstanding Debentures. In such event but not otherwise any Debentureholder, acting on behalf of himself and all other Debentureholders, shall be entitled to take proceedings in any court of competent jurisdiction such as the Trustee might have taken under section 7.5, but in no event shall any Debentureholder or combination of Debentureholders have any right to take any other remedy or proceedings out of court; it being understood and intended that no one or more Holders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Holders, or to obtain or to seek to obtain priority or preference over any other Holders or to enforce my right under this Indenture, except in the manner herein provided and for the equal and rateable benefit of all the Holders. 7.7 Application of Moneys --------------------- (a) Except as otherwise provided herein, any moneys arising from any enforcement hereof, whether by the Trustee or any Debentureholder, shall be held by the Trustee and applied by it, together with any moneys then or thereafter in the hands of the Trustee available for the purpose, as follows: (i) first, in payment or reimbursement to the Trustee of the amounts contemplated by section 6.5, including without limitation, the remuneration, expenses, disbursements and advances of the Trustee earned, incurred or made in the administration or execution of the trusts hereunder or otherwise in relation to this Indenture with interest thereon as herein provided; (ii) second (but subject to section 6.2), in or towards payment of the principal amount of all of the Debentures then outstanding and thereafter in or towards payment of the accrued and unpaid interest and interest on overdue interest on such Debentures (or if the Debentureholders, by Extraordinary Resolution, shall have directed payments to be made in accordance with any other order of priority, or without priority as between principal amount and interest, then such moneys shall be applied in accordance with such direction); and (iii) third, the surplus (if any) of such moneys shall be paid to the Corporation or as it may direct, provided, however, that no payments shall be made in respect of the principal amount or interest on any Debenture held by or for the benefit of the Corporation or any of its Subsidiaries (other than any Debenture pledged for value and in good faith to a Person other than the Corporation or any of its Subsidiaries, but only to the extent of such Person's interest therein) except subject to -49- the prior payment in full of the principal amount of and interest on all Debentures which are not so held. (b) For the purpose of disregarding any Debentures owned legally or beneficially by the Corporation or any of its Subsidiaries as required by subsection 7.7(a), the Corporation shall provide to the Trustee, from time to time and forthwith upon the Trustee's written request, a Certificate of the Corporation setting forth as at the date of such Certificate: (i) the names (other than the name of the Corporation) of the registered holders of Debentures which, to the knowledge of the Corporation, are owned by or held for the account of the Corporation or any of its Subsidiaries; and (ii) a list of Debentures owned legally and beneficially by the Corporation or any of its Subsidiaries; and the Trustee shall be entitled to rely on such Certificate for all purposes. 7.8 Distribution of Moneys ---------------------- Payments to Debentureholders pursuant to subsection 7.7(a)(ii) shall be made as follows: (a) at least 15 days' notice of every such payment shall be given in the manner provided in Article 11 specifying the date and time when and the place or places where such payments are to be made and the amount of the payment and the application thereof as between principal amount and interest; (b) payment of any Debenture shall be made upon presentation thereof at any one of the places specified in such notice and any such Debenture thereby paid in full shall be surrendered, otherwise a notation of such payment shall be endorsed thereon; but the Trustee may in its discretion dispense with presentation and surrender or endorsement in any special case upon receipt by it of such indemnity as it shall consider sufficient; (c) from and after the date of payment specified in the notice, interest shall accrue only on the amount owing on each Debenture after giving credit for the amount of the payment specified in such notice unless the Debenture in respect of which such amount is owing is duly presented on or after the date so specified and payment of such amount is not made; and (d) the Trustee shall not be required to make any partial or interim payment to Debentureholders unless the moneys in its hands, after reserving therefrom such amount as the Trustee may think necessary to provide for the payments mentioned in subsection 7.7(a)(i) exceed 5% of the aggregate principal amount of the outstanding Debentures, but it may retain the moneys so received by it and deal with the same as provided in section 12.10 until the money or investments representing the same, with the income derived therefrom, together with any other moneys for the time being under its control, shall be sufficient for such purpose or until it shall consider it advisable to apply the same in the manner hereinbefore set forth. For certainty, the foregoing shall, however, not apply to a final payment or distribution hereunder. -50- 7.9 Persons Dealing with Trustee ---------------------------- No Person dealing with the Trustee or any of its agents shall be concerned to enquire whether an Event of Default has occurred, or whether the powers which the Trustee is purporting to exercise have become exercisable, or whether any moneys remain due under this Indenture or on the Debentures, or to see to the application of any moneys paid to the Trustee; and in the absence of fraud on the part of such Person, such dealing shall be deemed to be within the powers hereby conferred and to be valid and effective accordingly. 7.10 Trustee Appointed Attorney -------------------------- Following an Event of Default, and for so long as such Event of Default continues, the Corporation appoints the Trustee to be the attorney of the Corporation in the name add on behalf of the Corporation to execute any instruments and do any things which the Corporation ought to execute and do, and has not executed or done, under the covenants and provisions contained in this Indenture and generally to use the name of the Corporation in the exercise of all or any of the powers hereby conferred on the Trustee with full powers of substitution and revocation. 7.11 Remedies Cumulative ------------------- No remedy herein conferred upon or reserved to the Trustee or to the Holders is intended to be exclusive of any other remedy, but each and every remedy shall, to the extent permitted by law, be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or by statute. 7.12 Judgment Against the Corporation -------------------------------- In the case of any judicial or other proceedings to obtain judgment for the principal amount of or interest on the Debentures, judgment may be rendered against the Corporation in favour of the Debentureholders or in favour of the Trustee, as trustee for the Debentureholders, for any amount which may remain due in respect of the Debentures and the interest thereon and any other moneys owing hereunder. ARTICLE 8 SATISFACTION AND DISCHARGE 8.1 Cancellation of Debentures -------------------------- All matured Debentures shall forthwith before payment thereof be delivered to the Trustee and cancelled by it. If required by the Corporation, the Trustee shall furnish to it a certificate setting out the designating numbers and denominations of the Debentures cancelled. -51- 8.2 Non-Presentation of Debentures ------------------------------ If the Holder of any Debenture shall fail to present the same for payment on the date of purchase pursuant to an Offer to Purchase or on the date fixed for redemption or on the date on which the principal amount thereof, the interest thereon and any Foregone Interest represented thereby becomes payable either at maturity or otherwise or shall not accept payment on account thereof and give such receipt therefor (if any) as the Trustee may require: (a) the Corporation shall be entitled to pay to the Trustee and direct it to set aside; or (b) in respect of moneys or securities in the hands of the Trustee which may or should be applied to the payment of the Debentures, the Corporation shall be entitled to direct the Trustee to set aside; or (c) if the redemption was pursuant to notice given by the Trustee, the Trustee may itself set aside; such money and/or securities, as the case may be, in trust to be paid to the Holder of such Debenture upon due presentation and surrender thereof in accordance with the provisions of this Indenture, and thereupon such principal amount, interest or Foregone Interest on or represented by each Debenture in respect of which such moneys and/or or securities have been set aside shall be deemed to have been paid and thereafter such Debentures shall not be considered as outstanding hereunder and the Holders thereof shall thereafter have no right in respect thereof except that of receiving payment of the moneys and/or securities so set aside by the Trustee (without interest thereon) upon due presentation and surrender thereof, subject always to the provisions of section 8.3. Any moneys so set aside may, and, if remaining unclaimed for 30 days shall, on the direction of the Corporation, be invested by the Trustee in accordance with section 12.10. 8.3 Repayment of Unclaimed Moneys or Securities ------------------------------------------- Any moneys and/or securities set aside under sections 3.6, 3.9, 3.16, 3.17, 3.18 or 8.2 and not claimed by and paid to Debentureholders within six years after the date of such setting aside shall, subject to applicable law, be repaid or returned, as the case may be, to the Corporation by the Trustee on demand, and thereupon the Trustee shall be released from all further liability with respect to such moneys and/or securities and thereafter the Holders of the Debentures in respect of which such moneys and/or securities were so repaid or returned, as the case may be, to the Corporation shall have no rights in respect thereof except to obtain payment of such moneys and/or securities without interest thereon from the Corporation up to such time as the right to proceed against the Corporation for recovery of such moneys has become statute barred under the laws of the Province of Ontario. 8.4 Discharge --------- Upon proof being given to the reasonable satisfaction of the Trustee that all the Debentures and interest (including interest on amounts in default) and Foregone Interest, if any, thereon or evidenced thereby have been paid or satisfied or that all the outstanding Debentures having matured or having been duly called for redemption or having been automatically -52- redeemed or the Trustee having been given irrevocable instructions by the Corporation to give within 90 days' notice of redemption of all the outstanding Debentures, such payment or redemption has been duly provided for by payment to the Trustee, and upon payment of all costs, charges and expenses properly incurred by the Trustee in relation to this Indenture and all interest thereon and the remuneration of and any other amounts accrued or owing by the Corporation to the Trustee under this Indenture, or upon provision satisfactory to the Trustee being made therefor, the Trustee shall, at the request and at the expense of the Corporation, execute and deliver to the Corporation such deeds or other instruments as shall be necessary to evidence the satisfaction and discharge of this Indenture and to release the Corporation from its covenants contained herein except those relating to the indemnification of the Trustee. 8.5 Withholding ----------- Unless otherwise directed by a Certificate of the Corporation, the Trustee shall withhold tax on all amounts paid or credited to a Holder, who at all relevant times for purposes of the Income Tax Act (Canada) is not a resident or deemed to be a resident of Canada for the purposes of such Act and does not use or hold a Debenture or Common Shares acquired under the terms of this Indenture in carrying on business in Canada, as, on account or in lieu of payment of or in satisfaction of interest including without limitation any amount paid or credited to such a Holder in respect of Foregone Interest and remit such withheld tax to the appropriate authorities. ARTICLE 9 SUCCESSOR PERSONS 9.1 Certain Requirements in Respect of Merger, etc. ----------------------------------------------- The Corporation may not, in a single transaction or a series of transactions, amalgamate or consolidate with or merge into any other Person, or permit any other Person to amalgamate or consolidate with or merge into the Corporation, or directly or indirectly transfer, sell, lease or otherwise dispose of all or substantially all of its property or assets (a "disposition") to any Person, but may do so if: (a) the Corporation shall be the surviving Person, or the Person (if other than the Corporation) formed by such amalgamation, consolidation or into which the Corporation is merged or that acquires by disposition all or substantially all of the properties or assets of the Corporation shall expressly assume, by a supplemental indenture executed and delivered to the Trustee in form satisfactory to the Trustee, all of the Corporation's obligations under this Indenture and the Debentures (the Corporation or such other Person who becomes such a successor obligor under this Indenture being herein referred to as the "Successor Person"); (b) such transaction will, to the satisfaction of Counsel to the Trustee, acting reasonably, be upon such terms as substantially to preserve and not impair in any material respect the rights and powers of the Trustee or of the Debentureholders hereunder; and (c) no condition or event shall exist in respect of the Corporation or the Successor Person, either at the time of such transaction or immediately thereafter after giving full effect -53- thereto, which constitutes or would, after the giving of notice or the lapse of time or both, constitute an Event of Default hereunder. 9.2 Vesting of Powers in Successor ------------------------------ Whenever the conditions of section 9.1 have been duly observed and performed, the Trustee shall execute and deliver the supplemental indenture provided for in Article 13 and thereupon: (a) the Successor Person shall possess and from time to time may exercise each and every right and power of the Corporation under this Indenture in the name of the Corporation or otherwise, and any act or proceeding by any provision of this Indenture required to be done or performed by any Directors or officers of the Corporation may be done and performed with like force and effect by the like directors or officers of such Successor Person; and (b) the Corporation shall be released and discharged from liability under this Indenture and the Trustee may execute such documents which it may be advised are necessary or advisable for effecting or evidencing such release and discharge. ARTICLE 10 MEETINGS OF DEBENTUREHOLDERS 10.1 Right to Convene Meetings ------------------------- The Trustee may at any time and from time to time and shall, on receipt of a Written Request of the Corporation or a Debentureholders' Request and receipt of sufficient funds and upon being indemnified to its reasonable satisfaction by the Corporation or by the Debentureholders signing such Debentureholders' Request against the costs which may be incurred in connection with the calling and holding of such meeting, convene a meeting of the Debentureholders. If the Trustee fails within 30 days after receipt of such Written Request of the Corporation or Debentureholders' Request and such indemnity to give notice convening a meeting, the Corporation or such Debentureholders, as the case may be, may convene such meeting. Every such meeting shall be held in the City of Toronto or at such other place as may be approved or determined by the Trustee. 10.2 Notice of Meetings ------------------ Subject to section 10.12, at least 21 days' notice of any meeting shall be given to Debentureholders and a copy thereof shall, be sent by mail to the Trustee unless the meeting has been called by it and to the Corporation unless the meeting has been called by it. Such notice shall state the time when and the place where the meeting is to be held and shall state briefly the general nature of the business to be transacted thereat, but it shall not be necessary for any such notice to set out the terms of any resolution to be proposed at the meeting or any of the provisions of this Article 10. -54- 10.3 Chairman -------- An individual, who need not be a Debentureholder, nominated in writing by the Trustee shall be chairman of the meeting and if no individual is so nominated or if the individual so nominated is unable or unwilling to act or if the individual so nominated is not present within 15 minutes from the time fixed for the holding of the meeting, the Debentureholders present in person or by proxy shall choose an individual present to be chairman. 10.4 Quorum ------ At any meeting of the Debentureholders other than a meeting convened for the purpose of considering a resolution proposed to be passed as an Extraordinary Resolution, as to which the provisions of section 10.12 shall be applicable, a quorum shall consist of Debentureholders present in person or by proxy and representing at least 15% in principal amount of the outstanding Debentures. If a quorum of the Debentureholders shall not be present within 30 minutes from the time fixed for holding any such meeting, the meeting, if convened by the Debentureholders or pursuant to a Debentureholder's Request, shall be dissolved; but in any other case the meeting shall be adjourned to be reconvened on the same day in the next week (unless such day is not a Business Day, in which case it shall be adjourned to be reconvened on the next Business Day following such day) at the same time and place, to the extent possible. At the reconvened meeting, the Debentureholders present in person or by proxy shall form a quorum and may transact the business for which the meeting was originally convened notwithstanding that they may not represent 15% of the principal amount of the outstanding Debentures. No business shall be transacted at any meeting unless the required quorum is present at the commencement of the meeting. 10.5 Power to Adjourn ---------------- The chairman of any meeting at which a quorum of the Debentureholders is present may, with the consent of the Holders of a majority in principal amount of the Debentures represented thereat, adjourn any such meeting and no notice of such adjournment need be given except such notice, if any, as the meeting may prescribe. 10.6 Show of Hands ------------- Every question submitted to a meeting shall be decided in the first place by a majority of the votes given on a show of hands except that votes on Extraordinary Resolutions shall be given in the manner hereinafter provided. At such meeting, unless a poll is duly demanded as herein provided, a declaration by the chairman that a resolution has been carried or carried unanimously or by a particular majority or lost or not carried by a particular majority shall be conclusive evidence of the fact. 10.7 Poll ---- On every Extraordinary Resolution, and on any other question submitted to a meeting, when demanded by the chairman or by one or more Debentureholders and/or proxies for Debentureholders holding at least 5% of the principal amount of the Debentures represented thereat, a poll shall be taken in such manner as the chairman shall direct. Questions other than -55- Extraordinary Resolutions shall, if a poll is taken, be decided by the votes of the holders of a majority in principal amount of the Debentures represented at the meeting and voted on the poll. 10.8 Voting ------ On a show of hands, every Person who is present and entitled to vote, whether as a Debentureholder or as proxy, shall have one vote. On a poll, each Debentureholder present in person or represented by a duly appointed proxy shall be entitled to one vote in respect of each $1,000 principal amount of Debentures of which he shall then be the Holder. A proxy need not be a Debentureholder. In the case of joint registered Holders of a Debenture, any one of them present in person or by proxy at the meeting may vote in the absence of the other or others; but in case more than one of them are present in person or by proxy, they shall vote together in respect of the Debentures of which they are joint registered Holders. 10.9 Regulations ----------- The Trustee or the Corporation, with the approval of the Trustee, may from time to time make and from time to time vary such regulations as it shall from time to time think fit providing for: (a) voting by proxy and the form of the instrument appointing a proxy (which shall be in writing) and the manner in which the same shall be executed and for the production of the authority of any Person signing on behalf of a Debentureholder; (b) the deposit of instruments appointing proxies at such place as the Trustee, the Corporation or the Debentureholders convening a particular meeting, as the case may be, may in the notice convening the meeting direct and the time, if any, before the holding of the meeting or any adjournment thereof by which the same shall be deposited; and (c) the deposit of instruments appointing proxies at some approved place or places other than the place at which a particular meeting is to be held and enabling particulars of instruments appointing proxies to be mailed, telecopied or electronically transmitted before the meeting to the Corporation or to the Trustee at the place where the same is to be held and for the voting of proxies so deposited as though the instruments themselves were produced at the meeting. Any regulations so made shall be binding and effective and the votes given in accordance therewith shall be valid and shall be counted. Save as herein provided or as such regulations may provide, the only Persons who shall be recognized at any meeting of the holders of any Debentures, or as entitled to vote or be present at the meeting in respect thereof, shall be Debentureholders and Persons whom Debentureholders have duly appointed as their proxies. 10.10 Corporation and Trustee May Be Represented ------------------------------------------ The Corporation and the Trustee, by their respective officers, directors and employees, and the legal advisors of the Corporation and the Trustee may attend any meeting of the Debentureholders, but shall have no vote as such. -56- 10.11 Powers Exercisable by Extraordinary Resolution ---------------------------------------------- In addition to the powers conferred upon them by any other provisions of this Indenture or by law, a meeting of the Debentureholders shall have the following powers which, subject to approval of the TSE, shall be exercisable from time to time by Extraordinary Resolution: (a) power to approve any change whatsoever in any of the provisions of this Indenture or the Debentures and any modification, abrogation, alteration, compromise or arrangement of the rights of the Debentureholders and/or (subject to the prior consent of the Trustee) the Trustee against the Corporation or against its undertaking, property and assets or any part thereof, whether such rights arise under this Indenture or the Debentures or otherwise; (b) power to approve any scheme for the reconstruction or reorganization of the Corporation or for the consolidation, amalgamation or merger of the Corporation with any other corporation or for the selling or leasing of the undertaking, property and assets of the Corporation or any part thereof, provided that no such approval shall be necessary in respect of any such transaction if the provisions of Article 9 shall have been complied with; (c) power to direct or authorize the Trustee to exercise any power, right, remedy or authority given to it by this Indenture or the Debentures in any manner specified in such Extraordinary Resolution or to refrain from exercising any such power, right, remedy or authority; (d) power to waive and direct the Trustee to waive any default or Event of Default hereunder and/or cancel any declaration made by the Trustee pursuant to section 7.3, in each case either unconditionally or upon any conditions specified in such Extraordinary Resolution; (e) power to restrain any Debentureholder from taking or instituting any suit, action or proceeding for the purpose of enforcing payment of the principal amount of or interest on any Debenture, or for the execution of any trust or power hereunder; (f) power to direct any Debentureholder who, as such, has brought any action, suit or proceeding, to stay or discontinue or otherwise deal with the same in the manner directed by such Extraordinary Resolution upon payment, if the taking of such action, suit or proceeding shall have been permitted by section 7.6, of the costs, charges and expenses reasonably and properly incurred by such Debentureholder in connection therewith; (g) power to appoint a committee to consult with the Trustee (and to remove any committee so appointed) and to delegate to such committee (subject to such limitation, if any, as may be prescribed in such Extraordinary Resolution) all or any of the powers which the Debentureholders may exercise by Extraordinary Resolution under this section 10.11; the Extraordinary Resolution making such appointment may provide for payment of the expenses and disbursements of and compensation to such committee and the Trustee; such committee shall consist of such number of individuals (who need not be Debentureholders) as shall be prescribed in the Extraordinary Resolution appointing it; subject to the Extraordinary Resolution appointing it, every such committee may elect its chairman and may make regulations respecting its quorum, the calling of its meetings, the filling of vacancies occurring in its number, the manner -57- in which it may act and its procedure generally and such regulations may provide that the committee may act at a meeting at which such quorum is present or may act by resolution signed in one or more counterparts by a majority of the members thereof or the number of members thereof necessary to constitute a quorum, whichever is the greater; all acts of any such committee within the authority delegated to it shall be binding upon all Debentureholders; (h) power to agree to any compromise or arrangement with any creditor or creditors or any class or classes of creditors, whether secured or otherwise, and with holders of any shares or other securities of the Corporation; (i) power to authorize the distribution in specie of any shares, bonds, debentures or other securities or obligations and/or cash or other consideration received or the use or disposition of the whole or any part of such shares, bonds, debentures or other securities or obligations and/or cash or other consideration in such manner and for such purpose as may be considered advisable and specified in such Extraordinary Resolution; (j) power to approve the exchange of the Debentures for or the conversion thereof into shares, bonds, debentures or other securities or obligations of the Corporation or of any corporation formed or to be formed; (k) power to remove the Trustee from office and to appoint a new Trustee or Trustees; and (l) power to amend, alter or repeal any Extraordinary Resolution previously passed or approved by the Debentureholders or by any committee appointed pursuant to subsection 10.11(g). 10.12 Meaning of "Extraordinary Resolution" ------------------------------------- (a) The expression "Extraordinary Resolution" when used in this Indenture means, subject as hereinafter provided in this Article 10, a resolution proposed to be passed as an Extraordinary Resolution at a meeting of Debentureholders duly convened for the purpose and held in accordance with the provisions of this Article 10 at which the Holders of more than 25% of the principal amount of the Debentures then outstanding are present in person or by proxy and passed by the favourable votes of the holders of not less than 66 2/3 % of the principal amount of Debentures represented at the meeting and voted on a poll upon such resolution. (b) If at any such meeting, the holders of more than 25% of the principal amount of the Debentures then outstanding are not present in person or by proxy within 30 minutes after the time appointed for the meeting, then the meeting, if convened by the Debentureholders or pursuant to a Debentureholder's Request, shall be dissolved; but in any other case it may, at the option of the Corporation, be adjourned to such date, being not less than 21 nor more than 60 days later, and to such place and time as may be appointed by the chairman. Not less than ten days' notice shall be given to Debentureholders of the time and place of such adjourned meeting in the manner provided in Article 11. Such notice shall state that at the adjourned meeting the Debentureholders present in person or by proxy shall form a quorum, but, it shall not be necessary to set forth the purposes for which the meeting was originally called or any other particulars. At the adjourned meeting, the Debentureholders present in person or by proxy shall form a quorum and may transact the business for which the meeting was originally convened and a resolution proposed at such adjourned meeting and passed in accordance with subsection 10.12(a) shall be an Extraordinary Resolution within the meaning of this Indenture notwithstanding that the holders of more than 25% of the principal amount of the Debentures then outstanding are not present in person or by proxy of such adjourned meeting. (c) Votes on an Extraordinary Resolution shall always be given on a poll and no demand for a poll on an Extraordinary Resolution shall be necessary. 