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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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, 2000
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 Identification No.)
of incorporation or organization)
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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
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, 2000, the aggregate market value of the voting stock held by
nonaffiliates of the registrant was $870,683,486. 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, 2000 was 25,649,054
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............................................................................................1
Risk Factors.......................................................................................15
Item 2. Properties.........................................................................................25
Item 3. Legal Proceedings..................................................................................25
Item 4. Submission Of Matters To A Vote Of Security Holders................................................26
PART II
Item 5. Market For The Company's Common Shares And Related Shareholders Matters............................27
Item 6. Selected Consolidated Financial Data...............................................................29
Item 7. Management's Discussion And Analysis Of Financial Condition And Results Of Operations..............29
Item 7A. Quantitative And Qualitative Disclosure About Market Risk..........................................37
Item 8. Financial Statements And Supplementary Data........................................................37
Item 9. Changes In And Disagreements With Accountants On Accounting And Financial Disclosure...............37
PART III
Item 10. Directors And Executive Officers Of The Company....................................................37
Item 11. Executive Compensation.............................................................................40
Item 12. Security Ownership Of Certain Beneficial Owners And Management.....................................45
Item 13. Certain Relationships And Related Transactions.....................................................46
PART IV
Item 14. Exhibits, Financial Statements Schedules, And Reports On Form 8-K..................................46
Signatures.........................................................................................48
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), certicom encryption(TM), SSl Plus(TM), SSL Plus for
Embedded Systems(TM), WTLS Plus(TM), Certifax(TM), Certilock(TM), Security
Builder(R), MobileTrust(TM), and Trustpoint(TM) are trademarks of Certicom.
There are also references in this Form 10-K to the trademarks of other
companies, including: Palm OS(R) is a registered trademark and Palm VII(TM) and
Palm.Net(TM) are trademarks of Palm, Inc.
In this Form 10-K, the terms the "Company," "Certicom," "we," "us," and
"our" refer to Certicom Corp., a Yukon Territory corporation, and/or its
subsidiaries.
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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 in
the City of New York on the last business day of each month during the period
for cable transfers as certified for customs purposes by the Federal Reserve
Bank of New York (the "Noon Buying Rate"). The table illustrates 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
- --------------------------- ---------- ------ ------ ----------
1997............................... 0.7329 0.7513 0.7145 0.7158
1998............................... 0.7116 0.7317 0.6832 0.6992
1999............................... 0.6629 0.6982 0.6341 0.6860
2000............................... 0.6804 0.6607 0.6969 0.6756
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(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 "Risk Factors" 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.
PART I
Item 1. BUSINESS
Overview
Certicom is an encryption technology company specializing in security
solutions for mobile computing and wireless data markets, including mobile
eCommerce, or mCommerce. Our solutions often use less processing power and
bandwidth than conventional encryption technologies, and are therefore more
suitable for many mobile and wireless environments. Our original equipment
manufacturer, or OEM, customers incorporate our patented technology into their
applications for handheld computers, mobile phones, two-way pagers and other
Internet information appliances. As these devices communicate increasingly
sensitive and valuable information, we believe the demand for stronger security
will increase.
Our product line includes cryptographic toolkits, information security
protocol toolkits, and public-key infrastructure, or PKI, products. We have
announced for availability later this year certificate authority, or CA,
services and a virtual private network, or VPN, client application. In addition
to licensing our security products, we provide consulting and systems
integration services to assist our customers in designing and implementing
efficient security solutions. Our customers include 724 Solutions, Aether
Systems, BellSouth Wireless Data, Motorola, Palm, Inc., PUMATECH, Inc. and
QUALCOMM.
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Industry Background
The Growth of the Internet
The Internet continues to evolve toward a trusted global communications
medium for exchanging information, establishing business relationships and
conducting commerce electronically. International Data Corporation, or IDC,
projects that the number of Internet users worldwide will increase from
approximately 140 million at the end of 1998 to 502 million by the end of 2003.
Rapid growth in the number of people who access the Internet continues to drive
the acceleration of on-line business activity. We believe businesses and
consumers will continue to leverage the Internet to conduct communications and
transactions that traditionally would have been handled in more personal ways.
The Growth of eCommerce
As a growing number of businesses and individuals access the Internet,
they increasingly establish commercial relationships and conduct electronic
commerce, or eCommerce. GartnerGroup estimates that worldwide eCommerce will
grow to approximately $7.3 trillion in 2004. Recent federal legislation, the
Electronic Signatures in Global and National eCommerce, or E-SIGN, Act, gives
electronic signatures the same legal status as handwritten signatures. This
legislation may further encourage eCommerce by allowing individuals to sign
agreements online.
Currently, eCommerce consists of business-to-business and
business-to-consumer transactions conducted primarily over the wireline Internet
infrastructure. For example, a business-to-business transaction such as that
required to execute vertical supply chain management involves data exchange
between enterprise servers across the wireline Internet. In addition,
business-to-consumer applications such as on-line banking, on-line stock trading
and on-line shopping generally involve electronic transactions between
enterprise servers and personal computers or workstations.
The Growth of Mobile Computing and the Wireless Internet
We believe that a substantial portion of the future growth of the
Internet will occur in the mobile and wireless environments. Early adoption of
the Internet relied upon a wireline infrastructure and a large base of personal
computers and workstations. While the number of personal computers and
workstations continues to grow, we expect the use of mobile devices to expand
more rapidly. Increased mobile access to the Internet by businesses and
consumers is being facilitated by Internet-enabled digital wireless devices such
as the Palm VII(TM) handheld computer, the NeoPoint 1000 smartphone and the RIM
Inter@ctive(TM) Pager 950. IDC forecasts that the number of users in the United
States of wireless devices that have the ability to send and receive information
over the Internet will increase from 7.4 million in 1999 to 61.5 million in
2003. As a result, we believe that individuals will increasingly use
Internet-enabled mobile devices to enhance their productivity when away from
their homes or offices.
The Growth of mCommerce
As technologies for mobile computing and wireless data advance, we
believe that mCommerce, which encompasses any eCommerce transaction in a mobile
environment, will account for an increasing portion of eCommerce. Current
business-to-business mCommerce applications include supply chain management in
vertical markets such as health care, insurance and real estate. Current
business-to-consumer mCommerce applications include on-line shopping, on-line
banking and securities trading. According to IDC, the total annual value of
wireless Internet transactions will increase from $4.3 billion in 1998 to $38.1
billion in 2003. While we believe that mCommerce will continue to be a rapidly
growing part of eCommerce, certain obstacles must be overcome for this to occur.
The Importance of Security in eCommerce and mCommerce
Speaking with a person either face-to-face or over the telephone
provides a natural way of ensuring that each person involved in a communication
or transaction is known to the other, or authenticated. In electronic
communication, authentication and other security services are required to
protect both parties to a communication.
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For example, typical eCommerce transactions, such as on-line shopping, require
authentication of the vendor and an encrypted communication path between the
purchaser and the vendor to communicate sensitive information such as credit
card numbers. Due to the immediacy of Internet communications, this trust
relationship between the parties should be established immediately and without a
prior introduction.
With the increased use of the Internet by individuals and businesses
for the transmission of sensitive data, the risk of fraud is present. For
example, it has been reported that while 2% of Visa International's credit card
business relates to Internet transactions, 50% of its disputes and discovered
frauds are in that area.
The potential damage to the emerging Internet economy goes beyond
security for transactions. In the early stages of Internet growth, institutions
could apply their existing risk management models and techniques to avoid
liability and manage fraud. Individuals were not at tremendous risk of loss due
to fraud. However, now that the information available on-line is increasingly
personal, potential damage to individuals may become increasingly prevalent.
We believe there is a need for an increased level of trust within
eCommerce and mCommerce applications. Individuals, or clients, interacting with
institutions, or servers, should be certified by a registration authority that
is trusted by both parties. Institutions want more assurance that they are
transacting with their true customer and individuals want assurance that their
reputations will not be damaged by unauthorized access to and misuse of their
personal information. Mutual authentication within either an eCommerce or
mCommerce transaction would satisfy both institutions and individuals.
Cryptographic technology is used to address the above-discussed
security challenges inherent in open networks. Cryptography delivers four basic
information security services:
o confidentiality, or keeping communications secret from anyone
other than an intended recipient;
o data integrity, or verifying that the message or transaction
has not been modified en route between the sender and the
recipient;
o authentication, or verifying the identity of another party to
ensure that communication is with a known or authorized
person; and
o non-repudiation, or signing a document or a record of
transaction to attest to its validity. This digital signature
can be checked by a relying party and its correctness can be
demonstrated to a third-party arbiter, allowing enforcement of
legally binding digital contracts.
Limitations of Existing Security Technologies
Currently, the vast majority of eCommerce transactions use a
conventional encryption algorithm that is the de facto public-key security
standard in the wireline Internet environment. These transactions generally do
not involve mutual authentication and thus are not as secure as they could be.
