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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended April 30, 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
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CERTICOM CORP.
(Exact name of registrant as specified in its charter)
Yukon Territory, Canada Not Applicable
(Province or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
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25801 Industrial Boulevard, Hayward, CA 94545
(Address of principal executive offices)
Registrant's telephone number, including area code: (510) 780-5400
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Shares
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
As of June 30, 2001, the aggregate market value of the voting stock held by
non-affiliates of the registrant was $83,031,841. For purposes of this
information, the outstanding common shares owned by directors and executive
officers of the registrant were deemed to be common shares held by affiliates.
The number of common shares outstanding as of June 30, 2001 was 30,981,583
shares.
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TABLE OF CONTENTS
Page
----
Exchange Rate Information............................................... 1
Special Note Regarding Forward-Looking Statements....................... 1
PART I
Item 1. Business...................................................... 2
Factors That May Affect Operating Results..................... 12
Item 2. Properties.................................................... 23
Item 3. Legal Proceedings............................................. 24
Item 4. Submission of Matters to a Vote of Security Holders........... 24
PART II
Market for the Company's Common Shares and Related
Item 5. Shareholders Matters.......................................... 25
Item 6. Selected Consolidated Financial Data.......................... 27
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................... 28
Item 7A. Quantitative and Qualitative Disclosure About Market Risk..... 38
Item 8. Financial Statements and Supplementary Data................... 38
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure..................................... 38
PART III
Item 10. Directors and Executive Officers of the Company............... 39
Item 11. Executive Compensation........................................ 41
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................... 48
Item 13. Certain Relationships and Related Transactions................ 49
PART IV
Exhibits, Financial Statements Schedules, and Reports on Form
Item 14. 8-K........................................................... 50
Signatures.............................................................. 52
Unless otherwise indicated, all information in this Form 10-K 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-K, 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-K 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 noon
buying rate, or 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 table
illustrates the portion of a U.S. dollar it would take to buy one Canadian
dollar.
U.S.$ per Cdn.$ Noon Buying Rate
-----------------------------------
Fiscal Year Ended April 30, Average(1) Low High Period End
--------------------------- ---------- ------ ------ ----------
2001................................... 0.6616 0.6831 0.6333 0.6510
2000................................... 0.6804 0.6969 0.6607 0.6756
1999................................... 0.6629 0.6982 0.6341 0.6860
1998................................... 0.7116 0.7317 0.6832 0.6992
1997................................... 0.7329 0.7513 0.7145 0.7158
--------
Note:
(1) The average of the daily Noon Buying Rates on the last business day of
each month during the period.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Form 10-K 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 under the heading "Factors That May Affect
Operating Results" in this Form 10-K. 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
Item 1. Business
Overview
We are a leading provider of information security software and services,
specializing in solutions for mobile e-business. Our products and services are
specifically designed to address the challenges imposed by a wireless data
environment. We offer 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.
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 1000 companies.
Industry Background
The Importance of Security in e-Business
The growth of the Internet and internal corporate networks has created new
opportunities for enterprises to interact with their customers, business
partners, and employees. These interactions fall into three categories:
(1) business-to-consumer e-commerce transactions, (2) business-to-business e-
commerce transactions, and (3) business-to-employee enterprise applications.
Collectively, these activities are called "e-business."
For rapid growth of mobile e-business, or m-business, to occur, we believe
that public trust and confidence in the security of e-business must be
strengthened. Failure to address consumers' security concerns adequately could
prevent broad adoption of new e-business products and services. For example,
because of financial losses resulting from credit card fraud on-line retail
transactions, some merchants have limited their use of e-commerce. Further,
many consumers remain concerned about the privacy of their personal
information, including credit card numbers. Identity theft, where a thief
obtains a consumer's personal identification and credit information and uses
it to gain access to the victim's credit and bank accounts, is an increasing
concern. To increase public confidence, we believe that e-business companies
must deliver four basic information security services:
. confidentiality--keeping communications secret from all except the
intended recipient;
. data integrity verification--proof that the message or transaction has
not been modified en route between the sender and the recipient;
. authentication--verifying the identity of another party to ensure that
communication is with a known or authorized person; and
. non-repudiation--creating binding communications and transactions.
2
Current Security Solutions for e-Business
Information management systems based on cryptographic technology, or
cryptosystems, have emerged as a critical element in creating an environment
of trust and confidence for e-business transactions. There are two types of
cryptosystems: symmetric-key systems and public-key systems. In a symmetric-
key system, both communicating parties share the same key, which must be kept
secret. Secret keys require complex key management systems to distribute the
keys to the appropriate parties while keeping them secret from others.
In contrast, in a public-key system, there are two distinct but related
keys, forming a key pair: a public key and a private key. The public key is
used for encrypting messages, which can then be decrypted using the
corresponding private key. It is extremely hard to determine or derive the
private key from the public key. Thus, the public key can be openly published
without compromising the confidentiality of the corresponding private key,
which the user must keep secret. Because the public key need not be kept
secret, key management systems for public-key cryptography can be much simpler
than for symmetric-key systems. While symmetric-key systems deliver better
performance than public-key systems, public-key systems permit easier key
management. As a result, hybrid solutions using both systems are generally
used to construct cryptographic protocols.
Public-key systems offer the ability to create digital signatures. A user
applies his or her private key to the data to be signed, creating a digital
signature. Subsequently, anyone can verify the correctness of the signature
using the user's public key. If the signature verifies, then the signer must
possess the correct private key. In addition, it proves that the data signed
has not been modified, thus providing:
. data integrity verification, since the message can be shown to be
unmodified;
. authentication, because the signer can be identified as the holder of
the private key used in signing; and
. non-repudiation, because the message and signature can be presented to a
third party who can independently validate the signature.
Digital signatures have recently been given legal weight in the United
States with the passage of the Electronic Signatures in Global and National
Commerce Act, which allows users to enter into legally binding agreements
using digital signatures.
Because a digital signature allows a user to prove only that he or she
holds the private key that matches a particular public key, additional data is
necessary to use signature validation to create an assurance of identity. This
is accomplished with digital certificates, which are signed messages that bind
a name or other attributes of the holder of a given private key to the
corresponding public key. Each certificate is signed by a trusted third party
known as the certificate authority, or CA; the CA vouches that a given user is
the sole holder of the private key matching the corresponding public key. The
signature from the CA allows the binding of the name to the public key to be
trusted. This allows a relying party to validate the identity of a user or
server by first checking the validity of the certificate and then verify the
signature against the certified public key. A CA may cooperate with a
registration authority. The registration authority is responsible for
validating a user's identity, on behalf of the CA, before a certificate is
issued. The collection of certificate authorities, registration authorities,
policies, and procedures associated with the management of public keys is
known as public-key infrastructure. Enterprises have adopted PKI because it
offers proven, tested information security standards leading to greater
confidence in the resulting applications and lower integration costs for
developers.
All known public-key cryptosystems are based on advanced mathematics. These
systems use the idea of a one-way function, a mathematical problem that is
hard to solve without some secret information. With this secret information,
the problem is easy to solve; without it, it is extremely difficult. In a
public-key cryptographic system, the public key is the statement of the
mathematical problem; the private key is the secret information. For example,
one of the earliest and most commonly used public-key cryptosystems, RSA, is
based on taking two large prime numbers, each dozens of digits long, and
multiplying them together. It is very difficult to take the composite result
and determine the two unique prime factors that were used to create it. For
the RSA
3
cryptosystem, the large composite number is the public key, and knowledge of
its prime factors is the secret information and can be used as the private
key.
The strength of secure, accepted cryptosystems can generally be measured in
terms of key size, which is measured in bits. The use of advanced mathematics
in a public-key cryptosystem leads to its keys being relatively large and its
operations being relatively slow when compared to those of a symmetric-key
cryptographic system.
Limitations of Applying Conventional Security Solutions to m-Business
The vast majority of existing e-business applications were designed to
operate on desktop computers and enterprise servers communicating over wired
Internet networks. However, operating in a wireless data environment imposes
unique challenges not present in conventional wired Internet networks. For
example, wireless environments are characterized by handheld devices with
limited processing power and battery life operating on low-bandwidth networks.
Therefore, security technology designed for wired Internet networks does not
operate as efficiently and successfully in a wireless environment without
extensive modification. This longer processing time may be unacceptable to the
end user when encountered during a secured communications session or while
trying to complete an e-business transaction on a handheld device.
Additionally, handheld platforms contain less memory and slower processors
when compared to desktop and server platforms. It can be difficult to develop
software that implements standard information security protocols on these
platforms. Other companies have attempted to deal with this challenge by using
non-standardized protocols for their wireless architecture. However, non-
standard solutions are more complex for information technology professionals
to integrate into their security infrastructure, potentially adding costs and
reducing the level of confidence in these systems.
We believe that realizing the full potential of m-business requires a
comprehensive wireless security architecture that is both cost-effective and
efficient. This requires a security solution designed for handheld devices and
wireless networks that interfaces with existing wired e-business security
infrastructures.
The Certicom Solution
We offer a comprehensive line of products and services that are designed
for wireless data environments and are vertically integrated around a common
cryptographic architecture. Our products are based on elliptic curve
cryptography, ECC, and are an efficient alternative to conventional
technologies. Our customers use our solutions to build increased security into
their products and to deliver reliable services for users of wireless devices.
Our products secure a variety of m-business transactions and
communications, including on-line banking and stock trading, retail e-
commerce, electronic payments, e-mail and vertical applications for use in
industries such as public safety and health care.
Comprehensive Wireless Security Architecture
We offer a set of products satisfying distinct needs for security in
wireless architectures. These solutions are specifically designed for wireless
data communication and handheld platforms and make use of a common
cryptographic architecture. Our comprehensive solution includes an enabling
technologies suite, which allows OEMs to develop secure e-business
applications; trust services, which provides OEMs and enterprises with the
necessary PKI management tools and certificate services to authenticate users
and servers; and enterprise application software, which provides VPN security
and strong PDA data security for enterprises wanting to enable a mobile
workforce.
We believe that, by offering our customers a complete solution, we enable
them to deploy a wide range of m-business data applications quickly, with
reduced costs and increased functionality. In addition, we provide consulting
services to help customers with difficult implementations of secure wireless
solutions.
4
Products and Services Designed for Handheld Devices and Wireless Data
Networks
We have assembled a team of engineers whose core competency is geared
specifically toward creating products for a wireless data environment.
Handheld devices and wireless data networks are different in many respects
from desktop platforms and wired networks. For example, wireless architectures
have less processing power, memory, battery life, and network bandwidth
available to them. We specifically design our products to address these
constraints, resulting in better performance and functionality in a wireless
environment. Further, our expertise in creating implementations for handheld
devices enables us to use standardized protocols, which we believe eases
integration with existing infrastructures.
Our Standardized Elliptic Curve Cryptographic Technology
We believe that our ECC-based technology offers significant advantages for
m-business applications when compared to conventional cryptographic
technologies such as RSA. These include:
. Seamless, transparent security: Digital signatures used in
authenticating communications and the signing of documents and
transactions can be created in significantly less time on handheld
platforms when using ECC. This faster operating time allows a user to
benefit from security built into e-business applications without
substantial impairment of the user experience.
. Lower costs: Since ECC requires less processing power than is required
for equivalent security when using conventional technologies, some
mobile and wireless devices that use our technologies are less expensive
for our OEM customers to produce.
. Stronger security: Our ECC-based technology enables higher levels of
security than conventional encryption technologies when evaluated at
equivalent levels of processing power, bandwidth, and battery capacity.
The strength of cryptographic systems is usually described by the length of
the key, measured in bits. Due to the different mathematical foundations of
public-key systems, they require varying key lengths to deliver similar levels
of security. The math execution of the elliptic curve discrete logarithm
problem is more complex and therefore harder to attack than the mathematical
problems used in conventional public-key systems. This means that our ECC
systems can deliver equivalent security with shorter keys than conventional
public-key systems.
The following table illustrates this advantage by showing the key sizes for
various cryptographic systems.
Comparable Key Sizes for Cryptographic Systems, in Bits
Public Key
----------------
Conventional
Symmetric Key ECC Algorithms
------------- --- ------------
80 163 1,024
128 283 3,072
192 409 7,680
256 571 15,360
Although the level of security offered by 80-bit symmetric keys is
currently sufficient for securing most business activities, we believe that
larger key sizes are needed to withstand future attacks made possible by the
rapid advance of computing power. The Advanced Encryption Standard, or AES,
endorsed by the U.S. Government, uses symmetric key sizes ranging from 128 to
256 bits. To deliver strength equivalent to the strongest AES symmetric key, a
571-bit ECC public key or a 15,360-bit RSA public key would be required. Given
that the computation required to create a digital signature grows with the key
size, and that the key size needed to deliver a particular level of security
grows more slowly for ECC than it does with conventional algorithms, the
performance and bandwidth advantages of ECC grow as the level of desired
security increases.
5
The security of a system is dependent on its design. Confidence in the
security of ECC's design stems from 15 years of scrutiny by cryptographic
experts. This confidence is reflected by the inclusion of ECC in many
prominent standards, including specifications from government bodies and more
commercially-oriented forums such as the American National Standards
Institute, or ANSI, the Institute for Electrical and Electronics Engineers, or
IEEE, and the International Organization for Standardization, or IOS. Most
recently, a digital signature standard based on ECC has become a U.S.
Government Federal Information Processing Standard. Given that the
standardization process in these organizations has typically taken several
years, and because we monitor these processes, we do not expect that any
emerging algorithms will achieve standardization by these organizations in the
near future.
Products and Services
Our products and services include:
. Enabling Technologies
. Security Builder(R) cryptographic toolkit
. SSL Plus(TM) and WTLS Plus(TM) security protocol toolkits
. Trustpoint(TM) PKI products and toolkits
. Trust Services
. MobileTrust(TM) managed certificate services
. Enterprise Application Solutions
. movian(TM) wireless security products (movianVPN(TM) &
movianCrypt(TM))
. Consulting and Design Services
. Hardware Components
Enabling Technologies
Our Security Builder software development toolkit family includes our
proprietary ECC-based technology, an implementation of the RSA algorithm and
other cryptographic algorithms. These products enable customers to integrate a
comprehensive selection of cryptographic components into their applications.
The Security Builder family of products is available for platforms including
Microsoft Windows 95/98/NT, Sun Solaris, several versions of UNIX, Java,
Microsoft Windows CE and the Palm OS(R) platform. We also offer integration
services to port Security Builder to other platforms.
Our SSL Plus software development toolkit family provides a comprehensive
set of libraries that permit customers to add secure communications quickly
and easily using the secure socket layer, or SSL, and transport layer
security, or TLS, security protocols. The family includes SSL Plus 3.0, SSL
Plus for Embedded Systems and SSL Plus for Java. SSL Plus for Embedded Systems
is the first SSL toolkit that enables secure connections of handheld computers
with enterprise data systems over both wired and wireless networks. The SSL
Plus family of products is available for platforms including Microsoft Windows
NT, Sun Solaris, HP/UX, QNX RTOS, Java, Microsoft Windows CE, Linux and the
Palm OS platform. SSL Plus is built using the ANSI C language, and we provide
services to port to other platforms on request. Our SSL Plus toolkit is used
by leading companies such as Agilent, BEA Systems, Citrix, Juno, Nortel,
Oracle, and Sybase to build security into a wide range of applications and
products for the Internet, intranets, and corporate networks, from traditional
Web browsers and servers to home banking products, handheld devices and legacy
mainframes.
Our WTLS Plus security protocol toolkit implements the wireless transport
layer security, or WTLS, protocol for secure transport layer communication
over wireless networks. WTLS Plus is the industry's first WTLS product to
support mutual authentication of Wireless Application Protocol, WAP,
transactions, providing
6
the highest levels of security for e-commerce and stock trading, wireless
communications, Internet access and on-line banking from mobile devices. WTLS
Plus is available for platforms including Microsoft Window NT, Sun Solaris,
Microsoft Windows CE and the Palm OS platform. Our industry-leading WTLS
toolkit provides full-strength, high-performance WTLS security is used by 724
Solutions, Digital Mobility (formerly DSR), Exalink Ltd., Motorola, Neomar,
Research In Motion, RTS Wireless and Sony.
Our Trustpoint PKI product line is a comprehensive suite of flexible PKI
products. The Trustpoint product line consists of certificate toolkits, a CA,
a registration authority and an administrative console built to open industry
standards for PKI interoperability, including X.509 and PKIX. These components
operate on the Java platform and have been tested on Linux, Microsoft Windows
NT and Sun Solaris. The Trustpoint PKI Portal is the industry's first solution
that bridges the wired and wireless PKI worlds by allowing companies to manage
the security needs of desktop PCs, handheld devices, RIM pagers, HTML PDAs,
cHTML phones and WAP-enabled phones from a centralized point of control. We
brought Trustpoint to the e-business community to complement our MobileTrust
CA service offering, resulting in an all-encompassing suite of PKI products to
suit diverse business needs.
Trust Services
Our MobileTrust managed certificate services provide Internet-based trust
services that ensure the identity of data servers and handheld clients in
mobile e-business solutions. MobileTrust issues X.509 certificates, which are
compatible with industry-standard cryptographic security protocols and are
supported by our entire line of products. Leading healthcare, enterprise, and
e-commerce application developers use MobileTrust certificates to enable
trusted, secure connections between wired and wireless users and to generate
digitally signed transactions. MobileTrust is the first CA in the industry to
provide both RSA and ECC digital certificates.
Enterprise Application Solutions
Our movian product line was introduced to meet the needs of today's
wireless enterprise computing environment. movian delivers cost-effective,
interoperable, high performance security solutions for handheld devices
including:
. movianVPN
The movianVPN is an Instant Protocol Security, or IPSec, software
client operating on devices running the Palm and WinCE operating
systems. This product enables enterprises to provide their mobile
professionals with secure remote access to the corporate intranet from
wireless devices like PDAs using their existing VPN infrastructures.
. movianCrypt
movianCrypt is a data encryptor that runs on Palm devices and extends
the basic functionality provided by a handheld computing device to
achieve stronger data security.
Consulting and Design Services
Our experts in cryptography and information security provide a
comprehensive range of systems solutions, consulting and design services to
help customers develop and deploy their own solutions faster and with higher
levels of confidence in their security. We offer the following services:
. Systems Security Engineering. From requirements analysis and business
modeling to design, development and deployment of solutions, we offer
comprehensive support to help our customers minimize time-to-market,
reduce development risk, minimize threats from attack, and maximize
performance and efficiency of security within their systems solutions
and applications.
. Product Review and Evaluation. We provide confidential reviews of our
clients' products and systems to assist them in creating secure systems
for their own customers. Our reviews include detailed technical
evaluations, architectural overviews and business plan viability
analysis.
7
. Enterprise and Information Security Reviews. We assist in identifying
threats and evaluating networks and computer security risks, and we
recommend solutions for potential security breaches. Typically, we
perform risk analysis, physical site reviews, network security reviews,
security architecture design, security policies and product review and
recommendations as part of the services.
. Cryptographic Design and Review. We have expertise in efficient
cryptographic security implementations. We help our customers design and
review custom cryptographic solutions for security in demanding
environments. Customers typically use our services in wireless handheld
devices, server- and client-based applications and network security
systems.
. Security and Cryptographic Training. We offer our customers training
courses that cover a broad range of cryptographic and digital
information security topics. These courses are tailored to help our
customers make informed decisions concerning technical designs and new
product and service opportunities.
. PKI Solutions. We help our customers evaluate PKI products and define
PKI system architectures. Our consultants have created solutions for our
customers that we believe meet the demands of new and challenging
environments.
Hardware Components
We offer several hardware components that are manufactured by others to our
specifications. These products, which include our smart card product line and
Certilock(TM) security module, provide secure processing and storage for
cryptographic keys based on ECC-based technology. We believe our smart card
product line addresses the need for low-cost, high-strength user
identification and authentication services in a form factor similar to a
credit card. Our Certilock security module provides a secure, hardware-based
execution environment in a PCI card for use in secure application servers and
certificate authorities.
Sales and Marketing
OEM Sales
We sell our enabling technologies and trust services directly to OEM
customers through dedicated technical sales representatives. We focus our
efforts in the sectors in which the advantages of our technology are most
compelling.
We have a sales presence in the United States, Canada, the United Kingdom,
Italy, Singapore and Finland. We assign our sales representatives account
responsibilities based on market sector, enabling the team and its members to
apply and further develop market sector expertise. A sales director leads each
sector team, which includes a business development manager, sales specialists
and field application engineers.
We intend to continue to expand our sales and business development presence
into Europe, Latin America and the Asia-Pacific region. As the market for our
technology matures, we anticipate complementing our direct sales force with
indirect channels to increase our worldwide sales presence.
Enterprise Sales
We have developed direct relationships with enterprises to sell our
enterprise application software offerings, which include our VPN and data
encryptor products. Enterprise users can purchase the software through our
retail e-commerce Web site or via telesales. We have agreements with several
companies to bundle our software with their products thus providing a wider
distribution of our product to the enterprise. We continue to expand the
distribution channels. We plan to leverage our brand recognition in the
enterprises, and expand into key vertical markets including healthcare and
financial services, in order to increase sales of our enabling technologies
and trust services.