10.13 Powers Cumulative ----------------- It is hereby declared and agreed that any one or more of the powers and/or combination of the powers in this Indenture stated to be exercisable by the Debentureholders by Extraordinary Resolution or otherwise may be exercised from time to time and the exercise of any one or more of such powers or any combination of powers from time to time shall not be deemed to exhaust the right of the Debentureholders to exercise the same or any other power or powers or combination of powers thereafter from time to time. 10.14 Minutes ------- Minutes of all resolutions and proceedings at every meeting of Debentureholders shall be made and duly entered in books to be provided for that purpose by the Trustee at the expense of the Corporation, and any such minutes, if signed by the chairman of the meeting at which such resolutions were passed or proceedings taken, or by the chairman of the next succeeding meeting of the Debentureholders, shall be prima facie evidence of the matters therein stated and, until the contrary is proved, every such meeting, in respect of the proceedings of which minutes shall have been made, shall be deemed to have been duly held and convened, and all resolutions passed or proceedings taken thereat to have been duly passed and taken. 10.15 Signed Instruments ------------------ Any action which may be taken and any power which may be exercised by the Debentureholders at a meeting held as hereinbefore in this Article 10 provided may also be taken and exercised by the Holders of not less than 66 2/3% of the principal amount of the outstanding Debentures by a signed instrument and the expression "Extraordinary Resolution" when used in this Indenture shall include an instrument so signed. Notice of any Extraordinary Resolution passed in accordance with this section 10.15 shall be given by the Trustee to the Debentureholders within 30 days of the date on which such Extraordinary Resolution was passed. 10.16 Binding Effect of Resolutions ----------------------------- Every resolution and every Extraordinary Resolution passed in accordance with the provisions of this Article 10 at a meeting of Debentureholders shall be binding upon all the Debentureholders, whether present at or absent from such meeting, and every instrument signed by Debentureholders in accordance with section 10.15 shall be binding upon all -59- Debentureholders, whether signatories thereto or not, and each and every Debentureholder and the Trustee (subject to the provisions for its funding and indemnity herein contained) shall be bound to give effect to every such resolution, Extraordinary Resolution and instrument. 10.17 Evidence of Rights of Debentureholders -------------------------------------- Any request, direction, notice, consent or other instrument which this Indenture may require or permit to be signed or executed by the Debentureholders may be in any number of concurrent instruments of similar tenor and may be signed or executed by such Debentureholders in person or by attorney duly appointed in writing. Proof of the execution of any such request, direction, notice, consent or other instrument or of a writing appointing any such attorney shall be sufficient for any purpose of this Indenture if made in the following manner, namely, the fact and date of the execution by any Person of such request, direction, notice, consent or other instrument or writing may be proved by the certificate of any notary public, or other officer authorized to take acknowledgements of deeds to be recorded at the place where such certificate is made, that the Person signing such request, direction, notice, consent or other instrument or writing acknowledged to him the execution thereof, or by an affidavit of a witness of such execution or in any other manner which the Trustee may consider adequate. The Trustee may, nevertheless, in its discretion require further proof in cases where it considers further proof necessary or desirable or may accept such other proof as it shall consider proper. ARTICLE 11 NOTICES 11.1 Notice to the Corporation ------------------------- Any notice to the Corporation under the provisions of this Indenture shall be valid and effective if delivered personally or by telecopy to, or subject to section 11.4, if given by registered mail, postage prepaid, addressed to the Corporation at 25821 Industrial Boulevard, Hawyard, California 94545, Attention: Chief Executive Officer, Telecopier No. (510) 780-5401 and shall be deemed to have been given on the date of delivery personally or by telecopy if so delivered prior to 5:00 p.m. (Toronto time) on a Business Day and otherwise on the next Business Day or on the fifth Business Day after such letter has been mailed, as the case may be. The Corporation may from time to time notify the Trustee of a change in address which thereafter, until changed by further notice, shall be the address of the Corporation for all purposes of this Indenture. 11.2 Notice to Debentureholders -------------------------- Except as otherwise expressly provided herein, all notices to be given hereunder to one or more Debentureholders shall be valid and effective if such notice is delivered personally or, subject to section 11.4, sent by first class mail, postage prepaid, addressed to such Holders at their post office addresses appearing in any of the registers hereinbefore mentioned, or sent by telecopier to such Holders at the telecopier number appearing in any of the registers hereinbefore mentioned. Any notice delivered or sent by mail shall be deemed to have been given on the day upon which it is delivered or mailed, as the case may be, and any notice -60- transmitted by telecopier shall be deemed to have been given on a day if transmitted prior to 5:00 p.m., (local time) on such day. Any accidental error, omission or failure in giving or in delivering, mailing or transmitting by telecopier any such notice or the non-receipt of any such notice by any Debentureholder or Holders shall not invalidate or otherwise prejudicially affect any action or proceeding founded thereon. 11.3 Notice to the Trustee --------------------- Any notice to the Trustee under the provisions of this Indenture shall be valid and effective if delivered personally or by telecopy to, or, subject to section 11.4, if given by registered mail, postage prepaid, addressed to, the Trustee at Computershare Trust Company of Canada, 100 University Avenue, 11th Floor, South Tower, Toronto, Ontario, M5J 2Y1, Facsimile: (416) 981-9777, and shall be deemed to have been given on the date of delivery personally or by telecopy if so delivered prior to 5:00 p.m. (local time) on a Business Day and otherwise on the next Business Day, or on the fifth Business Day after such letter has been mailed, as the case may be. The Trustee may from time to time notify the Corporation of a change in address which thereafter, until changed by further notice, shall be the address of the Trustee for all purposes of this Indenture. 11.4 Mail Service Interruption ------------------------- If the Trustee determines that mail service is or is threatened to be interrupted at the time when the Trustee is required or elects to give any notice to the Debentureholders hereunder, the Trustee shall, notwithstanding the provisions hereof, give such notice at the Corporation's expense by means of publication in the Globe and Mail or National Post, national edition, or any other English language daily newspaper or newspapers of general circulation in Canada and in a French language daily newspaper of general circulation in the Province of Quebec, once in each of two successive weeks and any notice so published shall be deemed to have been given on the latest date on which the publication takes place. If by reason of any actual or threatened interruption of mail service due to strike, lock-out or otherwise, any notice to be given to the Corporation or to the Trustee would be unlikely to reach its destination in a timely manner, such notice shall be valid and effective only if delivered personally or by telecopy in accordance with section 11.1 or 11.3, as the case may be. ARTICLE 12 CONCERNING THE TRUSTEE 12.1 Trust Indenture Legislation --------------------------- (a) In this Indenture, the term "Indenture Legislation" means the provisions, if any, of the Business Corporations Act (Ontario) and any other statute of Canada or a province thereof, and of the regulations under any such statute, relating to trust indentures and to the rights, duties and obligations of trustees under trust indentures and of corporations issuing debt obligations under trust indentures, to the extent that such provisions are at the time in force and applicable to this Indenture or the Corporation or the Trustee. -61- (b) If and to the extent that any provision of this Indenture limits, qualifies or conflicts with a mandatory requirement of Indenture Legislation, such mandatory requirement shall prevail. (c) At all times in relation to this Indenture and any action to be taken hereunder, the Corporation and the Trustee each shall observe and comply with Indenture Legislation and the Corporation, the Trustee and each Debentureholder shall be entitled to the benefits of Indenture Legislation. 12.2 No Conflict of Interest ----------------------- The Trustee represents to the Corporation that at the date of the execution and delivery of this Indenture there exists no material conflict of interest in the role of the Trustee as a fiduciary hereunder. If at any time a material conflict of interest exists in the Trustee's role as a fiduciary hereunder, the Trustee shall, within 90 days after it becomes aware that such a material conflict, of interest exists, either eliminate the same or else resign from the trusts hereunder by giving notice in writing to the Corporation at least 21 days prior to such resignation and shall upon such resignation becoming effective be discharged from all further duties and liabilities hereunder. If any such material conflict of interest exists or hereafter shall exist, the validity and enforceability of this Indenture and the Debentures shall not be affected in any manner whatsoever by reason thereof. 12.3 Rights and Duties of Trustee ---------------------------- (a) In the exercise of the rights and duties prescribed or conferred by the terms of this Indenture, the Trustee shall act honestly and in good faith with a view to the best interests of the Debentureholders as a whole and exercise that degree of care, diligence and skill that a reasonably prudent trustee would exercise in comparable circumstances. (b) The obligation of the Trustee to commence or continue any act, action or proceeding for the purpose of enforcing any rights of the Trustee or the Debentureholders hereunder shall be conditional upon the Debentureholders furnishing, when required by notice in writing by the Trustee, sufficient funds to commence or continue such act, action or proceeding and indemnity reasonably satisfactory to the Trustee to protect and hold harmless the Trustee against the costs, charges, expenses and liabilities to be incurred thereby and any loss and damage it may suffer by reason thereof. None of the provisions contained in this Indenture shall require the Trustee to expend or risk its own funds or otherwise incur financial liability in the performance of any of its duties or in the exercise of any of its rights or powers unless funded and indemnified as aforesaid. (c) The Trustee may, before commencing or at any time during the continuance of any such act, action or proceeding, require the Debentureholders at whose instance it is acting to deposit with the Trustee the Debentures held by them, for which Debentures the Trustee shall issue receipts. (d) Every provision of this Indenture that by its terms relieves the Trustee of liability or entitles it to rely upon any evidence submitted to it is subject to the provisions of the Indenture Legislation, this section 12.3 and section 12.4. -62- (e) In determining who is a U.S. Person, the Trustee may rely and shall be protected in relying solely upon the registered address of the Debentureholder or Common Share holder in the case that the Debenture has been converted or the address of the transferee as indicated on the form of transfer or conversion for the Debentures in question, as applicable, for all purposes. (f) The Trustee shall not be bound to give any notice or do or take any act, action or proceeding by virtue of the powers conferred on it hereby unless and until it shall have been required so to do under the terms hereof 12.4 Evidence, Experts and Adviser ----------------------------- (a) In addition to the reports, certificates, opinions, statutory declarations and other evidence required by this Indenture, the Corporation shall furnish to the Trustee such additional evidence of compliance with any provisions hereof, and in such form as may be prescribed by the Indenture Legislation or as the Trustee may reasonably require by written notice to the Corporation. (b) The Trustee shall be protected in acting and relying upon any written notice, request, waiver, consent, certificate, receipt, statutory declaration, opinion, report or other paper or document furnished to it, not only as to its due execution and the validity and the effectiveness of its provisions, but also as to the truth, acceptability and accuracy of any information therein contained which it in good faith believes to be genuine and what it purports to be. (c) The Trustee may employ or retain such counsel, auditors, accountants, agents, appraisers, brokers or other experts or advisers, whose qualifications give authority to any advice, opinion or report made by them, as it may reasonably require for the purpose of determining and discharging its duties hereunder and shall not be responsible for any misconduct on the part of any of them and the Trustee may act and rely and shall be protected in acting and relying in good faith on the opinion or advice of or information obtained from any Counsel, auditors, accountants appraisers, brokers or other experts or advisors whether retained or employed by the Corporation or by the Trustee, in relation to any matter arising in the administration of the trusts hereof. The fees of such counsel or other experts will be treated as part of the Trustee's fees hereunder. 12.5 Certificate, etc., of the Corporation as Evidence ------------------------------------------------- Except as otherwise specifically provided or prescribed by this Indenture, whenever in the administration of the provisions of this Indenture the Trustee shall deem necessary or desirable that the matter be approved or established prior to taking or admitting any action hereunder, the Trustee, if acting in good faith, may rely and act upon a Certificate of the Corporation, Written Order of the Corporation, Written Request of the Corporation or Written Direction of the Corporation. 12.6 Trustee May Deal in Debentures ------------------------------ Subject to section 12.3, the Trustee and its Affiliates may buy, sell, lend upon and deal in the Debentures or other securities of the Corporation, either with the Corporation or -63- otherwise, and generally contract and enter into financial transactions with the Corporation or otherwise, without being liable to account for any profits made thereby. 12.7 Trustee Not Required to Give Security ------------------------------------- The Trustee shall not be required to give any bond or security in respect of the execution of the trusts and powers of this Indenture or otherwise in respect of this Indenture. 12.8 Trustee Not to Be Appointed Receiver ------------------------------------ The Trustee and any Person related to the Trustee shall not be appointed a receiver or receiver and manager or liquidator of all or any part of the assets or undertaking of the Corporation. 12.9 Protection of Trustee --------------------- By way of supplement to the provisions of any law for the time being relating to trustees, it is expressly declared and addressed as follows: (a) the Trustee and its directors, officers, employees and agents will at all times be indemnified and saved harmless by the Corporation from and against all claims, demands, losses, actions, causes of action, costs, charges, expenses, damages and liabilities whatsoever arising in connection with this Indenture, including, without limitation, those arising out of or related to actions taken or omitted to be taken by the Trustee contemplated hereby, legal fees and disbursements on a solicitor and client basis, and costs and expenses incurred in connection with the enforcement of this indemnity, which the Trustee may suffer or incur, whether at law or in equity, in any way caused by or arising, directly or indirectly, in respect of any act, deed, matter or thing whatsoever made, done, acquiesced in or omitted in or about or in relation to the execution of its duties as Trustee. The foregoing provisions of this subsection do not apply to the extent that in any circumstances there has been a failure by the Trustee or its employees to act honestly and in good faith or where the Trustee or its employees have acted negligently or in willful disregard of the Trustee's obligations hereunder or shall not have complied with subsection 12.3(a). This indemnity shall survive resignation or removal of the Trustee and the discharge of this Indenture; (b) the Trustee shall not be liable for or by reason of any statements of fact or recitals in this Indenture or in the Debentures (except the representation contained in sections 12.2 and 12.13 and in the certificate of the Trustee on the Debentures) or required to verify the same, but all such statements or recitals are and shall be deemed to be made by the Corporation; (c) nothing herein contained shall impose any obligation on the Trustee to see to or to require evidence of the registration or filing (or renewal thereof) of this Indenture or any instrument ancillary or supplemental hereto; (d) the Trustee shall not be bound to give notice to any Person of the execution hereof; -64- (e) the Trustee shall not incur any liability or responsibility whatever or be in any way responsible for the consequence of any breach on the part of the Corporation or any of the covenants herein contained or of any acts of the agents of the Corporation; (f) notwithstanding any other provisions of this Indenture, the Trustee shall have no obligation to transfer any Debentures unless provided with such documents as it deems satisfactory, acting reasonably; (g) the Trustee shall incur no liability with regard to the delivery or non-delivery of any certificate, whether delivered by hand, mail or other means; (h) the Trustee shall disburse moneys according to this Indenture only to the extent that moneys have been deposited with it. The Trustee shall incur no liability for moneys deposited otherwise than with the Trustee; and (i) the Trustee shall not be responsible for ensuring that the proceeds of the Debenture issuance are used in the manner contemplated in the (final) prospectus qualifying the distribution of the Debentures under applicable securities laws of the provinces of Canada. 12.10 Investment of Trust Moneys -------------------------- Unless otherwise provided in this Indenture, any moneys held by the Trustee, which under the trusts of this Indenture may or ought to be invested or which may be on deposit with the Trustee or which may be in the hands of the Trustee, shall be invested and reinvested in the name or under the control of the Trustee as directed in writing by the Corporation in Authorized Investments. Pending such investment such moneys may be placed by the Trustee on deposit in a chartered bank in Canada or with its own deposit department. The Trustee shall allow interest at the current rate for similar deposits on moneys remaining on deposit with it and, provided that the Corporation is not in default hereunder, shall credit the Corporation with interest received on moneys deposited with other depositories and on all moneys invested as provided in this section 12.10. Any direction by the Corporation to the Trustee as to investment or reinvestment of funds shall be in writing and shall be provided to the Trustee no later than 9:00 a.m. (Toronto time) on the day on which the investment is to be made. Any such direction received after 9:00 a.m. (Toronto time) or received on a non-Business Day, shall be deemed to have been given prior to 9:00 a.m. (Toronto time) the next Business Day. 12.11 Action by Trustee to Protect Interests -------------------------------------- The Trustee shall have the power to institute and maintain all and any such actions, suits or proceedings as it may consider necessary or expedient to preserve, protect or enforce its interests and the interests of the Debentureholders. 12.12 Replacement of Trustee ---------------------- The Trustee may resign from the trusts hereunder and thereupon be discharged from all further duties and liabilities hereunder by giving to the Corporation 60 days' notice in -65- writing or such shorter notice as the Corporation may accept as sufficient. The Debentureholders by Extraordinary Resolution shall have power at any time to remove the Trustee and to appoint a new trustee hereunder. In the event of the Trustee resigning or being removed as aforesaid or being dissolved, becoming bankrupt, going into liquidation or otherwise becoming incapable of acting hereunder, the Corporation shall forthwith appoint a new trustee hereunder unless a new trustee has already been appointed by the Debentureholders; failing such appointment by the Corporation, the retiring trustee hereunder (at the expense of the Corporation) or any Debentureholder may apply to a Judge of the Ontario Superior Court of Justice, on such notice as such Judge may direct, for the appointment of a new trustee hereunder; but any trustee so appointed by the Corporation or by the Court shall be subject to removal as aforesaid by the Debentureholders. Any new trustee hereunder appointed under any provision of this section 12.12 shall be a corporation authorized and qualified to carry on the business of a trust company in the Province of Ontario and every other jurisdiction where such authorization or qualification is necessary to enable it to act as trustee hereunder, shall certify that it will not have any material conflict of interest upon becoming trustee hereunder, and shall accept the trusts herein declared and provided for. On any new appointment, the new trustee shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as Trustee. Any corporation into which the Trustee may be merged or with which it may be consolidated or amalgamated, or any corporation resulting from any merger, consolidation or amalgamation to which the Trustee shall be a party or any corporation which acquires all or substantially all of the corporate trust business of the Trustee, shall be the successor trustee under this Indenture without the necessity of the execution of any instrument or any further act. Upon the written request of the successor trustee or of the Corporation, the Trustee ceasing to act shall, subject to the payment of its outstanding remuneration and expenses, execute and deliver an instrument assigning and transferring to such successor trustee, upon the trusts herein expressed, all the rights, powers and trusts of the Trustee so ceasing to act, and shall duly assign, transfer and deliver all property and money held by such Trustee to the successor trustee so appointed in its place. Should any deed, conveyance or instrument in writing from the Corporation be required by any new trustee for more fully and certainly vesting in and confirming to it such estates, properties, rights, powers and trusts, then any and all such deeds, conveyances and instruments in writing shall on request of such new trustee be made, executed, acknowledged and delivered by the Corporation. 12.13 Authority to Carry on Business ------------------------------ The Trustee represents to the Corporation that at the date of execution and delivery by it of this Indenture, it is authorized to carry on the business of a trust company in the Province of Ontario but if, notwithstanding the provisions of this section, it ceases to be so authorized to carry on business, the validity and enforceability of this Indenture and the Debentures issued hereunder shall not be affected in any manner whatsoever by reason only of such event but the Trustee shall, within 90 days after ceasing to be authorized to carry on the business of a trust company in the Province of Ontario, either become so authorized or resign in the manner/and with the effect specified in section 12.12. -66- 12.14 Acceptance of Trusts -------------------- The Trustee accepts the trusts in this Indenture declared and provided for and agrees to perform the same upon the terms and conditions herein set forth and in trust for the various Persons who shall from time to time be Debentureholders, subject to the terms and conditions herein set forth. ARTICLE 13 SUPPLEMENTAL INDENTURES 13.1 Supplemental Indentures ----------------------- From time to time the Trustee may and, when authorized by a resolution of the Directors, the Corporation may and they shall, when required by this Indenture, execute, acknowledge and deliver, by their proper officers, deeds or indentures supplemental hereto, which thereafter shall form part hereof, for any one or more of the following purposes: (a) adding to the provisions hereof such additional covenants of the Corporation, enforcement provisions and other provisions for the protection of the Debentureholders and/or providing for events of default in addition to those herein specified; (b) making such provisions not inconsistent with this Indenture as may be necessary or desirable with respect to matters, or questions arising hereunder, including the making of any modifications in the form of the Debentures which do not affect the substance thereof and which, in the opinion of the Trustee, it may be expedient to make, provided that the Trustee shall be of the opinion that such provisions and modifications will not be materially prejudicial to its interests or those of the Debentureholders; (c) evidencing the succession, or successive successions of other corporations to the Corporation and the covenants of and obligations assumed by any such successor in accordance with the provisions of this Indenture; (d) giving effect to any Extraordinary Resolution passed as provided in Article 10; (e) making any modification of any of the provisions of this Indenture or the Debentures which are of a formal, minor or technical nature provided that, in the opinion of the Trustee, the rights of the Trustee and the Debentureholders are in no way materially prejudiced thereby; (f) making any additions to, deletions from or alterations of the provisions of this Indenture (including any of the terms and conditions of the Debentures) which, in the opinion of Counsel to the Trustee, are not materially prejudicial to the interests of the Debentureholders and which are necessary or advisable in order to incorporate, reflect or comply with the Indenture Legislation; (g) adding to or altering the provisions hereof in respect of the transfer of Debentures, including provision for the exchange of Debentures of different denominations, and -67- making any modification in the form of the Debentures which does not affect the substance thereof and which, in the opinion of the Trustee, is not materially prejudicial to the interests of the Debentureholders; (h) correcting or rectifying any ambiguities, defective provisions, errors or omissions herein, provided that, in the opinion of Counsel to the Trustee, the rights of the Trustee and the Debentureholders are in no way materially prejudiced thereby; (i) to evidence and provide for the acceptance or appointment hereunder by a successor Trustee pursuant to the requirements of section 12.12; and (j) any other purpose not inconsistent with the terms of this Indenture provided that, in the opinion of the Trustee, the rights of the Trustee and of the Debentureholders are in no way materially prejudiced thereby. Notwithstanding the foregoing, the Trustee shall not be required to enter into any such deed or indenture which increases its duties or responsibilities or affect its rights hereunder without its consent. ARTICLE 14 STOCK EXCHANGE APPROVAL 14.1 Stock Exchange Approval ----------------------- No amendment to the terms of this Indenture by supplement or otherwise shall be made without the prior written consent of the TSE. ARTICLE 15 EXECUTION 15.1 Counterparts and Formal Date ---------------------------- This Indenture may be executed in several counterparts, each of which when so executed shall be deemed to be an original, and such counterparts together shall constitute one and the same instrument and notwithstanding their date of execution shall be deemed to bear date as of August 30, 2001. 