We believe that as eCommerce evolves, businesses will increasingly demand mutual
authentication, particularly for employee enterprise data access and high-value
transactions. Conventional encryption technologies can be used for mutual
authentication. However, while these technologies offer a high level of security
for transactions conducted over the wireline network, they have certain inherent
limitations in providing the same level of security when operating in mobile and
wireless environments. Specifically, as a result of the relatively large key
sizes used in these technologies, mutual authentication is relatively difficult
and expensive due to the following disadvantages:
o Slower Processing Speed. Key generation and digital signature
operations using these technologies consume significant
amounts of processing time. For example, we have determined
that the public-key cryptographic components of a mutually
authenticated SSL handshake currently take approximately 23
seconds using conventional technologies on a Palm
VII(TM)handheld computer with a 20 MHz processor. This
handshake, or a similar handshake, would be used when a Palm
VII(TM) connects to a secure web server for a mutually
authenticated mCommerce transaction. This amount of processing
time may be unacceptable in devices that attempt to deliver
immediate user interaction.
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o Large Bandwidth Requirements. There is a limited amount of
wireless bandwidth available for use by mobile applications.
Authentication messages signed using conventional security
algorithms consume significant amounts of this limited
wireless bandwidth.
o Increased Battery Requirements. Due to the increased
processing time associated with conventional cryptographic
operations, these operations would cause a drain on the
battery power found in some wireless and mobile devices.
While any one or more of the above disadvantages inherent in the use of
conventional security technologies for mutual authentication in mobile and
wireless environments can be overcome, either through the addition of a
cryptographic coprocessor to the device or otherwise, we believe that the cost
of doing so would generally be significant.
Market Opportunity
We believe that a cost-effective and efficient security solution is
required to realize the full potential of mCommerce and other mobile and
wireless applications. What is needed is a security solution designed for mobile
and wireless devices that is substantially faster, uses significantly less
processing power, bandwidth and battery power, and provides secure
authentication and encryption to ensure the validity and privacy of mCommerce
transactions.
The Certicom Solution
We are an encryption technology company specializing in security
solutions for mobile computing and wireless data markets, including mCommerce.
Our products and services, which we provide to many of the leading mCommerce
OEMs, enable trust through mutual authentication. We provide cryptographic
toolkits, information security protocol toolkits and PKI products that enable
secure mCommerce. In addition, we have announced for availability to our OEM
customers in calendar year 2000 CA services and a VPN client application. We
also offer a wide range of cryptographic consulting and design services,
including design and review of secure systems. We provide comprehensive and
innovative solutions to our OEM customers that allow them to develop new mobile
computing and wireless data applications and to accelerate their product
delivery, reducing their costs.
Our Elliptic Curve Cryptography-Based Solutions
We believe that our elliptic curve cryptography, or ECC-based solutions
offer significant advantages in providing mutual authentication of mCommerce
transactions and applications over the wireless Internet. Our patented
implementation of ECC technology can provide a more efficient alternative to
conventional public-key cryptographic algorithms in many mobile and wireless
environments, resulting in generally faster processing speed, reduced bandwidth
requirements and decreased battery requirements. These advantages make our
ECC-based security technology particularly well suited to mobile devices that
incorporate less powerful processors, such as handheld computing devices,
Internet-enabled phones and two-way pagers. We have performed extensive research
in ECC, and we have developed numerous proprietary techniques and hold several
patents related to its implementation. ECC is included in many prominent
standards - including specifications from the National Institute of Standards
and Technology, or NIST, 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 ISO. For a more complete discussion of ECC, please refer to
"Cryptographic Systems and Elliptic Curve Cryptography" at the end of this Item
1.
We believe that our ECC-based solutions allow us to deliver strong
security and trusted communications based on mutual authentication, which help
address the problem of identity fraud on the wireless Internet. ECC performs
more efficiently than conventional security algorithms in many mobile and
wireless environments. When applied to mutual authentication on mobile and
wireless devices, our ECC implementation can provide, with equivalent security
strength, the following technical advantages over conventional encryption
technologies:
o Faster Processing Speed. We have determined that
characteristics of ECC allow rapid mutual authentication from
mobile and wireless devices. For example, the public-key
cryptographic components of a mutually authenticated,
ECC-based, SSL handshake currently take approximately
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3 seconds on a Palm VII(TM)handheld computer with a 20 MHz
processor. This compares to approximately 23 seconds for an
SSL handshake using conventional technologies on the same
device. This handshake, or a similar handshake, would be used
when the Palm VII(TM)connects to a secure web server for a
mutually authenticated mCommerce transaction. These faster
processing speeds help deliver a more acceptable user
experience with mobile and wireless devices.
o Reduced Bandwidth Requirements. The shorter key lengths of ECC
significantly reduce the amount of data required to be
exchanged for security purposes. This reduced use of the
limited wireless bandwidth results in time savings for device
users and lower bandwidth costs.
o Decreased Battery Requirements. Some ECC operations take less
time to process, which reduces the amount of battery power
consumed by a secure application. This results in an extension
of the battery life of the mobile and wireless devices.
We believe our ECC-based solutions can provide the following principal
benefits to our OEM customers:
o Lower costs. Because less processing power is required for
equivalent security, some mobile and wireless products built
with our technologies are less expensive for our OEM customers
to produce.
o Increased security. Our ECC-based technology enables greater
security than conventional encryption technologies in many
mobile and wireless environments when evaluated at equivalent
levels of processing power, bandwidth and battery capacity.
o Faster time-to-market. By incorporating our products and
services, our customers can quickly develop a wide range of
mobile computing and wireless data applications.
o Differentiated applications and services. Our solutions enable
customers to create new applications and deliver levels of
service that are high in value and easy to use.
o Increased trust. Our clients use our solutions to build
increased trust into their products and deliver reliable
services for users of mobile and wireless devices.
Built-in Security
Our encryption products and services allow our OEM customers to build
PKI, secure communication protocols and cryptographic algorithms directly into
their applications which enable rapid development of flexible trust management
solutions. We also provide security integration services to OEMs to assist them
in the incorporation of our cryptographic products and custom designed security
solutions into their products.
Vertically Integrated Security Offerings
We are poised to deliver a comprehensive set of tools, products and
services designed to provide an integrated ECC-based PKI solution to secure
network applications, including mobile and wireless devices. Our solution is
designed to allow an entity to act as a certificate authority for mCommerce
applications and to enable enterprises to form secure communities of trust.
Strategy
Our objective is to become the leading provider of information security
products and services for applications in the mobile computing and wireless data
markets, including mCommerce. We believe that our ECC-based technology will
allow us to provide the preferred security solution for mCommerce OEMs. Our
strategy includes the key elements discussed below.
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Deliver a comprehensive security product line for the mobile computing and
wireless data markets
We intend to become the provider of the most comprehensive line of
security products and services for the mobile computing and wireless data
markets. Our offerings currently include ECC-based cryptographic toolkits,
information security protocol toolkits and PKI products. We have announced, for
availability in the second half of calendar year 2000, CA services and a VPN
client application allowing us to address all aspects of our customers' mobile
and wireless security requirements. Unlike the offerings of many of our
competitors, our patented ECC-based technology and integrated standard security
protocols have been designed specifically for the constraints associated with
applications in the mCommerce market. By providing an end-to-end,
standards-based solution that is designed for the mobile computing and wireless
data markets, we intend to become the de facto technology standard and market
leader for delivering secure and trusted communications for mCommerce.
Continue to build brand awareness
Through our current marketing and branding efforts, we have built
significant brand awareness for Certicom. Through co-branding with leading
companies, as well as other marketing programs, we intend to establish the
certicom encryption(TM) ingredient brand logo as the assurance of trusted
communications in the mobile computing and wireless data markets.
Emphasize research and development to produce innovative standards-based
security solutions
Our implementation of our ECC-based technology is based on 15 years of
fundamental cryptographic research by our Chief Cryptographer and his staff, as
well as research by teams at leading academic institutions with which we have
working relationships. Through the continuation of this research and the
relationship between these research groups and our product development groups,
we intend to continue to incorporate leading-edge cryptographic technology into
our security products and services. We also intend to continue to capitalize on
our technical expertise in cryptography to differentiate our products and
services from other commercially available solutions. In addition, we intend to
continue to work with standards organizations to develop emerging industry
standards based on our technology.
Leverage our OEM business model and strategic technology relationships
Our security solutions are embedded in a wide variety of third-party
products and services, including those of 724 Solutions, Aether Systems,
BellSouth Wireless Data, Palm, Inc. and PUMATECH, Inc. By continuing to pursue
this OEM business model, all of our OEM customers in effect become our
distributors, broadening our sales channels. We work strategically with many of
our OEM customers in developing security solutions for their future products in
order to further the acceptance of our security technology with these market
leaders. We intend to use these existing strategic relationships and develop
additional strategic relationships to position ourselves as the leader in the
mCommerce security market.
Apply our technical expertise to enter new and emerging markets
In addition to our primary focus on security technology for the mobile
computing and wireless data markets, our expertise in security is well-suited to
other information and business applications. Other applications using our
efficient cryptographic technology include CyberSafe's secure payment solutions,
Critical Path's Internet messaging solution and XM Radio's satellite radio
broadcast solution. We intend to leverage our success in mobile computing and
wireless data applications into related applications and markets.
Products and Services
Our solutions include the following products and services:
o Cryptographic Toolkits;
o Information Security Protocol Toolkits;
o PKI Products;
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o Certificate Authority Services (announced for commercial
availability in the second half of calendar year 2000);
o Virtual Private Network Client (announced for commercial
availability in the second half of calendar year 2000);
o Consulting and Design Services; and
o Hardware Components.