8
Corporate Marketing
We maintain marketing efforts directed at broadening the demand for our
products and solutions by increasing awareness of the benefits of using our
products and the need for security solutions in general. Marketing efforts are
also aimed at supporting our worldwide sales channels and promoting joint
partner activities. Marketing personnel engage in a number of activities
including conducting public relations and product seminars, developing sales
and marketing collateral such as white papers, case studies and data sheets,
issuing newsletters, coordinating our participation in industry trade shows,
programs and forums, and establishing and maintaining relationships with
recognized industry analysts and press. Our executives are frequent speakers
at key industry forums in many of the vertical markets that we serve.
Brand Awareness
We provide the Certicom ingredient technology brand logo to our licensees
to incorporate in their product packaging to indicate the inclusion of our
enabling security technology in their products. We also provide variations of
the mark for use in the smaller screen sizes of handheld devices and
applications. The Certicom corporate logo is regularly featured in our
advertisements, trade show graphics, and other promotional efforts.
Standards Marketing and Education
We maintain an active commitment to open standards in the cryptography
industry and participate in setting standards that pertain to various aspects
of our technology. We have also expanded our coverage in application
standards. Our success in marketing our security products and services is
partially dependent on the acceptance of our technology by standards
organizations. In many cases, the memberships of standards committees include
representatives from our most important customers.
We are active in many important industry standards bodies, including the
Institute of Electrical and Electronics Engineers, Inc., or IEEE; the American
National Standards Institute, or ANSI; the International Organization for
Standardization, or ISO; the Internet Engineering Task Force, or IETF; the
Wireless Application Protocol Forum, or WAP Forum; Bluetooth Special Interest
Group; and Radicchio, a consortium established to promote adoption of wireless
PKI. We have formed our own standards group, the Standards for Efficient
Cryptography Group, or SECG, to promote ECC interoperability among the major
companies planning to ship ECC-based products.
Confidence in the strength of cryptographic algorithms is essential to the
expansion of their use. We have engaged in extensive educational activities to
explain the mathematical basis underlying elliptic curve cryptosystems. These
educational initiatives have been directed towards not only customers but also
the ultimate end users of our products, including banks, credit card
associations and governments.
Research and Development
We are engaged in advanced cryptographic research involving computational
algorithms and integrated circuit architectures for cryptographic processing.
Dr. Scott A. Vanstone, our Chief Cryptographer, leads our efforts in this
area. Dr. Vanstone is also a professor of Mathematics at St. Jerome's
University and the University of Waterloo, Canada's leading center for
cryptographic research, and has published numerous books and articles on
cryptography. He is an Executive Director for the Centre for Applied
Cryptographic Research, the holder of the NSERC/Pitney Bowes Industrial
Research Chair in Cryptography at the University of Waterloo and a Fellow,
Royal Society of Canada, Academy of Science. We maintain a long-standing
relationship with the University of Waterloo, where we co-sponsor the
NSERC/Certicom Industrial Research Chair in Cryptography.
On June 30, 2001, we employed eleven cryptographers who are involved in
pure research and applied cryptographic development. We also retain several
leading cryptographic researchers at academic institutions as paid
consultants. We present at a number of cryptography conferences and hold
workshops worldwide on ECC.
9
In addition to our core expertise in applied cryptographic research, we
emphasize the development of software toolkits that package core technology
innovations and standard security protocols into easy-to-use products targeted
at the development community. We have expertise in the development of
integrated circuit designs that integrate our ECC implementations directly
into hardware solutions.
Intellectual Property
We rely on combinations of proprietary technologies, trade secrets, patent
protection and copyright protection in the conduct of our business. Our
cryptographic research has resulted in seventeen patents granted in the United
States, with corresponding applications either pending or granted in other
jurisdictions. Our research has also led to our filing numerous patent
applications over the past five years. As of June 30, 2001, in addition to our
granted patents, we have approximately thirty-six inventions for which
applications are pending, each of which is filed in one or more jurisdictions.
All our patent applications are filed in the United States and Canada, and a
substantial portion are filed in Europe and Japan as well. We have filed
patent applications in countries that we believe to be significant markets. We
also rely on certain trade secret aspects of our products and services to
provide a commercially prudent level of protection to our proprietary
technology, both in markets in which we have filed patent applications and
those in which we have not filed.
A majority of our patents and pending patent applications is pertinent to
implementations of ECC, while some of them also relate to techniques used with
other public-key cryptosystems. We believe that our existing patents, together
with our pending patent applications, cover particularly advantageous methods
of implementing ECC. We have licensed and may in the future license our
patents to OEM customers.
We also engage in joint development work that has resulted in the filing of
additional patent applications. As a result of joint development efforts, we
jointly own five additional patents with Motorola, and have filed several
additional applications for patents which, if granted, would be jointly owned
with Pitney Bowes.
Customer Applications
We expect our licensees to incorporate our technologies into their products
for the following mobile applications:
. on-line banking and brokerage;
. vehicle fleet management services;
. general-purpose wireless data gateway services;
. access to law enforcement databases by police officers;
. wireless data application development environments;
. enterprise file and data synchronization;
. wireless e-mail and messaging;
. retail e-commerce initiated from wireless handheld devices;
. electronic prescription filing and patient records management for
physicians;
. smart card enabled electronic payments systems;
. WAP browsers and gateway systems;
. secure wireless Web browsing of HTML sites;
. digital content recording and distribution media for handheld devices;
. SIM chips for transaction-level security in GSM phones; and
. delivery of protected program content in satellite radio broadcasts.
10
Competition
Enabling Technologies
. Cryptographic Security Toolkits
Our primary competitor in this market is RSA Security Inc. RSA Security
offers a comprehensive product line that competes directly with us.
There are a number of other companies worldwide that offer commercial
protocol products. In addition, competition may come from solutions
developed in-house, or by companies that attempt to create their own
encryption implementations without licensing commercial toolkits.
Furthermore, OpenSSL, a royalty-free source-code implementation, and
other free cryptographic toolkits are used by some companies.
. PKI Products
Competition in this segment is increasing as traditional PKI companies
such as Entrust Technologies Inc. and Baltimore Technologies plc move
into the mobile and wireless market. RSA Security and Diversinet Corp.
also participate in this segment. In Europe and Asia, some specialty
vendors are emerging, such as Sonera SmartTrust Ltd., which develop and
sell PKI products for mobile phones.
Trust Services
Competition in this segment comes from companies such as VeriSign,
Inc., Entrust, Inc. and Baltimore Technologies plc. These companies
offer CA products and services for issuing and managing digital
certificates for use on public and private networks. Although
traditionally desktop focused, they have begun to modify their products
and services to make their products more attractive to the mobile and
wireless market.
Enterprise Application Products
. VPN Client for Handheld Devices
No direct competition exists for our handheld client at this time.
However, there is interest by companies to participate in the area of
PDA security products for remote access. One alternative solution is
the V-One Air SmartGate. This product does require investment in
additional network equipment and does not use a standard security
protocol.
There have been announcements recently from software toolkit providers,
which a third party or a toolkit provider could use to create a
handheld client, planned for 2001. To date no announcements of an
actual client using these toolkits have been made. In addition, we
believe that any competitive offering would need to develop broad
interoperability with gateways, handheld devices and wireless
connectivity methods in order to match our handheld VPN client feature
set.
Most gateway companies have a desktop VPN client available and, in
theory, could develop a handheld client for their wireless extensions.
The gateway companies, however, do not consider development for
handheld devices as a core competence and our handheld client is
already interoperable with their gateways. Certicom has announced a
bundling agreement with one VPN gateway provider, Cisco Systems, Inc.
. Database Encryptor for Handheld Devices
There are very few products that offer authentication and data
encryption for the Palm device. Competition in this market comes from
JAWZ Inc., PDASecure and Asynchrony.com. We believe that competing
encryption products will be developed during the third quarter of
calendar 2001.
Regulatory Matters
Our products are subject to export, import and/or use restrictions imposed
by the governments of the United States, Canada and other countries.
Therefore, our ability to export and re-export our products from the United
11
States and Canada to other countries is subject to a variety of government
approvals or licensing requirements. Such restrictions potentially could have
a material adverse effect on our business, financial condition and operating
results.
In general, our products can be exported from, imported into and used in
the United States and Canada without licenses or other approvals. In other
countries, the trends regarding export, import and use restrictions are mixed.
Given that the laws, regulations and requirements governing the export, import
and use of encryption products change frequently and without advance notice,
we cannot predict their ultimate impact on our activities.
Employees
On June 4, 2001, we announced a work force reduction that decreased our
work force by approximately 30%. As of June 30, 2001, we had approximately 319
full-time and part-time employees: 111 in cryptographic research and
engineering, 107 in sales and marketing, 35 in consulting and systems
integration services, and 66 in finance and administration. None of our
employees is represented by a labor union or subject to a collective
bargaining agreement. We consider our relationship with our employees to be
good. All our employees enter into intellectual property rights assignments
and non-disclosure agreements with us.
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-K. 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.
Since our inception, we have incurred substantial net losses. As of April
30, 2001, we had an accumulated deficit of approximately $95.0 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 and to maintain existing customer relationships and 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;
12
. our dependence in any quarter on the timing of a few large sales;
. our ability to maintain and grow a significant customer base;
. the fixed nature of a significant portion of our operating expenses,
particularly personnel, research and development, and leases;
. costs related to the opening or expansion of our facilities;
. unanticipated product discontinuation or deferrals by our OEM customers;
. changes in our pricing policies or those of our competitors;
. currency exchange rate fluctuations; and
. timing of acquisitions, our effectiveness at integrating acquisitions
with existing operations and related costs.
Accordingly, we believe that quarter-to-quarter comparisons of our results of
operations are not necessarily meaningful. You should not rely on the results
of one quarter as an indication of our future performance.
Our revenues are difficult to predict
We derive our revenue primarily from sales of our products and services to
our OEM customers. Our sales vary in frequency, and OEM customers may or may
not purchase our products and services in the future. The sale to, and
implementation by, OEMs of our products and services typically 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, or stop using, our
products and services at any time, and certain license agreements may be
terminated by the customer at any time. We negotiate most of our customer
contracts on a case-by-case basis, which makes our revenues difficult to
predict. Our existing customer contracts typically provide for base license
fees, technology access fees and/or royalties based on a per-unit or per-usage
charge or a percentage of revenue from licensees' products containing our
technology. 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, our revenues are not recurring from period to period, which makes them
more difficult to predict. In addition, estimating future revenue is difficult
because we generally ship our products soon after an order is received and, as
such, we do not have a significant backlog. Our expense levels are based, in
part, on our expectations of future revenues and are largely fixed in the
short term. We may not be able to adjust spending in a timely manner to
compensate for any unexpected shortfall in revenues.
The introduction of a subscription business model will impact our reported
revenue
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 customers to renew their
licenses upon license expiration.
13
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 to increase.
We are contractually obligated to complete certain leasehold improvements
We lease premises totaling approximately 111,000 square feet in Hayward,
California. This lease expires on July 31, 2007. Through April 30, 2001 we
have capitalized leasehold improvements and related construction costs
totaling approximately $7.7 million for our Hayward facilities. In addition,
we anticipate incurring approximately an additional $3.6 million subsequent to
April 30, 2001 to complete the build-out of our Hayward facilities. In
addition, we have signed a ten-year lease for approximately 130,000 square
feet located at 1980 Matheson Boulevard East, Mississauga, Ontario. At this
time, the facility is being constructed at our expense. We are obligated to
pay approximately $7.8 million of which approximately $7.4 million will be
paid subsequent to April 30, 2001 to complete the build-out of the facility.
The current economic downturn has impacted demand for our products and
services 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 growth in gross domestic product, reflect a decline in economic
activity 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 market. 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 cycles. 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 work force of approximately 30% as well as other steps to
reduce expenses. 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 increase more quickly than we expect. If we find that our
restructuring announced in June did not sufficiently decrease the growth of
our expenses, we may find it necessary to implement further streamlining of
our expenses, to perform another reduction in our work force or to undertake
another restructuring of our business. If our restructuring activities are not
successful in efficiently 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.
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. One of our customers accounted for approximately
23% of our revenue in fiscal 2001 while no customer accounted for 10% or more
of our revenue
14
in fiscal 2000. 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 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 existing 43,000 square foot Hayward facility. The
term of this new lease is seven years at an initial monthly rent of
approximately $61,000, with 3% annual increases. The lease on our existing
Hayward facility expires in July 2007 and provides for current monthly base
rent payments of approximately $54,000, increasing to approximately $57,000 in
March 2002 and approximately $60,000 in March 2004. Due to the restructuring
we announced in June 2001, we intend to sublease our current Hayward office
space, although there can be no assurance that we will be able to do so or at
rates equal to our current obligations under the lease, and to relocate our
Hayward operations to the new facility in the August of 2001.
We recently signed a ten-year lease for approximately 130,000 square feet
located at 1980 Matheson Boulevard East, 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. In the fall of
2001, we intend to relocate our Canadian operations from their current
location to this new facility and to sublease our current Canadian office
space and approximately 40,000 square feet space located at 1980 Matheson
Boulevard East, Mississauga, Ontario, although there can be no assurance that
we will be able to do so or at rates equal to our current obligations under
the lease. The annual rental fee for the new site varies between approximately
Cdn.$10.85 to Cdn.$13.05 per square foot (U.S.$7.06 to U.S.$8.50 per square
foot based on the exchange rate on April 30, 2001) over the life of the lease.
We began paying rent on this lease in May 2001.
We are currently searching for tenants to sublease our current Hayward and
Mississauga spaces and portion of our new Mississauga space. 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 profitably. The
total annual rent for all facilities is approximately $3.1 million. 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, 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.
15
Some of our products are new, unproven and currently generate little or no
revenue
In late 2000 and early 2001 we launched our PKI products, CA service and
VPN client software product. We cannot predict the future level of acceptance,
if any, of these new products, and we may be unable to generate significant
revenue from these products.
We have only recently begun to sell directly to enterprise customers
We have recently started to expand our sales efforts to encompass sales of
certain products directly to enterprises other than OEMs. The expansion of our
direct sales efforts will require that we attract, hire, train, manage and
adequately compensate a larger group of professionals. We may not be
successful in expanding and managing our sales effort or that the revenues
produced by our direct sales will offset our increased expenses.
These non-OEM, or enterprise, customers will require different products,
support services and integration services than our existing OEM customer base.
We 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.
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.
16
We must manage our growth
We have experienced a period of significant growth in our sales and
personnel that has placed strain upon our management systems and resources.
Our sales increased from $12.0 million for the fiscal year ended in April 30,
2000 to $26.6 million for the fiscal year ended in April 30, 2001. The number
of our full-time and part-time employees increased from 189 at the end of June
2000 to 319 at the end of June 2001. Subject to prevailing economic
conditions, we intend to continue to pursue existing and potential market
opportunities, including acquisitions. Our growth has placed, and will
continue to place, demands on our management and operational resources,
particularly with respect to:
. training, supervising, and retaining skilled technical, marketing and
management personnel in an environment where there is intense
competition for skilled personnel;
. managing and preparing our facilities for occupancy;
. expanding our treasury and accounting functions and information systems
to meet the demands of a growing company;
. strengthening our financial and management controls in a manner
appropriate for a larger enterprise;
. maintaining a cutting edge research and development staff;
. expanding our sales and marketing efforts;
. 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 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
17
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.
We face risks related to our international operations
We are currently in the process of expanding our international presence and
operations. This expansion is expected to involve opening foreign sales
offices, which may cause us to incur substantial costs. International sales
and operations may be limited or disrupted by increased regulatory
requirements, the imposition of government and currency controls, export
license requirements, political instability, labor unrest, transportation
delays and interruptions, trade restrictions, changes in tariffs and
difficulties in staffing and coordinating communications among international
operations. These foreign markets may require us to develop new products or
modify our existing products. There can be no assurance that we will be able
to manage effectively the risks associated with our international operations
or that those operations will contribute positively to our business, financial
condition or operating results.
We 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
18
Union. While we believe that at least some of our products are covered by one
or more of our patents and these patents are valid, a court may not agree if
the matter is litigated. There can be no assurance that we will be successful
in protecting our proprietary rights and, if we are not, our business,
financial condition and operating results could be materially adversely
affected.
The industry in which we compete has many participants who own, or claim to
own, intellectual property. We indemnify our licensees against third-party
intellectual property claims based on our technology. Claims relating to
intellectual property by any third-party business, individual or university,
whether or not with merit, could be time-consuming to evaluate, result in
costly litigation, cause shipment delays for products or the cessation of the
use and sale of products or services, or require us to obtain licenses by
paying license fees and/or royalties to the owners of the intellectual
property. Such licensing agreements, if required, may not be available on
royalty or other terms acceptable to us. Any of these situations could
materially adversely affect our business, financial condition and operating
results. We also currently license third party technology for use in some of
our products and services. These third party technology licenses may not
continue to be available on commercially reasonable terms or may not be
available at all. Our business, financial condition and operating results
could be materially adversely affected if we lose the right to use certain
technology.
We are engaged in joint development projects with certain companies. One of
these projects has resulted in the issuance of jointly owned patents. There is
a risk that the companies with which we are working could decide not to
commercialize the joint technology and that we may be unable to commercialize
joint technology without their consent and/or involvement.
We 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
19
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
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 their
UniCERT(TM) product, which competes with our Trustpoint(TM) product line. This
potential conflict may deter existing and potential future customers from
licensing some of our component products, most notably our Security Builder(R)
cryptographic toolkit. We expect to compete with a greater number of our
customers as we further expand our product line.
20
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
We may require additional equity or debt financing in the future. There can
be no assurance that we will be able to obtain on satisfactory terms, or at
all, the additional financing required to compete successfully. Failure to
obtain such financing could result in the delay or abandonment of some or all
of our business plans, which could have a material adverse effect on our
business, financial condition and operating results.
Risks Related to Our Industry
Public key cryptographic technology is subject to risks
Our products and services are largely based on public-key cryptographic
technology. With public-key cryptographic technology, a user has both a
public-key and a private-key. The security afforded by this technology depends
on the integrity of a user's private-key and on it not being stolen or
otherwise compromised. The integrity of private keys also depends in part on
the application of certain mathematical principles such as factoring and
elliptic curve discrete logarithms. This integrity is predicated on the
assumption that solving problems based on these principles is difficult.
Should a relatively easy solution to these problems be developed, then the
security of encryption products using public-key cryptographic technology
could be reduced or eliminated. Furthermore, any significant advance in
techniques for attacking cryptographic systems could also render some or all
of our products and services obsolete or unmarketable. Even if no
breakthroughs in methods of attacking cryptographic systems are made,
factoring problems or elliptic curve discrete logarithm problems can
theoretically be solved by computer systems that are significantly faster and
more powerful than those currently available. In the past, there have been
public announcements of the successful decoding of certain cryptographic
messages and of the potential misappropriation of private keys. Such publicity
could also adversely affect the public perception as to the safety of public-
key cryptographic technology. Furthermore, an actual or perceived breach of
security at one of our customers, whether or not due to our products, could
result in adverse publicity for us and damage to our reputation. Such adverse
public perception or any of these other risks, if they actually occur, could
materially adversely affect our business, financial condition and operating
results.
21
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.
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.
22
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 2. Properties
We occupy the following properties as operating facilities:
Square Lease
Major Locations Footage Expiration Use
--------------- ------- ---------- ---
Principal
Administration,
Worldwide Sales and
Marketing, Finance,
Engineering, Custom
25801-25821 Industrial Blvd Design and Systems
Hayward, California, U.S.A.... 111,000 July, 2007 Integration
Canadian Corporate
Administration, Customer
Support, Research and
5520 Explorer Drive Development, Engineering
Mississauga, Ontario, Canada.. 30,300 December, 2009 and Systems Integration
Canadian Corporate
Administration, Customer
Support, Research and
1980 Matheson Blvd East Development, Engineering
Mississauga, Ontario, Canada.. 130,000 October, 2010 and Systems Integration
1175 Herdon Parkway
Herndon, Virginia, U.S.A...... 6,000 October, 2007 Sales
We recently signed a ten-year lease for approximately 130,000 square feet
located at 1980 Matheson Boulevard East, Mississauga, Ontario. At this time,
the facility is being constructed at our expense. 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. In the Fall of 2001, we
intend to relocate our Canadian operations from their current location to this
new facility and to sublease our current Canadian office space and
approximately 40,000 square feet of this new facility, although there is no
assurance that we will be able to do so or at rates equal to our obligations
under the lease. The annual rental fee for the new site varies between
approximately Cdn.$10.85 to Cdn.$13.05 per square foot (U.S.$7.06 to U.S.$8.50
per square foot based on the exchange rate on April 30, 2001) over the life of
the lease. We began paying rent on this lease in May 2001. In addition, we
intend to sublease approximately 43,000 square feet of our Hayward facility in
the second quarter of fiscal 2002, although there can be no assurance that we
will be able to do so or at rates equal to our obligations under the lease.