15.2 Language of Indenture --------------------- The parties hereto have requested that this document be drafted in the English language. Les parties ont demande que le present document soit redige en langue anglaise. -68- IN WITNESS WHEREOF the parties hereto have caused this Indenture to be duly executed by their duly authorized officers as of the day and year first above written. CERTICOM CORP. By: ___________________________________ Authorized Officer COMPUTERSHARE TRUST COMPANY OF CANADA By: ___________________________________ Authorized Officer By: ___________________________________ Authorized Officer SCHEDULE "A" ------------ (Form of Debenture) No._____________ Cdn$ _______ CERTICOM CORP. (organized under the laws of the Yukon Territory) 7.25% SENIOR CONVERTIBLE UNSECURED SUBORDINATED DEBENTURE --------------------------------------------------------- DUE AUGUST 30, 2004 ------------------- FOR VALUE RECEIVED, Certicom Corp. (herein referred to as the "Corporation") hereby acknowledges itself indebted and promises to pay to __________________________ the registered holder hereof on the 30th day of August, 2004, or on such earlier date as the principal hereof may become due in accordance with the conditions herein set out and with the provisions of the indenture hereafter mentioned, on presentation and surrender of this Debenture, at Computershare Trust Company of Canada at its principal office in Toronto, Ontario, the principal sum of _________________ Dollars ($___________) in lawful money of Canada and to pay interest from the date hereof on the said principal at the rate of 7.25% per annum calculated semi-annually and not in advance and payable semi-annually on August 30 and February 28, commencing on February 28, 2002, (unless this Debenture shall have been previously called for redemption and payment hereof duly provided for); and should the Corporation at any time make default in payment of any principal or interest, to pay interest on the amount in default at the same rate, in like money and semi-annually on the same dates. As interest on this Debenture becomes due the Corporation shall forward or cause to be forwarded by prepaid ordinary mail to the holder hereof, or in the case of joint holders to one of such joint holders (failing written instructions to the contrary from all such joint holders), at the holder's registered address a cheque for such interest (less any tax required to be deducted) payable to the order of such holder, or in the case of joint holders to all such joint holders (failing written instructions to the contrary from all such joint holders), and negotiable at par at each of the places at which interest upon this Debenture is payable. The forwarding of such cheque shall satisfy and discharge the liability for interest upon this Debenture to the extent of the sum represented thereby (plus the amount of any tax deducted as aforesaid) unless such cheque is not paid on presentation. All interest accrued and not paid on a Convertible Note exercised into this Debenture shall be paid in the manner specified herein as if such interest occurred and was payable on this Debenture on the first interest payment date following the exercise of such Convertible Note. The holder acknowledges that this Debenture may not be transferred except in compliance with applicable securities laws. This Debenture is one of the Debentures designated "7.25% Convertible Unsecured Subordinated Debentures" (herein referred to as the "Debentures") issued and to be -2- issued under a convertible debenture trust indenture (herein referred to as the "Indenture") dated as of August 30, 2001 between the Corporation and Computershare Trust Company of Canada, as Trustee (hereinafter referred to as the "Trustee"). The aggregate principal amount of Debentures which may be issued under the indenture is limited to $13,500,000 in lawful money of Canada, and Debentures to this aggregate principal amount have been authorized for immediate issue. Reference is hereby made to the Indenture and all instruments supplemental thereto for a statement and description of the terms and conditions upon which the Debentures are issued or may be issued and held and of the rights and remedies of the holders of the Debentures and of the Corporation and of the Trustee in respect thereof, all to the same effect as if the provisions of the Indenture and of all instruments supplemental thereto were herein set forth, to all of which the holder of this Debenture by acceptance hereof assents. The Debentures are issuable as fully registered Debentures only in denominations of Cdn $1,000 and integral multiples thereof. This Debenture is a direct obligation of the Corporation ranking for payment pari passu with all other Debentures and the Convertible Notes. The Indenture restricts the Corporation from incurring certain additional indebtedness except as permitted in the Indenture. This Debenture and all other Debentures now or hereafter under the Indenture shall, subject to the terms of this Indenture, be equally and rateably entitled to the benefit of the Indenture as if all the Debentures had been issued simultaneously. All or any part (being $1,000 or an integral multiple thereof) of this Debenture is convertible, at the option of the holder hereof, upon surrender of this Debenture at the principal office of the Trustee in Toronto, Ontario, at any time up to the Time of Expiry into fully paid and non-assessable common shares (herein referred to as the "Common Shares") in the capital of the Corporation (without adjustment for interest accrued hereon or for dividends on Common Shares issuable upon conversion) at a Conversion Price (as defined in the Indenture) of $3.85 per Common Share, being a rate of 259.740 Common Shares for each $1,000 principal amount of Debentures, all subject to the terms and conditions set forth in the Indenture. The Indenture makes provision for the adjustment of the Conversion Price in certain events therein specified and for the giving of notice to Debentureholders of such events. The Debentures may be redeemed prior to maturity in whole at any time on or after August 30, 2003 or in part from time to time, at the option of the Corporation, on not more than 60 and not less than 30 days' notice upon payment of the principal amount being repaid plus accrued and unpaid interest thereon to but not including the date fixed for redemption. In the event of partial redemption, the holder hereof shall be entitled to receive, without expense to such holder, a new Debenture for the unredeemed part of the principal amount of the Debenture. The principal hereof may also become or be declared due before stated maturity on the conditions, in the manner, with the effect and at the times set forth in the Indenture. Upon presentation at the principal office of the Trustee in Toronto, Ontario, subject to the provisions of the Indenture and upon compliance with the reasonable requirements of the Trustee: (1) Debentures of any denomination may be exchanged for Debentures of any other authorized denomination of the same aggregate principal amount; and (2) subject to applicable securities laws, a Debenture may be transferred by the registered holder thereof or his executors, administrators or other legal representatives or his or their attorney duly appointed in writing. -3- The Corporation, the Trustee, any registrar and any paying agent may deem and treat the person in whose name this Debenture is registered as the absolute owner of this Debenture for the purpose of receiving payment of or on account of the principal hereof and interest due hereon and for all purposes whatsoever and the Corporation, the Trustee, any registrar and any paying agent shall not be affected, to the extent permitted by law, by any notice to the contrary. The Indenture contains provisions making binding upon all holders of Debentures outstanding thereunder resolutions passed at meetings of such holders held in accordance with such provisions and instruments in writing signed by the holders of a specified percentage of the principal amount of the Debentures outstanding. To the extent the terms and conditions set forth in this Convertible Debenture Certificate conflict with the terms and conditions of the Indenture, the Indenture shall prevail. The Corporation will furnish to the holder of this Convertible Debenture Certificate, upon request and without charge, a copy of the Indenture. This Debenture shall not become obligatory for any purpose until it shall have been certified by or on behalf of the Trustee for the time being under the indenture. All capitalized terms used herein and not otherwise defined herein shall have the meaning attributed to those terms in the Indenture. IN WITNESS WHEREOF Certicom Corp. has caused this Debenture to be signed by its President and Chief Financial Officer as of August 30, 2001. CERTICOM CORP. Per:______________________________________ President Per:______________________________________ Chief Financial Officer FORM OF TRUSTEE'S CERTIFICATE ----------------------------- Trustee's Certificate --------------------- This Debenture is one of the 7.25% Senior Convertible Unsecured Subordinated Debentures referred to in the Indenture within mentioned. COMPUTERSHARE TRUST COMPANY OF CANADA, Trustee Per:________________________________ EXHIBIT "A" ----------- CONVERSION NOTICE ----------------- The undersigned holder of the within Debenture, hereby subscribes for ______________ Common Shares of Certicom Corp. (the "Corporation") in conversion of $_____________of the principal amount and $__________ accrued and unpaid interest at a conversion price of $3.85 per Common Share in accordance with the conversion referred to in Article IV of the Indenture according to the conditions thereof. ALL SHARE CERTIFICATES ISSUED PRIOR TO AUGUST 30, 2002 , UNLESS A RECEIPT FROM THE SECURITIES REGULATORY AUTHORITY OF THE PROVINCE IN WHICH THE HOLDER RESIDES FOR A (FINAL) PROSPECTUS QUALIFYING THE DEBENTURES UPON CONVERSION OF THE CONVERTIBLE NOTES IS ISSUED PRIOR THERETO, MUST HAVE IMPRINTED ON THEIR FACE THE FOLLOWING: "THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE LISTED ON THE TORONTO STOCK EXCHANGE; HOWEVER, THE SAID SECURITIES CAN NOT BE TRADED THROUGH THE FACILITIES OF SUCH EXCHANGE SINCE THEY ARE NOT FREELY TRANSFERABLE, AND CONSEQUENTLY ANY CERTIFICATE REPRESENTING SUCH SECURITIES IS NOT `GOOD DELIVERY' IN SETTLEMENT OF TRANSACTIONS ON THE TORONTO STOCK EXCHANGE." DATED at ____________________________,this _____ day of_____________, _____. _______________________________________ Name of Debenture Holder _______________________________________ Authorized Signatory Registration Instructions: Delivery Instructions: _____________________________________ _______________________________________ Name Account reference, if applicable _____________________________________ _______________________________________ Account reference, if applicable Contact Name _____________________________________ _______________________________________ Address Address _______________________________________ (Telephone Number) EXHIBIT "B" ----------- POWER OF ATTORNEY TO TRANSFER DEBENTURES ---------------------------------------- WHEREAS the undersigned is the registered owner of Cdn $ principal amount of 7.25% Senior Convertible Unsecured Subordinated Debentures ("Debentures") of CERTICOM CORP. (the "Corporation") which are issued pursuant to a convertible debenture trust indenture dated as of August 30, 2001, between Computershare Trust Company of Canada and the Corporation; FOR VALUE RECEIVED the undersigned hereby sells, assigns and transfers unto ________________________________________________________________________________ (Name of transferee) ________________________________________________________________________________ (Address) the Debentures ________________________________________________________________________________ (Description of Security - include principal amount, rate and maturity of Debentures) standing in the name of the undersigned on the books of the Company all my right, title and interest in and to the said Debentures AND HEREBY IRREVOCABLY CONSTITUTES and APPOINTS Computershare Trust Company of Canada the Attorney of the undersigned to transfer the Debentures with full power of substitution in the premises. DATED at ________________________ on _____________________________. SIGNED in the presence of: ______________________________________ _____________________________________ (Witness) (name-of~transferor) SIGNATURE OF TRANSFEROR GUARANTEED BY: _____________________________________ Name of Debenture Holder _____________________________________ Authorized Signatory Registration Instructions: Delivery Instructions: ______________________________________ _____________________________________ Name Account reference, if applicable ______________________________________ _____________________________________ -2- _______________________________________ _____________________________________ Account reference, if applicable Contact Name _______________________________________ _____________________________________ Address Address _____________________________________ (Telephone Number) SIGNATURE GUARANTEE - ------------------- THE SIGNATURE(S) MUST BE GUARANTEED BYA SCHEDULE "A" MAJOR CHARTERED BANK/TRUST COMPANY, OR A MEMBER OFAN ACCEPTABLE MEDALLION SIGNATURE GUARANTEE PROGRAM. THE GUARANTOR MUST AFFIX A STAMP BEARING THE ACTUAL WORDS "SIGNATURE GUARANTEED". * PLEASE NOTE - SIGNATURE GUARANTEES ARE NOT ACCEPTED FROM TREASURY BRANCHES OR CREDIT UNIONS UNLESS THEY ARE MEMBERS OF THE STAMP MEDALLION PROGRAM EX-10.3 5 dex103.txt TRUST INDENTURE - DEBENTURES EXHIBIT 10.3 CERTICOM CORP. and COMPUTERSHARE TRUST COMPANY OF CANADA as Trustee ________________________________ TRUST INDENTURE ________________________________ 7.25% Convertible Notes Dated as of August 30, 2001 THIS CONVERTIBLE NOTE INDENTURE is made as of August 30, 2001. BETWEEN: CERTICOM CORP., a corporation continued under the laws of the Yukon Territory and having an office in the City of Toronto, in the Province of Ontario (hereinafter referred to as the "Corporation") -and- COMPUTERSHARE TRUST COMPANY OF CANADA, a trust company organized under the laws of Canada and having an office in the City of Toronto, in the Province of Ontario (hereinafter referred to as the "Trustee") WHEREAS the Corporation is proposing to issue Convertible Notes in the manner herein set forth; AND WHEREAS each Convertible Note shall entitle the holder thereof to acquire an aggregate principal amount of Convertible Debentures equal to the aggregate principal amount represented by such Convertible Note, at no additional cost and upon the terms and conditions herein set forth; AND WHEREAS the Corporation represents to the Trustee that all necessary resolutions of the Corporation have been duly enacted, passed or confirmed and all other proceedings taken and conditions complied with to authorize the execution and delivery of this Indenture and the execution and issue of the Convertible Notes and to make the same legal and valid and binding on the Corporation in accordance with the laws applicable to the Corporation; AND WHEREAS the Trustee has agreed to act as trustee for the Convertible Noteholders on the terms and conditions herein set forth; AND WHEREAS all acts and deeds necessary have been done and performed to make the Convertible Notes, when certified by the Trustee and issued as provided for in this Indenture, legal and valid and binding upon the Corporation with the benefits and subject to the terms of this Indenture; AND WHEREAS the foregoing recitals are made as representations and statements of fact by the Corporation and not by the Trustee. NOW THEREFORE, THIS INDENTURE WITNESSETH that for good and valuable consideration mutually given and received, the receipt and sufficiency of which is hereby acknowledged, the parties hereto agree as follows: -3- ARTICLE 1 - INTERPRETATION 1.1 Definitions In this Indenture, including the recitals and schedules hereto, and in all indentures supplemental hereto, the following words and terms shall have the indicated meanings: (a) "Affiliate" has the meaning ascribed to such term in the Business Corporations Act (Ontario); (b) "Applicable Legislation" means the provisions of the Business Corporations Act (Ontario), as from time to time amended, and any other statute of Canada or a province thereof, and the regulations and rules under any such named or other statute, relating to trust indentures or to the rights, duties and obligations of trustees and of corporations under trust indentures, to the extent that such provisions are at the time in force and applicable to this Indenture; (c) "Applicable Securities Law" means, collectively, the applicable securities laws of each of the Qualifying Jurisdictions and the respective regulations and rules made thereunder together with all applicable published policy statements, blanket orders and rulings of the Securities Commissions and all discretionary orders or rulings, if any, of the Securities Commissions made in connection with the transactions contemplated hereunder; (d) "Business Day" means a day other than a Saturday, Sunday or statutory holiday in Toronto, Ontario; (e) "Change of Control" means the occurrence of (i) a Person, including the Person's Affiliates and Associates, becoming the beneficial owner of directly or indirectly, or, exercising control or direction over, Common Shares carrying in excess of 50.1% of the total voting rights attached to the Common Shares; or (ii) the Corporation consolidating or amalgamating with, or merging with or into, another Person or selling, assigning, conveying, transferring, leasing or otherwise disposing of all or substantially all of its assets to any Person, or any Person consolidating or amalgamating with, or merging with or into, the Corporation, in any such event pursuant to a transaction in which any of the outstanding Common Shares are converted into or exchanged for cash, securities or other property, other than any such transaction in which the outstanding Common Shares are converted into or exchanged for, or the assets of the Corporation are exchanged for, voting securities or securities exchangeable at the option of the holder into voting securities of the surviving or transferee Person constituting a majority of such voting securities (giving effect to such issuance and the exercise of any rights to exchange such securities into voting securities); (f) "Common Shares" means common shares in the capital of the Corporation; (g) "Contingent Obligation" shall mean, as to any Person, any obligation, whether secured or unsecured, of such Person guaranteeing or indemnifying, or in effect -4- guaranteeing or indemnifying, for any indebtedness, leases, dividends, letters of credit or other monetary obligations (the "primary obligations") of any other Person (the "primary obligor") in any manner, whether directly or indirectly, including any obligation of such Person as an account party in respect of a letter of credit or letter of guarantee issued to assure payment by the primary obligor of any such primary obligation and any obligation of such Person, whether or not contingent, (a) to purchase any such primary obligation or any property constituting direct or indirect security therefor, (b) to advance or supply funds for the purchase or payment of any such primary obligation or to maintain working capital or equity capital of the primary obligor or otherwise to maintain the net worth or solvency of the primary obligor, (c) to purchase property, securities or services primarily for the purpose of assuring the obligee under any such primary obligation of the ability of the primary obligor to make payment of such primary obligation, or (d) otherwise to assure or hold harmless the obligee under such primary obligation against loss in respect of such primary obligation; provided, however, that the term Contingent Obligation shall not include endorsements of instruments for deposit or collection in the ordinary course of business; (h) "Convertible Debentures" means the debentures of the Corporation issuable under the Trust Indenture to holders of the Convertible Notes; (i) "Convertible Note Agency" means the principal office of the Trustee in the City of Toronto or such other place as may be designated in accordance with subsection 3.1(c); (j) "Convertible Note Certificate" means a certificate issued pursuant to this Indenture, in substantially the form set forth in Schedule "A", issued on or after the Effective Date to evidence Convertible Notes; (k) "Convertible Noteholders" or "holders" without reference to Convertible Notes or Common Shares, means the Persons who, on and after the Effective Date, are registered owners of Convertible Notes; (l) "Convertible Noteholders' Request" means an instrument signed in one or more counterparts by Convertible Noteholders representing in the aggregate not less than 25% of the aggregate principal amount of all Convertible Notes then unexercised and outstanding, requesting the Trustee to take or refrain from taking some action or proceeding specified therein; (m) "Convertible Notes" means the convertible notes issued and certified hereunder and for the time being outstanding and entitling the holder to acquire Convertible Debentures in accordance with the terms and conditions hereof; (n) "Counsel" means a barrister or solicitor or a firm of barristers and solicitors retained by the Trustee or retained by the Corporation and acceptable to the Trustee; (o) "Debt" shall mean, at any time: -5- (a) all items which would then be classified as a liability on a consolidated balance sheet of the Corporation or in the notes thereto; and (b) to the extent not otherwise included as Debt pursuant to the provisions of paragraph (a) of this definition, without duplication, any item which is (i) an obligation of the Corporation or any of its Subsidiaries in respect of borrowed money or for the deferred purchase price of property or services or an obligation of the Corporation which is evidenced by a note, bond, debenture or other similar instrument, (ii) a transfer with recourse or with an obligation to repurchase, to the extent of the liability of the Corporation or any of its Subsidiaries with respect thereto, (iii) an obligation secured by any Lien on any property of the Corporation or any of its Subsidiaries to the extent attributable to its respective interest in such property, even though it has not assumed or become liable for the payment thereof, (iv) an obligation of the Corporation or any of its Subsidiaries arising in connection with an acceptance facility or letter of credit or letter of guarantee issued by or for the account of the Corporation or any of its Subsidiaries, or (v) a Contingent Obligation of the Corporation or any of its Subsidiaries to the extent that the primary obligation so guaranteed is not otherwise classified as a liability on the consolidated balance sheet of the Corporation, provided, however, that there shall not be included for the purpose of this definition any item which is on account of (w) issued share capital or surplus, (x) reserves for deferred income taxes or general contingencies, (y) minority interests in Subsidiaries, or (z) trade debt; (p) "director" means a director of the Corporation for the time being and, unless otherwise specified herein, reference to action "by the directors" means action by the directors of the Corporation as a board or, whenever duly empowered, action by any committee of such board; (q) "Effective Date" means August 30, 2001; (r) "Escrow Agent" means Computershare Trust Company of Canada; (s) "Escrow Agreement" means the escrow and custodial agreement dated as of August 30, 2001 among the Corporation, the Underwriter and the Escrow Agent; -6- (t) "Escrow Direction" means a direction substantially in the form attached hereto as Schedule "B"; (u) "Event of Default" means any event specified in Section 6.1, continued for a period of time, if any, therein designated; (v) "Exercise Date" means, with respect to any Convertible Note, the date on which the Convertible Note is exercised in accordance with Section 3.1 or Section 3.7, as applicable; (w) "Exercise Form" means the exercise form attached to or applicable to a Convertible Note; (x) "Expiry Date" means the earlier of: (i) the date which is five Business Days following the date on which the Receipt is issued; and (ii) August 30, 2002; (y) "Extraordinary Resolution" has the meaning Set forth in Section 7.11; (z) "Final Prospectus" means the final short form prospectus of the Corporation qualifying the distribution, in the Qualifying Jurisdictions, of the Convertible Debentures to the holders of Convertible Notes upon exercise of the Convertible Notes; (aa) "Lien" means any lien, encumbrance, mortgage, pledge, charge, security interest or other encumbrance; (bb) "NASDAQ" means the Nasdaq National Market; (cc) "Permitted Secured Debt" means, with respect to the Corporation or any of its Subsidiaries: (i) indebtedness (other than trade debt) created, incurred, assumed or guaranteed, for moneys borrowed or raised by whatever means (including, without limitation, by means of commercial paper, bankers' acceptances, debt instruments, bank debt and financial leases, and any liability evidenced by bonds, debentures, notes or similar instruments); (ii) indebtedness created, incurred, assumed or guaranteed after the date of this Indenture to finance the cost of the acquisition by the Corporation or any of its Subsidiaries of any assets or services; (iii) any guarantee of any indebtedness of a type described in clause (i) or (ii); and -7- (iv) renewals, extensions or refunds of any indebtedness or guarantee referred to in clauses (i), (ii) or (iii); provided that, in each case, such indebtedness or guarantee is secured by a Lien and such Lien has been created or granted for bona fide purposes of the Corporation or any of its Subsidiaries and not for the purpose of avoiding the Corporation's obligations under section 5.2(q); (dd) "Person" means an individual, body corporate, partnership, trust, trustee, executor, administrator, legal representative or any unincorporated organization; (ee) "Preliminary Prospectus" means the preliminary short form prospectus of the Corporation qualifying the distribution, in the Qualifying Jurisdictions, of the Convertible Debentures to holders of Convertible Notes upon the exercise of Convertible Notes; (ff) "Qualifying Jurisdictions" means, collectively, the provinces of Ontario and Quebec; (gg) "Receipt" means collectively the receipts required to be issued by each of the Securities Commissions for the Final Prospectus; (hh) "Receipt Deadline" means 4:00 p.m. (Toronto time) on September 29, 2001 or such later date as agreed to in writing by the Corporation and the Underwriter; (ii) "Securities Commissions" means the securities commission or regulatory authority in each of the Qualifying Jurisdictions; (jj) "Shareholder" means a holder of record of one or more Common Shares; (kk) "Subscription Funds" means the aggregate amount of the funds paid or consideration provided by purchasers of the Convertible Notes for such Convertible Notes; (ll) "Subsidiary" has the meaning attributed thereto in the Business Corporations Act (Ontario); (mm) "Successor Corporation" has the meaning ascribed thereto in Section 8.2; (nn) "this Indenture", "herein", "hereby", "hereof" and similar expressions mean and refer to this Indenture and any indenture, deed or instrument supplemental hereto; and the expressions "Article", "Section", "subsection" and "paragraph" followed by a number, letter or both mean and refer to the specified article, section, subsection or paragraph of this Indenture; (oo) "Time of Expiry" means 5:00 p.m. (Toronto time) on the Expiry Date; -8- (pp) "trade debt" means all unsecured debt of the Corporation incurred in connection with the purchase of goods or services in the ordinary course of business; (qq) "Trust Indenture" means the convertible debenture trust indenture dated as of August 30, 2001 between the Corporation and the Trustee providing for the issuance of $13,500,000 aggregate principal amount of Convertible Debentures; (rr) "Trustee" means Computershare Trust Company of Canada or its successors from time to time in the trust hereby created; (ss) "TSE" means The Toronto Stock Exchange; (tt) "Underwriter" means Yorkton Securities Inc.; and (uu) "written request of the Corporation" and "certificate of the Corporation" mean, respectively, a written order, request, consent and certificate signed in the name of the Corporation by its President or a Vice-President; and may consist of one or more instruments so executed. 1.2 Gender and Number Unless herein otherwise expressly provided or unless the context otherwise requires, words importing the singular include the plural and vice versa and words importing gender include all genders. 1.3 Interpretation not Affected by-Headings, etc. The division of this Indenture into Articles and Sections; the provision of a table of contents and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this Indenture or any provision hereof. 1.4 Day not a Business Day In the event that any day on which any action is required to be taken under this Indenture is not a Business Day, then such action shall be required to be taken at or before the requisite time on the next succeeding day that is a Business Day. 1.5 Time of the Essence Time shall be of the essence of this Indenture. 1.6 Currency Except as otherwise specified herein, all dollar amounts herein are expressed in lawful money of Canada. -9- 1.7 Meaning of "Outstanding" Every Convertible Note represented by a Convertible Note Certificate countersigned and delivered by the Trustee hereunder shall be deemed to be outstanding until it shall be cancelled or exercised pursuant to Article 3, provided that where a new Convertible Note Certificate has been issued pursuant to Section 2.11 hereof to replace one which has been mutilated, lost, destroyed or stolen, the Convertible Notes represented by only one of such Convertible Note Certificates shall be counted for the purpose of determining the aggregate number of Convertible Notes outstanding. 1.8 Severability In the event that any provision hereof shall be determined to be invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remainder of such provision and any other provision hereof shall not be affected or impaired thereby. 1.9 English Language Only The parties to this Indenture hereby agree and request that this Indenture, and any documents related hereto, including without limitation the Convertible Note Certificates, be drafted only in the English language. 