Cryptographic Toolkits
Our Security Builder software development toolkit family, which is
based on our proprietary ECC-based technology, enables customers to integrate a
comprehensive selection of cryptographic components into their applications. The
current version of Security Builder supports platforms such as Microsoft Windows
95/98/NT, Sun Solaris, several versions of UNIX, Microsoft Windows CE and the
Palm OS(R) platform. We also offer integration services to port Security Builder
to other platforms, including real-time operating systems intended for embedded
devices.
Information Security Protocol Toolkits
Our information security protocol toolkits include:
o SSL Plus. 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.
This variety of toolkits allows developers to come to one
source for industry standard secure communications over
Internet, Intranet, mobile computing and embedded system
domains. SSL Plus is the first SSL toolkit that enables secure
connections of handheld computers into enterprise data systems
over both wired and wireless networks. SSL Plus is available
on platforms such as Microsoft Windows NT, Sun Solaris, HP/UX,
QNX RTOS, Microsoft Windows CE and the Palm OS(R)platform. SSL
Plus is built using the ANSI C language, and we provide
services to port to other platforms on request. The SSL Plus
for Embedded Systems toolkit extends SSL connections to
handheld computing environments and other embedded devices by
integrating our ECC-based technology with the TLS 1.0
specification (the successor standard to SSL 3.0).
o WTLS Plus. This information security protocol toolkit
implements the wireless transport layer security, or WTLS,
protocol for secure transport layer communication over
wireless networks. WTLS is part of the wireless application
protocol, or WAP, specification and delivers secure Internet
communications and advanced telephony services on mobile
phones, pagers and personal digital assistants.
PKI Products
Our Trustpoint PKI product line is a comprehensive set of software
components, products and tools for PKI development and deployment. Trustpoint
PKI products can be used by our OEM customers to build trust management
solutions into their products. Our Trustpoint product line consists of
certificate toolkits, a CA, a Registration Authority, or RA, an administrative
console and end-entity software. These components operate on Linux, Microsoft
Windows 95/98/NT, Sun Solaris, HP/UX, Java JDK, Microsoft Windows CE and the
Palm OS(R) platform. Additionally, Trustpoint components are built to open
industry standards for PKI interoperability, including X.509 and PKIX. We have
commenced shipping our Trustpoint PKI products for revenue during the first
quarter of fiscal 2001.
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Certificate Authority Services
We have announced, for commercial availability in calendar year 2000,
Internet-based trust services that assure the identity of both servers and
clients in eCommerce and mCommerce information systems. We will market these
trust services as MobileTrust managed certificate services. MobileTrust will
package the MobileTrust CA service with our PKI products, security protocol
toolkits and integration services to provide an integrated ECC-based managed
trust solution for our OEM customers. The MobileTrust CA service will operate in
a secure data center to provide reliability and protection against external
threats. We currently are beta testing our trust services.
Virtual Private Network Client
We have announced, for commercial availability in calendar year 2000, a
VPN client application for the Palm Computing Platform. The VPN client will
deliver an IPSec standard protocol implementation compatible with existing VPN
installations. The VPN client will also support a wide range of encryption
algorithms, enabling interoperability with the current installed base of
enterprise VPN products, and includes Certicom's ECC for vertical integration
with the MobileTrust CA service.
Consulting and Design Service
We deliver advanced security solutions. Our experts in cryptography and
information security provide a comprehensive range of consulting and design
services. These services are designed to help customers get their products
finished faster and with higher levels of confidence in their security. We offer
the following services:
o Security Design and Integration. We offer design and
development support to help our customers minimize
time-to-market and to maximize performance, efficiency and
robustness of security applications.
o Product Review and Evaluation. We provide confidential reviews
of our clients' products to assist them in fielding practical
and robust security solutions. Our reviews include detailed
technical evaluations, architectural overviews and business
plan viability analysis.
o 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, disaster recovery planning, security
policies and product review and recommendations as part of our
enterprise consulting services.
o Cryptographic Algorithm Design and Review. We have expertise
in efficient cryptographic security implementations. We help
our customers design and review custom cryptographic
algorithms for building strong security in demanding
environments. Customers typically use our services in wireless
handheld devices, high value financial transactions, server-
and client-based applications and network security systems.
o Security and Cryptographic Training. We offer training courses
to our customers 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.
o Public-Key Infrastructure Solutions. We help clients evaluate
PKI products and define PKI system architectures. Our
development teams have fielded robust 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 provide secure processing and storage for
cryptographic keys based on ECC-based technology. Our smart card product line
addresses the need for low-cost, high-strength user identification and
authentication services in a
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form factor similar to a credit card. Our Certilock security module provides a
secure, hardware-based execution environment in a PCI card form factor for use
in secure application servers and certificate authorities.
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 ten patents granted in the United States
and internationally. Our research has also led to our filing numerous patent
applications over the past five years. As of June 30, 2000, we had forty-four
pending patent applications, each of which is filed in one or more
jurisdictions. Most of our patent applications are filed in the United States
and Canada, while a portion are filed in Europe and Japan. We have filed patent
applications in countries which we perceive 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.
A majority of our pending patent applications relate to implementations
of ECC, while some of them relate to techniques used with other public-key
cryptosystems as well. We believe that our existing patents, together with our
pending patent applications, cover the most advantageous methods of implementing
ECC. We have licensed and may in the future license our patents to OEM
customers. We believe that our ECC-based technology will be commercially
competitive against public domain encryption systems.
We also engage in joint development work which has resulted in the
filing of additional patent applications. As a result of joint development
efforts, we jointly own two patents with Motorola. In addition, such work also
resulted in the filing of several applications for jointly owned patents with
Pitney Bowes.
Research and Development
We are engaged in advanced cryptographic research involving
computational algorithms and integrated circuit architectures for cryptographic
processing. Dr. Scott Vanstone, our Chief Cryptographer, leads our efforts in
this area. Dr. Vanstone is also a professor of Mathematics and Computer Science
at the University of Waterloo, a leading Canadian center for cryptographic
research, and has published numerous books and articles on cryptography. He is
an Executive Director for the Centre of Applied Cryptography, the holder of the
NSERC/Pitney Bowes Senior Chair of Applied Cryptography at the University of
Waterloo and a Fellow, Royal Society of Canada, Academy of Science. We maintain
a cooperative relationship with the University of Waterloo, including our
sponsorship of the Certicom Chair of Cryptography. We also sponsor research at
Stanford University.
As of June 30, 2000, we employed 20 cryptographers 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 numerous workshops
worldwide on ECC.
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 printed
circuit board and integrated circuit designs that integrate our ECC
implementations directly into hardware solutions.
Our research and development staff is active in many important industry
standards bodies, including the Institute for Electrical and Electronics
Engineers, or IEEE, the American National Standards Institute, or ANSI, the
International Organization for Standardization, or ISO, the Internet Engineering
Task Force, or IETF, and WAP, among others. 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.
Members of SECG, include companies such as Hewlett-Packard, VeriSign and
American Express.
Customers
As of June 30, 2000, the Company had over 100 licensed customers. The
following is a partial list of companies that have licensed our Security Builder
cryptographic toolkit or SSL Plus protocol toolkit product, or custom-developed
security solutions:
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724 Solutions Inc. Motorola, Inc.
Aether Systems Inc. NeoPoint, Inc.
AvantGo Inc. Palm, Inc.
BellSouth Wireless Data, L.P. Pitney Bowes
ClearCommerce Corp. PUMATECH, Inc., Inc.
Critical Path, Inc. QUALCOMM, Inc.
CyberCash, Inc. Schlumberger Limited
CyberSafe Corporation Sterling Commerce, Inc.
Datakey, Inc. Sybase, Inc.
JP Systems, Inc. XM Satellite Radio, Inc.
We license our cryptographic and information security protocol toolkits
to our OEM customers, which in turn use them to build security into their
products for sale to their end-user customers. Listed below are examples of
applications where our encryption technology has been implemented in products or
services offered to consumers or enterprise end-users.
Customer Applications
BellSouth Wireless Data--Fidelity Investments
BellSouth Wireless Data is a leading provider of wireless data services
with one of the largest wireless data networks in the United States. BellSouth
embeds our ECC technology into its BellSouth Powertool(TM) application, which
provides a development environment used by developers looking to quickly develop
secure wireless data applications for the RIM Inter@active(TM) Pager 950. Our
ECC technology allows the establishment of a secure wireless communications link
between a gateway server and a RIM two-way pager for the transfer of sensitive
application data utilizing the BellSouth Intelligent Wireless Network(TM).
Fidelity Investments licensed BellSouth's Powertool(TM) for the development of
its Fidelity InstantBroker(TM) secure wireless brokerage application. This
application allows Fidelity's brokerage customers to check account information,
receive quotes and place orders securely.
Aether Systems--Charles Schwab & Co., Inc.
Aether Systems is a leading provider of wireless and mobile data
services, allowing real-time communications and transactions across a full range
of devices and networks. Aether embeds our ECC technology into their Aether
Intelligent Messaging software platform allowing application providers to
securely extend their reach to wireless platforms. Aether chose our security
technology in order to secure communications from the wireless device back to
the application server. Financial institutions, such as Charles Schwab & Co.,
Inc., partner with Aether to develop wireless trading services for their
brokerage customers. These services are designed to enable customers to access
their accounts and conduct transactions from a wide range of mobile information
appliances.