We occasionally execute month-to-month leases for short-term office space.
We currently lease approximately 980 square feet of office space in Laguna
Hills, California on a month-to-month basis and we also have a lease for
approximately 540 square feet in London, England.
We currently anticipate leasehold improvements and related construction
costs will be approximately $11.0 million subsequent to April 30, 2001 to
complete the build-out of our Hayward and Mississauga facilities. The total
annual rent for all facilities is approximately $3.1 million.
23
Item 3. 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 aspects 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 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 have requested further elaboration from eSignX. 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.
In addition, we have become aware of a lawsuit commenced by Mr. Leon
Stambler against one of our customers and certain other parties asserting that
Mr. Stambler holds patents on certain aspects of technology related to online
transactions. Although we have not been named in this legal action, under the
terms of the license agreement we have entered into with this customer, we
have agreed to defend our customer against any claim that our licensed
product, when used within the scope of the license agreement, infringes any
U.S. or Canadian patent and to indemnify the customer in certain circumstances
for related costs and expenses it incurs as a result of such a claim. We had
previously reviewed the Stambler patent and prepared documentation indicating
a possible prior use of the subject matter purportedly claimed in the
referenced patent. We are currently investigating the scope of protection
afforded by the claims detailed in the complaint and effect, if any, of these
claims on the products supplied by Certicom. There can be no assurance that
such asserted patent will not have a material adverse impact on us.
One of our suppliers, East West Imports, Inc. dba California Computers, has
filed suit against us in the Superior Court of the State of California, County
of Alameda, for payment of approximately $230,000 plus costs, attorney fees,
and interest. Among other defenses, the focus of our dispute is whether or not
a number of personal computers and peripheral items were actually received by
us. At present, both parties are attempting to ascertain the proper amount
owed, and we anticipate a settlement on fair and reasonable terms may be
possible in the near future. In the event that no such settlement is reached
within a reasonable time, we intend to vigorously defend any litigation over
disputed amounts. In such case 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.
Item 4. Submission of Matters to a Vote of Security Holders
None.
24
PART II
Item 5. Market for the Company's Common Shares and Related Shareholder Matters
Price Range of Common Shares
Our common shares are listed and traded on the Nasdaq National Market under
the symbol "CERT" and on the Toronto Stock Exchange, or the TSE, under the
symbol "CIC". Our high and low sales prices of our common shares on the Nasdaq
National Market for each quarter within the last fiscal year are shown below.
U.S. $
-------------
High Low
------ ------
Fiscal 2001 (ended April 30, 2001)
First Quarter(1)............................................ $37.44 $12.31
Second Quarter.............................................. $47.23 $24.75
Third Quarter............................................... $37.00 $11.94
Fourth Quarter.............................................. $20.78 $ 5.01
--------
Note:
(1) Our common shares commenced trading on the Nasdaq National Market on May
2, 2000.
The high and low sales prices of our common shares on the TSE for each
quarter within our last two fiscal years are shown below, both in Canadian
dollars and U.S. dollars. All currency conversions are based on the prevailing
Cdn.$ to U.S.$ exchange rate on the last day of each respective quarter.
Cdn. $ U.S. $
-------------- -------------
High Low High Low
------- ------ ------ ------
Fiscal 2001 (ended April 30, 2001)
First Quarter................................ $ 56.25 $18.50 $37.80 $12.43
Second Quarter............................... $ 69.45 $37.00 $45.48 $24.23
Third Quarter................................ $ 57.00 $17.90 $38.01 $11.94
Fourth Quarter............................... $ 31.00 $ 7.75 $20.18 $ 5.05
Fiscal 2000 (ended April 30, 2000)
First Quarter................................ $ 7.63 $ 5.18 $ 5.06 $ 3.44
Second Quarter............................... $ 10.45 $ 5.65 $ 7.10 $ 3.84
Third Quarter................................ $ 74.00 $ 9.45 $51.19 $ 6.54
Fourth Quarter............................... $125.00 $27.65 $84.45 $18.68
As of June 30, 2001, there were 30,981,583 of our common shares issued and
outstanding. Except as otherwise indicated, all of the prices in the preceding
table, and elsewhere in this Form 10-K and all of the common share numbers in
this document, reflect the 2-for-1 stock split of our outstanding common
shares on July 12, 2000. On July 20, 2001, the last reported sale price of our
common shares on the Nasdaq National Market was $1.71 (Cdn. $2.64 based on the
exchange rate on July 20, 2001) and on the Toronto Stock Exchange was
Cdn.$2.63 ($1.70 based on the exchange rate on July 20, 2001).
Holders of Common Shares
As of June 30, 2001, there were approximately 113 registered holders of our
common shares. This number of shareholders does not include shareholders whose
shares are held in trust by other entities. The actual number of beneficial
owners of our common shares is greater than the number of holders of record.
25
Dividend Policy
We have never declared or paid any cash dividends on any of our common
shares. We currently intend to retain earnings to finance the growth and
development of our business and, therefore, we do not anticipate paying any
cash dividends in the foreseeable future. Our dividend policy will be reviewed
from time to time by our board of directors in the context of our earnings,
financial condition and other relevant factors.
Sales of Unregistered Securities
On September 12, 2000, we acquired all of the outstanding common shares of
DRG Resources Group, Inc., a corporation based in Redwood City, California.
The acquisition was completed with the issuance of 397,595 of our common
shares. In connection with the acquisition, we also assumed stock options
exercisable to acquire 103,100 of our common shares. The transaction did not
involve any underwriters, underwriting discounts or commissions, or any public
offerings, and we believe that it was exempt from the registration requirement
of the Securities Act of 1933, as amended, by virtue of Section 4(2) thereof.
The recipients of the securities represented their intention to acquire the
securities for investment only, had access to all relevant material
information necessary to evaluate the investment and represented that they
were "accredited investors" for purpose of Regulation D under the Securities
Act of 1933, as amended.
For the fiscal year ended April 30, 2001, approximately 135,364 of our
common shares were issued at strike prices ranging from $0.39 to $14.92 per
share, pursuant to the exercise of stock options assumed in connection with
acquisitions of Consensus Development Corporation and Trustpoint.
On March 26, 2001, we completed a public offering of 3,500,000 common
shares primarily in Canada at a per share price of Cdn.$ 12.50 (approximately
U.S.$8.14 based on the exchange rate on April 30, 2001), for an aggregate
offering price of approximately Cdn.$43.8 million (approximately U.S.$28.5
million based on the exchange rate on April 30, 2001). Of the total number of
common shares sold in connection with this offering, 405,000 were sold in the
United States on a private placement basis pursuant to Regulation D of the
Securities Act of 1933, as amended. The common shares have not been registered
under the Securities Act of 1933, as amended. The offering was underwritten by
a syndicate of underwriters consisting of Yorkton Securities Inc., BMO Nesbitt
Burns Inc., CIBC World Markets Inc., HSBC Securities (Canada) Inc. and TD
Securities Inc. On April 10, 2001, the syndicate of underwriters exercised its
over-allotment option in connection with the completed common share offering.
As a result, we issued an additional 500,000 common shares in Canada for gross
proceeds of approximately Cdn.$6.2 million (approximately U.S.$4.0 million
based on the exchange rate on April 30, 2001). The total gross proceeds from
this common share offering were Cdn.$50.0 million (approximately
U.S.$32.5 million based on the exchange rate on April 30, 2001). After
deducting underwriting discounts and commissions and offering expenses, our
net proceeds from the offering were approximately Cdn.$47.2 million
(approximately U.S.$30.8 million based on the exchange rate on April 30,
2001).
Use of Proceeds from Public Offering
We intend to use the net proceeds from the offering of common share
completed on March 26, 2001 (including the net proceeds realized upon exercise
of the over-allotment option) for capital expenditures including tenant
improvements for which we are currently obligated, the development and
enhancement of our products and services, the expansion and opening of sales
offices in Europe and the Asia-Pacific region, possible acquisitions of
additional businesses and technologies that are complementary to our current
or anticipated future business lines, working capital and general corporate
purposes.
Pending such uses, we expect to invest the net proceeds in short-term,
interest-bearing, investment grade securities.
26
Item 6. Selected Consolidated Financial Data
The selected consolidated financial data set forth below are presented in
U.S. dollars and have been derived from financial statements prepared under
accounting principles generally accepted in the United States of America, or
U.S. GAAP. The results of operations for the year ended April 30, 2001 are not
necessarily indicative of the results to be expected for future periods. The
selected consolidated financial data set forth are qualified in their entirety
by, and should be read in conjunction with, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the
Consolidated Financial Statements and notes thereto included elsewhere in this
Form 10-K. Effective May 1, 1999, we adopted the U.S. dollar as our functional
currency. See Note 2 to our Consolidated Financial Statements.
Fiscal Year Ended April 30,
-----------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- -------
(in thousands of U.S. dollars except per
share data and share amounts)
Consolidated Statement of
Operations Data:
Revenues...................... $ 26,647 $ 12,040 $ 4,042 $ 1,233 $ 1,085
Costs and expenses:
Cost of hardware ........... 824 579 125 349 234
Consulting and systems
integration (including
deferred compensation
amortization of $3,444 for
fiscal 2001)............... 9,624 2,080 587 -- --
Selling and marketing....... 19,731 6,616 6,087 4,918 2,038
Research and development.... 12,838 4,446 3,240 3,820 2,433
Depreciation and
amortization............... 12,731 7,861 5,063 561 130
General and administrative
(including stock
compensation amortization
of $312, $318, and $311 for
fiscal 2001, 2000, and
1999, respectively)........ 12,183 7,099 4,277 2,762 2,549
One-time secondary offering
costs...................... 1,693 -- -- -- --
Purchased in-process
research and development... -- 535 1,151 -- --
Operating loss................ (42,977) (17,176) (16,488) (11,177) (6,299)
Interest and other income
(expense) (net of value of
warrants issued of $423 for
fiscal 2001)................. 2,440 (359) 1,015 965 256
Loss before income taxes...... (40,537) (17,535) (15,473) (10,212) (6,043)
Income taxes.................. 135 334 (92) 167 (112)
Net loss...................... (40,672) (17,869) (15,381) (10,379) (5,931)
Net loss per share (basic and
diluted)..................... $ (1.54) $ (0.80) $ (0.73) $ (0.57) $ (0.41)
Weighted average number of
outstanding common shares
(000's)...................... 26,377 22,255 21,033 18,317 14,386
As of April 30,
-----------------------------------------------
2001 2000 1999 1998 1997
-------- -------- -------- -------- -------
(in thousands of U.S. dollars)
Consolidated Balance Sheet
Data:
Cash and cash equivalents..... $ 1,942 $ 10,508 $ 1,400 $ 628 $ 278
Marketable securities,
available for sale .......... 52,319 2,550 12,678 29,847 11,440
Total assets.................. 109,474 51,516 41,615 34,467 13,784
Total shareholders' equity.... 93,357 35,991 39,171 33,035 12,444
27
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
We are a leading provider of information security software and services,
specializing in solutions for mobile e-business. Our products and services are
specifically designed to address the challenges imposed by a wireless data
environment. We offer solutions that incorporate our proprietary encryption
technology and are based on industry standards for information security that
utilize public key cryptography. We believe that the addition of our products
to wireless infrastructures will help to build the trust and confidence
necessary for the success of mobile e-business.
Historically, we have focused on the development and marketing of
cryptographic and information security protocol toolkits. We have also
launched a line of authentication solutions including PKI software, CA
services and VPN client software for handheld devices. In addition, we provide
consulting and systems integration services to assist our customers in
designing and implementing efficient security solutions. Our customers
integrate our technologies into their hardware and software products, then
sell the finished products to consumers or enterprise customers. We also
market and sell our VPN software product directly to enterprise customers.
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 the 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 will be amortized over a three to five year period.
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 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. These amounts will be amortized over a period of eighteen
months to five years.
Our consolidated financial statements contained in this Form 10-K 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.
28
Results of Operations
Although we have experienced substantial growth in revenues in recent
periods, we have incurred substantial operating losses since our inception and
we expect to incur substantial operating losses for the foreseeable future. As
of April 30, 2001, we had an accumulated deficit of approximately $95.0
million. We expect to incur additional losses for the foreseeable future, and
we may never achieve profitability. We intend to invest in sales and marketing
and the development and enhancement of our product and service offerings.
The following table sets out, for the periods indicated, selected financial
information from our consolidated financial statements as a percentage of
revenue.
Year Ended
April 30,
-------------------
2001 2000 1999
---- ---- ----
Consolidated Statement of Operations Data:
Revenues............................................ 100 % 100 % 100 %
Costs and expenses:
Cost of hardware.................................... 3 5 3
Consulting and systems integration.................. 36(1) 17 15
Selling and marketing............................... 74 55 151
Research and development............................ 48 37 80
Depreciation and amortization....................... 48 65 125
General and administrative.......................... 46(2) 59 106
One time secondary offering costs................... 6 -- --
Purchased in-process research and development....... -- 4 28
Interest income (expense)............................. 11 (3) 25
Non-cash interest expense............................. 2 -- --
Loss before income taxes.............................. (152) (145) (383)
Income taxes.......................................... 1 3 (2)
---- ---- ----
Net loss.............................................. (153)% (148)% (381)%
==== ==== ====
--------
Notes:
(1) Includes the amortization of deferred compensation expense in connection
with the acquisition of DRG Resources Group, Inc. for fiscal 2001.
(2) Includes the percentage of non-cash expense related to the repricing of
stock options under FASB Interpretation No. 44 for fiscal 2001.
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.
29
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.
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 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 software licensing, consulting and
systems integration, and hardware. We earn software licensing revenues from
one-time base license fees or technology access fees, royalties, and annual
maintenance and support fees. In addition, we earn revenues on a transaction
basis through the sale of our authentication service offerings, which are
primarily digital certificates. Some of our license agreements permit the
licensee to sublicense without us receiving any revenue from the sub-
licensees. Consulting and systems integration revenues are derived from the
performance of contracted services for customers. Hardware revenues are
derived from sales of products manufactured by third parties to our
specifications and components procured from third parties and resold by us to
our customers.
We negotiate most of our customer contracts on a case-by-case basis.
However, most of our contracts (other than our contracts for consulting and
systems integration or hardware sales) include provisions for us to receive an
up-front license fee 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 solutions product lines are accounted for under the
30
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 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 to increase.
The following table sets forth our revenues by category and by geography
for the periods indicated:
Fiscal Year
Ended
April 30,
----------------
2001 2000 1999
---- ---- ----
Software licensing......................................... 77.2% 76.9% 65.9%
Consulting and systems integration......................... 18.7 16.5 24.0
Hardware................................................... 4.1 6.6 10.1
---- ---- ----
Total revenue.............................................. 100% 100% 100%
==== ==== ====
U.S. revenue............................................... 76.7% 91.1% 76.0%
Canadian revenue........................................... 13.7 4.1 14.5
International (non-Canadian/US) revenue.................... 9.6 4.8 9.5
---- ---- ----
Total revenue.............................................. 100% 100% 100%
==== ==== ====
Revenue for fiscal 2001 was $26.6 million, a 121% increase from $12.0
million in fiscal 2000. The increase was primarily attributable to increased
software licensing, which grew to approximately $20.6 million in fiscal 2001,
a 122% increase over $9.3 million in fiscal 2000. The increase in software
licensing revenue was primarily a result of growing market awareness of our
products and the increased use of wireless applications that require security.
In addition, consulting and systems integration revenue was approximately $5.0
million for fiscal 2001, a 151% increase over $2.0 million for fiscal 2000.
The increase in consulting and systems integration revenue is due to the
increase in personnel providing these services and the increase in consulting
services related to our development licenses and protocols. In fiscal 2001,
our increase in consulting personnel occurred primarily as the result of our
acquisition of DRG Resources Group, Inc., an eleven person professional
consulting organization specializing in security for public-key
infrastructure, in the second quarter of fiscal 2001. Hardware sales for
fiscal 2001 grew 37% to $1.1 million compared to $0.8 million for fiscal 2000.
Due to our change to the subscription licensing model, we expect revenue to
decrease in fiscal 2002 compare to fiscal 2001.
Revenue for fiscal 2000 was $12.0 million, a 200% increase from $4.0
million in fiscal 1999. The increase was primarily attributable to increased
software licensing, which grew to approximately $9.3 million, a 247% increase
over $2.7 million in fiscal 1999. The increase in software licensing revenue
was primarily a result of growing market awareness of our products and, to a
lesser extent, an expanded sales force. In addition, consulting and systems
integration revenue grew 105% from fiscal 1999 to 2000, to $2.0 million from
$1.0 million. We added resources in this area and focused our activities on
larger scale projects, thereby contributing to the increase in revenue in
fiscal 2000. Hardware sales grew 95% to $0.8 million for fiscal 2000, but
decreased as a percentage of revenue to 7% compared to 10% in fiscal 1999.
31
One of our customers accounted for approximately 23% of our revenue in
fiscal 2001 while no customer accounted for 10% or more of our revenue in
fiscal 2000 or 1999.
For the fiscal year ended April 30, 2001, approximately 99% of our revenues
were generated in U.S. dollars. In the same period, approximately 29% of our
total operating expenses were incurred in currencies other than the U.S.
dollar.
We expect that a majority of our revenue will continue to be generated in
U.S. dollars for the foreseeable future and that a significant percentage of
our expenses, including labor costs as well as capital and operating
expenditures, will continue to be denominated in Canadian dollars. If the
Canadian dollar appreciates against the U.S. dollar, our results of operations
could be materially adversely affected.
Costs and Expenses
Our costs and expenses consist of cost of hardware, consulting and systems
integration, selling and marketing, research and development, depreciation and
amortization, general and administrative expenses, and non-recurring costs in
connection with special events such as one-time secondary offering costs and
purchased in-process research and development.
Cost of Hardware
Our cost of hardware consists primarily of the component cost of our
hardware products manufactured by third parties to our specifications as well
as the procured costs of third-party hardware technology.
Cost of hardware increased 42% in fiscal 2001 to $0.8 million from $0.6
million the previous year. Cost of hardware sold increased 363% in fiscal 2000
compared to approximately $0.1 million in fiscal 1999. These increases in
fiscal 2001 and 2000 were primarily due to higher hardware sales, and a shift
in product mix with a greater proportion of hardware sales being generated by
sales of higher cost third-party procured hardware.
Consulting and Systems Integration
Consulting and systems integration expenses consist primarily of costs
related to consulting and systems integration activities. These expenses
include salaries, travel and related expenses, and amortization of deferred
compensation expense recorded in connection with the acquisition of DRG
Resources Group, Inc.
Consulting and systems integration expenses were $9.6 million for fiscal
2001, a 363% increase over $2.1 million for fiscal 2000. This increase was
primarily a result of increasing the number of professional services providers
in this group to keep up with growing customer and internal demands and the
deferred compensation expense and other costs recorded in connection with the
acquisition of DRG Resources Group, Inc.
Consulting and systems integration expenses were $2.1 million for fiscal
2000, a 254% increase over $0.6 million for fiscal 1999. This was primarily a
result of incurring the full year of expenses associated with our consulting
and systems integration group acquired from Uptronics Incorporated, only five
months of which were recorded in the previous year. In addition, we increased
the number of engineers in this group in order to keep up with the growing
demand from our customers in fiscal 2000.
Selling and Marketing
Selling and marketing expenses consist primarily of employee salaries and
commissions, related travel, public relations and corporate communications
costs, trade shows, marketing programs and market research.
Selling and marketing expenses were $19.7 million for fiscal 2001 compared
to $6.6 million for fiscal 2000, an increase of 198%. Selling and marketing
expenses increased 8% in fiscal 2000 from $6.1 million in fiscal 1999. These
increased expenses in fiscal 2001 were primarily due to an increase in
personnel costs, marketing
32
programs including branding, trade shows and Web-site upgrades,
MobileTrust(TM) launch costs and VPN beta testing and launch costs.
Research and Development
Research and development expenses consist primarily of employee salaries,
sponsorship of cryptographic research activities at various universities,
participation in various cryptographic, wireless and e-business standards
associations and related travel and other costs. 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.
Our research and development expenses were $12.8 million for fiscal 2001
compared to $4.4 million for fiscal 2000, an increase of 189%. Research and
development expenses for fiscal 2000 increased 37% relative to $3.2 million in
fiscal 1999. These increases are the result of the addition of personnel and
related costs necessary to support new product development in the PKI area in
both fiscal 2001 and 2000 and the VPN area in fiscal 2001.
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 increased 62% to $12.7 million for fiscal
2001 compared to $7.9 million for fiscal 2000. The primary reason for the
increase was that our results for fiscal 2001 included full-year amortization
expense related to our acquisition of Trustpoint, which occurred at the end of
the third quarter of fiscal 2000, and partial year amortization expense
related to our acquisition of DRG Resources Group, Inc., which occurred during
the second quarter of fiscal 2001, while our results for fiscal 2000 included
only partial year amortization expense related to our acquisition of
TrustPoint.