1.10 Schedules The following schedules are appended to this Indenture and are incorporated as fully as though contained in the body of this Indenture. Schedule "A" - Form of Convertible Note Certificate Schedule "B" - Escrow Direction Schedule "C" - Redemption Election Notice 1.11 Date of Issue of Receipt The Receipt shall conclusively be deemed to be issued on the date appearing on such Receipt as the Receipt's date. 1.12 Beneficiaries This Indenture is entered into by the Trustee for the benefit of all such Persons who subscribe for and purchase Convertible Notes and each of them shall, upon such subscription and purchase, be entered in the register as Convertible Noteholders. The Trustee hereby declares that it holds all rights, interest and benefits to be derived therefrom for and on behalf of all such Persons in accordance with the terms and restrictions contained herein. -10- ARTICLE 2 - ISSUE OF CONVERTIBLE NOTES 2.1 Issue of Convertible Notes The aggregate principal amount of Convertible Notes authorized for issue hereunder is limited to $13,500,000. The Corporation shall not have the right to prepay the Convertible Notes. Notwithstanding anything to the contrary contained in this Indenture, this Section 2.1 shall not be amended so as to increase the aggregate principal amount of Convertible Notes that may be created and authorized for issue hereunder without the approval of the Convertible Noteholders by Extraordinary Resolution. 2.2 Subscription Funds Upon issuance of the Convertible Notes all Subscription Funds shall be paid to the Escrow Agent in accordance with the terms of the Escrow Agreement. Upon the earlier of (i) receipt by the Escrow Agent of an Escrow Direction, and (ii) the Time of Expiry, the Subscription Funds, together with interest thereon, shall be paid by the Escrow Agent to the Trustee or the Corporation, as applicable in accordance with the provisions of Section 4.1. 2.3 Exercise of Convertible Notes Each Convertible Note shall entitle the holder thereof, upon exercise, to acquire an aggregate principal amount of Convertible Debentures equal to the aggregate principal amount of such Convertible Note, at any time until the Time of Expiry at no additional cost to the holder. 2.4 Interest (a) Each Convertible Note shall bear interest on the principal amount thereof from the Effective Date or the date of issue, whichever is later, at the rate of 7.25% per annum, after as well as before default, with interest on overdue interest at the same rate. Interest shall be based on a 365 or 366 day year, as the case may be, and shall be calculated semi-annually not in advance from the Effective Date or the date of issue of a Convertible Note, whichever is later, or from the last interest payment date to which interest has been paid or made available for payment on the Convertible Notes, whichever is later, and shall be paid in like money semi-annually on February 28 and August 30, commencing on February 28, 2002 (unless a Convertible Note shall have been previously exercised as duly provided for). (b) In the event of exercise of a Convertible Note all accrued and unpaid interest on a Convertible Note shall be paid on then first date for the payment of interest following the exercise of such Convertible Note provided for under the terms of the Convertible Debenture into which such Convertible Note is exercised to the Person to whom interest on such Convertible Debenture is payable on such date, and such Person shall be entitled to the interest accrued hereunder on the same basis as if such interest had accrued on such Convertible Debenture and was payable on such interest payment date. -11- 2.5 Payment (a) As the interest on the Convertible Notes becomes due (except interest payable at maturity which may be paid upon presentation and surrender of such Convertible Notes for payment), the Corporation, either directly or indirectly through the Trustee, shall forward or cause to be forwarded by prepaid ordinary mail at least three (3) Business Days prior to the interest payment date, to the holder for the time being, or, in the case of joint holders, to one of such joint holders (failing written instructions to the contrary from all of such joint holders), at his address appearing on the register, a cheque for such interest (less any tax required to be deducted), payable to or to the order of such holder or holders and negotiable at par. The forwarding of such cheque shall satisfy and discharge the liability for the interest upon the Convertible Notes to the extent of the sums represented thereby (plus the amount of any tax deducted as aforesaid) unless such cheque is not paid on presentation; provided that in the event of the non-receipt of such cheque by such registered holder or the loss or destruction thereof, the Corporation, upon being furnished with reasonable evidence of such non-receipt, loss or destruction and indemnity reasonably satisfactory to it, shall issue or cause to be issued to such registered holder a replacement cheque for the amount of such cheque. (b) The holder for the time being of any Convertible Note shall be entitled to the principal moneys and interest evidenced by such Convertible Notes, free from all equities or rights of set-off or counterclaim between the Corporation and the original or any intermediate holder thereof and all Persons may act accordingly. 2.6 Convertible Noteholder not a Shareholder Nothing in this Indenture nor in the holding of a Convertible Note or Convertible Note Certificate or otherwise, shall, in itself, confer, or be construed as conferring upon a Convertible Noteholder any right or interest whatsoever as a Shareholder or as any other shareholder of the Corporation, including, but not limited to, the right to vote at, to receive notice of, or to attend meetings of shareholders or any other proceedings of the Corporation, or the right to receive dividends and other distributions. 2.7 Convertible Notes to Rank Pari Passu All Convertible Notes and Convertible Debentures shall rank pari passu, whatever may be the actual date of issue thereof. 2.8 Form and Denomination of Convertible Notes The Convertible Note Certificates (including all replacements issued in accordance with this Indenture) shall be substantially in the form set out in Schedule "A" hereto, shall be dated on or after the Effective Date, shall bear such distinguishing letters and numbers as the Corporation may, with the approval of the Trustee, prescribe, shall be issuable only in fully registered form and only in integral multiples of $1,000. -12- 2.9 Signing of Convertible Note Certificates The Convertible Note Certificates shall be signed by any one (1) director or officer of the Corporation. The signatures of any such director or officer may be mechanically reproduced by way of photocopy or facsimile and Convertible Note Certificates bearing such photocopy or facsimile signatures shall be binding upon the Corporation as if they had been manually signed by such director or officer. Notwithstanding that any Person whose manual or facsimile signature appears on any Convertible Note Certificate as a director or officer may no longer hold office at the date of such Convertible Note Certificate or at the date of certification or delivery thereof, any Convertible Note Certificate signed as aforesaid shall, subject to Section 2.10, be valid and binding upon the Corporation and the holder thereof shall be entitled to the benefits of this Indenture. 2.10 Certification by the Trustee (a) The Trustee shall certify Convertible Note Certificates upon the written direction of the Corporation. No Convertible Note Certificate shall be issued or, if issued, shall be valid for any purpose or entitle the holder to the benefit of this Indenture until it has been certified by manual signature by or on behalf of the Trustee substantially in the form of the certificate set out in Schedule "A" and such certification by the Trustee upon any Convertible Note Certificate shall be conclusive evidence as against the Corporation that the Convertible Note Certificate so certified has been duly issued hereunder and that the holder is entitled to the benefits of this Indenture. (b) The certification of the Trustee on a Convertible Note Certificate issued hereunder shall not be construed as a representation or warranty by the Trustee as to the validity of this Indenture or the Convertible Note Certificate (except the due certification thereof) and the Trustee shall in no respect be liable or answerable for the use made of the Convertible Note Certificate or any of them or of the consideration therefor except as otherwise specified herein. 2.11 Issue in Substitution for Convertible Note Certificates Lost, etc. (a) If any Convertible Note Certificate becomes mutilated or is lost, destroyed or stolen, the Corporation, subject to applicable law, shall issue and thereupon the Trustee shall certify and deliver, a new Convertible Note Certificate of like tenor as the one mutilated, lost, destroyed or stolen in exchange for and in place of and upon cancellation of such mutilated Convertible Note Certificate, or in lieu of and in substitution for such lost, destroyed or stolen Convertible Note Certificate, and the substituted Convertible Note Certificate shall be in a form approved by the Trustee and the Convertible Notes evidenced thereby shall be entitled to the benefits hereof and shall rank equally, in accordance with their terms, with all other Convertible Notes issued or to be issued hereunder. (b) The applicant for the issue of a new Convertible Note Certificate pursuant to this Section 2.11 shall bear the cost of the issue thereof and in case of loss, destruction -13- or theft shall, as a condition precedent to the issue thereof, furnish to the Corporation and to the Trustee such evidence of ownership and of the loss, destruction or theft of the Convertible Note Certificate so lost, destroyed or stolen as shall be satisfactory to the Corporation and to the Trustee, in their sole discretion, and such applicant may also be required to furnish an indemnity or security in amount and form satisfactory to the Corporation and the Trustee, in their sole discretion, and shall pay the reasonable charges of the Corporation and the Trustee in connection therewith. 2.12 Exchange of Convertible Note Certificates (a) Any one or more Convertible Note Certificates representing any amount of Convertible Notes may, upon compliance with the reasonable requirements of the Trustee, be exchanged for one or more other Convertible Note Certificates in authorized denominations representing the same aggregate principal amount of Convertible Notes as represented by the Convertible Note Certificate or Convertible Note Certificates so exchanged. (b) Convertible Note Certificates may be exchanged only at the Convertible Note Agency or at any other place that is designated by the Corporation, with the approval of the Trustee. Any Convertible Note Certificate tendered for exchange shall be cancelled and surrendered to the Trustee. 2.13 Registration and Transfer The Corporation shall, at all times while any Convertible Notes are outstanding, cause the Trustee to maintain a register in which will be entered the names, latest known addresses of the Convertible Noteholders and if available, facsimile numbers of the holders and particulars of the Convertible Notes held by them, and a register of transfers in which shall be entered the particulars of all transfers of Convertible Notes, such registers to be kept by and at the Convertible Note Agency. The Convertible Notes may only be transferred on the register kept at the principal office of the Trustee in the City of Toronto by the holder or its legal representatives or its attorney duly appointed by an instrument in writing in form and execution satisfactory to the Trustee only upon surrendering to the Trustee the Convertible Note Certificates representing the Convertible Notes to be transferred and upon compliance with: (a) the conditions herein; (b) such reasonable requirements as the Trustee may prescribe (including evidence of compliance with item (c) of this Section 2.13 in such form as is satisfactory to the Trustee acting reasonably); (c) all applicable securities legislation and requirements of regulatory authorities; and (d) payment of the applicable transfer fee as per section 2.14; -14- and such transfer shall be duly noted in such register by the Trustee. Upon compliance with such requirements, the Trustee shall issue to the transferee a Convertible Note Certificate representing the Convertible Notes transferred. 2.14 Charges for Exchange or Transfer Except as otherwise herein provided, the Trustee may charge to a holder requesting an exchange of a Convertible Note Certificate a reasonable sum for each new Convertible Note Certificate issued in exchange for an existing Convertible Note Certificate and payment of such charges and reimbursement of the Trustee or the Corporation for any and all transfer, stamp or similar taxes or other governmental charges required to be paid shall be made by the holder requesting such transfer or exchange as a condition precedent to such transfer or exchange. 2.15 Cancellation of Surrendered Convertible Notes All Convertible Note Certificates surrendered or purchased pursuant to Sections 2.11, 2.12, 2.13, 3.1, 3.7, 4.1 or 5.1 shall be returned to the Trustee for cancellation and, after the expiry of any period of retention prescribed by law, destroyed by the Trustee. Upon request by the Corporation, the Trustee shall furnish to the Corporation a destruction certificate identifying the Convertible Note Certificates so destroyed, the number of Convertible Notes evidenced thereby, the number of Convertible Debentures, if any, issued pursuant to the exercise of such Convertible Notes and the details of any Convertible Note Certificates issued in substitution or exchange for such Convertible Note Certificates destroyed. 2.16 Persons Entitled to Payment (a) The Corporation and Trustee will deem and treat the Person in whose name any Convertible Note is registered as the absolute owner thereof for all purposes of this Indenture and payment of or on account of principal or interest on such Convertible Note shall be made only to or to the order in writing of such holder, and neither the Corporation nor the Trustee shall be affected by any notice to the contrary, except where the Corporation or the Trustee is required to take notice by statutes or by order of a court of competent jurisdiction, and such payment shall be a good and sufficient discharge to the Corporation and the Trustee for all amounts so paid. (b) The holder for the time being of any Convertible Note shall be entitled to the principal and interest evidenced by such Convertible Note, free from all equities or rights of set-off or counterclaim, between the Corporation and the original or any intermediate holder thereof and all Persons may act accordingly, and a transferee of a Convertible Note shall, after the appropriate form of transfer is lodged with the Trustee and upon compliance with all other conditions in that behalf required by this Indenture or by any conditions contained in such Convertible Note, be entitled to the principal and interest evidenced by such Convertible Note free from all equities or rights of set-off or counterclaim between the Corporation and his or her transferor or any previous holder thereof, -15- save in respect of equities of which the Corporation is required to take notice by statute or by order of a court of competent jurisdiction. (c) In the case of the death of one or more joint holders, principal or interest on any Convertible Note registered in their names may be paid to the survivor of such holders whose receipt therefor shall constitute a valid discharge to the Corporation and the Trustee. 2.17 U. S. Legend (a) The Convertible Notes have not been and will not be registered under the U.S. Securities Act and may not be sold or otherwise transferred except pursuant to sales or other transfers that satisfy the requirements of Rule 904 of Regulation S under the U.S. Securities Act. Each Convertible Note certificate originally issued in the United States or to, or for the account of, a U.S. Person, and each Convertible Note Certificate issued in exchange therefor or in substitution thereof (each a "Restricted Convertible Note") shall bear the following legend: "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE UNITED STATES SECURITIES ACT OF 1933, AS AMENDED (THE "U.S. SECURITIES ACT") OR UNDER ANY STATE SECURITIES LAWS. THE HOLDER HEREOF, BY PURCHASING SUCH SECURITIES, AGREES FOR THE BENEFIT OF CERTICOM CORP. THAT SUCH SECURITIES MAY BE OFFERED, SOLD OR OTHERWISE TRANSFERRED ONLY (A) TO CERTICOM CORP., (B) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE U.S. SECURITIES ACT, (C) PURSUANT TO THE EXEMPTION FROM REGISTRATION UNDER THE U.S. SECURITIES ACT PROVIDED BY RULE 144 THEREUNDER, IF AVAILABLE, OR (D) IN COMPLIANCE WITH CERTAIN OTHER PROCEDURES SATISFACTORY TO CERTICOM CORP. DELIVERY OF THIS CERTIFICATE MAY NOT CONSTITUTE "GOOD DELIVERY" IN SETTLEMENT OF TRANSACTIONS ON STOCK EXCHANGES IN CANADA. A NEW CERTIFICATE, BEARING NO LEGEND, DELIVERY OF WHICH WILL CONSTITUTE "GOOD DELIVERY" MAY BE OBTAINED FROM COMPUTERSHARE TRUST COMPANY OF CANADA. UPON DELIVERY OF THIS CERTIFICATE AND A DULY EXECUTED DECLARATION, IN A FORM SATISFACTORY TO COMPUTERSHARE TRUST COMPANY OF CANADA AND THE CORPORATION TO THE EFFECT THAT THE SALE OF THE SECURITIES REPRESENTED HEREBY IS BEING MADE IN COMPLIANCE WITH RULE 904 OF REGULATION S UNDER THE U.S. SECURITIES ACT;" provided, that if the Securities are being sold in compliance with the requirements of Rule 904 of Regulation S under the U.S. Securities Act and in compliance with Canadian local laws and regulations, the legend may be removed by providing a declaration to Computershare Trust Company of Canada, as registrar and transfer agent for the Securities, to the following effect (or as the Corporation may prescribe from time to time): -16- The undersigned (A) acknowledges that the sale of the Securities to which this declaration relates is being made in reliance on Rule 904 of Regulation S under the United States Securities Act of 1933, as amended (the "U.S. Securities Act"), and (B) certifies that (1) it is not an "affiliate" (as defined in Rule 405 under the U.S. Securities Act) of Certicom Corp., (2) the offer of such Securities was not made to a person in the United States and either (a) at the time the buy order was originated, the buyer was outside the United States, or the seller and any person acting on its behalf reasonably believed that the buyer was outside the United States or (b) the transaction was executed on or through the facilities of The Toronto Stock Exchange and neither the seller nor any person acting on its behalf knows that the transaction has been prearranged with a buyer in the United States and (3) neither the seller nor any person acting on its behalf engaged in any directed selling efforts in connection with the offer and sale of such Securities. Terms used herein have the meanings given to them by Regulation S; provided, further, that, if any such Securities are being sold pursuant to Rule 144 of the U.S. Securities Act, the legend may be removed by delivery to Computershare Trust Company of Canada of an opinion of counsel, of recognized standing reasonably satisfactory to the Corporation, to the effect that such legend is no longer required under applicable requirements of the U.S. Securities Act or state securities laws. (b) Notwithstanding any other provisions of this Indenture, in processing and registering transfers of Convertible Notes, no duty or responsibility whatsoever shall rest upon the Trustee to determine the compliance by any transferor or transferee with the terms of the legend contained in subsection 2.17(a), or with the relevant securities laws or regulations, including, without limitation, Regulation S and the Trustee shall be entitled to assume that all transfers are legal and proper. ARTICLE 3 - EXERCISE OF CONVERTIBLE NOTES 3.1 Exercise of Convertible Notes (a) Subject to Section 3.4, the holder of any Convertible Note may exercise the right conferred on such holder to acquire Convertible Debentures by surrendering, prior to the Time of Expiry, at the Convertible Note Agency the Convertible Notes Certificate representing such Convertible Note with a duly completed and executed Exercise Form. A Convertible Note Certificate with the duly completed and executed Exercise Form referred to in this subsection 3.1(a) shall be deemed to be surrendered only upon personal delivery thereof or, if sent by mail or other means of transmission, upon actual receipt thereof at, in each case, the Convertible Note Agency. (b) Any Exercise Form referred to in subsection 3.1(a) shall be signed by the Convertible Noteholder and shall specify: (i) the aggregate principal amount of Convertible Debentures which the holder wishes to acquire (being not more than that amount which the -17- holder is entitled to acquire pursuant to the Convertible Note Certificate(s) surrendered); (ii) the Person or Persons in whose name or names such Convertible Debentures are to be issued; (iii) the address or addresses of such Persons; (iv) the aggregate principal amount of Convertible Debentures to be issued to each such Person if more than one Person is so specified; and (v) social insurance number, if applicable. If any of the Convertible Debentures subscribed for are to be issued to a Person or Persons other than the Convertible Noteholder, the Convertible Noteholder shall pay to the Corporation, or the Trustee on behalf of the Corporation, all applicable transfer or similar taxes and the Corporation shall not be required to issue or deliver certificates evidencing Convertible Debentures unless or until such Convertible Noteholder shall have paid to the Corporation, or the Trustee on behalf of the Corporation, the amount of such tax or shall have established to the satisfaction of the Corporation that such tax has been paid or that no tax is due. (c) In connection with the exchange or transfer of Convertible Note Certificates and the exercise of Convertible Notes, the Corporation hereby appoints the principal office of the Trustee in the City of Toronto as the agency at which Convertible Note Certificates may be surrendered for exchange or transfer or at which Convertible Notes may be exercised. The Corporation may from time to time designate alternate or additional places as the Convertible Note Agency and shall give notice to the Trustee of any change of the Convertible Note Agency. 3.2 Effect of Exercise of Convertible Notes (a) Upon the exercise of Convertible Notes pursuant to Section 3.1 or Section 3.7, and subject to Section 3.3 the aggregate principal amount of Convertible Debentures into which Convertible Notes are exercised shall be deemed to have been issued and the Person or Persons to whom such Convertible Debentures are to be issued shall be deemed to have become the holder or holders of record of such aggregate principal amount of Convertible Debentures on the Exercise Date or, if the transfer registers of the Corporation shall be closed on such date, on the date on which such transfer registers are reopened. (b) Subject to Section 3.7, within five Business Days after the Exercise Date with respect to a Convertible Note, the Corporation shall cause to be mailed or delivered to the Person or Persons in whose name or names the Convertible Debentures are to be issued, in such aggregate principal amount or number as specified in the applicable Exercise Form, at the address specified in such Exercise Form or, if so specified in such Exercise Form, delivered at the Convertible Note Agency where the applicable Convertible Note Certificate was -18- surrendered, a certificate or certificates for the appropriate aggregate principal amount of Convertible Debentures into which such Convertible Note is exercised. 3.3 Partial Exercise of Convertible Notes; Fractions (a) The holder of any Convertible Notes may acquire an aggregate principal amount of Convertible Debentures less than the aggregate principal amount which the holder is entitled to acquire pursuant to any surrendered Convertible Note Certificate for exercise. In the event of any exercise of an aggregate principal amount of Convertible Notes less than the aggregate principal amount into which a Convertible Note is exercisable the holder of the Convertible Notes upon such exercise shall, in addition, be entitled to receive, without charge therefor, a new Convertible Note Certificate in respect of the balance of the principal amount of Convertible Notes represented by the unexercised portion of the surrendered Convertible Note Certificate. (b) Notwithstanding anything herein contained, the Corporation shall not be required, upon the exercise of any Convertible Notes, to issue Convertible Debentures in denominations of less than $1,000 and multiples thereof or to distribute certificates which evidence Convertible Debentures other than in $1,000 denominations and multiples thereof. 3.4 Exercise by Certain Persons Restricted The Convertible Notes may not be exercised by any Person resident in a jurisdiction which is not a Qualifying Jurisdiction unless the distribution of Convertible Debentures to such Person can be lawfully made without the Corporation being required to qualify such distribution in any manner under applicable law. 3.5 Reliance By Trustee The Trustee shall have no obligation to ensure or verify compliance with any Applicable Legislation or regulatory requirements on the issue, exercise or transfer of any Convertible Notes or any underlying Convertible Debentures or Common Shares or other securities issuable upon the exercise of any Convertible Notes. The Trustee shall be entitled to process all proffered transfers and exercises of Convertible Notes upon the presumption that such transfers or exercises are permissible pursuant to all Applicable Legislation and regulatory requirements and the terms of the Indenture and the related Convertible Note Certificates, provided that transfers and exercises of Convertible Notes, or the underlying Convertible Debentures or Common Shares or other securities issuable upon the exercise of any Convertible Notes, bearing the U.S. Legend may only be processed by the Trustee upon written instruction of the Corporation to the Trustee, which instruction may be based, in the Corporation's discretion, upon certificates, opinions and other documentation of the holders of such Convertible Notes or underlying Convertible Debentures or Common Shares. The Trustee may assume for the purposes of this Indenture that the address on the register of Convertible Noteholders of any Convertible Notes is the Convertible Noteholder's actual address and is also determinative of the Convertible Noteholder's residency and that the address of any transferee to whom any Convertible Notes or -19- underlying Convertible Debentures or Common Shares or other securities issuable upon the exercise of any Convertible Notes are to be registered, as shown on the transfer document, is the transferee's actual address and is also determinative of the transferee's residency. 3.6 Expiration of Convertible Notes (a) Subject to Section 3.7, immediately after the Time of Expiry, all rights to acquire Convertible Debentures under any Convertible Note in respect of which such right shall not have been exercised shall cease and terminate, and, subject to Section 3.7, such Convertible Note shall be void and of no further force or effect. (b) If for any reason, the exercise of Convertible Notes in accordance with the terms hereof is prohibited by law or does not take place as contemplated herein (including by order of any securities regulatory authority or court of competent jurisdiction) such Convertible Notes shall, notwithstanding anything to the contrary herein contained, remain valid and outstanding, and shall continue to bear interest at the rate herein provided and shall be due and payable in full on the sixth Business Day following the Expiry Date provided the Convertible Notes are then outstanding. 3.7 Accounting and Recording (a) Any securities or other instruments, from time to time received by the Trustee shall be received in trust for, and shall be segregated and kept apart by the Trustee in trust for, the Corporation. (b) The Trustee shall record the particulars of Convertible Notes exercised, which particulars shall include the names and addresses of the Persons who become holders of Convertible Debentures on the exercise thereof and the Exercise Date, if any, in respect thereof. The Trustee shall provide such particulars in writing to the Corporation within five Business Days of any request by the Corporation therefor. 3.8 Automatic Exercise Any Convertible Notes which are not exercised prior to the Expiry Time shall be deemed to be exercised by the holders thereof immediately prior to the Expiry Time to convert Convertible Notes into Convertible Debentures without any further action on behalf of such holder. Following such exercise, such Convertible Notes shall be cancelled and of no further force and effect other than evidence of entitlement to receive the Convertible Debentures resulting from the conversion of Convertible Notes upon the automatic exercise of any Convertible Notes, which shall be issued upon the surrender of the related Convertible Note Certificate accompanied with the duly completed and executed Exercise Form, either by personal delivery thereof to the Trustee at the Convertible Note Agency or at any other place or places that may be designated by the Corporation with the approval of the Trustee, or, if sent by mail upon actual receipt thereof by the Trustee at the Convertible Note Agency. Within two Business Days of the Expiry Date, the Corporation shall notify holders of the Convertible Notes that have -20- not exercised such Convertible Notes prior to the Time of Expiry that such Convertible Notes have been automatically exercised and converted. 