724 Solutions--Bank of Montreal
724 Solutions provides an Internet infrastructure software solution to
financial institutions that enables them to offer personalized and secure
on-line banking, brokerage and eCommerce services across a wide range of
Internet-enabled wireless and consumer electronic devices. 724 Solutions chose
our SSL Plus and Security Builder toolkits to embed ECC technology into
client-device financial applications. For example, 724 Solutions uses ECC
technology in home banking and customer solutions as well as in their back-end
architecture. Bank of Montreal deployed wireless banking and investment
applications based on software provided by 724 Solutions. These applications
provide Bank of Montreal customers with the capability to access bank account
balances and transaction details, transfer funds, pay bills, conduct wireless
trading, view investment portfolios and view credit card transactions and
payments.
- 10 -
Palm, Inc.--Amazon.com
Palm is the world's leading provider of personal companion handheld
devices with a 68% market share in the worldwide personal companion handheld
device market in 1998 according to IDC. For its wireless Palm VII(TM) handheld
computer, we designed a custom implementation of our ECC-based technology that
seamlessly embeds security into the Palm OS(R) platform. Palm's ECC-based
security allows the establishment of a secure link between a Palm VII(TM)
handheld and the Palm.Net(TM) wireless communications service allowing
over-the-air service activation as well as secure mobile eCommerce applications.
Amazon.com launched its Amazon.com Anywhere application, based on software
acquired in their acquisition of Convergence Corporation, which utilizes the
secure link between the Palm VII(TM) handheld and the Palm.Net(TM) servers that
is enabled by our security technology. Amazon.com Anywhere allows its customers
to securely shop for books, music, software, electronics and other products and
check the status of auction items at Amazon.com when they are away from their
desktop computers.
Sales and Business Development
We sell our cryptographic products and services directly to OEM
customers through dedicated technical sales representatives. We focus our
efforts on market leaders in the sectors in which the advantages of our
technology are most compelling.
We have sales offices in the United States and Canada. We intend to
expand our sales and business development presence into Europe and the Asia
Pacific region.
In North America, our sales representatives are assigned account
responsibilities based on market sector. This enables the team and its members
to develop expertise in their specific market sector. Each sector team will
consist of a business development manager, a group of sales specialists, and
field application engineers.
As the market matures for our technology, we anticipate complementing
our direct sales force with indirect channels to increase our sales reach
worldwide.
Marketing
We maintain marketing programs aimed at increasing market awareness of
Certicom, our technology and the need for security solutions in general.
Demand Generation
We generate demand from OEMs for our products by exhibiting and
speaking at industry conferences, trade shows, seminars and consortium meetings.
We focus our marketing efforts on selected opportunities to reach technical and
business decision-makers within particular target market sectors.
Customer Education
We educate our customers to help them understand public-key
cryptography and information security as it applies to their specific business
opportunities. For this we use a combination of white papers, case studies, data
sheets, product demonstrations and on-line tutorials.
Ingredient Brand
We provide our certicom encryption(TM) ingredient brand logo, a diamond
with the words "certicom encryption" inside, for use by our licensees in their
end-user product packaging to indicate the use of our technology in their
products. We also provide variations of our logo for use in handheld devices and
other systems where screen space is at a premium. Our logo features regularly in
our advertisements, trade show graphics, product packaging 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. Our success in marketing our security products
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and services is partially dependent on the acceptance of our technology by
standards organizations. In many cases, the membership of standards committees
are comprised of representatives from our most important customers.
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.
Competition
We face competition from vendors offering a wide range of security
products and services, including the following:
Cryptographic Toolkits
Our primary competitor in this market is RSA Security, Inc., or RSA
Security. The RSA public-key algorithm has long been established as the de facto
standard for the wired Internet. In addition, competition may come from
solutions developed in-house, or by companies who attempt their own encryption
implementations without licensing commercial toolkits.
Information Security Protocols
RSA Security also markets products in this segment. There are a number
of other companies worldwide who offer commercial protocol products. In
addition, OpenSSL, a royalty-free source-code implementation, is used by some
companies.
PKI Products
Competition in this segment is increasing as traditional PKI companies
such as Entrust Technologies, Inc., or Entrust and Baltimore Technologies, Inc.,
or Baltimore, move into the mobile and wireless market. RSA Security also
participates in this segment. In Europe and Asia, some specialty vendors are
emerging, such as Sonera SmartTrust, who develop and sell PKI products for GSM
phones.
CA Services
Competition in this segment may come from companies such as VeriSign,
Inc., or VeriSign, Entrust and IBM. These companies have CA products and
services for issuing and maintaining digital certificates for use on public and
private networks. Although traditionally desktop focused, they have begun to
modify their offerings to address the mobile and wireless market.
VPN Client
Competition in this segment is only just emerging. One other company,
V-ONE, has announced a VPN client for the Microsoft Windows CE platform.
Potential market entrants include SSH Communications Security and traditional
security software providers such as Entrust Technologies, Baltimore
Technologies, and RSA Security.
In addition, we may face competition in the future from competitors who
develop new cryptosystems. We believe that the important factors in choosing
security technologies in our market are proven technology, reputation of the
vendor, efficiency of the algorithms and ease-of-use of the products. We believe
that our products currently compete favorably with those of our competitors, but
there can be no assurance that we can maintain our competitive position against
current and future competitors.
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
States and Canada to other countries are subject to a variety of government
approvals or licensing requirements.
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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.
For example, France appears to be relaxing its requirements, whereas China
appears to be imposing new requirements. 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
As of June 30, 2000, we had 210 full-time, part-time and contract
employees: 79 in cryptographic research and engineering, 41 in sales and
marketing, 34 in consulting and systems integration services, and 56 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.
Cryptographic Systems and Elliptic Curve Cryptography
The expansion of digital data communication and the Internet has led to
a need to protect valuable information with cryptography. There are two types of
cryptographic systems: 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
them 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. As symmetric-key systems deliver better performance than
public-key systems, but public-key systems provide better key management, hybrid
solutions using both systems are generally used to construct cryptographic
solutions.
Public-key systems offer the ability to create digital signatures. To
sign digital data, a user applies his or her private key in a prescribed manner
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. This allows
the user to prove that he or she possesses the correct private key and proves
that the message has not been modified, thus creating:
o integrity, since the message can be shown to be unmodified;
o authentication, because the user can be identified as the
holder of the private key; and
o non-repudiation, because the message and signature can be
presented to a third party who can independently validate the
signature and treat it as legally binding, where appropriate.
Because a digital signature allows a user to prove only that he or she
holds the private key which 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 party, known
as the certificate authority, which makes the assertion that a given user is the
sole holder of the private key which matches the public key. The signature from
the certificate authority 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, then verifying a
signature against the certified public key. The collection of certificate
authorities, policies and procedures associated with the management of public
keys is known as public-key infrastructure, or PKI.
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All known public-key cryptographic systems are based upon advanced
mathematics. They use the idea of a trapdoor one-way function, a mathematical
problem which is hard to solve without knowledge of some secret trapdoor
information. With this knowledge, 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
trapdoor information. For example, one of the earliest and most commonly used
public-key cryptographic systems is RSA, which 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. Here, the large composite number is the
public key, and knowledge of its prime factors is the secret trapdoor
information and can be used as the private key.
Before elliptic curve cryptography, or ECC, was invented, only two
major families of public-key cryptographic systems were known. Each of these
conventional algorithm families is based on a different one-way function. The
families are called the integer factorization family and the discrete logarithm
family, and both are based on arithmetic using whole numbers. The integer
factorization family consists of algorithms such as RSA. The discrete logarithm
family is based on the difficulty of taking logarithms when arithmetic is
performed while taking remainders under division by a large number at each
stage. The best-known systems in this family are the Diffie-Hellman key
agreement protocol and the DSA signature scheme.
In 1985, Neal Koblitz and Victor Miller realized that elliptic curves
had practical application to public-key cryptography. Elliptic curves have been
studied as mathematical objects for over 150 years and formed the basis in 1995
of Andrew Wiles' much publicized proof of Fermat's Last Theorem--a problem which
had remained unsolved for hundreds of years and at the time was the most
celebrated open question in mathematics. ECC is based on a problem related to
the discrete logarithm family, except that arithmetic is performed on elliptic
curve points rather than on whole numbers.
Although a poorly-designed cryptographic system can be insecure
regardless of how long its keys are, the strength of secure, accepted
cryptographic systems can generally be measured in terms of key size, which is
measured in bits. The use of advanced mathematics in a public-key cryptographic
system leads to its keys being relatively large and its operations being
relatively slow when compared to those of a symmetric-key cryptographic system.
The most commonly used public-key systems must use a 1,024-bit key to
deliver the same security as an 80-bit symmetric key and take a great deal of
computation to create or verify signatures or to encrypt or decrypt data.
Because the elliptic curve problem is harder to attack than the whole number
problems used in conventional public-key systems, ECC offers similar security
with just 163-bit keys. We believe that the advantage of ECC over these older
public-key systems will increase as available computing power, and thus the
ability to attack a cryptosystem, increases. The following table illustrates
this advantage by showing the key sizes for various kinds of cryptosystems that
provide comparable security.