Depreciation and amortization increased to $7.9 million in fiscal 2000
compared to $5.1 million in fiscal 1999. The primary reason for the increase
was that our results for fiscal 2000 included full-year amortization expenses
related to our acquisitions of Consensus Development Corporation and Uptronics
Incorporated in fiscal 1999 and partial year amortization expense related to
our acquisition of TrustPoint in fiscal 2000, while our results for fiscal
1999 included only partial year amortization expenses related to our
acquisitions of Consensus Development Corporation and Uptronics Incorporated.
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, and amortization of stock compensation
expense.
In fiscal 2001, general and administrative expenses increased 72% to $12.2
million compared to $7.1 million in fiscal 2000. This increase is primarily
due to the growth in personnel and office space in California, Nasdaq
reporting requirements, information system enhancements, and amortization of
stock compensation expense related to the repricing of stock options.
General and administrative expenses increased 66% in fiscal 2000 to $7.1
million from $4.3 million for fiscal 1999. The primary reason for this
increase was the increase in our infrastructure in California.
33
One Time Secondary Offering Costs
We have recognized certain non-recurring costs in connection with special
events. In the third quarter of fiscal 2001, we incurred $1.7 million in one-
time costs in connection with our unsuccessful efforts toward a secondary
offering.
Purchased In-process Research and Development
In fiscal 2000, $0.5 million of purchased in-process research and
development costs were recorded in connection with the acquisition of
Trustpoint. We used third-party appraisers' estimates to determine the value
of in-process projects under development for which technological feasibility
had not been established. The total value of these projects at the time of the
acquisition was determined to be approximately $0.5 million. The value of the
projects was determined by estimating the costs to develop the in-process
technology into commercially feasible products, estimating the net cash flows
which we believed would result from the products and discounting these net
cash flows back to their present value. Management estimated that the
purchased in-process technology that represented $0.5 million of purchase
consideration had not yet reached technological feasibility and had no future
alternative use. Accordingly, $0.5 million was immediately expensed upon
consummation of the acquisition.
In fiscal 1999, $1.2 million of purchased in-process research and
development costs were recorded in connection with the acquisition of
Consensus Development Corporation. We used third-party appraisers' estimates
to determine the value of in-process projects under development for which
technological feasibility had not been established. The total value of these
projects at the time of the acquisition was determined to be approximately
$1.2 million and was expensed in the year ended April 30, 1999. The value of
the projects was determined by estimating the costs to develop the in-process
technology into commercially feasible products, estimating the net cash flows
we believed would result from the products and discounting these net cash
flows back to their present value. The products were substantially completed
during fiscal 2000. However, if they are not successfully completed, there
could be a negative impact on our operating results.
Interest and Other Income (Expense)
In fiscal 2001, interest income was $2.4 million compared to interest
expense $0.4 million in fiscal 2000. This increase resulted from an increase
in the amount of cash and marketable securities invested in fiscal 2001, as
well as currency adjustments, primarily Canadian dollars to U.S. dollars. This
increase is net of the one-time, non-cash interest expense of $0.4 million
related to the warrant issued to Sand Hill Capital II, LP, Sand Hill, which is
included in our results for fiscal 2001. As of the end of fiscal year 2000, we
had borrowed $10,000,000 from Sand Hill. In connection with this financing, we
issued a warrant which entitles Sand Hill to purchase 30,000 of our common
shares at an exercise price of Cdn$38.13 per share (U.S.$24.82 based on the
exchange rate on April 30, 2001) until April 27, 2005. The warrant was valued
at $423,000 at the time of issuance based on the Black-Scholes option
valuation model. The value of the warrant was charged to interest expense in
the first quarter of fiscal 2001 as the note payable was paid off with
proceeds from our public offering in May 2000.
In fiscal 2000, interest expense was $0.4 million compared to interest
income of $1.0 million for fiscal 1999. This decrease resulted from a
reduction in the amount of marketable securities invested during the year as
funds were applied to meet our cash requirements. This decrease also consists
of currency adjustments, primarily Canadian to U.S. dollars.
Income Taxes
We pay taxes in accordance with U.S. federal, state and local tax laws and
Canadian federal, provincial and municipal tax laws. Income tax was $0.14
million in fiscal 2001 compared to $0.33 million in fiscal 2000. In fiscal
1999, we have a tax recovery of $0.09 million, which arose due to the receipt
of Scientific Research and Experimental Development Tax Credits in Canada. We
do not expect to pay significant corporate income taxes
34
in both Canada and the United States in the foreseeable future because we have
significant tax credits and net operating loss carryforwards for Canadian,
U.S. federal and U.S. state income tax purposes.
Net Loss
We have incurred significant annual and quarterly net losses and losses
from our operations since our inception, and we expect to incur significant
net losses and losses from operations for the next fiscal year. Furthermore,
given the rapidly evolving nature of our business and fluctuations in the
timing of our sales, our operating results are difficult to forecast and,
accordingly, our historical financial results may not be meaningful
assessments of our future business operations or prospects.
Our net loss increased 128% in fiscal 2001 to $40.7 million ($1.54 per
share basic and diluted) compared to $17.9 million ($0.80 per share basic and
diluted) in the previous fiscal year. The loss before interest income,
depreciation and amortization, deferred compensation amortization, and taxes
amounted to $26.5 million in fiscal 2001, a 184% increase over $9.3 million
for fiscal 2000.
Our net loss increased 16% in fiscal 2000 to $17.9 million ($0.80 per share
basic and diluted) compared to $15.4 million ($0.73 per share basic and
diluted) in the previous fiscal year. This increase was predominately
attributable to the amortization of acquisition-related intangibles. The loss
before interest income, depreciation and amortization, and taxes amounted to
$9.3 million in fiscal 2000, an 18% decrease over $11.4 million for fiscal
1999.
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 U.S.$23.15 in the United States and Canada for an aggregate
offering price of approximately U.S.$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 30,000 of our common shares at
an exercise price of Cdn. $38.13 per share (U.S. $24.82 based on the exchange
rate on April 30, 2001) until April 27, 2005. We repaid the loan and interest
on May 5, 2000, using a portion of the proceeds received from our public
offering, and terminated this facility.
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 U.S.$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
U.S.$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 U.S.$30.8
million based on the exchange rate on April 30, 2001). Total cash and
available-for-sale marketable securities increased $41.2 million in fiscal
2001. Our cash and cash equivalents and marketable securities at April 30,
2001 were $54.3 million, including $2.5 million of restricted cash.
In fiscal 2001, net cash used in operating activities was $16.0 million.
Net cash used in operating activities was primarily due to our net loss of
$40.7 million, which included total non-cash charges of $16.9 million. The
non-cash charges included $9.4 million of amortization of acquired
intangibles, $3.8 million of stock compensation expense, $3.3 million of
depreciation and amortization, and $0.4 million of non-cash interest expense.
The cash operating loss of $23.8 million was offset by changes in non-cash
working capital items of $7.7 million. These consisted primarily of the
following items that provided cash: $8.3 million accounts payable, $1.0
million accrued liabilities and $1.3 million deferred revenue and was offset
by the following items that used cash: $1.9 million accounts receivable and
unbilled receivables and $0.7 million prepaid and other current assets.
35
In fiscal year 2001, net cash used by investing activities was $66.4
million. Net cash used in investing activities was primarily due to our
capital expenditures for property, equipment and patents and net purchase
$49.8 million of marketable securities, available for sale. The net cash used
for purchase of property, equipment and patents in fiscal 2001 was
approximately $16.7 million.
In fiscal year 2001, net cash provided by financing activities was $73.7
million. Net cash provided by financing activities was primarily due to our
issuances of common shares. In May 2000, we received net cash proceeds of
approximately $51.5 million from our public offering in the United States and
Canada. In March 2001, we received net cash proceeds of approximately
Cdn.$47.2 million (approximately U.S.$30.8 million based on the exchange rate
on April 30, 2001) from our public offering in Canada and related private
placement in the United States.
We lease premises totaling approximately 111,000 square feet in Hayward,
California. These leases expire on July 31, 2007. Through April 30, 2001 we
have capitalized leasehold improvements and related construction costs
totaling approximately $7.7 million for our Hayward facilities. In addition,
we anticipate incurring approximately an additional $3.6 million subsequent to
April 30, 2001 to complete the build-out of our Hayward facilities. We intend
to sublease approximately 43,000 square feet of our Hayward facility in second
quarter of fiscal 2002, although there can be no assurance that we will be
able to do so or at rates equal to our obligations under the lease. We also
have a lease for approximately 30,300 square feet of office space in
Mississauga, Ontario, which expires on December 25, 2009. Currently, our
Canadian offices occupy this space. We recently signed a ten-year lease for
approximately 130,000 square feet located at 1980 Matheson Boulevard East,
Mississauga, Ontario. At this time, the facility is being constructed at our
expense and we are obligated to pay approximately $7.8 million of which
approximately $7.4 million will be paid subsequent to April 30, 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. In the fall of 2001, we intend to
relocate our Canadian operations from their current location to this new
facility and to sublease our current Canadian office space and approximately
40,000 square feet space of new site, although there is no assurance that we
will be able to do so or at rates equal to our current obligations under the
lease. The annual rental fee for the new site varies between approximately
Cdn.$10.85 to Cdn.$13.05 per square foot (U.S.$7.06 to U.S.$8.50 per square
foot based on the exchange rate on April 30, 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 5, 2007, and we occasionally execute month-to-month leases for short-
term office space. The total annual base rent for all facilities is
approximately $3.1 million.
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.
In addition, we expect a significant percent of 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 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 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 cash flow that over the long term our 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.
36
In June 2001, we announced a restructuring of our business, which included a
reduction in work force of approximately 30% as well as other steps to reduce
expenses. In connection with the restructuring, we recognized charge of
approximately $2.2 million for workforce reduction, non-cash charge of
approximately $7.9 million for excess facilities relating primarily to lease
terminations and non-cancelable lease costs under the assumption that we will
not be able to sublease our excess facilities, non-cash charge of approximately
$3.7 million for disposed property and equipment, and non-cash charge of $9.3
million related to the impairment of goodwill and purchased intangible assets.
If we find that our restructuring announced in June did not sufficiently
decreases the growth of our expenses, we may find it necessary to implement
further streamlining of our expenses, to perform another reduction in our
headcount or to undertake another restructuring of our business.
In fiscal 2001 we began a company-wide Oracle Enterprise Resource Planning,
or ERP, system implementation. Through April 30, 2001, we have incurred costs
related to the implementation of this system totaling approximately $2.7
million. We anticipate incurring approximately $300,000 in additional costs
subsequent to April 30, 2001 to complete the implementation.
Our future capital requirements will be substantial and will depend on, and
could increase as a result of, many factors, including: costs associated with
facility expansion and construction; new products, such as our MobileTrust(TM)
CA service and our movianVPN client software business; our research and
development programs; acquisitions of companies; purchases of technology from
third parties; the time and costs involved in obtaining regulatory approvals;
costs involved in filing, prosecuting and enforcing patent claims; competing
technological and market developments; our success in entering into
collaborative relationships; and administrative and legal expenses.
We believe our current cash and cash equivalents 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
financing, strategic partnership, 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.
Recent Accounting Pronouncements
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 December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition", which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met in order to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. In June 2000, the SEC
issued Staff Accounting Bulletin No. 101B (SAB 101B), "Second Amendment:
Revenue Recognition in Financial Statements", which extends the effective date
of SAB 101 to the fourth fiscal quarter of fiscal years commencing after
December 15, 1999. During the fourth quarter of fiscal 2001, the company
adopted SAB 101. The adoption of SAB101 did not have a material effect on the
company's consolidated financial position or results of operations.
37
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes new
accounting and reporting standards for derivative financial instruments and for
hedging activities. SFAS No. 133 requires us to measure all derivatives at fair
value and to recognize them on the balance sheet as an asset or liability,
depending on our rights or obligations under the applicable derivative
contract. In June 1999, the FASB issued SFAS No. 137, which deferred the
effective date of adoption of SFAS No. 133 for one year. We will adopt SFAS No.
133 no later than the first quarter of fiscal 2002. In June 2000, the FASB
issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain
Hedging Activities," an amendment of FASB Statement No. 133. SFAS No. 138
amends SFAS No. 133 to permit use of central treasury offsetting of net
exposures of intercompany derivatives for foreign currency cash flow hedges.
SFAS 138 must be adopted concurrently with SFAS 133.
Item 7A. 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. 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 the 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 April 30, 2001, our interest rate risk was
further limited by the fact that approximately 99% of our investments mature in
less than one year. We do not use any derivative instruments to reduce our
exposure to interest rate fluctuations.
Item 8. Financial Statements and Supplementary Data
The response to this item is submitted as a separate section of this Form
10-K. See Part IV, Item 14 of this Form 10-K.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
38
PART III
Item 10. Directors and Executive Officers of the Company
The following table sets forth, as of April 30, 2001 (except as noted
below), the names, ages and positions of our directors and executive officers:
Name Age Position with Certicom
---- --- ----------------------
Richard P. Dalmazzi....... 46 President, Chief Executive Officer and
Director
Scott A. Vanstone......... 53 Founder, Chief Cryptographer and Director
Richard M. Depew.......... 40 Executive Vice President, Field Operations
Richard D. Brounstein(3).. 51 Senior Vice President, Finance, Chief
Financial Officer and Secretary
Gregory M. Capitolo(4).... 37 Vice President, Finance, Chief Financial
Officer and Secretary
Dennis J. Charlebois...... 47 Senior Vice President, Corporate Development
Robert L. Williams........ 44 Senior Vice President, Product Development
Timothy M. Dierks......... 32 Chief Technology Officer
Bernard W. Crotty(1)(2)... 39 Director
William T. Dodds(1)(2).... 53 Director
Louis E. Ryan(1).......... 46 Director
William J. Stewart(2)..... 40 Director
Robert P. Wierderhold..... 41 Director
--------
Notes:
(1) Member of the Audit Committee
(2) Member of the Compensation Committee as of May 2001
(3) Richard D. Brounstein retired as our Senior Vice President Finance and
Administration, Chief Financial Officer and Secretary in June 2001.
(4) Gregory M. Capitolo was appointed as Vice President Finance, Chief
Financial Officer and Secretary in June 2001.
We do not have an executive committee. We are required to have an audit
committee. The term of office for each of the above directors will expire at
the time of our next annual meeting. Each of our directors and executive
officers has been engaged in his present principal occupation for the previous
five years, except as indicated in the following summaries of the background
of each individual:
Richard P. Dalmazzi was appointed as our President, Chief Executive Officer
and Director in November, 1999. From September 1998 to November 1999, Mr.
Dalmazzi served as our President. From July 1997 to September 1998, he was our
Executive Vice President of Sales and Marketing. From October 1995 to December
1996, he was Senior Vice President of Digital Arts and Sciences Corporation, a
developer of an image database engine for the Internet. From February 1995 to
September 1995, he was President and COO of Strategic Communications Corp., a
developer of a wireless data communications service for the financial services
industry. From August 1992 to January 1995, he was Vice President and General
Manager, OEM Division of Geoworks Corporation, a developer of embedded
operating systems for the Internet appliance market. From September 1978 to
August 1992, Mr. Dalmazzi held various positions with IBM.
Scott A. Vanstone, Ph.D., co-founded us in March 1985 and was appointed our
Chief Cryptographer in January 1995. Dr. Vanstone is also a professor of
Mathematics at St. Jerome's University and the University of Waterloo, an
Executive Director of the Centre for Applied Cryptographic Research, the
holder of the
39
NSERC/Pitney Bowes Industrial Research Chair in Cryptography at the University
of Waterloo, and a Fellow, Royal Society of Canada, Academy of Sciences.
Richard M. Depew was appointed our Executive Vice President, Field
Operations in February 2000. From August 1999 to February 2000, Mr. Depew
served as our Vice President, Worldwide Sales. From July 1998 to August 1999,
Mr. Depew served as our Vice President, International Business Development.
Prior to joining Certicom, Mr. Depew was Vice President of Sales and Marketing
at Litronic, Inc. from December 1995 to July 1998. Prior to this, Mr. Depew
was Chief Executive Officer of LION Software, Inc.
Richard D. Brounstein, who announced his retirement in June 2001, was
appointed our Senior Vice President, Finance, Chief Financial Officer and
Secretary in February 2000. Mr. Brounstein will remain an employee of Certicom
until August 2001. Prior to joining Certicom, Mr. Brounstein served as Vice
President Finance and Chief Financial Officer of VidaMed, Inc. from May 1997
to January 2000. From August 1989 to February 1997, Mr. Brounstein served as
Vice President Finance & Administration and Chief Financial Officer of
MedaSonics Inc.
Gregory M. Capitolo was appointed our Vice President, Finance and Chief
Financial Officer and Secretary in June 2001. He joined Certicom as Vice
President, Finance in May 2001. Before joining Certicom, Mr. Capitolo served
as Vice President of Finance for Clustra Systems, Inc. from October 2000 to
May 2001. From March 1998 to September 2000, Mr. Capitolo was the Director of
Finance with Wind River Systems, Inc. From November 1994 through March 1998,
Mr. Capitolo served in various senior financial positions at Identx Inc. most
recently as Vice President of Finance.
Dr. Dennis J. Charlebois was appointed our Senior Vice President, Corporate
Development in October 2000. Prior to joining Certicom, Dr. Charlebois served
as President of DRS Technologies Data Systems Group from November 1998 to
October 2000. From June 1998 to November 1998, Dr. Charlebois served as Senior
Vice President of Corporate Development of Pittway Corporation. From March
1995 to June 1998, Dr. Charlebois served as President of Xetron, Inc.
Robert L. Williams joined the Company in November 1999 and was appointed
our Senior Vice President, Product Development in February 2000. From January
1999 to November 1999, he served as interim President of Nexsys-Commtech Inc.
Mr. Williams served as Vice President of Operations for Mobile Computing
Corporation from September 1990 to December 1998.
Timothy M. Dierks was appointed our Chief Technology Officer in November,
1999. From October 1998 through November 1999, he served as our Vice President
of Engineering. From July, 1998 to October 1998, Mr. Dierks served as our Vice
President of Product Architecture. Prior to joining us, Mr. Dierks served as
Vice President of Consensus Development Corporation from January 1996 to July
1998. Mr. Dierks filled several technical and management roles from November
1991 to January 1996 with Apple Computer Inc.
Bernard W. Crotty has been a member of our Board of Directors since October
1996. Mr. Crotty has been a Principal at Crotty & Company since April 2000.
Mr. Crotty was Counsel with Gibson, Dunn & Crutcher LLP, in Los Angeles from
April 1998 to March 2000. From February 1994 to April 1998, he was a partner
with McCarthy Tetrault, Barristers & Solicitors in Toronto, Ontario.
William T. Dodds has been a member of our Board of Directors since
February, 1997. Mr. Dodds is Vice President of The Woodbridge Co. Limited.
From September 1996 to the present, Mr. Dodds has been a member of the board
of directors of Axxent Inc., a company listed on the Toronto Stock Exchange
since November 1999.
Louis E. Ryan has been a member of our Board of Directors since October
1996. Mr. Ryan is the President of Clicknet Software Inc. From July 1996 to
January 1997, Mr. Ryan was the President of CKS New Media Inc. Previously, Mr.
Ryan was the Executive Vice President of Worldwide Sales and a co-founder of
Delrina Corporation, now a division of Symantec Corporation.
40
William J. Stewart has been a member of our Board of Directors since
October 1996. Mr. Stewart served as President of Asia Pacific Ventures
Technology Partners since 1989. He has been a General Partner of Asia Pacific
Ventures since 1994.
Robert P. Wierderhold has been a member of our Board of Directors since
February 2001. Mr. Wierderhold has been the President and Chief Executive
Officer and a director of Tality Corporation, a provider of product
development outsourcing, since 1998. From 1996 to 1998, Mr. Wierderhold was
Vice President of Cadence Corporation. Previously, Mr. Wierderhold was Chief
Operation Officer and a director of HLD Systems.
Item 11. Executive Compensation
The following table sets forth, for the fiscal year ended April 30, 2001,
all compensation of the Chief Executive Officer and each of our four other
most highly compensated executive officers who earned more than $100,000 in
fiscal 2001 and were serving as executive officers as of April 30, 2001.
Collectively, all such current executive officers and former executive officer
are referred to in this Form 10-K as the Named Executive Officers.
Summary Compensation Table
Long-Term
Annual Compensation(1) Compensation
-------------------------------------- ------------
Bonus/ Other Annual Securities
Name and Principal Fiscal Salary Commission Compensation Underlying
Position Year ($) ($) ($) Options (#)
------------------ ------ ------- ---------- ------------ ------------
Richard P. Dalmazzi(2).... 2001 303,001 -- 6,000 200,000
President and Chief
Executive Officer 2000 217,920 68,532 6,000 260,000
1999 180,000 70,000 8,880 120,000
Richard M. Depew.......... 2001 195,000 147,374 6,000 100,000
Executive Vice President,
Field Operations 2000 135,000 121,111 6,000 160,000
1999 99,141 31,157 4,500 40,000
Timothy M. Dierks......... 2001 175,000 49,875 -- 25,000
Chief Technology Officer 2000 142,500 46,948 -- 40,000
1999 95,192 2,500 -- 60,000
Richard D. Brounstein(3).. 2001 220,000 4,080 -- 80,000
Retired Senior Vice
President Finance, Chief 2000 41,170 -- -- 220,000
Financial Officer and
Secretary 1999 -- -- -- --
Scott A. Vanstone......... 2001 187,233 -- 6,351 100,000
Chief Cryptographer 2000 124,519 -- 6,532 100,000
1999 109,589 -- 5,403 120,000
--------
Notes:
(1) The aggregate compensation paid by us to all of our directors and
executive officers (15 persons) for the fiscal year ended April 30, 2001
was $1,828,588.