3.9 Securities Restrictions Notwithstanding anything herein contained, Convertible Debentures will only be issued upon exercise of any Convertible Note in compliance with the securities laws of any applicable jurisdiction, and without limiting the generality of the foregoing, in the event that the Convertible Notes are exercised pursuant to Section 3.1 prior to the issuance of a Receipt, the certificates representing the Convertible Debentures thereby issued, or any Common Shares into which the Convertible Debentures are converted, will bear such legend as may, in the opinion of counsel to the Corporation, be necessary in order to avoid a violation of any securities laws of any province in Canada or to comply with the requirements of any stock exchange on which the Common Shares are listed, provided that if, at any time, in the opinion of counsel to the Corporation, such legends are no longer necessary in order to avoid a violation of any such laws, or the holder of any such legended certificate, at the holders expense, provides the Corporation with evidence satisfactory in form and substance to the Corporation (which may include an opinion of counsel satisfactory to the Corporation, acting reasonably) to the effect that such holder is entitled to sell or otherwise transfer such Convertible Debentures or Common Shares in a transaction in which such legends are not required, such legended certificate may thereafter be surrendered to the Corporation in exchange for a certificate which does not bear such legend. ARTICLE 4 - REDEMPTION 4.1 Redemption (a) If the Corporation has not obtained a Receipt on or before the Receipt Deadline, then: (i) each Convertible Noteholder will be entitled to elect (the "Redemption Election") to cause the Corporation to redeem all, but not less than all, the Convertible Notes held by such Convertible Noteholder at a price (the "Redemption Price") per Convertible Note equal to the principal amount thereof, together with accrued and unpaid interest on the principal amount of the Convertible Note so redeemed to but not including the date fixed for redemption (the "Redemption Date"), which date shall not be less than 15 Business Days after the date of receipt or deemed receipt of a Redemption Election Notice (as defined herein) by the Convertible Noteholders; (ii) the Redemption Election may be exercised by delivery to the Corporation of a notice of exercise (a "Redemption Election Notice") substantially in the form attached hereto as Schedule "C" prior to 5:00 p.m. (Toronto time) on the third Business Day immediately preceding the Redemption Date by the Convertible Noteholders; (iii) notwithstanding Section 4.1(a)(i), in the event that Convertible Noteholders representing in the aggregate more than 50% of the aggregate -21- principal amount of the Convertible Notes outstanding on September 28, 2001 elect to cause the Corporation to redeem the Convertible Notes held by such Convertible Noteholders, all outstanding Convertible Notes shall be redeemed (a "Mandatory Redemption") by the Corporation on the Redemption Date at a price per Convertible Note equal to the Redemption Price; (iv) the Corporation shall, on or before October 2, 2001, deliver or cause to be delivered to each Convertible Noteholder and the Trustee a notice stating (A) that a Receipt was not obtained by the Corporation prior to the Receipt Deadline, (b) that each Convertible Noteholder has the rights set forth in, and shall be subject to the provisions of, Sections 4.1(a)(i), (ii) and (iii), as applicable, and (C) the Redemption Date, and including a Redemption Election Notice in the form attached hereto as Schedule "C". (v) if the Corporation is required to redeem any Convertible Notes pursuant to this Section 4.1, the Corporation shall deliver to the Escrow Agent, not later than 5:00 p.m. (Toronto time) on the second Business Day immediately preceding the Redemption Date, an Escrow Direction; (vi) the Corporation shall redeem, on the Redemption Date, (A) in the event of a Mandatory Redemption, all of the outstanding Convertible Notes, or (B) such aggregate principal amount of Convertible Notes as shall be specified in duly completed Redemption Election Notices delivered to the Corporation pursuant to Section 4.1(a)(ii), as applicable, at a price per Convertible Note equal to the Redemption Price; and (vii) except in the case of a Mandatory Redemption, the Escrow Agent shall pay or cause to be paid to the Corporation that portion of the Subscription Funds, including interest thereon, not required to pay the Redemption Price of any Convertible Notes redeemed on the Redemption pursuant to a Redemption Election. (b) Upon compliance by the Corporation with the provisions of Section 4.1(a)(v), all of the outstanding Convertible Notes so called for redemption shall thereupon become due and payable at the Redemption Price on the Redemption Date and from and after the Redemption Date such Convertible Notes shall not be considered as outstanding hereunder and interest on such Convertible Notes shall cease. (c) From the sums deposited with the Trustee by the Escrow Agent pursuant to the Escrow Direction, the Trustee shall deliver, pay or cause to be delivered and paid to the holders of Convertible Notes so redeemed, upon surrender of such Convertible Notes, the moneys to which the Convertible Noteholders are respectively entitled on redemption. -22- (d) If the Trustee determines that the sums deposited with the Trustee by the Escrow Agent will not be sufficient to allow the Trustee to pay the Redemption Price with respect to Convertible Notes to be redeemed in accordance with this Section 4.1, the Trustee shall give notice of such determination to the Corporation and the Corporation shall, within three Business Days of the date upon which such notice is received, pay to the Trustee such amount as shall be sufficient, together with the sums deposited with the Trustee by the Escrow Agent, to allow the Trustee to pay the Redemption Price with respect to Convertible Notes to be redeemed in accordance with this Section 4.1. ARTICLE 5 - RIGHTS OF THE CORPORATION AND COVENANTS. REPRESENTATIONS AND WARRANTIES 5.1 Optional Purchases by the Corporation The Corporation may from time to time purchase with the consent of the Convertible Noteholder, by private contract or otherwise any of the Convertible Notes. Any such purchases shall be offered to all Convertible Noteholders on a pro rata basis. Any such purchase shall be made at the lowest price or prices at which, in the opinion of the directors, such Convertible Notes are then obtainable from such Convertible Noteholder, plus reasonable costs of purchase, and may be made in such manner, from such Persons and on such other terms as the Corporation may determine. Any Convertible Note Certificates representing the Convertible Notes purchased pursuant to this Section 5. 1 shall forthwith be delivered to and cancelled by the Trustee. No Convertible Notes shall be issued in replacement thereof. 5.2 General Covenants of the Corporation The Corporation covenants and agrees with the Trustee that so long as any Convertible Notes remain outstanding: (a) it shall duly and punctually pay or cause to be paid to every Convertible Noteholder the principal of and interest on each of the Convertible Notes (including, in the case of default, interest on the amount in default) at the places, at the respective times and in the manner provided herein and in the Convertible Notes; (b) except as herein otherwise expressly provided, the Corporation will at all times maintain its corporate existence and will keep proper books of account in accordance with generally accepted accounting practices. Upon written notice from the Trustee stating that it has reasonable grounds to believe that an Event of Default has occurred or may occur, the Corporation will furnish or cause to be furnished to the Trustee or its duly authorized agent or attorney such information relating to its business as the Trustee may reasonably require and the books of account will be made available for inspection by the Trustee or such agent or attorney; -23- (c) the Corporation will furnish to the Trustee a copy of all financial statements, whether annual or interim, of the Corporation and the report, if any, of the Corporation's auditors thereon and of all annual and other periodic reports of the Corporation furnished to its shareholders at the same time as they are furnished to such shareholders. No obligation shall rest with the Trustee to analyze such statements or evaluate the performance of the Corporation in any manner whatsoever; (d) the Corporation will reserve and there will remain created and unissued a sufficient aggregate principal amount of Convertible Debentures to satisfy its obligations upon the exercise of Convertible Notes and it will reserve and authorize the issuance of a sufficient number of Common Shares for the purpose of enabling it to satisfy its obligations to issue Common Shares in accordance with the terms of the Convertible Debentures issued upon the exercise of the Convertible Notes; (e) the Corporation will cause the Convertible Debentures and certificates representing the Convertible Debentures from time to time issued pursuant to the exercise of the Convertible Notes to be duly issued and delivered in accordance with the Convertible Notes and the terms hereof; (f) the Corporation will cause the Common Shares and the certificates representing the Common Shares from time to time issued in accordance with the terms of the Convertible Debentures to be duly issued and delivered in accordance with the Convertible Debentures and the terms of the Trust Indenture; (g) all Common Shares issued in accordance with the terms of the Convertible Debentures shall be fully paid and non-assessable; (h) the Corporation will use its commercially reasonable efforts to obtain a Receipt, as soon as reasonably possible, from the Securities Commissions for the Final Prospectus so that the resale of such Convertible Debentures and Common Shares issuable in accordance with the terms of the Convertible Debentures will not generally be subject to the prospectus requirements or any "hold period" under Applicable Securities Law in the Qualifying Jurisdictions; (i) generally, the Corporation will duly and punctually perform and carry out all of the acts or things to be done by it as provided in this Indenture; (j) the Corporation shall not, directly or indirectly, declare or pay any dividends on account of any shares or any class of its shares now or hereafter outstanding or redeem, retire, defease, purchase or otherwise acquire any shares of any class of capital stock (or set aside or otherwise deposit or invest any sums for any of the foregoing purposes) or apply or set apart any sum, or make any other distribution (by reduction of capital or otherwise) in respect of any such shares or agree to do any of the foregoing; -24- (k) in order to prevent any accumulation after maturity of unpaid interest on, or of unpaid principal amount of, any Convertible Note, the Corporation will not directly or indirectly extend or assent to the extension of time for payment of any interest upon any Convertible Note or of any principal amount payable in respect of any Convertible Note and that it will not directly or indirectly be or become a party to or approve any such arrangement by purchasing or funding any interest on the Convertible Notes or any principal amount thereof or in any other manner and that the Corporation will deliver to the Trustee all Convertible Notes when paid as evidence of such payment; (l) if the time for the payment of any interest or principal amount shall be so extended, whether or not such extension is by or with the consent of the Corporation, notwithstanding anything herein or in the Convertible Notes contained, such interest or principal amount shall not be entitled, in case of default hereunder, to the benefit of this Indenture except subject to the prior payment in full of the principal amount of all the Convertible Notes then outstanding and of all matured interest on such Convertible Notes the payment of which has not been so extended; (m) on or before August 30, 2002 and on or before August 30 in each subsequent year and at any other reasonable time if requested by the Trustee, the Corporation will furnish to the Trustee a Certificate of the Corporation stating that the Corporation has complied with all covenants, conditions and other requirements contained in this Indenture, non-compliance with which would constitute an Event of Default hereunder or, if such is not the case, specifying the covenant, condition or other requirement which has not been complied with and giving particulars of such non-compliance and the action, if any, the Corporation proposes to take with respect thereto; (n) the Corporation will take all commercially reasonable steps and actions and do all such acts and things as may be required to: (i) as long as it meets the minimum listing requirements of such institutions, maintain the listing and posting for trading, on the TSE, of the Common Shares or, in the event of a Change of Control, on the TSE, NASDAQ or the New York Stock Exchange the securities for which the Common Shares were exchanged or converted in connection with the Change of Control, and (ii) maintain its status as a reporting issuer not in default of the requirements of applicable securities legislation of the provinces of Canada or have outstanding securities registered under the Securities Exchange Act of 1934, as amended, or, in the event of a Change of Control, maintain the status of the Person, or such Person's Affiliate, whose securities were exchanged or converted for Common Shares in connection with such Change of Control as a reporting issuer not in default of the requirements of applicable securities legislation in the Province of Ontario or have securities outstanding registered under the Securities Exchange Act of 1934, as amended; -25- (o) the Corporation shall, within three Business Days of a written request by the Trustee, furnish to the Trustee, or to such other Person as the Trustee may direct, a true copy of this Indenture; (p) the Corporation shall not change its name or amalgamate with another corporation under a different name without giving at least ten days' prior notice to the Trustee of the new name and the date upon which such change of name or amalgamation is to take effect and, within five Business Days of the change of name or amalgamation, the Corporation shall provide the Trustee with: (i) a notarial or certified copy of the articles of amendment or articles of amalgamation effecting the change of name; and (ii) an opinion from legal counsel satisfactory to the Trustee as to the correct name of the Corporation and confirming that all appropriate registrations, filings or recordings have been made to ensure the continued validity and enforceability of this Indenture and the Convertible Notes; (q) the Corporation represents and warrants to the Trustee that there is no (i) Permitted Secured Debt or (ii) Debt ranking senior to, or pari passu, with the Debentures outstanding or in effect on the date of this Indenture, except such Permitted Secured Debt as has been incurred to finance the cost of acquisition by the Corporation or any of its Subsidiaries of any assets or services in the ordinary course of their respective businesses. The Corporation will not, and will not permit any of its Subsidiaries to, create, incur, assume, suffer, permit to exist or guarantee, directly or indirectly, any Debt that ranks senior to, or pari passu, with the Debentures other than Permitted Secured Debt. Nothing in this section 5.2(q) will prevent or be deemed to prevent the Corporation or any of its Subsidiaries from creating, incurring, assuming, suffering, permitting to exist or guaranteeing trade debt; (r) the Corporation shall promptly notify the Trustee in writing of the details of the occurrence of any Event of Default; and (s) if the closing price of the Common Shares on NASDAQ is less than U.S. $1.00 for any period of 10 consecutive trading days, the Corporation will consider calling a special meeting of its shareholders for the purpose of approving a consolidation of the Common Shares on such terms as the directors of the Corporation may approve. 5.3 Trustee's Remuneration and Expenses (a) The Corporation covenants that it will pay to the Trustee reasonable remuneration for its services as Trustee and will pay all costs, charges and expenses (including reasonable fees and disbursements of its Counsel and all other advisors not regularly in its employ) properly incurred by the Trustee in connection with the trusts hereof, on demand by the Trustee and also (in addition to any right of indemnity given to the Trustee by law) will at all times keep indemnified the -26- Trustee against all liabilities, losses, damages, actions, proceedings, costs, claims, expenses and demands in respect of any matter or thing done or omitted by the Trustee (other than through the gross negligence of or misconduct by the Trustee) in any way relating to this Indenture. The said remuneration shall continue to be payable until the trusts hereof be finally wound up and whether or not the trusts of this Indenture shall be in the course of administration by or under the direction of the court. (b) Any amount due under this Section 5.3 and unpaid 30 days after demand for such payment shall bear interest from the expiration of such 30 day period at a rate per annum equal to the rate generally charged by the Corporate Trust Department of the Trustee from time to time on overdue accounts. After default all amounts so payable and the interest thereon shall be payable out of any funds coming into possession of the Trustee in priority to any payment of the principal amount of, or any interest on, the Convertible Notes. 5.4 Securities Qualification Requirements (a) Following the Effective Date, the Corporation shall, as soon as reasonably possible, file with the Securities Commissions the Preliminary Prospectus and all such other documents as may be required under Applicable Securities Law with the Securities Commissions and use its commercially reasonable efforts to obtain all required receipts therefor from the Securities Commissions. (b) The Corporation shall, after satisfaction of any comments with respect to the Preliminary Prospectus by the Securities Commissions, file the Final Prospectus and all such other documents as may be required under Applicable Securities Law with the Securities Commissions, and undertakes to use its commercially reasonable efforts to obtain a Receipt therefor from the Securities Commissions as soon as reasonably possible but in any event by the Receipt Deadline and to take all other commercially reasonable steps as may be necessary to qualify the distribution in the Qualifying Jurisdictions of the Convertible Debentures and Common Shares issuable in accordance with the terms of the Convertible Debentures, provided that the Corporation shall not be obligated to file the Final Prospectus on or after August 30, 2002. (c) The Corporation shall send written notice to each holder of Convertible Notes and the Trustee advising of the issuance of a Receipt by the Securities Commissions together with a copy of the Final Prospectus. Such notice shall be hand delivered or mailed to each holder of the Convertible Notes at the address of each such holder appearing in the register of the Convertible Notes maintained pursuant to this Indenture within five Business Days after the date on which a Receipt was issued by the Securities Commissions. -27- 5.5 Performance of Covenants by Trustee If the Corporation shall fail to perform any of its covenants contained in this Indenture, the Trustee may notify the Convertible Noteholders of such failure on the part of the Corporation or may itself perform any of the covenants capable of being performed by it but, subject to Section 9.2, shall be under no obligation to perform said covenants or to notify the Convertible Noteholders of such performance by it. All sums reasonably expended or advanced by the Trustee in so doing shall be repayable as provided in Section 5.3. No such performance, expenditure or advance by the Trustee shall relieve the Corporation of any default hereunder or of its continuing obligations under the covenants herein contained. ARTICLE 6 - ENFORCEMENT 6.1 Events of Default If any of the Events of Default listed below in this Section 6.1 shall occur and be continuing: (a) the Corporation shall default in payment of the principal on any Convertible Note when the same becomes due under any provision hereof or of the Convertible Notes; or (b) the Corporation shall default in payment of any interest due on any Convertible Notes when the same becomes due under any provision hereof or of the Convertible Notes and any such default continues for a period of five days; or (c) the Corporation shall default in the performance, or breach, of any covenant or agreement of the Corporation in this Indenture or the Convertible Notes, continued for a period of 30 days after there has been given notice, by registered or certified mail, to the Corporation by the Trustee or by Holders of not less than 25% of the principal amount of Convertible Notes then outstanding specifying such default or breach and requiring it to be remedied, unless the Trustee (having regard to the subject matter of the default) shall have agreed to a longer period and, in such event, for the period agreed to by the Trustee; or (d) the institution by the Corporation of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable federal, provincial or state law relating to bankruptcy, insolvency, reorganization or relief of debtors, or the consent by it to the filing of any such petition or to the appointment under any such law of a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Corporation or of substantially all of its property, or the making by it of a general assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due; or -28- (e) the entry of a decree or order by a court having jurisdiction in the premises adjudging the Corporation a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement or adjustment of or in respect of the Corporation under any applicable law relating to bankruptcy, insolvency, reorganization or relief of debtors, or appointing under any such law a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of the Corporation or of substantially all of its property, or ordering pursuant to any such law the winding-up or liquidation of its affairs, and the continuance of any such decree, petition, appointment or order unstayed and in effect for a period of 90 consecutive days; or (f) if an encumbrancer takes possession of, or appoints a receiver in respect of, all or substantially all of the property of the Corporation, or if any process or execution is levied or enforced upon or gains all or substantially all of the property of the Corporation and remains unsatisfied for such period as would permit any such property to be sold thereunder, unless the Corporation actively and diligently contests in good faith such process, but in that event the Corporation shall, if the Trustee so requires, give security which, in the discretion of the Trustee, is sufficient to pay in full the amount thereby claimed in case the claim is held to be valid; then, in each and every such event, if such event is continuing, subject to Section 6.3 and Section 7.10(d), the Trustee may in its discretion and shall, upon receipt of a Convertible Noteholders' Request, declare the principal of, and interest on, all Convertible Notes then outstanding and all other moneys outstanding hereunder to be due and payable, and the same shall forthwith become immediately due and payable to the Trustee, anything therein or herein to the contrary notwithstanding, and the Corporation shall forthwith pay to the Trustee for the benefit of the Convertible Noteholders the amount of the principal of, and interest then accrued on, all of the Convertible Notes then outstanding and all other moneys outstanding hereunder, together with interest thereon, at the rate of interest borne by the Convertible Notes from the date of the said declaration until payment is received by the Trustee and such payment when made shall be deemed to have been made on such Convertible Notes and shall be applied as provided in Section 6.5. 6.2 Notice of Events of Default If an Event of Default shall occur and be continuing the Trustee shall, as soon as reasonably possible but in any event within 15 days after it becomes aware of the occurrence of such Event of Default, give notice of such Event of Default, to the Convertible Noteholders in the manner provided in Article 10; provided that, notwithstanding the foregoing, unless the Trustee shall have been requested to do so pursuant to a Convertible Noteholders' Request, the Trustee shall not be required to give such notice, if the Trustee, in good faith, reasonably believes that it is in the best interests of the Convertible Noteholders to withhold such notice and shall have so informed the Corporation in writing. -29- 6.3 Waiver of Default Upon the happening of any Event of Default, except default in payment of principal, and in addition to the powers exercisable by the Convertible Noteholders by Extraordinary Resolution, the holders of not less than 51% in principal amount of all the Convertible Notes which shall then be outstanding shall have power, by an instrument or instruments in writing or by affirmative votes of such holders at a meeting duly convened and held as hereinafter provided, to cancel any declaration made by the Trustee pursuant to Section 6.1 or to require the Trustee to waive the default, or both, and such declaration shall thereupon be cancelled or the Trustee shall thereupon waive the default, in either case, upon such terms and conditions as such holders shall prescribe. So long as it has not become bound as provided in this Article 6 to declare the principal of and interest on all the Convertible Notes then outstanding to be due and payable, or to obtain and enforce payment of the same, the Trustee shall have the power to waive any default arising hereunder if, in the reasonable opinion of the Trustee, acting in good faith, the same shall have been cured, or adequate satisfaction made therefor, upon such terms and conditions as the Trustee may deem advisable. Provided always that no act or omission either of the Trustee or of the Convertible Noteholders in the premises shall extend to or be taken in any manner whatsoever to affect any subsequent default or the rights resulting therefrom. 6.4 Right of Trustee to Enforce Payment (a) Subject to the provisions of Section 6.3, if the Corporation shall fail to pay to the Trustee, on demand, the principal of and interest on all Convertible Notes then outstanding which shall have been declared by the Trustee to be due and payable pursuant to Section 6.1, together with any other amounts due hereunder, the Trustee may in its discretion and shall upon receipt of a Convertible Noteholders' Request and upon being funded and indemnified to its reasonable satisfaction against all costs, expenses and liabilities to be incurred, proceed in its name as Trustee hereunder to obtain or enforce payment of the said principal of and interest on all the Convertible Notes then outstanding together with any other amounts due hereunder, by any remedy provided by law either by legal proceedings or otherwise. (b) The Trustee shall be entitled and empowered, either in its own name or as trustee of an express trust, or as attorney-in-fact for the holders of the Convertible Notes, or in any one or more of such capacities, to file such proof of debt, amendment of proof of debt, claim, petition or other document as may be necessary or advisable in order to have the claims of the Trustee and of the holders of the Convertible Notes allowed in any insolvency, bankruptcy, liquidation or other judicial proceedings relative to the Corporation or its creditors or relative to or affecting its property. The Trustee is hereby irrevocably appointed (and the successive respective holders of the Convertible Notes by taking and holding the same shall be conclusively deemed to have so appointed the Trustee) the true and lawful attorney-in-fact of the respective holders of the Convertible Notes with authority to make or file in the respective names of the holders of the Convertible Notes or on behalf of the holders of the Convertible Notes as a class, subject to deduction from any such claims of the amounts of any claims filed by any of the holders of -30- the Convertible Notes themselves, any proof of debt, amendment of proof of debt, claim, petition or other document in any proceedings and to receive payment of any sums becoming distributable on account thereof, and to execute any such other papers and documents and to do and perform any and all such acts and things for and on behalf of such holders of the Convertible Notes, as may be necessary or advisable in the opinion of the Trustee, in order to have the respective claims of the Trustee and of the holders of the Convertible Notes against the Corporation or its property allowed in any such proceeding, and to receive payment of or on account of such claims; provided, however, that nothing contained in this Indenture shall be deemed to give to the Trustee, unless so authorized by Extraordinary Resolution, any right to accept or consent to any plan of reorganization or otherwise by action of any character in such proceeding to waive or change in any way any right of any Convertible Noteholder. (c) Any such suit or proceeding instituted by the Trustee shall be brought in the name of the Trustee as trustee of an express trust, and any recovery of judgment shall be for the rateable benefit of the holders of the Convertible Notes subject to the provisions of this Indenture. In any proceeding brought by the Trustee (and also any proceeding in which a declaratory judgment of a court may be sought as to the interpretation or construction of any provision of this Indenture, to which the Trustee shall be a party) the Trustee shall be held to represent all the holders of the Convertible Notes, and it shall not be necessary to make any holders of the Convertible Notes parties to any such proceeding. 