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 80-bit symmetric keys currently provide acceptable commercial
security, we believe that the next generation standards for symmetric-key
systems will use keys in the 128-bit to 256-bit range in order to withstand
attacks made possible by the rapid advance of computing power. For equivalent
security strength, either 571-bit ECC keys or extremely large 15,360-bit RSA
keys should be used to protect 256-bit symmetric keys in hybrid solutions. Given
that the processing effort for a cryptographic algorithm generally grows with
the key size, the bandwidth and computational advantages of ECC grow
disproportionately as security increases.
- 14 -
The security of a system is very 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 ANSI, IEEE and ISO. 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 novel algorithms will achieve
standardization by these organizations in the near future.
RISK FACTORS
You should carefully consider the risks described below and the other
information in this Form 10-K. If any of the following risks occur, our
business, financial condition or results of operations could be materially
harmed.
Risks Related to Our Business
We have historically incurred losses and will for the foreseeable
future.
We have experienced substantial net losses in each fiscal period since
we were formed. As of April 30, 2000, we had an accumulated deficit of $54.3
million and, in addition, an accumulated other comprehensive loss of $2.5
million. The risk factors described in this Form 10-K, among other factors, make
predicting our future operating results difficult. We expect to incur additional
losses for the next few years, and we may never achieve profitability. If we do,
we may not be able to sustain it. Because we may be unable to sustain our
revenue growth, you should not consider our historical growth indicative of our
future revenue levels or operating results.
Our business depends on continued development of the Internet, the
acceptance of mobile and wireless devices and the continued growth of
eCommerce and mCommerce.
Our future success is substantially dependent upon continued growth in
the use of the Internet and the acceptance of mobile and wireless devices and
their use for mobile eCommerce, or mCommerce. The adoption of the Internet for
commerce and communications, particularly by individuals and companies that have
historically relied upon alternative means of commerce and communication,
generally requires the understanding and acceptance of a new way of conducting
business and exchanging information. In particular, companies that have already
invested substantial resources in other means of conducting commerce and
exchanging information may be particularly reluctant or slow to adopt a new,
Internet-based strategy that may make their existing personnel and
infrastructure obsolete. To the extent that individuals and businesses do not
consider the Internet to be a viable commercial and communications medium, and
do not increase their use of mobile and wireless devices, our business may not
grow.
In addition, our business may be materially adversely affected if the
number of users of mobile and wireless devices does not increase, or if
eCommerce and mCommerce do not become more accepted and widespread. The
projections, estimates and forecasts in this regard of third parties that we
cite in this Form 10-K could prove to be overly optimistic. The use and
acceptance of the Internet and of mobile and wireless devices may not increase
for any number of reasons, including:
o actual or perceived lack of security for sensitive
information, such as credit card numbers;
o congestion of traffic or other usage delays on the Internet;
o inconsistent quality of service or the lack of availability of
cost-effective, high-speed service;
o lack of high-speed modems and other communications equipment;
o competing technologies;
o possible outages or other damage to the Internet;
- 15 -
o governmental regulation; and
o uncertainty regarding intellectual property ownership.
Published reports have indicated that capacity constraints caused by
growth in the use of the Internet may impede further development of the Internet
to the extent that users experience delays, transmission errors and other
difficulties. If the necessary infrastructure, products, services or facilities
are not developed, or if the Internet does not become a viable and widespread
commercial and communications medium, and if individuals and businesses do not
increase their use of mobile and wireless devices for mCommerce, our business,
financial condition and operating results could be materially adversely
affected.
Unless the demand for mutual authentication in mCommerce transactions
increases, our growth prospects will be materially adversely affected.
Most of the advantages of our ECC-based technology for mobile and
wireless devices over conventional security technology are not applicable to a
transaction that does not involve the mutual authentication of both parties to
the transaction. The vast majority of eCommerce and mCommerce transactions
currently do not involve mutual authentication. Participants in mCommerce have
only recently begun to require mutual authentication in some applications, such
as enterprise data access and certain high-value transactions. Unless the number
of mCommerce transactions involving mutual authentication increases, the demand
for our products and services, and our growth prospects, will be materially
adversely affected.
Our success depends on ECC technology becoming accepted as an industry
standard.
To date, ECC technology has not been broadly accepted. In order for our
business to be successful, ECC technology must become accepted as an industry
standard, which may never happen. The technology of our principal competitor,
RSA Security, is, and has been for the past several years, the de facto standard
such for security over open networks like the Internet. RSA Security owns a
patent relating to its algorithm that expires in September, 2000. This patented
technology should be freely available after that date and may become
commoditized. The inexpensive or free availability of such security technology
could significantly delay or prevent the acceptance of ECC as a security
standard.
Our quarterly operating results are subject to fluctuations and if we
fail to meet the expectations of securities analysts or investors in
any quarter, our share price could decline significantly.
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 occurs, our share price would likely
decline significantly. Factors that may cause our operating results to fluctuate
include:
o the level of demand for our products and services as well as
the timing of new releases of our products;
o our dependence in any quarter on the timing of a few large
sales, as described below;
o our ability to maintain and grow a significant customer base;
o the fixed nature of a significant proportion of our operating
expenses, particularly personnel, research and development and
facilities;
o costs related to the opening or expansion of our facilities;
o unanticipated product discontinuation, exchange or deferrals
by our original equipment manufacturer, or OEM, customers;
o changes in our pricing policies or those of our competitors;
o competition from sources that provide products similar to ours
for free;
- 16 -
o currency exchange rate fluctuations and other general economic
factors;
o our effectiveness at integrating acquisitions with existing
operations; and
o timing of acquisitions 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 fiscal 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. In addition, our customers
may defer the purchase of, or cease using, our products and services at any
time, and certain license agreements may be terminated by the customer at any
time. Our customer contracts typically provide for base license fees or
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,
and 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 specified in the contracts. 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.
We may be unable to protect our intellectual property rights, which
would materially adversely affect our business.
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 and products, or obtain and use
information we regard as proprietary. Preventing the unauthorized use of our
proprietary technology may be difficult 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 the European Union. While we believe that at least some of our
products are covered by one or more of our patents and these patents are valid,
a court may not agree if the matter is litigated. There can be no assurance that
we will be successful in protecting our proprietary rights and, if we are not,
our business, financial condition and operating results could be materially
adversely affected.
Enforcement of intellectual property rights is time consuming and
costly and entails the possibility that some or all of our intellectual property
rights may be invalid or unenforceable or subject to adverse claims of
ownership. None of our patents has faced a challenge in the courts or in front
of an administrative body. There is always the possibility that some or all of
our patents could be found invalid or unenforceable. Likewise, no one has
challenged our trade secrets or copyrights, but there is a possibility that some
or all of the rights we believe that we have could be adversely affected by
litigation.
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 always a risk that the companies with which we are working could decide
not to commercialize the joint technology and that we may be unable to
commercialize joint technology without their consent and/or involvement.
We are members of organizations which set standards. As such, we may be
required to 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. Such licensing requirements may adversely affect the
value of our products.
- 17 -
If the sales of our customers' products decline, our royalty revenue
would also decline.
Our licenses to our OEM customers generally provide that royalty
payments are not due to us until such time as the licensee both incorporates our
technology into its products and ships those products for sale to third parties.
Accordingly, our royalty license revenue is linked to our OEM customers' sales,
and if those customers' product shipments decline, then our royalty license
revenue would also decline.
We depend on sales of our principal products.
We currently derive substantially all our revenue from sales of our
cryptographic toolkits and protocol information security toolkits. As a result,
any factor adversely affecting sales of these products would have a material
adverse effect on our business, financial condition and operating results. Our
future financial performance will depend in part on the successful development,
introduction and customer acceptance of new and enhanced versions of our
cryptographic toolkits and protocol information security toolkits. There can be
no assurance that we will continue to be successful in marketing our products or
any new or enhanced versions of our products.
Our recently announced products and services may generate little or no
revenue.
We recently announced our PKI tools products and our certificate
authority service. We cannot accurately predict the future level of acceptance,
if any, of these new products by our customers and we may not be able to
generate anticipated, or any, revenue from these products.
If we cannot successfully control our product defects and our product
liability, our business, financial condition and operating results
would be materially adversely affected.
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 adverse publicity 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.
Our products are integrated into our customers' products. 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. The
consequences of such errors, failures and claims could have a material adverse
effect on our business, financial condition and operating results.
The lengthy sales and implementation cycles of our products and
services could materially adversely affect us.
We market many of our products and services directly to OEMs. The sale
to, and implementation by, OEMs of our products and services typically involve a
lengthy education process and a significant technical evaluation and commitment
of capital and other resources by them. This process is also subject to the risk
of delays associated with their internal budgeting and other procedures for
approving capital expenditures, deploying new technologies within their networks
and testing and accepting new technologies that affect key operations. As a
result, the sales and implementation cycles associated with many of our products
and services are generally lengthy, and we may not succeed in closing
transactions on a timely basis, or at all. If orders expected for a specific
customer for a particular period are not realized, our business, financial
condition and operating results could be materially adversely affected.
We anticipate increased operating expenses, which would materially
adversely affect our business, financial condition and operating
results if we do not correspondingly increase our revenue.
We expect to increase our operating expenses significantly as we:
o expand our sales and marketing operations and develop new
distribution channels;
o enhance existing or build additional software development
centers;
- 18 -
o enhance our operational and financial systems;
o broaden our customer support capabilities; and
o fund greater levels of research and development.