(2) Richard P. Dalmazzi was appointed our President, Chief Executive Officer
and Director on November 30, 1999.
(3) Richard D. Brounstein retired as our Senior Vice President Finance and
Administration, Chief Financial Officer and Secretary in June 2001.
41
Option Grants During the Fiscal Year Ended April 30, 2001
The following table sets forth information concerning options that were
granted to each of the Named Executive Officers during the fiscal year ended
April 30, 2001.
Potential
Realizable Value of
% of Total Assumed Annual Rate
Options Exercise of Stock Price
Securities Granted to or Base Appreciation for
Under Employees in Price Option Term(2)(3)
Options Fiscal ($/Common Expiration -------------------
Name Granted (#) Year(1) Share)(2) Date 5%($) 10%($)
---- ---------- ------------ --------- ------------ -------- ----------
Richard P. Dalmazzi..... 200,000 8.21% 14.25 May 31, 2005 $787,402 $1,739,954
Richard M. Depew........ 100,000 4.11% 14.25 May 31, 2005 $393,701 $ 869,977
Timothy M. Dierks....... 25,000 1.03% 14.25 May 31, 2005 $ 98,425 $ 217,494
Richard D. Brounstein... 80,000 3.28% 14.25 May 31, 2005 $314,961 $ 695,981
Scott A. Vanstone....... 100,000 4.11% 14.21 May 31, 2005 $392,628 $ 867,606
--------
Notes:
(1) Based on options to acquire a total of 2,435,501 common shares granted to
our employees, directors and consultants during fiscal 2001.
(2) The stock price and the option exercise price for shares with original
prices determined in Cdn.$ are based on our 2001 fiscal year average
exchange rate, U.S.$0.6616 per Cdn.$1.00.
(3) The potential realizable value is calculated based on the term of the
option at the time of grant. Stock price appreciation of 5% and 10% is
assumed pursuant to rules promulgated by the Securities and Exchange
Commission and does not represent our prediction of our stock price
performance. There is no assurance provided to any executive officer or
any other holder of our securities that the actual stock price
appreciation over the option term will be at the assumed 5% or 10% annual
rates of compounded stock price appreciation or at any other defined
level. Unless the market price of the common shares appreciates over the
option term, no value will be realized from the option grants made to the
executive officers. The potential realizable value at 5% and 10%
appreciation is calculated by assuming that the exercise price on the date
of grant appreciates at the indicated rate for the entire term of the
option and that the option is exercised at the exercise price and sold on
the last day of its term at the appreciated price.
Aggregated Option Exercises During the Fiscal Year Ended April 30, 2001 and
Fiscal Year-End Option Values
The following table sets forth information concerning the exercise of
options during the fiscal year ended April 30, 2001 by each of the Named
Executive Officers and the fiscal year-end value of unexercised options and
SARs, on an aggregated basis.
Number Number of Shares Value of Unexercised
of Shares Underlying Unexercised In-The-Money Options
Acquired Value Options at April 30, 2001 at April 30, 2001($)(2)
on Realized ------------------------- -------------------------
Name Exercise ($) (1) Exercisable Unexercisable Exercisable Unexercisable
---- --------- ---------- ----------- ------------- ----------- -------------
Richard P. Dalmazzi..... 50,000 $1,162,828 314,583 445,417 $1,355,058 $665,905
Richard M. Depew........ 30,000 $ 886,346 60,000 210,000 $ 195,512 $337,756
Timothy M. Dierks(3).... -- $ -- 301,867 70,833 $2,826,131 $308,972
Richard D. Brounstein... -- $ -- 64,167 235,833 $ -- $ --
Scott A. Vanstone....... 30,000 $1,031,765 256,085 206,509 $1,513,990 $664,523
--------
Notes:
(1) Based upon the market price of the purchased shares on the exercise date
less the option exercise price payable for such shares. The exchange rate
is based on our 2001 fiscal year average exchange rate of U.S.$0.6616 per
Cdn.$1.00.
42
(2) Based upon the market price of Cdn.$15.60 per share, which was the
U.S.$10.16 equivalent of the closing price of our common shares on The
Toronto Stock Exchange on the last trading day of our 2001 fiscal year,
less the option exercise price payable per share. The exchange rate is
based on the exchange rate at April 30, 2001 of U.S.$0.6510 per Cdn.
$1.00.
(3) Includes options that are exercisable with respect to 247,700 shares on
April 30, 2001 that were assumed in connection with the acquisition of
Consensus Development Corporation in July 1998.
Employment Contracts
Richard P. Dalmazzi performs his duties as our President and Chief
Executive Officer in our Hayward, California office pursuant to an Employment
Contract made as of November 30, 1999. This agreement terminates on April 30,
2001, but is automatically renewable for successive periods of one year
following April 30 in each year starting in 2001 unless either party has given
at least 180 days' written notice to the other that such agreement is to
terminate at the end of the term in question. On April 30, 2001 the agreement
was automatically renewed until April 30, 2002. In the event that Mr.
Dalmazzi's employment is terminated by us, other than for cause, Mr. Dalmazzi
is entitled to be paid the amount of his salary for the unexpired term of the
agreement. In the event there is a change of control and Mr. Dalmazzi's
employment is terminated without cause, or Mr. Dalmazzi voluntarily terminates
his employment with good reason, then all of Mr. Dalmazzi's options and other
rights to acquire securities shall vest immediately.
Scott A. Vanstone performs his duties as our Chief Cryptographer in our
Mississauga, Ontario office pursuant to a Services Agreement as of May 1,
1999. This agreement terminates on April 30, 2004, but may be renewed for
successive periods of one year by mutual consent of the parties. Either party
may terminate the agreement on April 30 of any year by giving at least 90
days' written notice to the other that the agreement is to terminate at the
end of the term in question. In addition, in the event of a take-over bid, an
amalgamation, a plan of arrangement or other form of business transition
pursuant to which holders of our common shares cease to own at least 33% of
the voting securities of our Company or the surviving entity resulting from
such transaction, we have agreed to issue to Mr. Vanstone 100,000 common
shares. These shares, if issued to Mr. Vanstone, will vest over a three-year
period commencing twelve months after completion of the transaction giving
rise to their issuance.
Until June 2001, when Mr. Brounstein announced his retirement, Richard D.
Brounstein performed his duties as our Senior Vice President Finance, Chief
Financial Officer and Secretary in our Hayward, California office pursuant to
an employment contract as of February 7, 2000. This agreement is for no fixed
term, but is terminable at the option of either party at any time. In the
event that Mr. Brounstein's contract is terminated by us, other than for
cause, or Mr. Brounstein voluntarily terminates his employment with good
reason after a change of control of our Company, Mr. Brounstein is entitled
(i) to be paid nine months' salary; (ii) to receive nine months acceleration
of vesting of all unvested stock options; (iii) to receive nine months'
continued health insurance benefits; and (iv) to receive up to $10,000 in
outplacement services. In the event there is a change of control of our
Company and Mr. Brounstein's employment is terminated without cause, or Mr.
Brounstein voluntarily terminates his employment with good reason, then 50% of
Mr. Brounstein's options and other rights to acquire securities shall vest
immediately. In June 2001, Mr. Brounstein announced his retirement.
Compensation of Directors
Effective October 1, 2000, each of our directors who is not one of our
full-time employees or one of our affiliates or a nominee of a shareholder who
has requested and received a right to representation on our board of directors
and who has not previously received remuneration, is remunerated (exclusive
of, and in addition to payments on account of traveling and other out-of-
pocket expenses) at the rate of $1,500 for each meeting of the board of
directors attended in person. In addition, each director so entitled to
receive remuneration is granted options vesting so as to permit the purchase
of 25,000 common shares each year having a per share exercise price based on
the closing market price on the last trading day prior to the date the option
was granted. Directors
43
so entitled to receive remuneration serve on committees of the board of
directors, as required, with no additional compensation. Prior to October 1,
2000, the amount of remuneration paid on an annual basis to each director
eligible for remuneration pursuant to the same criteria was $10,000 per annum
plus $1,000 for each meeting of the board of directors attended; 20,000
options per year; and an additional 10,000 options or $2,500 for each
committee of which the director was a member.
Employee Benefit Plans
We have four stock option plans and one stock purchase plan pursuant to
which our common shares may be issued. As of April 30, 2001, options including
assumed options in connection with acquisitions to acquire 7,382,041 common
shares at an average exercise price of $14.20 per share were outstanding.
Original Plan
Pursuant to our original stock option plan, or the original plan, we
granted options to purchase our common shares to our directors and employees
and other approved persons. These options have a term of five years and vest
for the purpose of exercise at a rate of 33% during each twelve-month period
following the first anniversary from the date of the grant of the option.
These options become immediately exercisable in the event that any person
acquires 90% of the common shares and may also be exercised for specified
periods following the termination of employment or death of an option holder.
The exercise price for these options was determined by a committee of our
board of directors. The following table sets forth, as of April 30, 2001,
certain information with respect to options outstanding under the original
plan and the exercise prices related thereto:
Average
Number of Exercise Price
Common Shares Per
Group Under Option Common Share(1)
----- ------------- ---------------
Executive Officers (1 person)................ 58,552 $4.19
Directors (excluding those who are also
Executive Officers) (5 person).............. 63,052 $5.42
Employees and Others (16 persons)............ 27,998 $5.59
-------
Total...................................... 149,602
=======
--------
Note:
(1) The option exercise price is based on our 2001 fiscal year average
exchange rate, U.S.$ 0.6616 per Cdn.$1.00.
The 1997 Plan
On June 17, 1997, we adopted our 1997 stock option plan, or the 1997 plan,
pursuant to which we may grant options to purchase our common shares to our
directors and employees or other approved persons. On October 19, 2000, our
shareholders approved an amendment increasing the number of shares available
under the 1997 plan. As a result, the total number of common shares reserved
for issuance under the 1997 plan may not exceed 8,000,000. Pursuant to the
1997 plan, the following additional restrictions apply to the 1997 plan and
all other plans or stock option agreements to which we are a party:
. no person shall be issued, within any one-year period, a number of
common shares which exceeds 5% of our outstanding common shares; and
. the number of common shares reserved for issuance pursuant to options to
any one person shall not exceed 5% of our outstanding common shares.
The 1997 plan is administered by a committee appointed by our board of
directors. Subject to the discretion of the board or an option committee,
options granted under the 1997 plan have a term of 5 years from the date
44
of grant and vest at a rate of 25% one year after the date of the grant of the
option, and at a rate of 2.0833% each month after such initial one-year
period. Options may become immediately exercisable in the discretion of the
board in the event of a take-over bid, merger, amalgamation or other
reorganization and may also be exercised for specified periods following the
termination or death of the option holder. No options may be exercisable for
more than 10 years after the date of grant. The exercise price for the options
is determined on the basis of the closing price of the common shares on the
Toronto Stock Exchange on the trading date immediately preceding the date of
the grant of the option. The following table sets forth, as of April 30, 2001,
the options outstanding under the 1997 plan and the exercise prices related
thereto:
Average
Number of Exercise Price
Common Shares Per
Group Under Option Common Share(1)
----- ------------- ---------------
Executive Officers (7 person)................ 1,707,542 $11.97
Directors (excluding those who are also
Executive Officers) (5 person).............. 858,512 $ 6.35
Employees and Others (291 persons)........... 2,638,817 $17.51
---------
Total...................................... 5,204,871
=========
--------
Note:
(1) The option exercise price is based on our 2001 fiscal year average
exchange rate, U.S.$0.6616 per Cdn.$1.00.
The 2000 United States Stock Plan
On April 27, 2000, we adopted our 2000 U.S. stock plan, or the 2000 stock
plan, pursuant to which we may grant options to purchase our common shares, or
rights to purchase common shares, to our directors, officers and employees, or
any of our subsidiaries, and other persons resident in the United States. The
total number of common shares available for issuance under the 2000 stock plan
is 3,000,000.
Except as otherwise determined by our board of directors, or an option
committee of our board of directors, options granted under the 2000 stock plan
will have a term of five years from the date of grant and vest at a rate of
25% one year after the date of the grant of option, and at a rate of 2.0833%
each month after such initial one-year period. Options may become immediately
exercisable in the discretion of our board of directors in the event of a
take-over bid, merger, amalgamation or other reorganization and may also be
exercised for specified periods following the termination or death of the
option holder. No option may be exercisable more than 10 years after the date
of its grant. The exercise price for the options under the 2000 stock plan is
determined on the basis of the closing price of our common shares on The
Nasdaq National Market on the trading date immediately preceding the date of
the grant of the option.
The following restrictions apply to options granted under the 2000 stock
plan:
. no person shall be issued, within any one-year period, a number of
common shares under all of our plans which exceeds 5% of our outstanding
common shares; and
. the number of common shares reserved for issuance pursuant to options
granted under all of our plans to any one person, shall not exceed 5% of
our outstanding common shares.
45
The stock purchase rights which may be granted under the 2000 stock plan
permit the person receiving the right to acquire our common shares on terms
imposed by our board of directors or a committee of our board of directors.
Number of Average Exercise
Common Shares Price Per
Group Under Option Common Share
----- ------------- ----------------
Executive Officers (5 person)............... 430,000 $14.25
Directors (excluding those who are also
Executive Officers) (3 person)............. 85,000 $14.25
Employees and Others (208 persons).......... 990,810 $19.69
---------
Total..................................... 1,505,810
=========
2000 Directors' Incentive Plan
On October 19, 2000, our shareholders adopted our 2000 directors' incentive
plan. The directors' incentive plan permits us to issue our common shares and
options to acquire our common shares to members of our board of directors who
are not also employed by us on a full-time basis. Up to 500,000 common shares
may be issued under the directors' incentive plan.
The directors' incentive plan is administered by our board of directors.
Subject to the discretion of the board, options granted under the plan:
. will have a term of 10 years;
. will have an exercise price based on the fair market value per common
share. The fair market value generally will be the closing price of our
common shares on The Nasdaq National Market on the trading day
immediately preceding the date on which the option is granted;
. can only be exercised while a person remains a director or within one
year after he or she ceases to be a director: and
. will vest at a rate of 25% one year after the date of grant and at a
rate of 2.083333% each month after the first anniversary of the date of
grant. However, the option will become fully vested if:
. there is a sale of all or substantially all of our assets;
. we merge or consolidate with another corporation other than a merger
or consolidation in which our shareholders immediately prior to the
merger or consolidation continue to hold more than 50% of the voting
power of the surviving corporation; or
. a single party and its affiliates acquire more than 50% of our
voting securities.
The directors' incentive plan also permits the board to directly issue
common shares to our outside directors. Common shares may be issued for
reasons determined by the board, including as payment for services provided to
us by a director. The board will determine the price and terms of any common
shares issued to a director.
A director may be eligible to participate in the directors' incentive plan
even if he or she:
. receives fees or other consideration for services on the board of
directors or its committees;
. is employed by us for 20 hours or less per week or five months or less
in a calendar year; or
. provides consulting services to us, but is not eligible to participate
in our Employee Stock Purchase Plan.
As of April 30, 2001, we have granted options under this plan to acquire
100,000 common shares at a price of $11.88 per common share.
46
Options Assumed in Connection with Acquisitions
On July 29, 1998, January 26, 2000 and September 12, 2000, we acquired
Consensus Development Corporation, Trustpoint and DRG Resources Group, Inc.,
respectively. The outstanding stock options of these three companies were
converted at the time of each acquisition into options to acquire our common
shares. The Consensus Development Corporation options were converted into
options to acquire 799,818 of our common shares, the Trustpoint options were
converted into options to acquire 98,884 of our common shares, and the DRG
Resources Group, Inc. options were converted into options to acquire 103,100
of our common shares. As of April 30, 2001, the remaining outstanding former
Consensus Development Corporation options were exercisable for 282,312 of our
common shares at a weighted average exercise price of $0.39 per share, while
the remaining outstanding former Trustpoint options were exercisable for
49,096 of our common shares at a weighted average exercise price of $6.38 per
share and the remaining outstanding former DRG Resources Group, Inc. options
were exercisable for 90,350 of our common shares at a weighted average
exercise price of $38.94 per share. We will not grant any additional options
under the Consensus Development Corporation, the Trustpoint or the DRG
Resources Group, Inc. option plans.
Employee Stock Purchase Plan
On April 27, 2000, we adopted our employee stock purchase plan, or the
ESPP. The ESPP is administered by our board of directors, or a committee of
our board of directors, and will permit a total of 1,000,000 of our common
shares to be purchased by our employees.
Our employees will be eligible to participate in the ESPP if they are
customarily employed by us for more than 20 hours per week and more than five
months in a calendar year and do not own 5% or more of our outstanding common
shares. Eligible employees may select a rate of payroll deduction between 2%
and 15% of their compensation and are subject to certain maximum purchase
limitations. Participation in the ESPP will end automatically upon termination
of employment for any reason.
Each offering under the ESPP will be for a period of 12 months and will
consist of two six-month purchase periods. Offering periods will begin on July
1, and January 1, of each calendar year. Each participant will be granted an
option to purchase our common shares on the first day of the offering period
and such option will be automatically exercised on the last day of each
purchase period during the offering period. The purchase price for common
shares purchased under the ESPP is 85% of the lesser of the fair market value
of common shares on the first business day of the applicable offering period
and the last business day of the applicable purchase period.
The ESPP provides that in the event of the proposed dissolution or
liquidation of our company, the offering period will terminate immediately
prior to the consummation of such proposed action. The ESPP provides that, in
the event of a take-over bid, merger, amalgamation or other reorganization,
the board may terminate the ESPP or the ESPP will continue for all offering
periods that began prior to the transaction and common shares will be
purchased based on the fair market value of the surviving corporation's shares
on each purchase date. The ESPP will terminate on April 26, 2010, unless
earlier terminated pursuant to the terms of the Plan.
As of April 30, 2001, no rights to purchase shares under the ESPP have been
granted.
Shareholder Rights Plan
Our directors and shareholders have approved a shareholder rights plan. The
terms of the shareholder rights plan are such that a take-over bid must be
made for all of our common shares and must be open for 60 days after the bid
is made. If at least 50% of the common shares held by persons independent of
the bidder are deposited or tendered pursuant to the bid, and not withdrawn,
the bidder may take up and pay for such shares. The bid must then remain open
for a further period of 10 clear business days on the same terms.
In the event a take-over bid is made that does not adhere with the above
terms, the rights attaching to each common share will separate from the common
shares and become exercisable eight trading days after the earlier
47
of: (a) a person having acquired 20% or more of the common shares, or (b) the
commencement or announcement in respect of a take-over bid to acquire 20% or
more of the common shares. After separation, rights will be evidenced by
rights certificates which are transferable and will be traded separately from
the common shares.
The rights, when exercisable, permit the holder to purchase, for the
exercise price of the rights, common shares having a value (based on the then
prevailing market price) equal to twice such exercise price (i.e., at a 50%
discount). The exercise price of the rights will be equal to five times the
prevailing market price at the time the rights separated from the common
shares. Rights that are beneficially owned by the person making the take-over
bid which does not adhere to the above terms shall become null and void.
The term of the shareholder rights plan is ten years from August 1997,
subject to reconfirmation by shareholders at every third annual meeting of our
shareholders. At our annual and special meeting of shareholder held on October
19, 2000, our shareholders reconfirmed the shareholders rights plan.
Item 12. Security Ownership of Certain Beneficial Owners and Management
To our knowledge, no person beneficially owned 5% or more of our common
shares as of April 30, 2001. However, on July 16, 2001, John S. Scurci of
Bernardsville, New Jersey, U.S. filed a Schedule 13D with the SEC stating that
he and his immediate family own 2,264,3000 of our common shares which would
account for approximately 7.31% of our common shares outstanding at June 30,
2001. The following table sets forth certain information regarding the
beneficial ownership of our common shares as of April 30, 2001. The
information is provided with respect to:
. each of our directors;
. each of our Named Executive Officers; and
. all of our directors, Named Executive Officers and other executive
officer as a group (15 persons).
Except as otherwise indicated by footnote, and subject to community
property laws where applicable, the named person has sole voting and
investment power with respect to all of the shares of common stock shown as
beneficially owned. An asterisk indicates beneficial ownership of less than 1%
of the common stock outstanding. Percentage ownership is based on 30,541,876
shares of common stock outstanding as of April 30, 2001. Shares of common
stock subject to options exercisable on or before June 29, 2001 (within 60
days of April 30, 2001) are deemed to be outstanding and to be beneficially
owned by the person holding such options for the purpose of computing the
percentage ownership of such person but are not treated as outstanding for the
purpose of computing the percentage ownership of any other person.