6.5 Application of Moneys (a) Except as herein otherwise expressly provided, any moneys received by the Trustee from the Corporation pursuant to the foregoing Sections of this Article 6, or as a result of legal or other proceedings or from any trustee in bankruptcy or liquidator of the Corporation, shall be applied, together with any other moneys in the hands of the Trustee available for such purposes, as follows: FIRST: to the payment and reimbursement to the Trustee of the amounts contemplated by Section 5.3, including, without limitation, compensation, costs, charges, expenses, borrowings, advances, or other moneys furnished or provided by or at the instance of the Trustee in or about the execution of its trust or otherwise in relation to this Indenture, with interest thereon as herein provided; SECOND: subject to Section 5.4 and as hereinafter in this Section 6.5 provided, in payment rateably and proportionately of the principal of and accrued and unpaid interest and interest on amounts in default on the Convertible Notes which shall then be outstanding in the priority of principal first and then accrued and unpaid interest and interest on amounts in default, unless otherwise directed by Extraordinary Resolution and, in that case, in such order of priority -31- as between principal and interest as may be directed by such resolution; and THIRD: the surplus (if any) of such moneys shall be paid to the Corporation or its assigns; provided, however, that no payment shall be made in respect of the principal of or interest on any Convertible Note held, directly or indirectly, by or for the benefit of the Corporation or any Subsidiary (other than any Convertible Note pledged for value and in good faith to a Person other than the Corporation or any Subsidiary but only to the extent of such Person's interest therein) except subject to the prior payment in full of the principal of, and premium, if any, and interest of all Convertible Notes which are not so held. (b) Provided always that the Trustee shall not be bound to apply or make any partial or interim payment of any moneys coming into its hands pursuant to the foregoing Sections of this Article 6 if the amount so received by it is insufficient to make a distribution of at least 2% of the principal amount of the outstanding Convertible Notes but it may retain the money so received by it and deposit the same in its deposit department or in a chartered bank in Canada to its credit at such rate of interest as is then current on similar deposits or invest the same as provided in Section 12.10 of the Trust Indenture until the moneys or the investments representing the same, with the income derived therefrom together with any other moneys for the time being under its control shall be sufficient for the said purpose or until it shall consider it advisable to apply the same in the manner above set forth. 6.6 Notice of Payment by Trustee Not less than 21 days' notice shall be given by the Trustee to the Convertible Noteholders of any payment to be made under this Article 6 to the Convertible Noteholders. Such notice shall state the time when and the place where such payment is to be made, and the amount of the payment and the application thereof as between principal and interest. After the day so fixed, unless payment shall have been duly demanded and have been refused, the Convertible Noteholders will be entitled to interest only on the balance (if any) of the principal moneys and interest due to them, respectively, on the Convertible Notes, after deduction of the respective amounts payable in respect thereof on the day so fixed. 6.7 Trustee May Demand Production of Convertible Notes The Trustee shall have the right to demand production of the Convertible Notes in respect of which any payment of principal or interest required by this Article 6 is made and may cause to be endorsed on the same memorandum of the amount so paid and the date of payment, but the Trustee may, in its discretion, dispense with such production and endorsement in any special case, upon such indemnity being given to it and to the Corporation as the Trustee shall deem sufficient. -32- 6.8 Trustee Appointed Attorney The Corporation hereby irrevocably appoints the Trustee to be the attorney of the Corporation for and in the name and on behalf of the Corporation to execute any instruments and to do any acts and things which the Corporation ought to sign, execute and do hereunder and generally to use the name of the Corporation in the exercise of all or any of the powers hereby conferred on the Trustee, with full powers of substitution and revocation. 6.9 Suits by Convertible Noteholders No Convertible Noteholder shall have the right to institute any action, suit or proceeding, judicial or otherwise, with respect to this Indenture or for the appointment of a receiver or trustee, or for any other remedy authorized or permitted by this Indenture or by law or by equity hereunder, unless: (a) such Convertible Noteholder has previously given written notice to the Trustee, or vice versa, of a continuing Event of Default; (b) the Trustee shall have received a Convertible Noteholders' Request requesting the Trustee to institute proceedings in respect of such Event of Default in its own name as Trustee hereunder and the Trustee shall have been offered a reasonable opportunity either itself to proceed to exercise the powers hereinbefore granted or to institute an action, suit or proceeding in its name for such purpose; (c) the Convertible Noteholder or Convertible Noteholders executing such Convertible Noteholders' Request have provided to the Trustee sufficient funds and/or indemnity against the costs, expenses and liabilities to be incurred in compliance with such request in accordance with subsection 9.2(b); (d) the Trustee, for 60 days after its receipt of such notice, Convertible Noteholders' Request and provision of funds and/or indemnity, has failed to institute any such proceeding; and (e) no direction inconsistent with such written request has been given to the Trustee during such 60-day period by the Convertible Noteholders of a majority or more in principal amount of the outstanding Convertible Notes. In such event but not otherwise any Convertible Noteholder. acting on behalf of himself and all other Convertible Noteholders, shall be entitled to take proceedings in any court of competent jurisdiction such as the Trustee might have taken under Section 6.4, but in no event shall any Convertible Noteholder or combination of Convertible Noteholders have any right to take any other remedy or proceedings out of court; it being understood and intended that no one or more Convertible Noteholders shall have any right in any manner whatever by virtue of, or by availing of, any provision of this Indenture to affect, disturb or prejudice the rights of any other Convertible Noteholders, or to obtain or to seek to obtain priority or preference over any other Convertible Noteholders or to enforce any right under this Indenture, except in the manner herein provided and for the equal and rateable benefit of all the Convertible Noteholders. -33- 6.10 Immunity of Shareholders, etc. The Trustee and, by the acceptance of the Convertible Note Certificates and as part of the consideration for the issue of the Convertible Notes, the Convertible Noteholders, hereby waive and release any right, cause of action or remedy now or hereafter existing in any jurisdiction against any incorporator or any past, present or future shareholder, director, officer, employee or agent of the Corporation or any Successor Corporation on any covenant, agreement, representation or warranty by the Corporation contained in this Indenture or in the Convertible Note Certificates. 6.11 Limitation of Liability The obligations hereunder are not personally binding upon, nor shall resort hereunder be had to, the private property of any of the past, present or future directors or shareholders of the Corporation or any Successor Corporation or any of the past, present or future officers, employees or agents of the Corporation or any Successor Corporation, but only the property of the Corporation or any Successor Corporation shall be bound in respect hereof. 6.12 Remedies Cumulative No remedy herein conferred upon or reserved to the Trustee, or upon or to the Convertible Noteholders, is intended to be exclusive of any other remedy, but each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now existing or hereafter to exist by law or by statute. ARTICLE 7 - MEETINGS OF CONVERTIBLE NOTEHOLDERS 7.1 Right to Convene Meetings The Trustee may at any time and from time to time, and shall on receipt of a written request of the Corporation or of a Convertible Noteholders' Request and upon being indemnified to its reasonable satisfaction by the Corporation or by the Convertible Noteholders signing such Convertible Noteholders' Request against the cost which may be incurred in connection with the calling and holding of such meeting, call and hold a meeting of the Convertible Noteholders. In the event of the Trustee failing to so call a meeting within 15 days after receipt of such written request of the Corporation or such Convertible Noteholders' Request and indemnity given as aforesaid, the Corporation or such Convertible Noteholders who signed such Convertible Noteholders' Request, as the case may be, may call and hold such meeting. Every such meeting shall be held in the City of Toronto or at such other place as may be approved by the Trustee and the Corporation 7.2 Notice At least 21 days' prior notice of any meeting of Convertible Noteholders shall be given to the Convertible Noteholders entitled to attend such meeting in the manner provided for in Section 10.2 and a copy of such notice shall be sent by mail to the Trustee (unless the meeting has been called by the Trustee) and to the Corporation (unless the meeting has been called by the -34- Corporation). Such notice shall state the time when and the place where the meeting is to be held, shall state briefly the general nature of the business to be transacted thereat and shall contain such information as is reasonably necessary to enable the Convertible Noteholders to make a reasoned decision on the matter, but it shall not be necessary for any such notice to set out the terms of any resolution to be proposed or any of the provisions of this Article 7. The notice convening any such meeting may be signed by an appropriate officer of the Trustee or by the Corporation or by the holder or holders convening the meeting. 7.3 Chairman An individual (who need not be a Convertible Noteholder) designated in writing by the Trustee shall be chairman of the meeting and if no individual is so designated, or if the individual so designated is not present within 30 minutes from the time fixed for the holding of the meeting, the Convertible Noteholders present in Person or by proxy shall choose some individual present to act as chairman. 7.4 Quorum Subject to the provisions of Section 7.11, at any meeting of the Convertible Noteholders a quorum shall consist of Convertible Noteholders present in Person or by proxy and holding Convertible Notes having an aggregate principal amount of at least 25 % of the aggregate principal amount of the then outstanding Convertible Notes, provided that at least two Persons entitled to vote thereat are personally present. If a quorum of the Convertible Noteholders shall not be present within 30 minutes from the time fixed for holding any meeting, the meeting, if summoned by Convertible Noteholders or on a Convertible Noteholders' Request, shall be dissolved; but in any other case the meeting shall be adjourned to the same day in the next week (unless such day is not a Business Day, in which case it shall be adjourned to the next following Business Day) at the same time and place and no notice of the adjournment need be given. Any business may be brought before or dealt with at an adjourned meeting which might have been dealt with at the original meeting in accordance with the notice calling the same. No business shall be transacted at any meeting unless a quorum be present at the commencement of business. At the adjourned meeting the Convertible Noteholders present in Person or by proxy shall form a quorum and may transact the business for which the meeting was originally convened, notwithstanding that they do not hold Convertible Notes in an aggregate principal amount of at least 25% of the aggregate principal amount of then outstanding Convertible Notes. 7.5 Power to Adjourn The chairman of any meeting at which a quorum of the Convertible Noteholders is present may, with the consent of the meeting, adjourn any such meeting, and no notice of such adjournment need be given except such notice, if any, as the meeting may prescribe. 7.6 Show of Hands Every question submitted to a meeting shall be decided in the first place by a majority of the votes given on a show of hands except that votes on an Extraordinary Resolution shall be given in the manner hereinafter provided. At any such meeting, unless a poll is duly demanded as herein provided, a declaration by the chairman that a resolution has been carried or carried -35- unanimously or by a particular majority or lost or not carried by a particular majority shall be conclusive evidence of the fact. 7.7 Poll and Voting (a) On every Extraordinary Resolution, and on any other question submitted to a meeting and after a vote by show of hands when demanded by the chairman or by one or more of the Convertible Noteholders acting in Person or by proxy and holding Convertible Notes in the aggregate principal amount of at least 5% of the aggregate principal amount of all the Convertible Notes then outstanding, a poll shall be taken in such manner as the chairman shall direct. Questions other than those required to be determined by Extraordinary Resolution shall be decided by a majority of the votes cast on the poll. (b) On a show of hands, every Person who is present and entitled to vote, whether as a Convertible Noteholder or as proxy for one or more absent Convertible Noteholders, or both, shall have one vote. On a poll, each Convertible Noteholder present in Person or represented by a proxy duly appointed by instrument in writing shall be entitled to one vote in respect of each $1,000 principal amount of Convertible Note or Convertible Notes then held or represented by such holder or Person. A proxy need not be a Convertible Noteholder. The chairman of any meeting shall be entitled, both on a show of hands and on a poll, to vote in respect of the Convertible Notes, if any, held or represented by him or her. 7.8 Regulations The Trustee, or the Corporation with the approval of the Trustee, may from time to time make and from time to time vary such regulations as it shall think fit for: (a) the setting of the record date for a meeting for the purpose of determining Convertible Noteholders entitled to receive notice of and to vote at the meeting; (b) the issue of voting certificates by any bank, trust company or other depositary satisfactory to the Trustee stating that the Convertible Note Certificates specified therein have been deposited with it by a named Person and will remain on deposit until after the meeting, which voting certificate shall entitle the Persons named therein to be present and vote at any such meeting and at any adjournment thereof or to appoint a proxy or proxies to represent them and vote for them at any such meeting and at any adjournment thereof in the same manner and with the same effect as though the Persons so named in such voting certificates were the actual holders of the Convertible Note Certificates specified therein; (c) the deposit of voting certificates and instruments appointing proxies at such place and time as the Trustee, the Corporation or the Convertible Noteholders convening the meeting, as the case may be, may in the notice convening the meeting direct; -36- (d) the deposit of voting certificates and instruments appointing proxies at some approved place or places other than the place at which the meeting is to be held and enabling particulars of such instruments appointing proxies to be mailed or telecopied before the meeting to the Corporation or to the Trustee at the place where the same is to be held and for the voting of proxies so deposited as though the instruments themselves were produced at the meeting; (e) the form of the instrument of proxy; and (f) generally for the calling of meetings of Convertible Noteholders and the conduct of business thereat. Any regulations so made shall be binding and effective and the votes given in accordance therewith shall be valid and shall be counted. Save as such regulations may provide, the only Persons who shall be recognized at any meeting as a Convertible Noteholder, or be entitled to vote or be present at the meeting in respect thereof (subject to Section 7.9), shall be Convertible Noteholders or their counsel, or proxies of Convertible Noteholders. 7.9 Corporation and Trustee May be Represented The Corporation and the Trustee, by their respective directors and officers, the counsel for the Corporation and the Counsel for the Trustee may attend any meeting of the Convertible Noteholders, but shall not be entitled to vote thereat, whether in respect of any Convertible Notes held by them or otherwise. 7.10 Powers Exercisable by Extraordinary Resolution In addition to all other powers conferred upon them by any other provisions of this Indenture or by law, the Convertible Noteholders at a meeting shall, subject to the provisions of Section 7.11, have the power, exercisable from time to time by Extraordinary Resolution: (a) to agree to any modification, abrogation, alteration, compromise or arrangement of the rights of Convertible Noteholders or the Trustee in its capacity as trustee hereunder or on behalf of the Convertible Noteholders whether such rights arise under this Indenture or the Convertible Note Certificates or otherwise and to authorize the Trustee to concur in and execute any indenture supplemental hereto in connection therewith; (b) to amend, alter or repeal any "Extraordinary Resolution" previously passed or sanctioned by the Convertible Noteholders; (c) to direct or to authorize the Trustee to enforce any of the covenants on the part of the Corporation contained in this Indenture or the Convertible Note Certificates or to enforce any of the rights of the Convertible Noteholders in any manner specified in such Extraordinary Resolution or to refrain from enforcing any such covenant or right; -37- (d) to waive, and to direct the Trustee to waive, any default on the part of the Corporation in complying with any provisions of this Indenture or the Convertible Note Certificates either unconditionally or upon any conditions specified in such Extraordinary Resolution; (e) to restrain any Convertible Noteholder from taking or instituting any suit, action or proceeding against the Corporation for the enforcement of any of the covenants on the part of the Corporation in this Indenture or the Convertible Note Certificates or to enforce any of the rights of the Convertible Noteholders; (f) to direct any Convertible Noteholder who, as such, has brought any suit, action or proceeding to stay or to discontinue or otherwise to deal with the same upon payment of the costs, charges and expenses reasonably and properly incurred by such Convertible Noteholder in connection therewith; (g) to assent to any change in or omission from the provisions contained in the Convertible Note Certificates and this Indenture or any ancillary or supplemental instrument which may be agreed to by the Corporation, and to authorize the Trustee to concur in and execute any ancillary or supplemental indenture embodying the change or omission; (h) to remove the Trustee and to appoint a successor Trustee in the manner specified in Section 9.7 hereof; (i) to appoint a committee with power and authority to exercise, and to direct the Trustee to exercise, on behalf of the Convertible Noteholders, such powers of the holders as are exercisable by Extraordinary Resolution; and (j) to assent to any compromise or arrangement with any creditor or creditors or any class or classes of creditors, whether secured or otherwise, and with holders of any shares or other securities of the Corporation; 7.11 Meaning of Extraordinary Resolution (a) The expression "Extraordinary Resolution" when used in this Indenture means, subject as hereinafter provided in this Section 7.11 and in Section 7.14, a resolution proposed at a meeting of Convertible Noteholders duly convened for that purpose and held in accordance with the provisions of this Article 7 at which there are present in Person or by proxy Convertible Noteholders holding Convertible Notes in an aggregate principal amount equal to at least 25% of the aggregate principal amount of all the then outstanding Convertible Notes and passed by the affirmative votes of Convertible Noteholders holding Convertible Notes in an aggregate principal amount equal to not less than 66 "% of the aggregate principal amount of all the then outstanding Convertible Notes represented at the meeting and voted on the poll upon such resolution. (b) If, at the meeting at which an Extraordinary Resolution is to be considered, Convertible Noteholders holding Convertible Notes in an aggregate principal -38- amount equal to at least 25% of the aggregate principal amount of all the then outstanding Convertible Notes are not present in Person or by proxy within 30 minutes after the time appointed for the meeting, then the meeting, if convened by Convertible Noteholders or on a Convertible Noteholders' Request, shall be dissolved; but in any other case it shall stand adjourned to such day, being not less than 15 or more than 60 days later, and to such place and time as may be appointed by the chairman. Not less than ten days prior notice shall be given of the time and place of such adjourned meeting in the manner provided for in Section 10.2. Such notice shall state that at the adjourned meeting the Convertible Noteholders present in Person or by proxy shall form a quorum but it shall not be necessary to set forth the purposes for which the meeting was originally called or any other particulars. At the adjourned meeting the Convertible Noteholders present in Person or by proxy shall form a quorum and may transact the business for which the meeting was originally convened and a resolution proposed at such adjourned meeting and passed by the requisite vote as provided in subsection 7.11(a) shall be an Extraordinary Resolution within the meaning of this Indenture notwithstanding that Convertible Noteholders holding Convertible Notes in an aggregate principal amount equal to at least 25% of the aggregate principal amount of all the then outstanding Convertible Notes are not present in Person or by proxy at such adjourned meeting. (c) Votes on an Extraordinary Resolution shall always be given on a poll and no demand for a poll on an Extraordinary Resolution shall be necessary. 7.12 Powers Cumulative Any one or more of the powers or any combination of the powers in this Indenture stated to be exercisable by the Convertible Noteholders by Extraordinary Resolution or otherwise may be exercised from time to time and the exercise of any one or more of such powers or any combination of powers from time to time shall not be deemed to exhaust the right of the Convertible Noteholders to exercise such power or powers or combination of powers then or thereafter from time to time. 7.13 Minutes Minutes of all resolutions and proceedings at every meeting of Convertible Noteholders shall be made and duly entered in books to be provided from time to time for that purpose by the Trustee at the expense of the Corporation, and any such minutes as aforesaid, if signed by the chairman or the secretary of the meeting at which such resolutions were passed or proceedings had shall be prima facie evidence of the matters therein stated and, until the contrary is proved, every such meeting in respect of the proceedings of which minutes shall have been made shall be deemed to have been duly convened and held, and all resolutions passed thereat or proceedings taken shall be deemed to have been duly passed and taken. -39- 7.14 Instruments in Writing All actions which may be taken and all powers that may be exercised by the Convertible Noteholders at a meeting held as provided in this Article 7 may also be taken and exercised by Convertible Noteholders holding Convertible Notes in an aggregate principal amount equal to at least 66 2/3% of the aggregate principal amount of all the then outstanding Convertible Notes by an instrument in writing signed in one or more counterparts by such Convertible Noteholders in Person or by attorney duly appointed in writing, and the expression "Extraordinary Resolution" when used in this Indenture shall include an instrument so signed. 7.15 Binding Effect of Resolutions Every resolution and every Extraordinary Resolution passed in accordance with the provisions of this Article 7 at a meeting of Convertible Noteholders shall be binding upon all the Convertible Noteholders, whether present at or absent from such meeting, and every instrument in writing signed by Convertible Noteholders in accordance with Section 7.14 shall be binding upon all the Convertible Noteholders, whether signatories thereto or not, and each and every Convertible Noteholder and the Trustee (subject to the provisions for indemnity herein contained) shall be bound to give effect accordingly to every such resolution and instrument in writing. 7.16 Holdings by Corporation Disregarded In determining whether Convertible Noteholders holding Convertible Note Certificates evidencing the required principal amount of Convertible Notes then outstanding are present at a meeting of Convertible Noteholders for the purpose of determining a quorum or have concurred in any consent, waiver, Extraordinary Resolution, Convertible Noteholders' Request or other action under this Indenture, Convertible Notes owned legally or beneficially by the Corporation or any Subsidiary of the Corporation shall be disregarded in accordance with the provisions of Section 10.8. ARTICLE 8 - SUPPLEMENTAL INDENTURES 8.1 Provision for Supplemental Indentures for Certain Purposes From time to time the Corporation (when authorized by action of the directors) and the Trustee may, subject to the provisions hereof, and they shall, when so directed in accordance with the provisions hereof, execute and deliver by their proper officers, indentures or instruments supplemental hereto, which thereafter shall form part hereof, for any one or more or all of the following purposes: (a) adding to the provisions hereof such additional covenants and enforcement provisions as, in the opinion of Counsel, are necessary or advisable in the premises, provided that the same are not in the opinion of the Trustee prejudicial to the interests of the Convertible Noteholders; (b) giving effect to any Extraordinary Resolution passed as provided in Article 7; -40- (c) making such provisions not inconsistent with this Indenture as may be necessary or desirable with respect to matters or questions arising hereunder, provided that such provisions are not, in the opinion of the Trustee, prejudicial to the rights or interests of any of the Convertible Noteholders; (d) adding to or altering the provisions hereof in respect of the transfer of Convertible Notes, making provision for the exchange of Convertible Note Certificates and making any modification in the form of the Convertible Note Certificates which does not affect the substance thereof; (e) modifying any of the provisions of this Indenture, including relieving the Corporation from any of the obligations, conditions or restrictions herein contained, provided that such modification or relief shall be or become operative or effective only if, in the opinion of the Trustee relying on the advice of Counsel, such modification or relief in no way prejudices any of the rights of the Convertible Noteholders or of the Trustee, and provided further that the Trustee may in its sole discretion decline to enter into any such supplemental indenture which in its opinion may not afford adequate protection to the Trustee when the same shall become operative; (f) for any other purpose not inconsistent with the terms of this Indenture, including the correction or rectification of any ambiguities, defective or inconsistent provisions, errors, mistakes or omissions herein, provided that in the opinion of the Trustee the rights of the Trustee and of the Convertible Noteholders are in no way prejudiced thereby; and (g) to evidence the assumption by any Successor Corporation of the obligations under this Indenture as provided in Section 8.2 hereof. 8.2 Successor Corporations In the case of the consolidation, amalgamation, merger or transfer of the undertaking or assets of the Corporation as an entirety or substantially as an entirety to another Corporation ("Successor Corporation"), the Successor Corporation resulting from such consolidation, amalgamation, merger or transfer (if not the Corporation) shall expressly assume, by supplemental indenture satisfactory in form to the Trustee and executed and delivered to the Trustee, the due and punctual performance and observance of each and every covenant and condition of this Indenture to be performed and observed by the Corporation. ARTICLE 9 - CONCERNING THE TRUSTEE 9.1 Trust Indenture Legislation (a) If and to the extent that any provision of this Indenture limits, qualifies or conflicts with a mandatory requirement of Applicable Legislation, such mandatory requirement shall prevail. -41- (b) The Corporation and the Trustee agree that each will, at all times in relation to this Indenture and any action to be taken hereunder, observe and comply with and be entitled to the benefits of Applicable Legislation. 