If we do not significantly increase our revenue to meet these increased
operating expenses, our business, financial condition and operating results
would be materially adversely affected.
We have only a limited operating history, which makes it difficult to
evaluate an investment in our common shares.
We have only a limited operating history. In particular, in 1997 we
shipped our first commercial toolkit and entered the U.S. market. Accordingly,
our business operations are subject to all the risks inherent in the
establishment and maintenance of a new business enterprise, such as competition
and viable operations management. Most of our competitors and their products
have greater market recognition and acceptance than we or our products do. Our
ability to market our products profitably is currently unproven. We may never be
able to achieve and sustain profitable operations.
Acquisitions could harm our financial condition and operations.
We acquired Consensus Development Corporation and Uptronics
Incorporated in fiscal 1999 and we acquired Trustpoint in fiscal 2000. We may
acquire additional businesses, technologies, product lines or services in the
future. Acquisitions involve a number of risks, including:
o the difficulty of assimilating the operations and personnel of
the acquired business;
o the potential disruption of our business;
o our inability to integrate, train, retain and motivate key
personnel of the acquired business;
o the diversion of our management from our day-to-day
operations;
o our inability to incorporate acquired technologies
successfully into our products and services;
o the additional expense associated with completing an
acquisition and amortizing any acquired intangible assets;
o increased demands for liquidity;
o the potential impairment of relationships with our employees,
customers and strategic partners; and
o the 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 companies had achieved or might have achieved
separately. Successful integration of each of their operations would depend upon
our ability to manage those operations and to eliminate redundant and excess
costs. As a result of difficulties associated with combining operations, we may
not be able to achieve the cost savings and other benefits that we would hope to
achieve with these acquisitions.
Given that our management will have to devote time and attention to
integrate the technology, operations and personnel of the businesses we acquire,
we may not be able to serve our current customers properly or attract new
customers. Also, our management faces the difficult and potentially time
consuming challenge of implementing uniform standards, controls, procedures and
policies throughout our various offices. Any difficulties in this process could
disrupt our ongoing business, distract our management, result in the loss of key
personnel or customers, increase our expenses and otherwise materially adversely
affect our business, financial condition and operating results.
- 19 -
In the event of any future acquisitions, we could issue equity shares,
which would dilute our existing shareholders' equity interests, incur debt or
assume liabilities. We cannot assure you that we would be able to obtain any
additional financing on satisfactory terms, or at all, and this failure would
have a material adverse effect on our business, financial condition and
operating results. Additional indebtedness would make us more vulnerable to
economic downturns and may limit our ability to withstand competitive pressures.
The terms of any additional indebtedness may include restrictive financial and
operating covenants, which would limit our ability to compete and expand.
Our business strategy also includes strategic investments and joint
ventures with other companies. These transactions are subject to many of the
same risks identified above for acquisitions.
We depend on key personnel for our future success and we have no
protection if they leave us.
Our success is largely dependent on the performance of our key
employees, particularly Scott A. Vanstone, our Chief Cryptographer. 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 could have a
material adverse effect on our business, financial condition and operating
results. We do not maintain key person life insurance policies on any of our
employees.
We may not be able to attract or retain qualified personnel.
Competition for qualified personnel in the digital information security
industry is intense, and finding and retaining qualified and experienced
personnel in the San Francisco Bay Area is 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
these 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. For example, to address this concern, in fiscal
1999, we repriced certain outstanding employee stock options, as described in
Note 7 to our consolidated financial statements included elsewhere in this Form
10-K. In addition, the volatility and current market price of our common shares
may make it difficult to attract and retain personnel.
If we are unable to manage our growth, our business would be disrupted.
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 $4.0 million in fiscal 1999 to $12.0 million in fiscal
2000. During the same period, the number of our employees increased from 102 to
165. We intend to continue to grow in the foreseeable future and to pursue
existing and potential market opportunities, including acquisitions. Our growth
has placed, and will continue to place, significant demands on our management
and operational resources, particularly with respect to:
o recruiting and retaining skilled technical, marketing and
management personnel in an environment where there is intense
competition for skilled personnel;
o managing a larger, more complex international organization;
o expanding our facilities and other infrastructure in a timely
manner to accommodate a significantly larger global workforce;
o maintaining and expanding a cutting edge research and
development staff;
o expanding our sales and marketing efforts;
o providing adequate training and supervision to maintain our
high quality standards;
o expanding our treasury and accounting functions to meet the
demands of a growing company;
- 20 -
o strengthening our financial and management controls in a
manner appropriate for a larger enterprise; and
o preserving our culture, values and entrepreneurial
environment.
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, our business,
financial condition and operating results could be materially adversely
affected.
If we do not successfully transition our financial, accounting and
treasury systems from Canada to California on a timely basis, our
business could be materially adversely affected.
Since November 30, 1999, we have appointed a new Chief Executive
Officer and a new Chief Financial Officer, both of whom are located in our
Hayward, California office rather than our Mississauga, Ontario office. We
intend to move our internal financial, accounting and treasury functions from
Mississauga to Hayward. There is a risk that these changes could cause
significant disruption in our company and adversely affect these critical
functions. If that were to occur, our business, financial condition and
operating results could be materially adversely affected.
If we fail to develop and maintain our strategic relationships, our
business would be materially adversely affected.
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. In such case, we may have to
devote substantially more resources to the development of new technology and the
distribution, sales and marketing of our digital information security products
and services than we would otherwise. Failure of one or more of our strategic
relationships could materially adversely affect our business, financial
condition and operating results.
We do not insure against all potential losses and we could be seriously
harmed and our reputation damaged by unexpected liabilities.
Many of our products provide benefits to our clients' businesses that
are difficult to quantify. Any failure in a client's system could adversely
affect our reputation and result in a claim for substantial damages against us,
regardless of our responsibility for such failure. Although we generally attempt
to limit our contractual liability for damages arising from negligent acts,
errors, mistakes or omissions in rendering our services, we have not been, and
cannot assure you that we will be, able to do so in all cases or that any
limitations of liability set forth in our agreements will be enforceable in all
instances or will otherwise protect us from liability for damages. In addition,
our failure to meet client expectations or to deliver error free services may
result in adverse publicity for us and damage to our reputation.
We maintain general liability insurance coverage, including coverage
for errors or omissions. However, we cannot assure you that:
o insurance coverage will be available to us in sufficient
amounts to cover one or more significant claims that are
successfully asserted against us;
o insurance coverage will continue to be available to us in the
future on reasonable terms, including reasonable premium,
deductible and co-insurance requirements; or
o our insurer will not disclaim coverage of any future claim.
Our business, financial condition and operating results could be
materially adversely affected if any of these developments were to occur.
- 21 -
Our share price is, and likely will continue to be, volatile.
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:
o announcements of technological or competitive developments;
o acquisitions or entry into strategic alliances by us or our
competitors;
o the gain or loss of a significant customer or strategic
relationship;
o changes in estimates of our financial performance or changes
in recommendations by securities analysts regarding us, our
industry or our customers' industries; and
o general market or economic conditions.
This risk may be heightened because our industry is new and evolving,
characterized by rapid technological change and 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 often have been unrelated to the operating performance of the
affected companies. Volatility in the market price of our common shares could
result in securities class action litigation. This type of litigation,
regardless of the outcome, could result in substantial costs to us and a
diversion of our management's attention and resources.
In May, 2000, we listed and began trading on the Nasdaq National
Market. We cannot predict the extent to which investor interest in our common
shares will continue to support a trading market in the United States or how
liquid that market might become. As discussed earlier, our financial results are
difficult to predict and could fluctuate significantly.
System interruptions and security breaches could materially adversely
affect our business.
We plan to construct what we believe will be a secure data center. 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 may be
located, and most of our customer information may be stored, in the San
Francisco, California area, which is susceptible to earthquakes. Any damage or
failure that causes interruptions in our data center and our other computer and
communications systems could materially adversely affect our business, financial
condition and operating results.
Our success also depends upon the scalability of our systems. Our
systems have not been tested at the usage volumes that we expect will be
required in the future. Thus, a substantial increase in demand for our products
and services could cause interruptions in our systems. Any such interruptions
could affect our ability to deliver our services and our business, financial
condition and operating results.
Although we periodically perform, and retain accredited third parties
to perform, evaluations of our operational controls, practices and procedures,
we may not be able to 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 similar disruptive problems.
It is possible that we may have to expend additional financial and other
- 22 -
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 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
would materially adversely affect our business, financial condition and
operating results.
We do not expect to be able to use our Canadian tax credits and loss
carry forwards fully before they expire over the next several years.
As of April 30, 2000, we had $0.6 million in Canadian investment tax
credits and $32.4 million in Canadian loss carry forwards. These Canadian tax
credits can be used to offset only our Canadian tax liabilities in the ten years
following incurrence. The Canadian loss carry forwards can be used to offset
only our Canadian taxable income in the seven years following incurrence. Given
that approximately 91% of our revenue was generated in the United States in
fiscal 2000, we may not be able to use all our Canadian tax credits or loss
carry forwards before they expire over the next several years.
We have limited financial resources and will likely require additional
financing that may not be available.
Our financial resources are substantially smaller than the financial
resources of our current principal and potential competitors. We will likely
require additional equity or debt financing in the future. There can be no
assurance that we will be able to obtain the additional financial resources
required to successfully compete in our markets on satisfactory terms or at all.