Percentage
of Shares
Number of Beneficially
Name and Address of Beneficial Owner(1) Shares Owned
--------------------------------------- --------- ------------
Richard P. Dalmazzi(2)............................... 396,250 1.28%
Timothy M. Dierks(3)................................. 335,304 1.09%
Scott A. Vanstone(4)................................. 293,906 *
Louis E. Ryan(5)..................................... 160,465 *
William J. Stewart(6)................................ 104,989 *
Richard M. Depew(7).................................. 95,417 *
Richard D. Brounstein(8)............................. 95,000 *
Bernard W. Crotty(9)................................. 84,989 *
William T. Dodds(10)................................. 67,179 *
Robert P. Wierderhold................................ -- *
All directors, Named Executive Officers and other
executive officer as a group (15 persons)(11)(12)... 2,380,294 7.23%
--------
Notes:
* Less than one percent.
48
(1) The address of each of Messrs. Vanstone and Dodds is c/o Certicom Corp.,
5520 Explorer Drive, Mississauga, Ontario L4W 5L1 Canada. The address of
each of Messrs. Dalmazzi, Dierks, Ryan, Stewart, Depew, Brounstein,
Crotty, and Wierderhold is c/o Certicom Corp., 25801 Industrial
Boulevard, Hayward, CA 94545.
(2) Includes options that are exercisable with respect to 396,250 shares on
or before June 29, 2001.
(3) Includes options that are exercisable with respect to 312,804 shares on
or before June 29, 2001.
(4) Includes options that are exercisable with respect to 293,906 shares on
or before June 29, 2001.
(5) Includes options that are exercisable with respect to 160,465 shares on
or before June 29, 2001.
(6) Includes options that are exercisable with respect to 104,989 shares on
or before June 29, 2001.
(7) Includes options that are exercisable with respect to 95,417 shares on or
before June 29, 2001.
(8) Includes options that are exercisable with respect to 95,000 shares on or
before June 29, 2001.
(9) Includes options that are exercisable with respect to 84,989 shares on or
before June 29, 2001.
(10) Includes options that are exercisable with respect to 67,179 shares on or
before June 29, 2001.
(11) Includes options that are exercisable with respect to 2,035,572 shares on
or before June 29, 2001.
(12) The percentage of beneficially owned for Philip C. Deck, our former
Chairman of the Board, was 2.16% with 352,906 options that are
exercisable on or before June 29, 2001.
Item 13. Certain Relationships and Related Transactions
None.
49
PART IV
Item 14. Exhibits, Financial Statements Schedules, and Reports on Form 8-K
(a) The following documents are filed as part of this report
1. Consolidated Financial Statements
Page
----
Independent Auditors' Report, KPMG, LLP.................................. 55
Independent Auditors' Report, DELOITTE & TOUCHE LLP...................... 56
Consolidated Balance Sheets as of April 30, 2001 and 2000................ 57
Consolidated Statements of Operations for the Years Ended April 30, 2001,
2000 and 1999........................................................... 58
Consolidated Statements of Comprehensive Loss for the Years Ended April
30, 2001, 2000 and 1999................................................. 59
Consolidated Statements of Shareholders' Equity for the Years Ended April
30, 2001, 2000 and 1999................................................. 60
Consolidated Statements of Cash Flows for the Years Ended April 30, 2001,
2000 and 1999........................................................... 61
Notes to Consolidated Financial Statements for the Years Ended April 30,
2001, 2000 and 1999..................................................... 62
Quarterly Results of Operations (Unaudited).............................. 79
2. Consolidated Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts and Reserves
All other schedules are omitted because they were not required or the
required information is included in the Consolidated Financial Statements or
Notes thereto.
3. Exhibits
The following exhibits are filed herewith or are incorporated by reference
to exhibits previously filed with the Commission:
Incorporated by
Reference
---------------------
Exhibit Exhibit Filed
Number Description Form Date Number Herewith
------- ----------- ---- -------- ------- --------
2.1 Agreement and Plan of Merger by and 10-Q 12/14/00 2.1
among Certicom Corp., DRG
Acquisition Corp., DRG Resources
Group, Inc., Jim Cowing, Michael
Harris and Daniel Moy ("Agreement
and Plan of Merger")
2.2 Exhibit B to the Agreement and Plan 10-Q 12/14/00 2.2
of Merger: Form of Escrow Agreement
2.3 Exhibit F to the Agreement and Plan 10-Q 12/14/00 2.3
of Merger: Form of Repurchase
Agreement
3.1 Restated Articles of Continuance of 10-K 07/31/00 3.1
the Company
3.2 By-laws of the Company 10-K 07/31/00 3.2
4.1 Specimen Certificate for Common 8-A 03/14/00
Shares of the Company
10.1 Lease Agreement, dated October 11, X
2000, by and between W9/LWS Real
Estate Limited Partnership and
Certicom Corp.
10.2 Lease Agreement, dated October 6, X
2000 by and between Pauls Properties
Corporation and Certicom Corp.
10.3 Lease Agreement, dated March 29, 10-K 07/31/00 10.2
1999, by and between The Airport
Corporate Centre Office Park, Inc.
and Certicom Corp., as amended by
First Amendment to Lease Agreement,
dated April 25, 2000
50
Incorporated by
Reference
---------------------
Exhibit Exhibit Filed
Number Description Form Date Number Herewith
------- ----------- ---- -------- ------- --------
10.4 Lease Agreement, dated December 7, 10-K 07/31/00 10.3
1998, by and between Alliance
Reston, L.P., d/b/a Alliance
Business Centers, and Certicom
Corp., as amended by First
Amendment, dated June 2, 1999, as
further amended by Second Amendment,
dated May 18, 2000
10.5 Lease Agreement, dated October 30, 10-K 07/31/00 10.1
1998, by and between The Multi-
Employer Property Trust and Certicom
Corp., as amended by First Amendment
to Lease Agreement, dated November
17, 1998, as further amended by
Second Amendment to Lease Agreement,
dated April 1, 2000
10.6 Certicom Corp. 2000 Directors' 10-Q 12/14/00 10.1
Incentive Plan *
10.7 Certicom Corp. 2000 United States 10-Q 03/16/01 10.2
Stock Plan (as amended as of October
19, 2000) *
10.8 Certicom Corp 1997 Stock Option Plan 10-Q 03/16/01 10.1
(as amended as of October 19, 2000)
*
10.9 Shareholder Rights Plan Agreement (as 10-Q 12/14/00 10.2
amended as of October 19, 2000)
10.10 Certicom Corp. Stock Option Plan * S-8 05/02/00 4.3
10.11 Certicom Corp. Employee Stock S-8 05/17/00 4.1
Purchase Plan *
10.12 Employment Agreement, dated November 10-K 07/31/00 10.8
20, 1999, between Certicom Corp. and
Richard P. Dalmazzi *
10.13 Employment Agreement, dated May 1, 10-K 07/31/00 10.9
1999, between Certicom Corp. and Dr.
Scott A. Vanstone *
10.14 Employment Agreement, dated February 10-K 07/31/00 10.10
7, 2000, between Certicom Corp. and
Richard D. Brounstein *
21.1 List of Subsidiaries 10-K 07/31/00 21.1
23.1 Consent of KPMG LLP X
23.2 Consent of DELOITTE & TOUCHE LLP X
24.1 Power of Attorney (included on page X
52 of this Form 10-K)
--------
* Denotes a management contract or compensatory plan or arrangement.
(b) Report on Form 8-K
No reports on Form 8-K were filed in the fourth quarter of fiscal 2001.
51
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 27th day of
July, 2001.
Certicom Corp.
/s/ Richard P. Dalmazzi
By: _________________________________
Richard P. Dalmazzi
President, Chief Executive Officer
POWER OF ATTORNEY AND SIGNATURES
KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears
below constitutes and appoints Richard P. Dalmazzi and Gregory M. Capitolo as
his true and lawful attorneys-in-fact and agents, with full power of
substitution for him in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Form 10-K, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with
the Securities and Exchange Commission, granting unto said attorneys-in-fact
and agents, full power and authority to do and perform each and every act and
thing requisite and necessary to be done in connection therewith, as fully to
all intents and purposes as he might or could do in person.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the Company
and in the capacities and on the dates indicated.
Name Title Date
---- ----- ----
/s/ Richard P. Dalmazzi President, Chief Executive July 27, 2001
____________________________________ Officer and Director
Richard P. Dalmazzi (Principal Executive
Officer)
/s/ Gregory M. Capitolo Chief Financial Officer, July 27, 2001
____________________________________ Vice President, Finance and
Gregory M. Capitolo Secretary (Principal
Financial and Accounting
Officer)
/s/ Scott A. Vanstone Director July 27, 2001
____________________________________
Scott A. Vanstone
/s/ Bernard W. Crotty Director July 27, 2001
____________________________________
Bernard W. Crotty
/s/ William T. Dodds Director July 27, 2001
____________________________________
William T. Dodds
/s/ Louis E. Ryan Director July 27, 2001
____________________________________
Louis E. Ryan
52
Name Title Date
---- ----- ----
/s/ William J. Stewart Director July 27, 2001
____________________________________
William J. Stewart
/s/ Robert P. Wierderhold Director July 27, 2001
____________________________________
Robert P. Wierderhold
53
CERTICOM CORP. AND SUBSIDIARIES
Consolidated Financial Statements as of April 30, 2001 and 2000
and for the Years Ended April 30, 2001, 2000 and 1999 and Independent Auditors'
Report
Index to Consolidated Financial Statements
Page
----
Consolidated Financial Statements:
Independent Auditors' Report, KPMG LLP.................................. 55
Independent Auditors' Report, DELOITTE & TOUCHE LLP..................... 56
Consolidated Balance Sheets as of April 30, 2001 and 2000............... 57
Consolidated Statements of Operations for the Years Ended April 30,
2001, 2000 and 1999.................................................... 58
Consolidated Statements of Comprehensive Loss for the Years Ended April
30, 2001, 2000 and 1999................................................ 59
Consolidated Statements of Shareholders' Equity for the Years Ended
April 30, 2001, 2000 and 1999.......................................... 60
Consolidated Statements of Cash Flows for the Years Ended April 30,
2001, 2000 and 1999.................................................... 61
Notes to Consolidated Financial Statements for the Years Ended April 30,
2001, 2000 and 1999.................................................... 62
Quarterly Results of Operations (Unaudited)............................... 79
Financial Statement Schedule:
Schedule II--Valuation and Qualifying Accounts and Reserves............. 80
All other schedules are omitted because they were not required or the
required information is included in the Consolidated Financial Statements or
Notes thereto.
54
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders
Certicom Corp.:
We have audited the accompanying consolidated balance sheet of Certicom
Corp. and subsidiaries as of April 30, 2001, and the related consolidated
statements of operations, comprehensive loss, shareholders' equity, and cash
flows for the year then ended. In connection with our audit of the
consolidated financial statements, we have also audited the accompanying
financial statement schedule related to the fiscal year ended April 30, 2001.
These consolidated financial statements and financial statement schedule are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements and financial
statement schedule based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Certicom
Corp. and subsidiaries as of April 30, 2001, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. Also
in our opinion, the financial statement schedule related to the fiscal year
ended April 30, 2001, when considered in relation to the basic consolidated
financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
/s/ KPMG LLP
San Francisco, California
June 1, 2001
55
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Certicom Corp.
We have audited the accompanying consolidated balance sheet of Certicom
Corp. and its subsidiaries as at April 30, 2000 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
two years in the period ended April 30, 2000. Our audits also included the
financial statement schedules listed in the index at item 14. These
consolidated financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements and financial statement schedules
based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform an audit to obtain reasonable assurance whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Certicom Corp. and its
subsidiaries as at April 30, 2000, and the results of their operations and
their cash flows for each of the two years in the period ended April 30, 2000
in conformity with accounting principles generally accepted in the United
States of America. Also, in our opinion, such financial statement schedules,
when considered in relation to the basic consolidated financial statements
taken as a whole, present fairly in all material respects the information set
forth therein.
Accounting principles generally accepted in Canada vary in certain
significant respects from accounting principles generally accepted in the
United States of America. We reported separately to the shareholders of the
Company on financial statements for the same period prepared in accordance
with accounting principles generally accepted in Canada.
/s/ Deloitte & Touche LLP
Chartered Accountants
Toronto, Ontario
June 13, 2000
56
CERTICOM CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars, except number of shares)
April 30,
------------------
2001 2000
-------- --------
ASSETS
------
Current assets:
Cash and cash equivalents................................ $ 1,942 $ 10,508
Marketable securities, available for sale................ 52,319 2,550
Accounts receivable (net of allowance for doubtful
accounts of $1,075 and $161, respectively).............. 7,149 3,862
Unbilled receivables..................................... 731 2,115
Inventories.............................................. 444 218
Prepaid expenses, deposits and other current assets...... 2,253 1,740
-------- --------
Total current assets................................... 64,838 20,993
Property and equipment, net................................ 18,288 5,213
Patents.................................................... 1,156 873
Acquired intangibles (net of accumulated amortization of
$19,994 and $10,586, respectively)........................ 25,192 24,437
-------- --------
Total assets........................................... $109,474 $ 51,516
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable......................................... $ 9,240 $ 974
Accrued liabilities...................................... 3,106 2,107
Other current payables................................... 510 430
Deferred revenue......................................... 2,168 909
Note payable............................................. -- 10,000
-------- --------
Total current liabilities.............................. 15,024 14,420
Lease inducements.......................................... 1,093 1,105
-------- --------
Total liabilities...................................... 16,117 15,525
Shareholders' equity:
Common shares, no par value; shares authorized:
unlimited; shares issued and outstanding: 30,541,876 and
23,087,866 respectively................................. 175,151 80,859
Additional paid-in capital............................... 19,945 11,922
Deferred compensation expense on expense................. (4,314) --
Accumulated other comprehensive loss..................... (2,460) (2,497)
Deficit.................................................. (94,965) (54,293)
-------- --------
Total shareholders' equity............................. 93,357 35,991
-------- --------
Total liabilities and shareholders' equity............. $109,474 $ 51,516
======== ========
See accompanying notes to consolidated financial statements.
57
CERTICOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except number of shares and per share data)
Years ended April 30,
----------------------------------
2001 2000 1999
---------- ---------- ----------
Revenues................................... $ 26,647 $ 12,040 $ 4,042
---------- ---------- ----------
Costs and expenses:
Cost of hardware......................... 824 579 125
Consulting and systems integration
(including deferred compensation
amortization of $3,444, $0, and $0 for
fiscal 2001, 2000, and 1999,
respectively)........................... 9,624 2,080 587
Selling and marketing.................... 19,731 6,616 6,087
Research and development................. 12,838 4,446 3,240
Depreciation and amortization............ 12,731 7,861 5,063
General and administrative (including
stock compensation amortization of $312,
$318, and $311 for fiscal 2001, 2000,
and 1999, respectively)................. 12,183 7,099 4,277
One time secondary offering costs........ 1,693 -- --
Purchased in-process research and
development............................. -- 535 1,151
---------- ---------- ----------
Total costs and expenses............... 69,624 29,216 20,530
Operating loss............................. (42,977) (17,176) (16,488)
Non-cash interest income (expense)......... (423) -- --
Interest and other income (expense), net... 2,863 (359) 1,015
---------- ---------- ----------
Loss before income taxes................... (40,537) (17,535) (15,473)
Income taxes............................... 135 334 (92)
---------- ---------- ----------
Net loss................................... $ (40,672) $ (17,869) $ (15,381)
========== ========== ==========
Basic and diluted net loss per share....... $ (1.54) $ (0.80) $ (0.73)
========== ========== ==========
Weighted average shares used in computing
basic and diluted net loss per share...... 26,376,728 22,255,044 21,032,848
========== ========== ==========
See accompanying notes to consolidated financial statements.
58
CERTICOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands of U.S. dollars)
Years ended April 30,
----------------------------
2001 2000 1999
-------- -------- --------
Net loss.......................................... $(40,672) $(17,869) $(15,381)
Other comprehensive income:
Unrealized gain (loss) on marketable securities,
available for sale............................. (118) 14 (18)
Foreign currency translation adjustment......... 155 -- (1,052)
-------- -------- --------
Comprehensive loss................................ $(40,635) $(17,855) $(16,451)
======== ======== ========
See accompanying notes to consolidated financial statements.
59
CERTICOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended April 30, 2001, 2000 and 1999
(In thousands of U.S. dollars, except number of shares)
Accumulated
Common Stock Additional Deferred Other Total
------------------- Paid in Compensation Comprehensive Shareholders'
Shares Amount Capital Expense Loss Deficit Equity
---------- -------- ---------- ------------ ------------- -------- -------------
Balances, April 30,
1998................... 19,363,472 $ 51,215 $ 4,304 $ -- $(1,441) $(21,043) $ 33,035
Net loss................ -- -- -- -- -- (15,381) (15,381)
Shares issued in
acquisitions........... 2,325,966 16,091 5,919 -- -- -- 22,010
Exercise of employee
options................ 134,316 534 (268) -- -- -- 266
Stock compensation...... -- -- 311 -- -- -- 311
Net unrealized loss on
marketable securities,
available for sale..... -- -- -- -- (18) -- (18)
Foreign currency
translation
adjustment............. -- -- -- -- (1,052) -- (1,052)
---------- -------- ------- ------- ------- -------- --------
Balances, April 30,
1999................... 21,823,754 67,840 10,266 -- (2,511) (36,424) 39,171
Net loss................ -- -- -- -- -- (17,869) (17,869)
Shares issued in
acquisitions........... 201,120 7,306 3,080 -- -- -- 10,386
Exercise of employee
options................ 1,062,992 5,713 (1,742) -- -- -- 3,971
Stock compensation...... -- -- 318 -- -- -- 318
Net unrealized gain on
marketable securities,
available for sale..... -- -- -- -- 14 -- 14
---------- -------- ------- ------- ------- -------- --------
Balances, April 30,
2000................... 23,087,866 80,859 11,922 -- (2,497) (54,293) 35,991
Net loss................ -- -- -- -- -- (40,672) (40,672)
Exercise of employee
options................ 556,415 3,785 (1,503) -- -- -- 2,282
Shares issued in
acquisition............ 397,595 9,030 6,452 (7,741) 7,741
Issuance of common
shares................. 6,500,000 81,477 -- -- -- 81,477
Fair market value of
options issued for
acquisition............ -- -- 2,322 -- -- 2,322
Deferred stock
compensation expense... -- -- 329 (329) -- -- --
Amortization of deferred
stock compensation..... -- -- -- 3,756 -- -- 3,756
Net unrealized gain
(loss) on marketable
securities, available
for sale............... -- -- -- -- (118) -- (118)
Fair market value of
warrants issued in
connection with loan... -- -- 423 -- -- -- 423
Foreign currency
translation
adjustment............. -- -- -- -- 155 -- 155
---------- -------- ------- ------- ------- -------- --------
Balances, April 30,
2001................... 30,541,876 $175,151 $19,945 $(4,314) $(2,460) $(94,965) $ 93,357
========== ======== ======= ======= ======= ======== ========
60
CERTICOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
Years ended April 30,
----------------------------
2001 2000 1999
-------- -------- --------
Cash flows from operating activities:
Net loss....................................... $(40,672) $(17,869) $(15,381)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 3,323 1,555 959
Amortization of acquired intangibles......... 9,408 6,306 4,104
Write-off of purchased in-process research
and development............................. -- 535 1,151
Stock compensation expense................... 3,756 318 311
Non-cash interest expense.................... 423 -- --
Changes in non-cash working capital items:
Accounts receivable and unbilled
receivables............................... (1,903) (3,901) (1,461)
Inventories................................ (226) 178 (174)
Investment tax credits receivable.......... -- -- 266
Prepaid and other current assets........... (734) (1,102) 41
Accounts payable........................... 8,266 453 32
Accrued liabilities........................ 999 1,084 513
Income taxes payable....................... 80 210 77
Deferred revenue........................... 1,259 507 277
-------- -------- --------
Net cash used in operating activities.... (16,021) (11,726) (9,285)
-------- -------- --------
Cash flows from investing activities:
Business acquisitions (net of cash acquired)... -- 182 (4,443)
Purchase of property and equipment............. (16,328) (3,902) (1,722)
Purchase of patents............................ (353) (355) (217)
Purchase of marketable securities, available
for sale...................................... (69,228) (4,855) (91,445)
Sales and maturities of marketable securities,
available for sale............................ 19,462 14,983 107,554
-------- -------- --------
Net cash (used in) provided by investing
activities.............................. (66,447) 6,053 9,727
-------- -------- --------
Cash flows from financing activities:
Proceeds from employee stock option exercise... 2,282 3,971 266
Issuance of common shares...................... 81,477 -- --
Notes payable.................................. -- 10,000 --
Repurchase of debenture payable................ -- -- (22)
Redemption of mandatorily redeemable preferred
shares........................................ -- -- (209)
Leasehold inducements.......................... (12) 931 315
Repayment of note payable...................... (10,000) -- --
-------- -------- --------
Net cash provided by financing
activities.............................. $ 73,747 $ 14,902 $ 350
-------- -------- --------
Effect of exchange rate on cash.................. 155 (121) (20)
(Decrease) increase in cash and cash
equivalents..................................... (8,566) 9,108 772
Cash and cash equivalents, beginning of year..... 10,508 1,400 628
-------- -------- --------
Cash and cash equivalents, end of year........... $ 1,942 $ 10,508 $ 1,400
======== ======== ========
Supplemental disclosure of cash flow information:
Income taxes paid.............................. $ -- $ -- $ 117
Interest paid.................................. $ -- $ -- $ --
Non-cash investing and financing activities:
Fair market value of common shares and options
issued for business acquisitions.............. $ 10,063 $ 10,386 $ 22,010
Warrant issued in connection with line of
credit........................................ $ 423 $ -- $ --
Deferred stock compensation.................... $ 8,070 $ -- $ --
See accompanying notes to consolidated financial statements.