9.2 Rights and Duties of Trustee (a) In the exercise of the rights and duties prescribed or conferred by the terms of this Indenture, the Trustee shall act honestly and in good faith with a view to the best interests of the Convertible Noteholders and shall exercise that degree of care, diligence and skill that a reasonably prudent trustee would exercise in comparable circumstances. No provision of this Indenture shall be construed to relieve the Trustee from liability for its own negligent action, its own negligent failure to act, or its own wilful misconduct or bad faith. (b) The obligation of the Trustee to commence or continue any act, action or proceeding for the purpose of enforcing any rights of the Trustee or the Convertible Noteholders hereunder shall be conditional upon the Convertible Noteholders furnishing, when required by notice by the Trustee, sufficient funds to commence or to continue such act, action or proceeding and an indemnity reasonably satisfactory to the Trustee to protect and to hold harmless the Trustee against the costs, charges and expenses and liabilities to be incurred thereby and any loss and damage it may suffer by reason thereof. None of the provisions contained in this Indenture shall require the Trustee to expend or to risk its own funds or otherwise to incur financial liability in the performance of any of its duties or in the exercise of any of its rights or powers unless indemnified as aforesaid. (c) The Trustee may, before commencing or at any time during the continuance of any such act, action or proceeding, require the Convertible Noteholders, at whose instance it is acting to deposit with the Trustee the Convertible Notes held by them, for which Convertible Notes the Trustee shall issue receipts. (d) Every provision of this Indenture that by its terms relieves the Trustee of liability or entitles it to rely upon any evidence submitted to it is subject to the provisions of Applicable Legislation, of this Section 9.2 and of Section 9.3. 9.3 Evidence, Experts and Advisers (a) In addition to the reports, certificates, opinions and other evidence required by this Indenture, the Corporation shall furnish to the Trustee such additional evidence of compliance with any provision hereof, and in such form, as may be prescribed by Applicable Legislation or as the Trustee may reasonably require by written notice to the Corporation. (b) In the exercise of its rights and duties hereunder, the Trustee may, if it is acting in good faith, rely as to the truth of the statements and the accuracy of the opinions expressed in statutory declarations, opinions, reports, written requests, consents, or orders of the Corporation, certificates of the Corporation or other evidence -42- furnished to the Trustee pursuant to a request of the Trustee, provided that such evidence complies with Applicable Legislation and that the Trustee complies with Applicable Legislation and that the Trustee examines the same and determines that such evidence complies with the applicable requirements of this Indenture. (c) Whenever it is provided in this Indenture or under Applicable Legislation that the Corporation shall deposit with the Trustee resolutions, certificates, reports, opinions, requests, orders or other documents, it is intended that the truth, accuracy and good faith on the effective date thereof and the facts and opinions stated in all such documents so deposited shall, in each and every such case, be conditions precedent to the right of the Corporation to have the Trustee take the action to be based thereon. (d) Proof of the execution of an instrument in writing, including a Convertible Noteholders' Request, by any Convertible Noteholder may be made by the certificate of a notary public, or other officer with similar powers, that the Person signing such instrument acknowledged to it the execution thereof, or by an affidavit of a witness to such execution or in any other manner which the Trustee may consider adequate. (e) The Trustee may employ or retain such Counsel, accountants, appraisers or other experts or advisers as it may reasonably require for the purpose of determining and discharging its duties hereunder and may pay reasonable remuneration for all services so performed by any of them, without taxation of costs of any Counsel, and shall not be responsible for any misconduct or negligence on the part of any such experts or advisers who have been appointed with due care by the Trustee. The Corporation shall pay or reimburse the Trustee for any reasonable remuneration, expenses, disbursements and advances of such Counsel, accountant, appraiser or other expert or advisor. (f) The Trustee may act and rely and shall be protected in acting and relying in good faith on the opinion or advice of or information obtained from any counsel, accountant or other expert or advisor, whether retained or employed by the Corporation or by the Trustee, in relation to any matter arising in the administration of the trusts hereof. 9.4 Actions by Trustee to Protect Interest The Trustee shall have power to institute and to maintain such actions and proceedings as it may consider necessary or expedient to preserve, protect or enforce its interests and the interests of the Convertible Noteholders. 9.5 Trustee Not Required to Give Security The Trustee shall not be required to give any bond or security in respect of the execution of the trusts and powers of this Indenture or otherwise in respect of the premises. -43- 9.6 Protection of Trustee Except as provided in Section 9.2, by way of supplement to the provisions of any law for the time being relating to trustees it is expressly declared and agreed as follows: (a) the Trustee shall not be liable for or by reason of any statements of fact or recitals in this Indenture or in the Convertible Note Certificates (except the representation contained in Section 9.8 or in the certificate of the Trustee on the Convertible Note Certificates) or be required to verify the same, but all such statements or recitals are and shall be deemed to be made by the Corporation; (b) nothing herein contained shall impose any obligation on the Trustee to see to or to require evidence of the registration or filing (or renewal thereof) of this Indenture or any instrument ancillary or supplemental hereto; (c) the Trustee shall not incur any liability or responsibility whatsoever, or be in any way responsible for the consequence of any breach on the part of the Corporation of any of the covenants herein contained or of any acts of any directors, officers, employees, agents or servants of the Corporation; and (d) the Corporation hereby indemnifies and saves harmless the Trustee and its officers, directors and employees from and against any and all liabilities, losses, costs, actions, or demands whatsoever which may be brought against the Trustee or which it may suffer or incur as a result of or arising out of the performance of its duties and obligations under this Indenture, save only in the event of the negligent action, the negligent failure to act or the wilful misconduct or bad faith of the Trustee. It is understood and agreed that this indemnification shall survive the termination or discharge of this Indenture or the resignation or removal of the Trustee. 9.7 Replacement of Trustee; Successor by Merger (a) The Trustee may resign its trust and be discharged from all further duties and liabilities hereunder, subject to this Section 9.7, by giving to the Corporation not less than 30 days prior notice in writing or such shorter prior notice as the Corporation may accept as sufficient. The Convertible Noteholders by Extraordinary Resolution shall have power at any time to remove the existing Trustee and to appoint a new trustee. In the event of the Trustee resigning or being removed as aforesaid or being dissolved, becoming bankrupt, going into liquidation or otherwise becoming incapable of acting hereunder, the Corporation shall forthwith appoint a new trustee unless a new trustee has already been appointed by the Convertible Noteholders; failing such appointment by the Corporation, the retiring Trustee at the Corporation's expense or any Convertible Noteholder may apply to a justice of the Ontario Superior Court of Justice on such notice as such justice may direct, for the appointment of a new trustee; but any new trustee so appointed by the Corporation or by the Court shall be subject to removal as aforesaid by the Convertible Noteholders. Any new trustee appointed -44- under any provision of this Section 9.7 shall be a corporation authorized to carry on the business of a trust company in the Qualifying Jurisdictions and, if required by the Applicable Legislation for any other provinces, in such other provinces. On any such appointment the new trustee shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named herein as trustee under this Indenture. (b) Upon the appointment of a successor trustee, the Corporation shall promptly notify the Convertible Noteholders thereof in the manner provided for in Section 10.2 hereof. (c) Any corporation into or with which the Trustee may be merged or consolidated or amalgamated, or any corporation resulting therefrom to which the Trustee shall be a party, or any corporation succeeding to the trust business of the Trustee shall be the successor to the Trustee hereunder without any further act on its part or any of the parties hereto, provided that such corporation would he eligible for appointment as a successor trustee under subsection 9.7(a). (d) Any Convertible Note Certificates certified but not delivered by a predecessor trustee may be certified and delivered by the successor trustee in the name of the predecessor or successor trustee. 9.8 Conflict of Interest (a) The Trustee represents to the Corporation that at the time of execution and delivery hereof no material conflict of interest exists between its role as a trustee hereunder and its role in any other capacity and agrees that in the event of a material conflict of interest arising hereafter it will, within 90 days after ascertaining that it has such material conflict of interest, either eliminate the same or assign its trust hereunder to a successor trustee approved by the Corporation and meeting the requirements set forth in subsection 9.7(a). Notwithstanding the foregoing provisions of this subsection 9.8(a), if any such material conflict of interest exists or hereafter shall exist, the validity and enforceability of this Indenture and the Convertible Note Certificate shall not be affected in any manner whatsoever by reason thereof. (b) Subject to subsection 9.8(a), the Trustee, in its personal or any other capacity, may buy, lend upon and deal in securities of the Corporation and generally may contract and enter into financial transactions with the Corporation or any Subsidiary of the Corporation without being liable to account for any profit made thereby. 9.9 Acceptance of Trust The Trustee hereby accepts the trusts in this Indenture declared and provided for and agrees to perform the same upon the terms and conditions herein set forth. -45- 9.10 Trustee Not to be Appointed Receiver The Trustee and any Person related to the Trustee shall not be appointed a receiver, a receiver and manager or liquidator of all or any part of the assets or undertaking of the Corporation. ARTICLE 10 - GENERAL 10.1 Notice to the Corporation and the Trustee (a) Unless herein otherwise expressly provided, any notice to be given hereunder to the Corporation or to the Trustee shall be deemed to be validly given if delivered, sent by registered letter, postage prepaid or telecopied: If to the Corporation: Certicom Corp 25801 Industrial Blvd. Hayward, California 94545 U.S.A. Telecopy: (510) 780-5401 Attention: President If to the Trustee: Computershare Trust Company of Canada 100 University Avenue 11th Floor Toronto, Ontario M5J 2Y1 Telecopy: (416) 981-9777 Attention: Manager, Corporate Trust Department and any such notice delivered in accordance with the foregoing shall be deemed to have been received on the date of delivery or, if mailed, on the third Business Day following the date of the postmark on such notice or, if telecopied, on the next Business Day following the date of transmission provided that its contents are transmitted and received completely and accurately. (b) The Corporation or the Trustee, as the case may be, may from time to time notify the other in the manner provided in this Section 10.1 of a change of address which, from the effective date of such notice and until changed by like notice, shall be the address of the Corporation or the Trustee, as the case may be, for all -46- purposes of this Indenture. A copy of any notice of change of address given pursuant to this subsection 10.1(b) shall be sent to the Convertible Note Agency, and shall be available for inspection by Convertible Noteholders during normal business hours. (c) If, by reason of a strike, lockout or other work stoppage, actual or threatened, involving postal employees, any notice to be given to the Trustee or to the Corporation hereunder could reasonably be considered unlikely to reach its destination, such notice shall be valid and effective only if it is delivered or sent by telecopy or other means of prepaid, transmitted and recorded communication. 10.2 Notice to Convertible Noteholders (a) Any notice to the Convertible Noteholders under the provisions of this Indenture shall be valid and effective if delivered or sent by ordinary mail addressed to such holders at their post office addresses appearing on the register of holders maintained by the Trustee and shall be deemed to have been effectively given on the date of delivery or, if mailed, on the third Business Day following the date of the postmark on such notice. (b) If, by reason of a strike, lockout or other work stoppage, actual or threatened, involving postal employees, any notice to be given to the Convertible Noteholders hereunder could reasonably be considered unlikely to reach its destination, such notice shall be valid and effective only if it is delivered or is published twice in the Report on Business section of the Globe and Mail newspaper. 10.3 Ownership of Convertible Notes The Corporation and the Trustee may deem and treat the registered owner of any Convertible Notes as the absolute owner thereof for all purposes, and the Corporation and the Trustee shall not be affected by any notice or knowledge to the contrary except where the Corporation or the Trustee is required to take such notice by statute or by order of a court of competent jurisdiction. A Convertible Noteholder shall be entitled to the rights evidenced by the Convertible Notes held by such holder free from all equities or rights of set off or counterclaim between the Corporation and the original or any intermediate holder of the Convertible Notes and all Persons may act accordingly. The receipt by any such Convertible Noteholder of the Convertible Debentures which may be acquired pursuant to the exercise of Convertible Notes held by such holder, shall be a good discharge to the Corporation and the Trustee for the same and neither the Corporation nor the Trustee shall be bound to inquire into the title of any such holder except where the Corporation or the Trustee is required to take such notice by statute or by order of a court of competent jurisdiction. 10.4 Evidence of Ownership (a) Upon receipt of a certificate of any bank, trust company or other depositary satisfactory to the Trustee stating that the Convertible Note Certificates specified therein have been deposited by a named Person with such bank, trust company or other depositary and will remain so deposited until the expiry of the period -47- specified therein, the Corporation and the Trustee may treat the Person so named as the owner thereof, and such certificate as sufficient evidence of the ownership by such Person of the Convertible Notes represented thereby during such period, for the purpose of any requisition, direction, consent, instrument or other document to be made, signed or given by the holder of the Convertible Note Certificate so deposited. (b) The Corporation and the Trustee may accept as sufficient evidence of the fact and date of the signing of any requisition, direction, consent, instrument or other document by any Person, by (i) the signature of any officer of any bank, trust company, or other depositary satisfactory to the Trustee as witness of such execution, (ii) the certificate of any notary public or other officer authorized to take acknowledgments of deeds to be recorded at the place where such certificate is made that the Person signing acknowledged to him the execution thereof, (iii) a satisfactory statutory declaration of a witness of such execution, or (iv) any other documentation satisfactory to the Corporation and the Trustee. 10.5 Counterparts This Indenture may be executed in several counterparts, each of which when so executed shall be deemed to be an original and such counterparts together shall constitute one and the same instrument and notwithstanding their date of execution they shall be deemed to be dated as of the date hereof. 10.6 Satisfaction and Discharge of Indenture Upon the earlier of: (a) the date by which there shall have been delivered to the Trustee for exercise or destruction all Convertible Note Certificates theretofore certified hereunder; and (b) the Time of Expiry; and if all certificates representing Convertible Debentures required to be issued in compliance with the provisions hereof have been issued and delivered hereunder in accordance with such provisions this Indenture shall cease to be of further effect and the Trustee, on demand of and at the cost and expense of the Corporation and upon delivery to the Trustee of a certificate of the Corporation stating that all conditions precedent to the satisfaction and discharge of this Indenture have been complied with, shall execute proper instruments acknowledging satisfaction and discharge of this Indenture. Notwithstanding the foregoing, the indemnities provided to the Trustee by the Corporation hereunder shall remain in full force and effect and survive the termination of this Indenture. 10.7 Provisions of Indenture and Convertible Notes for the Sole Benefit of Parties and Convertible Noteholders Nothing in this Indenture or in the Convertible Note Certificates, expressed or implied shall give or be construed to give to any Person other than the parties hereto and the Convertible -48- Noteholders, as the case may be, any legal or equitable right, remedy or claim under this Indenture, or under any covenant or provision herein or therein contained, all such covenants and provisions being for the sole benefit of the parties hereto and the Convertible Noteholders. 10.8 Convertible Notes Owned by the Corporation or its Subsidiaries - Certificate to be Provided For the purpose of disregarding any Convertible Notes owned legally or beneficially by the Corporation or any Subsidiary of the Corporation as contemplated in Section 7.16, the Corporation shall, upon the request of the Trustee, provide to the Trustee, from time to time, a certificate of the Corporation setting forth at the date of such certificate: (a) the names (other than the name of the Corporation) of the registered holders of Convertible Notes which, to the knowledge of the Corporation, are owned by or held for the account of the Corporation or any Subsidiary of the Corporation; and (b) the number of Convertible Notes owned by or held for the account of the Corporation or any Subsidiary of the Corporation; and the Trustee, in making the computations in Section 7.16, shall be entitled to rely on such certificate without any additional evidence. 10.9 Further Assurances The parties hereto and each of them do hereby covenant and agree to do such things and execute such further documents, agreements and assurances as may be necessary or advisable from time to time in order to carry out the terms and conditions of this Indenture in accordance with their true intent. 10.10 Unenforceable Terms If any term, covenant or condition of this Indenture, or the applicability thereof to any party or circumstance shall be invalid or unenforceable to any extent, the remainder of this Indenture or application of such term, covenant or condition to a party or circumstance other than those to which it is held invalid or unenforceable shall not be affected thereby and each remaining term, covenant or condition of this Indenture shall be valid and shall be enforceable to the fullest extent permitted by law. 10.11 Governing Law This Indenture shall be governed by and construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein. Each of the parties irrevocably attorns to the exclusive jurisdiction of the courts of the Province of Ontario with respect to all matters arising out of this Indenture and the transactions contemplated herein. -49- 10.12 Enurement This Indenture shall benefit and bind the parties to it and their respective successors and assigns. IN WITNESS WHEREOF the parties hereto have executed this Indenture under the hands of their proper offices in that behalf on the day and year first above written. CERTICOM CORP. COMPUTERSHARE TRUST COMPANY OF CANADA Per: ____________________________ Per: _______________________________ Per: ____________________________ Per: _______________________________ THIS IS SCHEDULE "A" to the Convertible Note Indenture made as of August 30, 2001 between Certicom Corp. and Computershare Trust Company of Canada CONVERTIBLE NOTE CERTIFICATE CERTICOM CORP. (Continued under the laws of the Yukon Territory) CONVERTIBLE NOTE CERTIFICATE NO._________ ------------------------------------ aggregate principal amount of CONVERTIBLE NOTES entitling the holder to acquire an aggregate principal amount of Convertible Debentures equal to the aggregate principal amount of the Convertible Notes represented hereby. THE CONVERTIBLE NOTES REPRESENTED BY THIS CONVERTIBLE NOTE CERTIFICATE ARE SUBJECT TO STATUTORY RESALE RESTRICTIONS UNDER THE APPLICABLE SECURITIES LEGISLATION OF THE PROVINCE IN WHICH YOU RESIDE. IN THE EVENT THAT THE CORPORATION IS UNABLE TO OBTAIN A RECEIPT FOR THE (FINAL) PROSPECTUS FROM THE SECURITIES REGULATORY AUTHORITY OF THE PROVINCE IN WHICH YOU RESIDE, OR THAT THE CONVERTIBLE NOTES ARE EXERCISED PRIOR TO THE ISSUANCE OF SUCH RECEIPT, THE CONVERTIBLE DEBENTURES ISSUABLE ON EXERCISE OF THE CONVERTIBLE NOTES AND THE COMMON SHARES ISSUABLE IN ACCORDANCE WITH THE TERMS OF THE CONVERTIBLE DEBENTURES MAY BE SUBJECT TO STATUTORY RESALE RESTRICTIONS UNDER THE APPLICABLE SECURITIES LEGISLATION OF THAT PROVINCE. A LEGEND TO THIS EFFECT MAY BE PLACED ON CERTIFICATES EVIDENCING SUCH CONVERTIBLE DEBENTURES AND COMMON SHARES UNTIL SUCH STATUTORY RESALE RESTRICTIONS ARE NO LONGER APPLICABLE IN THE SOLE DISCRETION OF THE CORPORATION. YOU ARE ADVISED TO CONSULT YOUR OWN LEGAL ADVISORS IN THIS REGARD. THIS IS TO CERTIFY THAT FOR VALUE RECEIVED ________________________________________________________________________________ (Name) (hereinafter referred to as the "holder") is entitled to acquire in the manner and subject to the terms hereof and of the Indenture (as hereinafter defined), at any time and from time to time until 5:00 p.m. (Toronto time) (the "Time of Expiry") on the date (the "Expiry Date") which is five Business Days following the earlier of: (a) the date on which all required receipts for the Final Prospectus are issued by the Securities Commissions relating to the distribution of Convertible Debentures to the holders of Convertible Notes upon the exercise of Convertible Notes; and (b) -2- August 30, 2002, Convertible Debentures due August 30, 2004 (the "Convertible Debentures") of Certicom Corp. (the "Corporation"), issued under the Convertible Debenture Trust Indenture made as of August 30, 2001 between the Corporation and the Trustee, in an aggregate principal amount equal to the aggregate principal amount of the Convertible Notes represented hereby exercised by the holder, for each integral multiple of $1,000 of principal amount of Convertible Notes represented hereby exercised by the holder. Upon issuance of the Convertible Notes represented hereby the aggregate amount of funds paid for such Convertible Notes shall be paid to the Escrow Agent. The right to acquire Convertible Debentures may only be exercised by the holder within the time set forth above by: (a) duly completing and executing the Exercise Form attached hereto; and (b) surrendering this Convertible Note Certificate to the Trustee at the principal office of the Trustee in the City of Toronto. This Convertible Note Certificate shall be deemed to be surrendered only upon personal delivery hereof to, or, if sent by mail or other means of transmission, upon actual receipt hereof by, the Trustee at the office referred to above. Upon due completion and execution of the Exercise Form and the surrender of this Convertible Note Certificate in accordance with the terms and conditions of the Indenture, the Person(s) in whose name the Convertible Debentures issuable upon exercise of the Convertible Notes represented hereby are to be issued shall be deemed for all purposes (except as provided in the Indenture) to be the holder or holders of record of such Convertible Debentures on the Exercise Date, and the Corporation has covenanted that it will (subject to the provisions of the Indenture) cause certificates representing such Convertible Debentures to be mailed or delivered to the Person or Persons at the address or addresses specified in the Exercise Form within five Business Days. The registered holder of the Convertible Notes represented hereby may acquire any lesser principal amount of Convertible Debentures than the aggregate principal amount of the Convertible Notes represented by this Convertible Note Certificate. In such event, the holder shall be entitled to receive a new Convertible Note Certificate for the unexercised portion of the Convertible Notes represented hereby. Convertible Debentures will only be issued in denominations of $1,000 and multiples thereof. At the Time of Expiry on the Expiry Date, the Convertible Notes represented hereby shall be deemed to have been exercised immediately prior to the Time of Expiry (unless the Convertible Notes represented hereby have been previously exercised) to convert such Convertible Notes into Convertible Debentures and the certificates representing such Convertible Debentures will be issued to the holder of this Convertible Note Certificate upon surrender to the Trustee at the principal office of the Trustee in the City of Toronto and thereupon the Convertible Notes represented hereby be deemed to be cancelled and of no further force and effect. On the second Business Day following the Expiry Date, the Corporation shall notify -3- holders of the Convertible Notes that if they have not exercised such Convertible Notes prior to the Time of Expiry that such Convertible Notes have been deemed to be exercised. The Convertible Notes represented by this certificate are issued under and pursuant to a Convertible Note Trust Indenture (hereinafter referred to as the "Indenture") made as of August 30, 2001 between the Corporation and the Trustee. Reference is made to the Indenture and any instruments supplemental thereto for a full description of the rights of the holder of this Convertible Note Certificate and the terms and conditions upon which the Convertible Notes are, or are to be, issued and held, with the same effect as if the provisions of the Indenture and all instruments supplemental thereto were herein set forth. By acceptance hereof, the holder assents to all provisions of the Indenture. Capitalized terms used herein have the same meaning as in the Indenture, unless otherwise defined herein. To the extent the terms and conditions set forth in this Convertible Note Certificate conflict with the terms and conditions of the Indenture, the Indenture shall prevail. The Corporation will furnish to the holder of this Convertible Note Certificate, upon request and without charge, a copy of the Indenture. The Convertible Notes represented hereby shall bear interest from the Effective Date or the date of issue, whichever is later, at the rate of 7.25% per annum, after as well as before default, with interest on overdue interest at the same rate. Interest shall be based on a 365 or 366 day year, as the case may be, and shall be calculated semi-annually not in advance from the Effective Date or the date of issue of the Convertible Notes, whichever is later, or from the last interest payment date to which interest has been paid or made available for payment on the Convertible Notes, whichever is later, and shall be paid in like money semi-annually on February 28 and August 30, commencing on February 28, 2002, unless this Convertible Note shall have been previously exercised as duly provided for. As the interest on the Convertible Notes becomes due (except interest payable at maturity which may be paid upon presentation and surrender of such Convertible Notes for payment), the Corporation, either directly or indirectly through the Trustee, shall forward or cause to be forwarded by prepaid ordinary mail at least three (3) Business Days prior to the interest payment date, to the holder for the time being, or, in the case of joint holders, to one of such joint holders (failing written instructions to the contrary from all of such joint holders), at the holder's address appearing on the register, a cheque for such interest (less any tax required to be deducted), payable to or to the order of such holder or holders and negotiable at par. The forwarding of such cheque shall satisfy and discharge the liability for the interest upon the Convertible Notes to the extent of the sums represented thereby (plus the amount of any tax deducted as aforesaid) unless such cheque is not paid on presentation; provided that in the event of the non-receipt of such cheque by such registered holder or the loss or destruction thereof, the Corporation, upon being furnished with reasonable evidence of such non-receipt, loss or destruction and indemnity reasonably satisfactory to it, shall issue or cause to be issued to such registered holder a replacement cheque for the amount of such cheque. If for any reason, the exercise of Convertible Notes in accordance with the terms hereof is prohibited by law or does not take place as contemplated in the Indenture (including by order of any securities regulatory authority or court of competent jurisdiction) such Convertible Notes shall, notwithstanding anything to the contrary herein contained, remain valid and outstanding, -4- and shall continue to accrue interest at the rate herein provided and shall be due and payable in full on the sixth Business Day following the Expiry Date. The registered holder of this Convertible Note Certificate may, at any time prior to the Time of Expiry, upon surrender hereof to the Trustee at its principal office in the City of Toronto, exchange this Convertible Note Certificate for other Convertible Note Certificates entitling the holder to acquire, in the aggregate, the same aggregate principal amount of Convertible Debentures as may be acquired on exercise of the Convertible Notes represented by this Certificate. The holding of the Convertible Notes evidenced by this Convertible Note Certificate shall not entitle the holder to any right or interest in respect of the Corporation except as expressly provided in the Indenture and in this Convertible Note Certificate. The Indenture provides that all holders of Convertible Notes shall be bound by any resolution passed at a meeting of the holders held in accordance with the provisions of the Indenture and resolutions signed by the holders of Convertible Notes of 66"% of the principal amount of all then outstanding Convertible Notes. Subject to the Corporation's right to purchase the Convertible Notes under the Indenture and to any restriction under applicable law or policy of any applicable regulatory body, the Convertible Notes evidenced by this Convertible Note Certificate may be transferred on the register kept at the principal offices of the Trustee in the City of Toronto by the registered holder hereof or its legal representatives or its attorney duly appointed by an instrument in writing in form and execution satisfactory to the Trustee, only upon compliance with the conditions prescribed in the Indenture and upon compliance with such reasonable requirements as the Trustee may prescribe. This Convertible Note Certificate shall not be valid for any purpose whatever unless and until it has been certified by or on behalf of the Trustee. -5- IN WITNESS WHEREOF the Corporation has caused this Convertible Note Certificate to be signed by its duly authorized officer as of the 30th day of August, 2001. CERTICOM CORP. Per: ___________________________ President Per: ___________________________ Certified by: COMPUTERSHARE TRUST COMPANY OF CANADA, as Trustee Per: _________________________________ TRANSFER OF CONVERTIBLE NOTES FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers to ________________________________________________________________________________ ________________________________________________________________________________ ________________________________________________________________________________ $__________________________ principal amount of Convertible Notes of Certicom Corp. registered in the name of the undersigned on the records of Certicom Corp. maintained by Computershare Trust Company of Canada represented by the Convertible Note Certificate attached hereto, together with any rights of action for rescission or otherwise available to the undersigned, and irrevocably appoints __________________________ the attorney of the undersigned to transfer the said securities on the books or register with full power of substitution. DATED ____________________________ __________________________________ ____________________________________ Signature Medallion Guaranteed (Signature of Convertible Noteholder) Instructions: 1. Signature of the Convertible Noteholder must be the signature of the Person appearing on the face of this Convertible Note Certificate. 