Failure to obtain such financing could result in the delay or abandonment of
some or all of our plans for development, which could have a material adverse
effect on our business, financial condition and operating results.
Risks Related to the Digital Information Security Industry
Public-key cryptography technology is subject to the risk that it will
be successfully attacked or decoded.
Our digital information security products and services are largely
based on public-key cryptography technology. With public-key cryptography
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 cryptography
technology would 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 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 cryptography 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. See "Business--Cryptographic Systems and
Elliptic Curve Cryptography."
Product development and technological change could materially adversely
affect us.
The digital information security industry is an emerging industry that
is characterized by rapid technological change and frequent new product
introductions. Accordingly, we believe that our future success depends upon our
ability to enhance our current products and develop and introduce new products
offering enhanced performance and functionality at competitive prices. In
addition, technological innovation in the marketplace, such as in the areas of
mobile processing power or, wireless bandwidth, or the development of new
cryptosystems, may reduce the comparative benefits of our products and could
materially adversely affect our business, financial
- 23 -
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 intense competition that could materially adversely affect us.
We operate in a dynamic and evolving industry that is highly
competitive. We anticipate that the quality, functionality and breadth of our
competitors' product offerings will improve. Most 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 compete in a new and rapidly evolving market and there
can be no assurance that we will be able to compete effectively with such
companies. In addition, we could face competition from our OEMs in the event
that some or all of them develop and distribute their own systems. We also could
be materially adversely affected if there were a significant movement towards
the acceptance of open source solutions that compete with our products.
We expect that additional competition will develop, both from existing
businesses in the digital information security industry and from new entrants,
as demand for digital information products and services expands and as the
market for these products and services becomes more established. We may not be
able to compete successfully and competitive pressures may harm our business.
Our largest competitors include RSA Security, which licenses the de facto
Internet security standard, VeriSign, Baltimore and Entrust.
The technology and wireless industry may fail to grow significantly,
which would materially adversely affect our growth.
There can be no assurance that the market for our existing products and
services will continue to grow, that firms within the industry will adopt our
products and services, or that we will be successful in independently
establishing markets for our products and services. If the various markets in
which our, and our OEM customers', products and services compete fail to grow,
or grow more slowly than we currently anticipate, or if we are unable to
establish markets for our new products and services, our revenue and net income
may be lower than expected.
Disputes over intellectual property rights are common in our industry
and, if we become involved in such a dispute, we 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 product shipment delays for products or the
cessation of the use and sale of products or services, or require us to enter
into licensing agreements that may require the payment of a license fee and/or
royalties to the owner of the intellectual property. Such licensing agreements,
if required, may not be available on royalty or other licensing terms acceptable
to us. Any of these situations would materially adversely affect our business,
financial condition and operating results. We also currently license third party
technology for use in 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 could be materially harmed if we lose
the rights to certain technology.
We could be materially adversely affected by government regulation.
The digital information security industry is governed by regulations
that could have a material adverse effect on our business. The export of strong
cryptographic equipment and software, including many of our products, is
regulated by both the U.S. and Canadian governments. Governments could seek to
impose taxes on companies that engage in electronic commerce or which are
involved in other markets where we sell our products and services. 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, taxes and laws could materially adversely affect our sales
- 24 -
and our OEM customers' sales. Foreign governments could adopt regulations that
are detrimental to our interests. For example, the Chinese government has
recently implemented legislation that requires all companies exporting to or
operating in China to provide sensitive information to the government about
their encryption software and users. This legislation also includes provisions
(which very recently may have been effectively reversed) requiring that all
electronic products in China use encryption software developed in China. This
legislation and similar intrusive regulations by other countries 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, financial condition and operating
results.
Risks Related to Our Corporate Charter; Limitations on Dividends
We have a shareholder rights plan that could delay or prevent an
acquisition of us even if an acquisition would be beneficial to our
shareholders.
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 us.
The anti-takeover effect of certain of our charter provisions could
delay or prevent an acquisition of us even if an acquisition would be
beneficial to our shareholders.
Our authorized capital consists of an unlimited number of common shares
and an unlimited number of preference shares issuable in one or more series. 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 preference shares that may be issued in the future. The issuance
of preference 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, 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 maintain our U.S. corporate offices and worldwide sales and
marketing, finance, custom design and systems integration and administration
operations at leased premises totaling approximately 111,000 square feet at
25801 and 25821 Industrial Boulevard, Hayward, California. The lease for this
facility expires February 28, 2006. We also lease approximately 30,300 square
feet of office space at 5520 Explorer Drive, Mississauga, Ontario, which
contains our Canadian administrative offices, customer support, cryptographic
research, engineering and custom design and systems integration functions. The
lease for this facility expires December 15, 2009. We also lease short-term,
executive suite office space in Reston, Virginia which services the Washington,
D.C. area. The total annual base rent for all three facilities is currently
approximately $1,733,000.
Item 3. LEGAL PROCEEDINGS
We are currently not subject to any material litigation. We have
received a letter on behalf of Carnegie Mellon University asserting that it owns
the trademark "CERT", and that it believes our use of the stock symbol "CERT" on
the Nasdaq National Market will cause confusion with and/or dilute its
trademark. Although we intend
- 25 -
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, Inc. asserting
that it holds a patent on certain aspects of technology which are part of the
WAP standard, and that it believes that our WTLS Plus toolkit implements such
technology. After an internal investigation, it is our belief that we do not
implement any validly patented 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 which are implemented within certain aspects of
the Secure Sockets Layer standard. After an internal investigation, it is our
belief that we do not implement any validly patented technology. Although we
intend to vigorously defend any litigation that may arise on these matters,
there can be no assurance that we will be successful in doing so, or that such
disputes will not have a material adverse impact on us. In addition, we recently
became aware of a letter on behalf of a Mr. Leon Stambler asserting that he
holds a patent on certain aspects of technology which are implemented within the
Secure Sockets Layer standard. This latter matter is currently undergoing
internal review of the technological and legal issues to determine an
appropriate response, therefore there can be no assurance that such asserted
patent will not have a material adverse impact upon us.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At our Special Meeting of Shareholders held on April 27, 2000, the
following proposals were adopted by the margins indicated:
(The numbers below do not reflect the 2-for-1 stock split of the Company's
outstanding common shares which occured on July 12, 2000.)
NUMBER OF SHARES
-----------------
VOTES VOTES NOT VOTES
FOR AGAINST VOTED EXCLUDED
--------- --------- -------- --------
1. The amendment to the Articles of Continuance 4,868,779 144 130 0
subdividing each of the issued and outstanding common
shares of the Company on a two-for-one basis.
2. The removal of the requirement contained in 2,756,710 1,436,793 589,086 86,464
the Company's 1997 Stock Option Plan that the aggregate
number of common shares reserved for issuance may not
exceed 15% of the common shares outstanding as of that
date.
3. The removal of the requirement contained in 2,782,462 1,411,491 589,086 86,014
the 1997 Stock Option Plan that the total number of
common shares reserved for issuance pursuant to options
granted to insiders of the Company in any one-year
period not exceed 10% of the common shares outstanding.
4. The increase in the total number of common 3,147,350 1,046,603 589,086 86,014
shares reserved for issuance under the 1997 Stock
Option Plan from 2,750,000 to 3,000,000.
5. The adoption of a 2000 U.S. Stock Plan 2,842,589 1,351,364 589,086 86,014
pursuant to which the Company may grant stock options
to eligible U.S. directors, officers and employees of
the Company.
6. The adoption of an Employee Stock Purchase 4,011,234 182,719 589,086 86,014
Plan pursuant to which eligible employees of the
Company, and its subsidiaries, may be entitled to
purchase up to a total of 500,000 common shares.
- 26 -
PART II
Item 5. MARKET FOR THE COMPANY'S COMMON SHARES AND RELATED SHAREHOLDER MATTERS
Our common shares are listed and traded on The Toronto Stock Exchange,
or the TSE, under the symbol "CIC." Since May 2, 2000, our common shares also
have been listed and traded on the Nasdaq National Market under the symbol
"CERT". Our high and low sales prices on the TSE for each quarter within the
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.
Canadian U.S.
-------- ----
High Low High Low
---- --- ---- ---
Canadian $ Canadian $ U.S. $ U.S. $
1999 Fiscal Year (ended April 30, 1999)
First Quarter..................... Cdn.$16.00 Cdn.$9.50 $10.62 $6.30
Second Quarter.................... Cdn.$11.13 Cdn.$4.50 $7.19 $2.91
Third Quarter..................... Cdn.$12.50 Cdn.$4.00 $8.27 $2.65
Fourth Quarter.................... Cdn.$9.63 Cdn.$6.55 $6.61 $4.50
2000 Fiscal Year (ended April 30, 2000)
First Quarter..................... Cdn.$7.63 Cdn.$5.18 $5.06 $3.44
Second Quarter.................... Cdn.$10.45 Cdn.$5.65 $7.10 $3.84
Third Quarter..................... Cdn.$74.00 Cdn.$9.45 $51.19 $6.54
Fourth Quarter.................... Cdn.$125.00 Cdn.$27.65 $84.45 $18.68
On July 12, 2000, we completed a two-for-one split of our outstanding
common shares. As of June 30, 2000, there were 25,649,054 common shares issued
and outstanding. Except as otherwise indicated, all of the prices in the
preceding table, and elsewhere in this document and all of the common share
numbers in this document, reflect this split. On July 20, 2000, the last
reported sale price of the common shares on the Nasdaq National Market was
$34.38 (Cdn. $50.70) and on the Toronto Stock Exchange was Cdn.$50.50 ($34.24).