61
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 2001, 2000 and 1999
Note 1: Description of Business
Certicom Corp. and its wholly-owned subsidiaries (the "Company") are
suppliers of digital information security products and services to original
equipment manufacturers (OEMs) of information technology products. The
Company's products and services include enabling technologies, trust services,
enterprise application solutions, consulting and design services, and hardware
components.
Note 2: Summary of Significant Accounting Policies
Generally Accepted Accounting Principles. These consolidated financial
statements have been prepared in accordance with accounting principles
generally accepted in the United States of America ("generally accepted
accounting principles" or "U.S. GAAP").
Principles of Consolidation. These consolidated financial statements
include the accounts of Certicom Corp. and its wholly-owned subsidiaries. All
significant inter-company transactions and balances have been eliminated.
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 revenues and expenses
during the reporting period. Actual results could differ from those estimates
and could affect future operating results.
Cash and Cash Equivalents. Cash equivalents consist of highly liquid
investments with remaining maturity at the date of purchase of three months or
less. These investments consist of fixed income securities, which are readily
convertible to cash and are stated at cost, which approximates fair value.
Fair value is determined based upon the quoted market prices of the securities
as of the balance sheet date.
Marketable Securities. The Company follows the provisions of Statement of
Financial Accounting Standards (SFAS) No. 115, "Accounting for Certain
Investments in Debt and Equity Securities." SFAS No. 115 requires the Company
to record securities which management has classified as available for sale at
fair market value and to record unrealized gains and losses on securities
available for sale as a separate component of other comprehensive income.
As the Company's management expects to sell a portion of the marketable
securities in the next fiscal year in order to meet its working capital
requirements, it has classified them as current assets.
Inventories. Inventories are recorded at the lower of cost, on a first-in,
first-out basis, or net realizable value.
Property and Equipment. Property and Equipment are stated at cost, less
accumulated depreciation and amortization. Depreciation and amortization is
computed using the straight-line method over the estimated useful lives of the
assets at the following annual rates:
Furniture and fixtures -- straight-line over five years
Computer equipment -- straight-line over three years
Software -- straight-line over two years
Leasehold improvements -- straight-line over the term of the lease
62
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Lease Inducements. Lease Inducements represent primarily tenant improvement
allowances provided by our lessors in connection with certain leased
properties. These amounts are being amortized over the term of their
respective leases and are recorded as a reduction in rent expense. The costs
associated with these tenant improvements have been capitalized as leasehold
improvements and are being amortized over the term of the respective lease.
Patents. Patents are recorded at cost and are amortized over three years on
a straight-line basis.
Acquired Intangibles. Acquired Intangible assets resulting from the
acquisitions of entities accounted for using the purchase method of
accounting, are estimated by management based on the fair value of assets
received. These include acquired customer lists, trademarks, workforce, in
process research and development, purchased technology and goodwill arising
from business acquisitions. Acquired intangible assets are amortized on a
straight-line basis over periods ranging from three to five years, except
purchased in-process research and development without alternative future use
which is expensed when acquired.
Impairment of Long-Lived Assets. The Company evaluates the recoverability
of its property and equipment and intangible assets in accordance with SFAS
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." SFAS No. 121 prescribes the accounting treatment
for long-lived assets, identifiable intangibles and goodwill related to those
assets when there are indications that the carrying value of those assets may
not be recoverable. SFAS 121 requires recognition of impairment of long-lived
assets in the event the net book value of such assets exceeds the future
undiscounted cash flows attributable to such assets. Accordingly, the company
evaluates asset recoverability at each balance sheet date or when an event
occurs that may impair recoverability of the asset.
Revenue Recognition and Deferred Revenues. The Company recognizes 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, the company recognizes 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, training,
etc. 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
63
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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 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.
Research and Product Development. The Company expenses all research and
development costs as they are incurred. The company has capitalized certain
legal costs associated with the filing of approximately fifty patent
applications in various jurisdictions. These patent filings relate to Elliptic
Curve Cryptography (ECC), various mathematical computational methodologies,
security protocols and other cryptographic inventions. Once granted, the
company amortizes the individual patent cost over three years.
Stock-Based Compensation. The Company accounts for stock-based employee
compensation arrangements in accordance with the provisions of According
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,"
("APB 25") and complies with the disclosure provisions of SFAS 123,
"Accounting for Stock Based Compensation". APB 25 requires compensation cost
for stock-based employee compensation plans to be recognized over the vesting
period based on the difference, if any, on the grant date between the quoted
market price of the company's stock and the amount an employee must pay to
acquire the stock.
Foreign Currency Translation. For the period up to April 30, 1999, the
functional currency of the Company was the Canadian dollar. As such, assets
and liabilities of the Company were translated to U.S. dollars at the year-end
exchange rates. Income and expense items were translated at the average rate
of exchange prevailing during the year. Translation adjustment are included in
"accumulated other comprehensive loss", a separate component of stockholders'
equity.
For the period from May 1, 1999, the Company has determined that its
functional currency is the U.S. dollar as it derives a majority of its
revenues and incurs a significant portion of its expenditures in U.S. dollars.
As such, monetary assets and liabilities denominated in currencies other than
the U.S. dollar are translated into U.S. dollars at the rate of exchange
prevailing at year end while other balance sheet items are translated at
historic rates. Revenue and expense items are translated at the rate of
exchange in effect on the transaction dates except for depreciation and
amortization which are translated at historic rates. Realized foreign exchange
gains and losses are included in income or loss in the year in which they
occur. Unrealized foreign currency transaction gains and losses are included
in other comprehensive income or loss in the year in which they occur.
64
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Income Taxes. The Company follows the asset and liability approach to
financial accounting for income taxes. Under SFAS No. 109 "Accounting for
Income Taxes", deferred tax assets and liabilities are determined based on the
difference between financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect
when the differences are expected in reverse. SFAS 109 provides for the
recognition of deferred tax assets if realization of such assets is more
likely than not. Deferred tax assets are reduced, if necessary, by the amount
of any tax benefits that, based on available evidence, are not expected to be
realized.
Basic and Diluted Net Loss per Share. The Company follows the provisions of
SFAS No. 128, Earnings Per Share. Basic net loss per common share is based on
the weighted average number of shares outstanding during each period. Stock
options are not included in the computation of the weighted average number of
shares outstanding for dilutive net loss per common share during the period as
the effect would be anti-dilutive.
Comprehensive Income. Comprehensive income is defined as the change in
equity of a company during a period from transactions and other events and
circumstances excluding transactions resulting from investments by owners and
distributions to owners. The primary difference between net income and
comprehensive income, for the company, results from foreign currency
translation adjustments and unrealized gains and losses on available-for-sale
securities.
The functional currency of foreign subsidiaries are translated using the
exchange rates in effect at the end of the period, while income and expense
items are translated at average rates of exchange during the period. Gains or
losses from translation of foreign operations where the local currency is the
functional currency are included as other comprehensive income or loss. The
net gains and losses resulting from foreign currency transactions are recorded
in net income in the period incurred and were not significant for any of the
periods presented.
Fair Value of Financial Instruments. For financial assets and liabilities,
including cash and cash equivalents, short-term investments, accounts
receivable and account payable, the carrying values approximate their fair
value due to their short maturities, based on management's estimates.
Concentration of Credit Risk. Financial instruments that potentially
subject the Company to concentrations of credit risk consist of cash,
marketable securities and accounts receivable. Risk associated with cash are
mitigated by banking and creditworthy institutions. Marketable securities
consist primarily of bonds and commercial paper. Credit risk with respect to
the trade receivables is spread over diverse customers who make up the
Company's customer base. At April 30, 2001, no customer accounted for a
significant portion of total accounts receivable.
Certain Significant Risks and Uncertainties. The Company participates in a
dynamic high-technology industry and believes that changes in any of the
following areas could have a material adverse effect on the Company's future
financial position, results of operations or cash flows: advances and trends
in new technologies and industry standards; competitive pressures in the form
of new products and services or price reductions on current products and
services; changes in the overall demand for products and services offered by
the Company; market acceptance of the Company's products and services;
development of sales channels; changes in certain strategic relationships or
customers relationships; litigation or claims against the Company based on
intellectual property, patent, product, regulatory or other factors; and the
Company's ability to attract and retain necessary employees to support its
growth.
Recent Accounting Pronouncements. 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
65
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 December 1999, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101 (SAB 101), "Revenue Recognition", which provides
guidance on the recognition, presentation and disclosure of revenue in
financial statements filed with the SEC. SAB 101 outlines the basic criteria
that must be met in order to recognize revenue and provides guidance for
disclosures related to revenue recognition policies. In June 2000, the SEC
issued Staff Accounting Bulletin No. 101B (SAB 101B), "Second Amendment:
Revenue Recognition in Financial Statements", which extends the effective date
of SAB 101 to the fourth fiscal quarter of fiscal years commencing after
December 15, 1999. During the fourth quarter of fiscal 2001, we adopted
SAB101. The adoption of SAB101 did not have a material effect on the company's
consolidated financial position or results of operations.
In June 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 133 establishes new
accounting and reporting standards for derivative financial instruments and
for hedging activities. SFAS No. 133 requires us to measure all derivatives at
fair value and to recognize them on the balance sheet as an asset or
liability, depending on our rights or obligations under the applicable
derivative contract. In June 1999, the FASB issued SFAS No. 137, which
deferred the effective date of adoption of SFAS No. 133 for one year. We will
adopt SFAS No. 133 no later than the first quarter of fiscal 2002. In June
2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," an amendment of FASB Statement
No. 133. SFAS No. 138 amends SFAS No. 133 to permit use of central treasury
offsetting of net exposures of intercompany derivatives for foreign currency
cash flow hedges. SFAS 138 must be adopted concurrently with SFAS 133.
Liquidity. Historically, we have incurred significant losses and negative
cash flows from operations. As of April 30, 2001, we have an accumulated
deficit of $95.0 million and positive working capital of $49.8 million. We
have primarily funded operations through public offerings and private
placements. To the extent that sources of financing are not available to us,
we will reduce capital expenditures which are not under binding contractual
obligations and reduce other variable costs as necessary to maintain
sufficient working capital to operate our business.
Reclassifications. Certain reclassifications have been made in the 1999 and
2000 financial statement presentation to conform to the 2001 presentation.
Note 3: Net Loss Per Common Share
Basic net loss per common share is computed using the weighted average
number of common shares outstanding during the period. Diluted net loss per
common share is computed using the weighted average number of common shares
outstanding during the period and, when dilutive, potential common shares from
options and warrants to purchase common shares and common shares subject to
repurchase, using the treasury stock method.
66
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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:
Year Ended April
30,
-------------------
2001 2000
--------- ---------
Shares issuable under stock options................... 6,008,688 4,354,864
Shares of restricted stock subject to repurchase...... 165,665 --
Shares issuable pursuant to warrants.................. 30,000 30,000
The weighted average exercise price of stock options, calculated by using
the yearly average exchange rates, was $8.34 and $5.76 at April 30, 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 ($24.82 based
on the exchange rate on April 30, 2001).
Note 4: Acquisitions
During the years ended April 30, 2001 and 2000 the Company made the
acquisitions described in the paragraphs that follow, each of which has been
accounted for as a purchase. The consolidated financial statements include the
operating results of each business from the date of acquisition.
The amounts allocated to purchased research and development were determined
through generally accepted valuation techniques and were expensed upon
acquisition because technological feasibility had not been established and no
future alternative use existed. The fair value of purchased research and
development was estimated by discounting, to present value, the cash flows
attributable to the technology once it has reached technological feasibility.
Acquisition of Trustpoint
On January 26, 2000, the Corporation acquired all of the outstanding common
shares of Trustpoint, a corporation based in Mountain View, California.
Trustpoint is a provider of comprehensive, flexible, cross-platform public key
infrastructure (PKI) products that allow OEM's to develop applications with
built in digital certificate services. Details of the consideration and the
fair values of the net assets acquired are as follows (in thousands of U.S.
dollars):
Net assets acquired:
Non-cash working capital (net of cash of $302)................... $ (34)
Capital assets................................................... 29
Other acquired intangibles....................................... 878
Goodwill......................................................... 9,633
-------
$10,506
=======
Consideration:
Common shares (201,120 shares issued)............................ $ 7,306
Options to acquire 98,884 common shares.......................... 3,080
Acquisition costs................................................ 120
-------
$10,506
=======
The value of common shares issued in connection with the acquisition was
determined based on the average market price of our common shares near the
date the acquisition was announced. The stock options assumed in connection
with the acquisition were valued at the time of issuance based on the Black-
Scholes option valuation model. Other acquired intangibles include the fair
value of workforce, customer base and trademarks and are amortized over 3
years. The goodwill is amortized over 5 years.
67
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The valuations of purchased in-process research and development, other
acquired intangibles and purchased technology were based upon appraisals
received from third parties. Based upon the valuation, management estimated
that $535,000 of the purchase consideration represents purchased in-process
technology that had not yet reached technological feasibility and had no
future alternative use. Accordingly, this amount was immediately expensed upon
consummation of the acquisition. The purchased in-process research and
development was determined by identifying the ongoing research projects for
which technological feasibility had not been achieved and assessing the
anticipated date of completion of the research and development effort. The
state of completion was determined by estimating the costs and time incurred
to date relative to those costs and time to be incurred to develop the
purchased in-process research and development into commercially viable
products. The value of the in-process research and development was the amount
attributable to the research and development efforts up to the time of
acquisition. The amount was estimated through application of the "stage of
completion" calculation by multiplying the estimated present value of future
cash flow expected to result from the product, excluding estimated cost of
completion, by the percentage of completion of the purchased research and
development efforts at the time of acquisition. The discount rate included a
factor that took into account the uncertainty surrounding the successful
development of the purchased in-process research and development projects.
Acquisition of DRG Resources Group, Inc.
On September 12, 2000, we acquired all of the outstanding common shares of
DRG Resources Group, Inc., a corporation based in Redwood City, California.
DRG Resources Group is an e-commerce security consulting company. Prior to our
acquisition of DRG Resources Group, Digital Resources Group, LLC merged into
DRG Resources Group. At the time these two companies merged, Digital Resources
Group LLC transferred $100,000 in assets into DRG Resources Group. Prior to
the merger of Digital Resources Group, LLC and DRG Resources Group, all other
assets and liabilities of Digital Resource Group LLC were distributed to its
members. The acquisition was completed with the issuance of 397,595 of our
common shares. In connection with the acquisition, we also assumed stock
options exercisable to acquire a total of 103,100 of our common shares.
Details of the consideration and the fair values of the net assets acquired
are as follows (in thousands of U.S. dollars):
Net assets acquired:
Current assets.................................................... $ 100
Other acquired intangibles........................................ 634
Goodwill.......................................................... 9,529
Deferred compensation expense..................................... 7,741
-------
$18,004
=======
Consideration:
Common shares (397,595 shares issued)............................. $15,482
Options to acquire 103,100 common shares.......................... 2,322
Acquisition costs................................................. 200
-------
$18,004
=======
The value of common shares issued in connection with the acquisition was
determined based on the average market price of our common shares near the
date the acquisition was announced. The stock options assumed in connection
with the acquisition were valued at the time of issuance based on the Black-
Scholes option valuation model. Deferred compensation of approximately $7.7
million was recorded in connection with the acquisition as we issued
restricted stock to the partners of DRG Resources Group, Inc. Such stock is
considered compensation for services to be provided by the partners, and the
related expense will be recognized over the term of the
68
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
services provided, which is 18 months. Other acquired intangibles include the
fair value of workforce and customer base and are amortized over 3 years. The
goodwill is amortized over 5 years.
Unaudited Pro Forma Financial Information
The following table represents unaudited consolidated pro forma information
as if the acquisitions of Trustpoint and DRG Resources Group, Inc. had
occurred at the beginning of the years immediately preceding the years in
which they were acquired. The pro forma data is presented for illustrative
purposes only and is not necessarily indicative of the combined results of
operations of future periods or the results that actually would have occurred
had the acquisitions been in effect for the entire specified periods. The pro
forma combined results include the impact of certain adjustments, primarily
amortization of goodwill, deferred compensation, and other intangible assets
and exclude intercompany revenues and expenses (in thousands of U.S. dollars,
except per share data).
Years Ended April
30,
------------------
2001 2000
-------- --------
Pro forma revenue...................................... $ 27,726 $ 14,398
Pro forma net loss..................................... $(42,989) $(26,879)
Pro forma net loss per share--basic and diluted........ $ (1.62) $ (1.19)
Number of shares used in calculation--basic and diluted
(000's)............................................... 26,477 22,634
Note 5: Marketable Securities, Available for Sale
The following table summarizes the Company's investment in marketable
securities (in thousands of U.S. dollars):
April 30, 2001
--------------------------------------
Gross Gross
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
-------- ---------- ---------- -------
Bonds................................. $25,523 $11 $ -- $25,534
Commercial paper...................... 26,813 26 122 26,717
Other................................. 87 10 29 68
------- --- ----- -------
Total................................. $52,423 $47 $ 151 $52,319
======= === ===== =======
April 30, 2000
-------------------------------------
Gross Gross
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
-------- ---------- ---------- ------
Bonds.................................. $1,392 $ 6 $ -- $1,398
Commercial paper....................... 1,131 8 -- 1,139
Other.................................. 13 -- -- 13
------ --- ----- ------
Total.................................. $2,536 $14 $ -- $2,550
====== === ===== ======
69
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6: Property and Equipment
Property and equipment consist of the following (in thousands of U.S.
dollars):
April 30,
----------------
2001 2000
------- -------
Furniture and fixtures..................................... $ 1,812 $ 724
Computer equipment......................................... 6,775 2,741
Software................................................... 6,445 1,649
Leasehold improvements..................................... 4,523 3,532
Construction in-progress................................... 4,816 --
------- -------
Total cost................................................. 24,371 8,646
Accumulated depreciation and amortization.................. (6,083) (3,433)
------- -------
$18,288 $ 5,213
======= =======
Note 7: Note Payable
On April 27, 2000, we entered into an agreement with Sand Hill Capital II,
LP for a line of credit of $15 million bearing interest at the prime rate of
interest plus 3%. As of the end of fiscal year 2000, we had borrowed $10
million against this line. In connection with this financing, we issued a
warrant which entitles Sand Hill to purchase up to 30,000 of our common shares
for Cdn. $38.13 per share ($24.82 based on the exchange rate on April 30,
2001) until April 27, 2005. The amount borrowed was repaid in May 2000, and
the line of credit was terminated. The warrant was valued at $423,000 at the
time of issuance based on the Black-Scholes option valuation model. The value
of the warrant was charged to interest expense in the first quarter of fiscal
2001 as the note payable was paid off with proceeds from a public offering
completed in May 2000. The warrant has not been exercised as of April 30,
2001.
Note 8: Common Shares
Authorized capital
As of April 30, 2001, the Company's authorized share capital consists of an
unlimited number of common shares, no par value, and an unlimited number of
preference shares.
In August 1999, the Articles of Continuance of the Company were amended and
restated to (i) remove and cancel the authorized and unissued preferred
shares, (ii) create an unlimited number of preference shares, issuable in
series, and (iii) authorize the directors of the Company from time to time
before the issue thereof to fix the number of shares and determine the
designation, rights, privileges, restrictions and conditions attaching to the
shares of each series of preference shares.
Stock Split
On July 12, 2000, the Company effected a two-for-one stock split of the
outstanding shares of common stock. All share and per share amounts in these
consolidated financial statements have been adjusted to give effect to the
stock split.
70
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 9: Stock Incentive Plans
Employee Stock Option Plans
The Company's original plan (its "original plan") is administered by a
committee (the "Committee") of the Board of Directors. Subject to the
discretion of the Committee, options have a term of five years and vest for
the purpose of exercise at a rate of 33% during each twelve-month period
following the first anniversary from the date of the grant of the option.
Options become immediately exercisable in the event that any person acquires
ninety percent of the common shares and may be also exercised for specified
periods following the termination of employment or death of an option holder.