2. If the Transfer Form is signed by a trustee, executor, administrator, curator, guardian, attorney, officer of a corporation or any Person acting in a fiduciary or representative capacity, the certificate must be accompanied by evidence of authority to sign satisfactory to the Trustee and the Corporation. 3. The signature on the Transfer Form must be signature guaranteed by a Canadian chartered bank or a major Canadian trust company or by a medallion signature guarantee from a member of a recognized Medallion Signature Guarantee Program. 4. Convertible Notes shall only be transferable in accordance with applicable laws. The transfer of Convertible Notes to a purchaser not resident in the Qualifying Jurisdictions (as defined in the Indenture under which the Convertible Notes represented by the Convertible Note Certificate have been issued) may result in the Convertible Debentures obtained upon the exercise of the Convertible Notes and the Common Shares obtained in accordance with the terms of the Convertible Debentures (whether after or before obtaining receipts for a final prospectus relating to the distribution of Convertible Debentures upon exercise of Convertible Notes in such Qualifying Jurisdictions) not being freely tradeable in the jurisdiction of the purchaser. EXERCISE FORM TO: ______________________________________________________________________ AND TO: ______________________________________________________________________ The undersigned hereby exercises the right to acquire $___________________ principal amount of Convertible Debentures of Certicom Corp. in accordance with and subject to the provisions of the Indenture referred to in the accompanying Convertible Note Certificate. THE SENIOR CONVERTIBLE UNSECURED SUBORDINATED DEBENTURES ARE TO BE ISSUED AS FOLLOWS: Name: _________________________________ (Print Clearly) Address in Full: _________________________________ _________________________________ Social Insurance Number: _________________________________ Aggregate Number of Convertible Debentures: _________________________________ Note: If further nominees intended, please attach (and initial) schedule giving these nominees. DATED: _____________________________ ______________________________________ _____________________________________ Signature Medallion Guaranteed Signature of Convertible Noteholder ______________________________________ Address in Full Print Name in Full _____________________________________ THIS IS SCHEDULE "B" to the Convertible Note Indenture made as of August 30, 2001 between Certicom Corp. and Computershare Trust Company of Canada ESCROW DIRECTION TO: Computershare Trust Company of Canada (the "Escrow Agent") Reference is made to the Escrow and Custodial Agreement dated as of August 30, 2001 (the "Escrow Agreement") between Certicom Corp. (the "Corporation"), Computershare Trust Company of Canada, as escrow agent, and Yorkton Securities Inc. and to the Convertible Notes Trust Indenture dated as of August 30, 2001 (the "Indenture") between the Corporation and Computershare Trust Company of Canada. Capitalized terms used, but not otherwise defined, herein shall have the meanings given to them in the Indenture. The Corporation hereby represents and warrants that (i) it did not obtain a Receipt prior to the Receipt Deadline, and (ii) pursuant to Redemption Election Notices delivered to the Corporation in accordance with the terms of the Indenture, the Corporation shall redeem, on the Redemption Date, [all/$. aggregate principal amount] of the Convertible Notes at a price per Convertible Note equal to the Redemption Price. The Corporation hereby irrevocably authorizes and directs the Escrow Agent to deliver or cause to be paid to the Trustee the sum of $_____________ from the Subscription Funds and to pay the balance of the Subscription Funds, if any, to the Corporation. DATED: ______________________. CERTICOM CORP. Per: _______________________ Name: Title: THIS IS SCHEDULE "C" to the Convertible Note Indenture made as of August 30, 2001 between Certicom Corp. and Computershare Trust Company of Canada REDEMPTION ELECTION NOTICE TO: Certicom Corp. AND TO: Computershare Trust Company of Canada Reference is made to the Convertible Notes Trust Indenture dated as of August 30, 2001 (the "Indenture") between Certicom Corp. (the "Company") and Computershare Trust Company of Canada. Capitalized terms used, but not otherwise defined, herein shall have the meanings given to them in the Indenture. The undersigned hereby exercises the right to require the Corporation to redeem, on the Redemption Date, all, but not less than all, of the Convertible Notes registered in the name of the undersigned. The undersigned acknowledges and agrees that, in the event that Convertible Noteholders representing in the aggregate more than 50% of the aggregate principal amount of the Convertible Notes outstanding on September 28, 2001 elect to cause the Corporation to redeem the Convertible Notes held by such Convertible Noteholders, the Convertible Notes held by the undersigned shall be redeemed by the Corporation on the Redemption Date at a price per Convertible Note equal to the Redemption Price. DATED: ___________________________. _______________________________________ _____________________________________ Signature Medallion Guaranteed Signature of Convertible Noteholder _______________________________________ Address in Full Print Name in Full _____________________________________ _____________________________________ EX-10.4 6 dex104.txt FIRST SUPPLEMENTAL INDENTURE EXHIBIT 10.4 ================================================================================ CERTICOM CORP. and COMPUTERSHARE TRUST COMPANY OF CANADA Trustee ____________________________________ First Supplemental Indenture Dated as of August 30, 2001 to Trust Indenture Dated as of August 30, 2001 providing for the issue of 7.25% Senior Convertible Unsecured Subordinated Debentures Due August 30, 2004 ____________________________________ ================================================================================ THIS FIRST SUPPLEMENTAL INDENTURE is made as of August 30, 2001 B E T W E E N: CERTICOM CORP., a corporation continued under the laws of the Yukon Territory and having an office in the City of Toronto in the Province of Ontario, Canada (the "Corporation"), -and- COMPUTERSHARE TRUST COMPANY OF CANADA, a trust company incorporated under the laws of Canada and duly authorized to carry on the trust business in each province of Canada (the "Trustee"). WHEREAS by a trust indenture (hereinafter referred to as the "Trust Indenture") made as of August 30, 2001 between the Corporation and the Trustee provision was made for the issue of Debentures of the Corporation; AND WHEREAS the Corporation and the Trustee have agreed to enter into this Supplemental Indenture in order to clarify certain terms of the Trust Indenture; AND WHEREAS the Corporation is not in default under the Trust Indenture; AND WHEREAS all necessary acts and proceedings have been done and taken and all necessary resolutions passed to authorize the execution and delivery of this Supplemental Indenture and to make the same legal and valid and binding upon the Corporation; AND WHEREAS the foregoing recitals are made as representations and statements of fact by the Corporation and not by the Trustee; NOW THEREFORE THIS FIRST SUPPLEMENTAL INDENTURE WITNESSES that, in consideration of the premises and the covenants herein contained, the parties hereto agree as follows: -2- ARTICLE 1 DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION Section 1.01 Definitions ----------- For all purposes of this Supplemental Indenture, except as otherwise expressly provided or unless the subject matter or context otherwise requires: "Trust Indenture" means the trust indenture made as of August 30, 2001 between the Corporation and the Trustee relating to the creation and issue of $13,500,000 aggregate principal amount of 7.25% Senior Convertible Unsecured Subordinated Debentures due August 30, 2004; "Supplemental Indenture", "hereto", "herein", "hereof", "hereby", "hereunder" and similar expressions refer to this First Supplemental Indenture made as of August 30, 2001 and not to any particular Article, Section or other portion hereof, and include any and every instrument supplemental or ancillary hereto or in implementation hereof, and the expressions "Article" and "Section" followed by a number mean and refer to the specified Article or Section of this Supplemental Indenture, and all other terms and expressions used herein shall have the same meanings as corresponding terms and expressions defined in the Trust Indenture. Section 1.02 To be Read with Trust Indenture; Governing Law ---------------------------------------------- This Supplemental Indenture is a supplemental indenture within the meaning of the Trust Indenture and this Supplemental Indenture shall be read together and shall have effect, so far as practicable, as though all the provisions of the Trust Indenture and this Supplemental Indenture were contained in one instrument, which instrument shall be governed by and construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein. ARTICLE 2 AMENDMENTS Section 2.01 Article 2 - The Debentures -------------------------- (1) Subsection 2.2.(d) of the Trust Indenture is hereby amended by deleting the reference in the first line thereof to "sections 3.9 and 3.18" and substituting therefor a reference to "section 3.18". (2) Subsection 2.6(a) of the Trust Indenture is hereby deleted in its entirety and the following shall be substituted therefor: -3- "(a) Every Debenture, whether issued originally or in exchange for other Debentures, shall bear interest from and including the date of issue or from and including the last interest payment date to which interest shall have been paid or made available for payment on the Debentures, whichever shall be later." Section 2.02 Article 3 - Redemption and Purchase For Cancellation of ------------------------------------------------------- Debentures - ---------- (1) Subsection 3.6(a) of the Trust Indenture is hereby amended by deleting the words "Subject to section 3.9, upon" in the first line thereof and substituting therefor the word "Upon". (2) Section 3.7 of the Trust Indenture is hereby deleted in its entirety and the following shall be substituted therefor: "3.7 Failure to Surrender Debentures Called for Redemption ----------------------------------------------------- If the Holder of any Debentures called for redemption shall, within 30 days from the date fixed for redemption, fail to surrender any of such Debentures or shall not within such time accept payment of the Redemption Price payable in respect thereof, including certificates representing Common Shares issuable to such Holder, as the case may be, or give such receipt therefor, if any, as the Trustee may require, such Redemption Price shall be set aside in trust for such Holder, in accordance with section 12.10; and such setting aside shall for all purposes be deemed a payment to the Debentureholder of the sum so set aside, and to that extent such Debentures shall on and after the redemption date thereafter not be considered as outstanding hereunder and the Debentureholder shall have no right except to receive payment out of the moneys so paid and deposited, upon surrender of his Debentures, of the Redemption Price of such Debentures without interest thereon." (3) Section 3.9 of the Trust Indenture is hereby deleted in its entirety. (4) Section 3.10 of the Trust Indenture is hereby deleted in its entirety. (5) Section 3.11 of the Trust Indenture is hereby deleted in its entirety and the following shall be substituted therefor: "3.11 Restricted Debentures --------------------- The Debentures and Common Shares issuable upon conversion or repurchase of the Debentures have not been and will not be registered under the U.S. Securities Act and Debentures and Common Shares issuable upon conversion or repurchase of Debentures may not be offered, sold, pledged or transferred within the United States or to, or for the account or benefit of, a U.S. Person and may be offered, sold, pledged or -4- otherwise transferred only outside the United States in accordance with the U.S. Securities Act." (6) Section 3.12 of the Trust Indenture is hereby deleted in its entirety. (7) Section 3.13 of the Trust Indenture is hereby deleted in its entirety. (8) Subsection 3.16(c)(ii) of the Trust Indenture is hereby amended by inserting the words ", which date shall not be prior to the tenth Business Day following the date of mailing of such notice" in the fourth line immediately following the words "payment date". (9) Subsection 3.16(i) of the Trust Indenture is hereby deleted in its entirety and the following shall be substituted therefor: "(i) The provisions of section 3.7 apply mutatis mutandis to the Corporation's obligation to satisfy the purchase price under an Offer to Purchase except that reference to the Redemption Price in such section shall be deemed to be a reference to the Offer to Purchase Price for the purpose of this section 3.16;" (10) Article 3 of the Trust Indenture is hereby supplemented by inserting the following immediately after Section 3.17 of the Trust Indenture: "3.18 Payment of Offer to Purchase Price ---------------------------------- Subject to section 3.19 and applicable law and regulatory approval, and notwithstanding any other provision of this Indenture, the Corporation may, at its option, in the case of an Offer to Purchase on notice given not less than five Trading Days preceding the Change of Control Date to the Trustee and the Holders of the Debentures and in accordance with subsection 3.20 and Article 11, elect to satisfy and discharge its obligation hereunder and under the Debentures to pay all or any part of the Offer to Purchase Price by paying (A) cash, (B) issuing and delivering, or causing to be issued and delivered, freely tradeable, fully paid and non-assessable Common Shares or freely tradeable, fully paid and non-assessable securities of the successor Person resulting from the Change of Control or of the Person that made the offer to purchase Common Shares resulting in the Change of Control or such Person's Affiliate, provided in each case that such securities were issued to holders of Common Shares in connection with the Change of Control or (C) any combination of cash, Common Shares or such securities. The satisfaction of the Offer to Purchase Price payable to a Holder shall occur by the delivery to the Holder of cash and/or securities (or securities that are convertible thereinto or exchangeable therefor) as provided under this section 3.18, such securities being valued, in the case of Common Shares, at 95% of the Current Market Price as at the Change of Control Date and, in the case of other securities, at 95% of the weighted average trading price of such -5- securities on the principal stock exchange, quotation system or market on which such securities are listed, quoted or traded for the period of 20 consecutive trading days on such exchange, quotation system or market ending five trading days before the Change of Control Date. The Corporation may not exercise the right conferred by this section 3.18 if an Event of Default hereunder has occurred and is continuing at the date of the notice referred to in this section 3.18. 3.19 Issue of Common Shares on Repurchase of Debentures Upon ------------------------------------------------------- a Change of Control ------------------- (a) If the Corporation elects under section 3.18 to satisfy its obligation to pay all or any part of the Offer to Purchase Price on the Payment Date by the issue of Common Shares or other securities and if otherwise permitted to do so by law, the Corporation will issue or cause to be issued that number of Common Shares or other securities determined under section 3.18, and will deliver to the Trustee the following: (i) a Certificate of the Corporation certifying that no Event of Default hereunder has occurred and is continuing as at the date of the notice referred to in section 3.18; and (ii) an opinion of Counsel that (i) all requirements imposed by this Indenture or by the laws of Canada and any applicable province thereof (based on the addresses of Holders set forth in the general register kept by the Corporation pursuant to section 2.8 as at the Payment Date) in connection with the proposed issue of Common Shares or other securities have been complied with including that no prospectus or similar document is required to be filed or authorizations of regulatory authorities required to be obtained under applicable legislation of any province of Canada (other than as may have been filed or obtained) before such Common Shares or other securities may properly and legally be issued and, once issued, traded without being subject to any general restriction as to the resale thereof provided such Common Shares or other securities are traded through persons registered, if required, under applicable laws, (ii) on the Payment Date the Common Shares or other securities will have been validly issued and upon such issue in satisfaction of the Corporation's obligation to pay all or any part of the Offer to Purchase Price will be outstanding as fully paid and non-assessable securities, and (iii) if the Common Shares or other securities are then quoted on NASDAQ and/or listed on the TSE, application to quote the Common Shares or -6- other securities so issued has been made to NASDAQ and the Common Shares or other securities so issued have been conditionally approved for listing on the TSE (or on such other principal stock exchange, quotation system or market as the Common Shares or other securities may then be listed, quoted or traded), subject to compliance with the requirements of such stock exchange, quotation system or market. (b) If any order, ruling, registration, notice or filing pursuant to any securities laws of Canada or any province thereof is required to ensure that any Common Shares or other securities issuable on the Payment Date are issued in compliance with all such laws or to ensure that any such Common Shares or other securities, once issued, are not subject to any general restriction as to the resale thereof provided that such Common Shares or other securities are traded through persons registered, if required under applicable laws, the Corporation covenants that it will take or cause to be taken all action as may be necessary to make or obtain such order, ruling, registration or filing, or give such notice, as the case may be. (c) If the provisions of subsections 3.19 (a)(i) and (ii) are not complied with, the Offer to Purchase Price payable on the Payment Date will be payable in lawful money of Canada as otherwise provided hereunder. If such provisions are complied with, the issue by the Corporation or such other Person referred to in clause 3.18(B) or such Person's Affiliates of that number of Common Shares or other securities determined under section 3.18 shall fully satisfy and discharge the obligation of the Corporation to pay all or any part of the Offer to Purchase Price determined to be satisfied in accordance with subsection 3.18 on the Payment Date. 3.20 General Requirements -------------------- (a) The notice to the Trustee and Holders of Debentures to be given by the Corporation pursuant to section 3.18 must: (i) state that the Corporation has exercised its option to pay all or any part of the Offer to Purchase Price payable to the Holders of Debentures on the Payment Date by the issue of Common Shares or other securities to the Holders of Debentures; (ii) advise each Holder of Debentures that the Common Shares or other securities to be issued in respect of such Holder's Debentures will be registered in the name of the Holder unless the Trustee receives from such Holder, on or before 5:00 p.m. (Toronto time) on the fifth Business Day prior to -7- the Payment Date at its principal stock transfer office in the City of Toronto written notice in form and substance satisfactory to the Trustee directing the Corporation to register or to direct the registration of such Common Shares or other securities in some other name or names and stating the name or names (with addresses), accompanied by payment to the Trustee of any transfer tax which may be payable by reason thereof; and (iii) advise each Holder that such Holder may, on or after the Payment Date and on proof of identity satisfactory to the Trustee, take personal delivery of the certificates representing that Holder's Common Shares or other securities so issued, at the principal stock transfer office of the Trustee in the City of Toronto if the Trustee receives from such Holder at such principal stock transfer office, in addition to any other notice or delivery required by this subsection and on or before 5:00 p.m. (Toronto time) on the fifth Business Day prior to the Payment Date written notice in form and substance satisfactory to the Trustee, stating that such Holder wishes to take personal delivery of the Common Shares or other securities issued pursuant hereto at the principal stock transfer office of the Trustee in the City of Toronto; and (b) On the Payment Date the Corporation will, subject to subsections 3.20(a)(ii) and (iii), cause to be sent by prepaid ordinary mail (or, in the event of mail service interruption, by such other means as the Trustee and the Corporation determine to be appropriate), certificates for Common Shares or other securities issued pursuant to section 3.18 to each Holder of Common Shares or other securities in respect of which Debentures have been surrendered in accordance with the requirements of the notice, given pursuant to subsection 3.20(a), at their addresses as shown on the records of the Corporation. (c) On or after the Payment Date the Corporation will deliver certificates representing the Common Shares or other securities issued pursuant to section 3.19 to any other registered Holder thereof, upon presentation and surrender of the Debentures in respect of which such Common Shares or other securities were issued. (d) Each certificate delivered pursuant to this section 3.20 will be for that number of Common Shares or other securities that is the Holder's proportionate share of the number of Common Shares or other securities determined in accordance with section 3.18. -8- (e) Interest accrued and unpaid on the Debentures on the Payment Date will be paid to the Holders of Debentures in the manner contemplated in Article 2 except that the Corporation may, at its option, forward payment of interest contemporaneously with the sending of Common Shares or other securities under subsections 3.20(a)(iii) or 3.20(b). 3.21 No Requirement to Issue Fractional Shares or Other -------------------------------------------------- Security -------- The Corporation shall not be required to issue or cause to be issued fractional Common Shares or other securities upon the issue of Common Shares or other securities pursuant to section 3.18. If any fractional interest in a Common Share or other security would, except for the provisions of this section, be deliverable upon the issue of any Common Shares or other securities pursuant to section 3.18, the Corporation shall, in lieu of delivering any certificate representing such fractional interest, satisfy such fractional interest by paying to the registered holder of such shares an amount in lawful money of Canada equal (computed to the nearest cent) to the appropriate fraction, in the case of any fraction of any Common Share, of the Current Market Price of the Common Shares as at the Payment Date and, in the case of a fraction of any other security, of the weighted average trading price of such securities on the principal stock exchange, quotation system or market on which such securities are listed, quoted or traded for the period of 20 consecutive trading days on such exchange, quotation system or market as at the date ending five trading days before the Payment Date." Section 2.03 Article 4 - Conversion ---------------------- (1) Subsection 4.2(e)(i) of the Trust Indenture is hereby amended by deleting the reference to "June 30, 2003" in the first line thereof and substituting therefor a reference to "August 30, 2003". (2) Subsection 4.12(b) of the Trust Indenture is hereby amended by deleting the reference to "section 3.19" and substituting therefor a reference to "section 3.17". Section 2.04 Article 8 - Satisfaction and Discharge -------------------------------------- Section 8.3 of the Trust Indenture is hereby amended by deleting the reference to "sections 3.6, 3.9, 3.16, 3.17, 3.18" in the first line thereof and substituting therefor a reference to "sections 3.6, 3.7, 3.16 and 3.19". Section 2.05 Schedule "A" (Form of Debenture) -------------------------------- Schedule "A" of the Trust Indenture is hereby amended by deleting the words "the date hereof" in the eighth line thereof and substituting therefor the words "the date of issue hereof". -9- ARTICLE 3 MISCELLANEOUS PROVISIONS Section 3.01 Confirmation of Trust Indenture ------------------------------- The Trust Indenture, as amended and supplemented by this Supplemental Indenture, is in all respects confirmed. Section 3.02 Acceptance of Trusts -------------------- The Trustee hereby accepts the trusts in this Supplemental Indenture declared and provided for and agrees to perform the same upon the terms and conditions and subject to the provisions set forth in the Trust Indenture as supplemented by this Supplemental Indenture. Section 3.03 Counterparts and Formal Date ---------------------------- This Supplemental Indenture may be executed in any number of counterparts, each of which so executed shall be deemed to be an original; but and all such counterparts together shall constitute but one and the same instrument and notwithstanding the date of execution shall be deemed to bear the date August 30, 2001. -10- IN WITNESS WHEREOF the parties hereto have caused this Supplemental Indenture to be duly executed, and their respective corporate seals to be hereunto affixed, all as of the day and year first above written. CERTICOM CORP. By: ______________________________ By: ______________________________ COMPUTERSHARE TRUST COMPANY OF CANADA By: ______________________________ By: ______________________________ -----END PRIVACY-ENHANCED MESSAGE-----