No option may be exercisable more than ten years after its grant. The exercise
price for options was determined at the discretion of the Committee.
The Company's 1997 Stock Option Plan (the "1997 Plan") is administered by a
committee of the Board and was adopted on June 17, 1997. The total number of
common shares reserved for issuance under the 1997 Plan may not exceed
8,000,000. Subject to the discretion of the Board or an option committee,
options granted under the 1997 Plan have a term of 5 years from the date of
grant and vest at a rate of 25% one year after the date of the grant of the
option, and at a rate of 2.0833% each month after such initial one-year
period. Options may become immediately exercisable in the discretion of the
Board in the event of a takeover bid, merger, amalgamation or other
reorganization and may also be exercised for specified periods following the
termination or death of the option holder. Options also become immediately
exercisable in the event that any person acquires ninety percent of the common
shares. No option may be exercisable for more than ten years after its grant.
The exercise price for options is determined on the basis of the closing price
of the common shares on The Toronto Stock Exchange on the trading date
immediately preceding the date of the grant of the option.
On April 27, 2000, the Company's shareholders approved a new stock option
plan (the "2000 Plan") for employees who are residents of the United States.
The total number of common shares reserved for issuance under the 2000 Plan
may not exceed 3,000,000. Subject to the discretion of the Board or an option
committee, options granted under the 2000 Plan have a term of five years from
the date of grant and vest at a rate of 25% one year after the date of the
grant of the option, and at a rate of 2.0833% each month after such initial
one-year period. Options may become immediately exercisable at the discretion
of the Board in the event of a take-over bid, merger, amalgamation or other
reorganization and may also be exercised for specified periods following the
termination or death of the option holder. No option may be exercisable for
more than 10 years after its grant. The exercise price for options is
determined on the basis of the closing price of the common shares on The
Nasdaq National Market on the trading date immediately preceding the date of
the grant of the option.
On October 19, 2000, our shareholders adopted our 2000 directors' incentive
plan. The directors' incentive plan permits us to issue our common shares and
options to acquire our common shares to members of our board of directors who
are not also employed by us on a full-time basis. Up to 500,000 common shares
may be issued under the directors' incentive plan. The directors' incentive
plan is administered by our board of directors. Subject to the discretion of
the board, options granted under the plan have a term of ten years from the
date of grant and vest at a rate of 25% one year after the date of the grant
of the option, and at a rate of 2.0833% each month after such initial one-year
period. Options may become fully vested in the event of a sale of all or
substantially all of our assets, merger or consolidation in which our
shareholders immediately prior to the merger or consolidation would not hold
more than 50% of the voting power of the surviving corporation, or acquisition
of more than 50% of our voting securities by a single party and its
affiliates. Option can only be exercised while a person remains a director or
within one year after he or she ceases to be a director. The exercise price
for options is determined on the basis of the closing price of the common
shares on The Nasdaq National Market on the trading date immediately preceding
the date of the grant of the option.
71
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The directors' incentive plan also permits the board to directly issue
common shares to our outside directors. Common shares may be issued for
reasons determined by the board, including as payment for services provided to
us by a director. The board will determine the price and terms of any common
shares issued to a director. A director may be eligible to participate in the
directors' incentive plan even if he or she receives fees or other
consideration for services on the board of directors or its committees; is
employed by us for 20 hours or less per week or five months or less in a
calendar year; or provides consulting services to us, but is not eligible to
participate in our Employee Stock Purchase Plan.
The following table summarizes information about stock options outstanding
at April 30, 2001:
Options Outstanding Options Exercisable
------------------------------------- --------------------
Weighted Average Weighted Weighted
Remaining Average Average
Number Contractual Life Exercise Number Exercise
Range of Exercise Price Outstanding (Years) Price Exercisable Price
----------------------- ----------- ---------------- -------- ----------- --------
$0.04-$4.29............ 927,311 2.66 $ 3.01 390,269 $ 2.65
$4.30-$4.99............ 1,569,954 2.73 4.72 727,196 4.74
$5.00-$9.00............ 1,148,226 2.87 7.04 579,296 7.24
$9.01-$14.99........... 1,208,193 4.59 15.37 172,253 13.88
$15.00-$29.99.......... 1,046,268 3.97 20.58 219,554 19.53
$30.00-$72.28.......... 1,060,331 3.95 40.06 241,050 42.83
--------- ---- ------ --------- ------
6,960,283 3.44 $14.49 2,329,618 $11.03
========= ==== ====== ========= ======
At April 30, 2000 and 1999, options to acquire 1,219,976 and 376,618 shares
of our common stock were exercisable at a weighted average exercise price of
$4.50 and $4.26, respectively.
Changes for the employee stock option plans during the years ended April
30, 2001, 2000 and 1999 were as follows:
Year Ended April 30,
-------------------------------------------------------------
2001 2000 1999
------------------- ------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Number of Exercise Number of Exercise Number of Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- ---------- --------
Outstanding at beginning
of year................ 5,155,300 $ 12.36 3,603,198 $ 4.46 3,512,562 $ 7.11
Granted................. 2,435,501 17.61 2,783,866 19.37 1,681,300 3.89
Exercised............... (489,041) (4.30) (850,000) (4.48) (96,678) (2.56)
Canceled................ (141,477) (15.10) (381,764) (5.31) (770,660) (7.48)
Canceled for
reissuance............. -- 0.00 -- -- (2,843,584) (9.74)
Reissued................ -- 0.00 -- -- 2,120,258 5.06
--------- ------- --------- ------ ---------- ------
Outstanding at end of
year................... 6,960,283 $ 14.49 5,155,300 $12.36 3,603,198 $ 4.46
========= ======= ========= ====== ========== ======
Exercisable at end of
year................... 2,329,618 $ 11.03 1,219,976 $ 4.50 376,618 $ 4.26
========= ======= ========= ====== ========== ======
Weighted average fair
value of options
granted during the
year................... $ 14.07 $ 19.71 $ 1.91
72
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Options Assumed in Connection with Acquisitions
On July 29, 1998, January 26, 2000 and September 12, 2000, we acquired
Consensus Development Corporation, Trustpoint and DRG Resources Group, Inc.,
respectively. The outstanding stock options of these three companies were
converted at the time of each acquisition into options to acquire our common
shares. The Consensus Development Corporation options were converted into
options to acquire 799,818 of our common shares, the Trustpoint options were
converted into options to acquire 98,884 of our common shares, and the
DRG Resources Group, Inc. options were converted into options to acquire
103,100 of our common shares. As of April 30, 2001, remaining assumed options
to acquire 282,312 of our common shares in connection with acquisition of
Consensus Development Corporation were outstanding and exercisable at a
weighted average exercise price of $0.39 per share, remaining assumed options
to acquire 49,096 of our common shares in connection with acquisition of
Trustpoint were outstanding and exercisable at a weighted average exercise
price of $6.38 per share and remaining options to acquire 90,350 and 0 of our
common shares in connection with acquisition of DRG Resources Group, Inc. were
outstanding and exercisable respectively at a weighted average exercise price
of $38.94 per share. We will not grant any additional options under the
Consensus Development Corporation, the Trustpoint or the DRG Resources Group,
Inc. option plans.
Accounting for Stock-Based Compensation
As a result of the Company applying APB No. 25, SFAS No. 123, "Accounting
for Stock-Based Compensation," we are required to disclose pro forma
compensation expense arising from the Company's stock compensation plans based
on the fair value of the options granted. The pro forma expense is measured as
the fair value of the award at the date it is granted using an option-pricing
model that takes into account the exercise price and expected term of the
option, the current price of the underlying stock, its expected volatility,
expected dividends on the stock and the expected risk-free rate of return
during the expected term of the option. The compensation cost is recognized
over the service period, usually the period from the grant date to the vesting
date.
Had the compensation cost for the Company's plan been determined based on
the fair value at the dates of award under the plan consistent with the method
of SFAS No. 123, the Company's net loss and basic and diluted net loss per
common share would have been increased to the pro forma amounts indicated
below (in thousands of U.S. dollars, except per share data):
Years Ended April 30,
----------------------------
2001 2000 1999
-------- -------- --------
Net loss:
As reported................................. $(40,672) $(17,869) $(15,381)
Pro forma................................... $(65,672) $(27,913) $(22,395)
Basic and diluted net loss per common share:
As reported................................. $ (1.54) $ (0.80) $ (0.73)
Pro forma................................... $ (2.49) $ (1.25) $ (1.07)
The fair value of the options at the date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
Years Ended
April 30,
------------------
2001 2000 1999
---- ----- -----
Expected life (years).................................... 4 4 4
Risk free interest rate.................................. 6.14% 6.02% 5.08%
Expected volatility...................................... 120% 91.00% 60.00%
Dividend yield........................................... -- -- --
---- ----- -----
73
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During the year ended April 30, 1997 certain option grants were made at
prices below the market price. The excess of market price over the exercise
price is being amortized over the vesting period of the related options that
ended in fiscal 2000.
Conversion of Stock Options
We assumed certain options in connection with the acquisition of Consensus
Development Corporation and converted these to options to acquire 799,818 of
our common shares at a weighted average exercise price of $0.39 per share.
During the years ended April 30, 2001, 2000 and 1999, 91,844, 204,072 and
49,788 of such options were exercised. We assumed certain options in
connection with the acquisition of Trustpoint in fiscal 2000 and converted
these to options to acquire 98,884 of our common shares at a weighted average
exercise price of $5.55 per share. During the year ended April 30, 2001 and
2000, 43,520 and 6,134 of such options were exercised at weighted average
exercise price $12.30 and $4.01 per share respectively. The amounts relating
to options exercised during the year were transferred from additional paid-in
capital to common shares.
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.
Compensation amortization expense of approximately $312 thousand was recorded
for the fiscal year ended April 30, 2001. Deferred compensation expense, a
contra-equity account, of approximately $329 thousand was recorded on the
balance sheet as of April 30, 2001.
Note 10: Income Taxes
The Company recorded current income tax expense (benefit) of approximately
$135,000, $334,000 and ($92,000) for the years ended April 30, 2001, 2000, and
1999, respectively.
74
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The tax effect of significant temporary differences representing deferred
tax assets is as follows (in thousands of U.S. dollars):
Years Ended April 30,
----------------------------
2001 2000 1999
-------- -------- --------
Deferred tax assets:
Operating loss carryforwards................. $ 30,636 $ 14,442 $ 11,729
Tax credit carryforwards..................... 1,895 638 647
Capitalized research expenditures............ -- 579 423
Reserve, accruals and allowances............. 888 266 270
Fixed assets................................. 1,761 653 182
Lease inducement............................. -- 164 --
Other........................................ -- 279 166
-------- -------- --------
Net deferred tax assets...................... 35,180 17,021 13,417
Valuation allowance.......................... (33,700) (17,021) (13,417)
-------- -------- --------
Total deferred tax liabilities............. $ 1,480 $ -- $ --
======== ======== ========
Deferred tax liabilities:
Intangible assets acquired................... (568) -- --
Capitalized software......................... (912) -- --
-------- -------- --------
Total deferred tax liabilities............. (1,480) -- --
-------- -------- --------
Net deferred tax assets (liabilities)...... $ -- $ -- $ --
======== ======== ========
The Company has determined that realization is not more likely than not and
therefore a valuation allowance has been recorded against this deferred income
tax asset. A reconciliation between the Company's statutory and effective tax
rates is as follows:
Years Ended April
30,
---------------------
2001 2000 1999
----- ----- -----
Statutory rate.......... 42.1 % 44.6 % 44.6 %
Permanent differences... (0.1) (0.5) (0.2)
Net opening loss
currently not
benefited.............. (42.0) (44.1) (44.4)
Foreign taxes........... -- (1.9) (0.7)
Scientific research
investment tax credit.. -- -- 1.3
Other................... (0.3) -- --
----- ----- -----
Effective tax rate...... (0.3)% (1.9)% 0.6 %
===== ===== =====
Due to the Company's recent history of operating losses, a valuation
allowance had been established against the deferred tax assets because it is
presently unable to conclude that it is more likely than not that deferred tax
assets will be realized.
For the year ended April 30, 2001, approximately $2 million of the
valuation allowance for deferred tax assets is attributable to employee stock
option deductions, the benefit from which will be allocated to paid-in capital
rather than current earnings when utilized.
As of April 30, 2001, the Company had net operating loss carryforwards for
Canadian, U.S. federal and U.S. state income tax purposes of approximately
$32.6 million, $38.7 million and $18.5 million, respectively. The Canadian net
operating loss carryforwards, if not utilized, will begin to expire in 2002.
The federal net operating loss carryforwards, if not utilized, will begin to
expire in 2020. The California net operating loss carryforwards, if not
utilized, will begin to expire in 2005.
75
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
As of April 30, 2001, the Company had tax credit carryforwards for
Canadian, U.S. federal and U.S. state income tax purposes of approximately
$1.5 million, $0.3 million, $0.3 million, respectively. The Canadian credit
carryforwards, if not utilized, will begin to expire in 2002. The U.S. federal
credit carryforwards, if not utilized, will begin to expire in 2020. The U.S.
state credits will carryforward indefinitely.
In addition, at April 30, 2001, the Company had an unclaimed scientific and
research and experimental development expenditure pool balance of
approximately $4.5 million which can be applied against future taxable income.
The U.S. Tax Reform Act of 1986 imposes substantial restrictions on the
utilization of net operating losses and tax credits in the event of an
"ownership change" as defined. Some of the U.S. federal and state net
operating loss carryforwards are subject to limitation as a result of these
restrictions. The ownership change restrictions are not expected to impair the
Company's ability to utilize the affected carryforward items. If there should
be a subsequent ownership change, as defined, of the Company, its ability to
utilize its carryforwards could be reduced.
Note 11: Segment Information
The Company operates in one reportable segment and is a developer,
manufacturer and vendor of digital information security products, technologies
and services within the industry segment of electronic commerce. Information
about the Companies' revenues is as follows (in thousands of U.S. dollars):
Years Ended April 30,
----------------------
2001 2000 1999
------- ------- ------
Software license...................................... $20,571 $ 9,259 $2,665
Consulting............................................ 4,987 1,988 971
Hardware.............................................. 1,089 793 406
------- ------- ------
Total revenue....................................... $26,647 $12,040 $4,042
======= ======= ======
Information about the Company's geographic operations is given below (in
thousands of U.S. dollars):
Years Ended April 30,
----------------------
2001 2000 1999
------- ------- ------
U.S.................................................. $20,425 $10,971 $3,072
Canadian............................................. 3,651 494 588
International (non-Canadian/US)...................... 2,571 575 382
------- ------- ------
Total revenue...................................... $26,647 $12,040 $4,042
======= ======= ======
Years Ended April 30,
---------------------
2001 2000
---------- ----------
Total long-lived assets:
United States.......................................... $ 39,865 $ 27,222
Canada................................................. 4,771 3,301
---------- ----------
Total................................................ $ 44,636 $ 30,523
========== ==========
76
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 12: Significant Customers
One of our customers accounted for approximately 23% of our revenue in
fiscal 2001 while no customer accounted for 10% or more of our revenue in
fiscal 2000 or 1999.
Note 13: Commitments and Contingencies
Operating leases
At April 30, 2001 the Company has operating leases for office and furniture
and equipment with the following minimum annual rental payments (in thousands
of U.S. dollars):
Years ended April 30,
---------------------
2002.............................................................. $ 4,117
2003.............................................................. 3,845
2004.............................................................. 3,855
2005.............................................................. 3,948
2006.............................................................. 3,927
Thereafter........................................................ 10,921
-------
Total minimum rental payments................................... $30,613
=======
Rental expense under operating leases amounted to approximately $2,196,000
in 2001, $1,520,000 in 2000 and $438,000 in 1999.
The Company has an outstanding letter of guarantee of approximately
$2,000,000 in respect of a lease for its office premises.
Through April 30, 2001 we have capitalized leasehold improvements and
related construction costs totaling approximately $7.7 million and $1.7
million for our U.S. and Canadian facilities, respectively. In addition, we
anticipate incurring approximately an additional $3.6 million and $7.4 million
subsequent to April 30, 2001 to complete the build-out of our Hayward and
Canadian facilities, respectively.
Litigation
We are subject to legal proceedings and claims that arise in the ordinary
course of our business. While management currently believes the amount of
ultimate liability, if any, with respect to these actions will not materially
affect the financial position, results of operations, or liquidity of our
company, the ultimate outcome of any litigation is uncertain. Were an
unfavorable outcome to occur, the impact could be material to us.
One of our suppliers, East West Imports, Inc. dba California Computers, has
filed suit in the Superior Court of the State of California, County of
Alameda, for payment of approximately $230,000 plus costs, attorney fees, and
interest. Among other defenses, the focus of Certicom's dispute is whether or
not a number of personal computers and peripheral items were actually received
by Certicom. At present both parties are attempting to ascertain the proper
amount owed, and we anticipate a settlement on fair and reasonable terms may
be possible in the near future. In the event that no such settlement is
reached within a reasonable time, we intend to vigorously defend any
litigation over disputed amounts. In such case 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.
77
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 14: Subsequent Event
1. Restructuring Costs and Other Special Charges (Unaudited)
On June 4, 2001, we announced a restructuring program to prioritize our
initiatives around high-growth areas of our business, reduce discretionary
spending, and improve efficiency. This restructuring program includes a
reduction of our full-time employee headcount, consolidation of excess
facilities, and restructuring of certain business functions.
As a result of the restructuring program, we will, assuming we cannot
sublease our excess facilities, record estimated restructuring costs and other
special charges of approximately $23.1 million described below.
Workforce reduction
The restructuring program will result in the reduction by approximately 30%
of our regular employees across all business functions, and geographic
regions. The workforce reductions started and will be substantially completed
in the first quarter of fiscal 2002. We will record an estimated workforce
reduction charge of approximately $2.2 million relating primarily to severance
and fringe benefits.
Consolidation of excess facilities and other special charges
We will record a restructuring charge of approximately $7.9 million for
excess facilities relating primarily to lease terminations and non-cancelable
lease costs under the assumption that we will not be able to sublease our
excess facilities. Property and equipment that will be disposed or removed
from operations will result in an estimated charge of $3.7 million and
consisted primarily of leasehold improvements, and office equipment,
furniture, and fixtures.
Impairment of goodwill and purchased intangible assets
Due to the decline in current business conditions, we have restructured
certain functions and realign resources to focus on high-growth markets and
core opportunities. As a result, we will record a charge of $9.3 million
related to the impairment of goodwill and purchased intangible assets,
measured as the amount by which the carrying amount exceeded the present value
of the estimated future cash flows for goodwill and purchased intangible
assets.
Remaining cash expenditures relating to workforce reductions and
termination of agreements will be substantially paid in the second and third
quarter of fiscal 2002. Amounts related to the net lease expense due to the
consolidation of facilities will be paid over the respective lease terms
through fiscal 2007. We expect to substantially complete implementation of our
restructuring program during the next six months.
2. Introduction of Subscription Business Model
In June 2001, we converted our enabling technologies products primarily to
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 will have access
to unspecified upgrades on an "if and when available" basis.
78
SUPPLEMENTARY FINANCIAL INFORMATION
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
(in thousands of U.S. dollars, except per share data)
The following table contains unaudited Statement of Operations information
for each quarter of fiscal 2001 and 2000 (in thousands of U.S. dollars, except
per share data). The operating results for any quarter are not necessarily
indicative of results for any future period.
Year ended April 30, 2001
------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- -------- --------
Revenues................................ $ 5,053 $ 6,301 $ 7,627 $ 7,666
Total costs and expenses................ 12,149 16,168 20,150 21,157
Net loss................................ (6,647) (9,089) (12,042) (12,894)
Basic and diluted net loss per
share(1)............................... $ (0.26) $ (0.35) $ (0.46) $ (0.46)
Shares used in computing basic and
diluted net loss per share (000's)..... 25,572 25,974 26,239 27,773
======= ======= ======== ========
Year ended April 30, 2000
------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- -------- --------
Revenues................................ $ 2,148 $ 2,612 $ 3,309 $ 3,971
Total costs and expenses................ 5,676 6,040 7,248 10,252
Net loss................................ (3,676) (3,435) (3,930) (6,828)
Basic and diluted net loss per
share(1)............................... $ (0.17) $ (0.16) $ (0.18) $ (0.30)
Shares used in computing basic and
diluted net loss per share (000's)..... 21,843 21,894 22,348 22,951
======= ======= ======== ========
--------
Note:
(1) the sum of quarterly per share amounts may not equal to per share amounts
reported for year-to-date periods. This is due to changes in the number of
weighted-average shares outstanding and the effects of rounding for each
period.
79
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Additions
Balance at Charged Balance at
Beginning to Deductions End of
of Period Expenses Write-offs (1) Period
---------- --------- -------------- ----------
U.S. dollars in thousands
Year ended April 30, 2001....... 161 924 10 1075
Year ended April 30, 2000....... 13 148 -- 161
Year ended April 30, 1999....... 14 41 42 13
=== === === ====
--------
Note:
(1) Uncollectible accounts written off, net of recoveries
80