Use of Proceeds from Public Offering
On May 3, 2000, we completed the public offering of 2,500,000 common
shares in the United States and Canada at a per share price of U.S.$23.15, for
an aggregate offering price of U.S.$57,875,000. The shares were offered pursuant
to a Form F-10 Registration Statement filed with the U.S. Securities and
Exchange Commission under Registration No. 333-11586, and began trading on the
Nasdaq National Market on May 2, 2000. Our placement agent for the offering was
FleetBoston Robertson Stephens, Inc. After deducting underwriting discounts and
commissions and offering expenses, our net proceeds from the offering were
approximately U.S.$51,500,000.
On May 5, 2000, we used a portion of the proceeds of the offering to
repay a $10 million loan obtained from Sand Hill Capital II, LP in April, 2000.
We intend to use the remaining net proceeds from that offering for the expansion
of our sales and marketing activities, including hiring additional sales
personnel and opening new sales offices in Europe and the Asia Pacific region,
the development and enhancement of our products and services, working capital
and general corporate purposes.
We may also use a portion of the net proceeds of that offering to fund
strategic investments or acquisitions. While we have from time to time had
preliminary discussions regarding potential investments and acquisitions in the
ordinary course of our business, we do not currently have any agreements to make
any such investment or acquisition.
- 27 -
Except as indicated above, we have not yet determined the amount of the
net proceeds to be used specifically for the purposes specified above. Pending
such uses, we expect to invest the net proceeds in short-term, interest-bearing,
investment grade securities.
Sales of Unregistered Securities
On January 26, 2000, in connection with our acquisition of Trustpoint
of Mountain View, California, we issued 201,120 common shares to the former
owners of Trustpoint. We also converted outstanding stock options of Trustpoint
into options to acquire 98,884 of our common shares.
During the fiscal year ended April 30, 2000, the following common
shares were issued pursuant to the exercise of stock options:
------------------------ ---------------------- ----------------------
Month Number of Shares Exercise price
------------------------ ---------------------- ----------------------
June 7,666 $1.72
------------------------ ---------------------- ----------------------
August 7,136 $1.09
------------------------ ---------------------- ----------------------
October 62,812 $3.65
------------------------ ---------------------- ----------------------
November 127,948 $4.58
------------------------ ---------------------- ----------------------
December 361,272 $5.02
------------------------ ---------------------- ----------------------
January 89,824 $3.72
------------------------ ---------------------- ----------------------
February 55,612 $3.57
------------------------ ---------------------- ----------------------
March 127,190 $4.79
------------------------ ---------------------- ----------------------
April 10,540 $2.42
------------------------ ---------------------- ----------------------
The exercise price shown above is the weighted-average price based on
the shares issued in the month. The exchange rate is based on the average rate
for the fiscal quarter.
To the extent sales described above occurred outside the United States,
they were not required to be registered under United States securities laws.
Those issuance of the above-described securities occurring within the United
States were deemed to be exempt from registration under the U.S. Securities Act
of 1933 either in reliance on Section 4(2) of the U.S. Securities Act of 1933 as
transactions by an issuer not involving any public offering, or in reliance upon
Rule 701 promulgated under the U.S. Securities Act of 1933 and in reliance on
related state "blue sky" law exemptions as transactions pursuant to compensatory
benefit plans and contracts relating to compensation.
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.
Holders of Common Shares
As of June 30, 2000, there were approximately 136 record owners 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.
- 28 -
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, 2000, 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 1 to our Consolidated Financial Statements.
Fiscal Year Ended April 30,
----------------------------------------------------------------------
1996 1997 1998 1999 2000
------------ ---------- ------------- ------------- ----------
Consolidated Statement of (in thousands of U.S. dollars except per share data and share amounts)
Operations Data:
Revenues....................... $ 966 $ 1,085 $ 1,233 $ 4,042 $ 12,040
Costs and expenses:
Selling and marketing........ 1,044 2,038 4,918 6,087 6,616
Research and development..... 1,120 2,433 3,820 3,240 4,446
Depreciation and amortization 130 130 561 5,063 7,861
General and administrative... 518 2,549 2,762 4,277 7,099
Purchased in-process research -- -- 1,151 535
and development............
Consulting and systems -- -- -- 587 2,080
integration
Cost of hardware sold........ 290 234 349 125 579
Operating loss................. (2,136) (6,299) (11,177) (16,488) (17,176)
Interest income (expense)...... 77 256 965 1,015 (359)
Loss before income taxes....... (2,059) (6,043) (10,212) (15,473) (17,535)
Income taxes................... (115) (112) 167 (92) 334
Net loss....................... (1,944) (5,931) (10,379) (15,381) (17,869)
Net loss per share
Basic and diluted.............. $ (0.23) $ (0.41) $ (0.57) $ (0.73) $ (0.80)
Weighted average number of
outstanding common shares.... 8,392 14,386 18,317 21,033 22,255
As of April 30,
----------------------------------------------------------------------
1996 1997 1998 1999 2000
------------ ---------- ------------- ------------- ----------
Consolidated Balance Sheet Data: (in thousands of U.S. dollars)
Cash........................... $ 40 $ 278 $ 628 $ 1,400 $ 10,508
Marketable securities.......... 3,987 11,440 29,847 12,678 2,550
Total assets................... 5,498 13,784 34,467 41,615 51,516
Total shareholders' equity..... 4,536 12,444 33,035 39,171 35,991
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
We are an encryption technology company specializing in security
solutions for mobile computing and wireless data markets, including mobile
eCommerce, or mCommerce. Our solutions often use less processing power and
bandwidth than conventional encryption technologies, and are therefore more
suitable for many mobile and wireless environments. Our OEM customers
incorporate our patented technology into their applications for handheld
computers, mobile phones, two-way pagers and other Internet information
appliances. As these devices communicate increasingly sensitive and valuable
information, we believe the demand for stronger security will increase.
- 29 -
Our product line includes cryptographic and information security
protocol toolkits. We have announced for availability later this year public-key
infrastructure, or PKI, products and certificate authority, or CA, services. In
addition to licensing our security products, we provide consulting and systems
integration services to assist our customers in designing and implementing
efficient security solutions. Our customers include 724 Solutions, Aether
Systems, BellSouth Wireless Data, Motorola, Palm, Inc., PUMATECH, Inc. and
QUALCOMM.
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.
The following discussion and analysis relates to our financial
statements that have been prepared in accordance with U.S. GAAP.
Sources of Revenue and Revenue Recognition Policy
We derive our revenues from a variety of sources, which 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 based upon per unit or per usage charges or a
percentage of the revenue from licensees' products containing our technology and
annual maintenance and support fees. In addition, a small amount of our revenue
comes from annual license fees under licenses entered into by Consensus
Development Corporation, or Consensus, prior to our acquisition of Consensus.
Our license agreements may permit the licensee to sublicense without us
receiving any revenue from the sub-licensees. Consulting and systems integration
revenue is derived from the performance of contracted services to licensees and
can be based upon a time-and-materials framework or a fixed contract for a
complete solution. Hardware revenues comprise sales of products manufactured by
third parties to our specifications, and components procured by third parties
and resold by us.
We generally negotiate sales contracts with our customers and we
generally do not use standardized contracts. However, each of our contracts
(other than our contracts for consulting and systems integration or hardware
sales) includes provisions for us to receive an up-front license fee and
royalties. Our royalties for mobile and wireless devices generally range from
$1.00 to $5.00 per unit, with other amounts if the royalties are calculated on a
per user or usage basis or as a percentage of revenue.
In the fiscal year ended April 30, 2000, our software licensing
revenue, consulting and systems integration revenue and hardware revenue
represented approximately 77%, 16% and 7%, respectively, of our total revenue.
In the same period, approximately 91% of our total revenue was derived from
sales in the United States, while 4% of our total revenue was derived from sales
in Canada.
In the fiscal year ended April 30, 1999, our software licensing
revenue, consulting and systems integration and hardware revenue represented
approximately 66%, 24% and 10%, respectively, of our total revenue. In the same
period, approximately 76% of our total revenue was derived from sales in the
United States, while 15% and 9% of our total revenue were derived from sales in
Canada and Europe, respectively.
We recognize software licensing revenue in accordance with all
applicable accounting regulations including the American Institute of Certified
Public Accountants Statement of Position ("SOP") 97-2, "Software Revenue
Recognition", as amended. Following the requirements of SOP 97-2, we recognize
license revenues when all the following conditions are met:
o we have signed a non-cancelable license agreement with the
customer;
o we have delivered the software product to the customer;
o the amount of the fees to be paid by the customer are fixed or
determinable; and
o we believe that collection of these fees is probable.
- 30 -
Maintenance and support services revenue is recognized ratably over the
period, usually one-year. Revenue derived from consulting and systems
integration are recognized upon performance of the related services.
In the fiscal year ended April 30, 2000, over 97% of our revenue was
generated in U.S. dollars. In the same period, approximately 33% of our expenses
were incurred in Canadian dollars, and the balance was incurred in U.S. dollars
and other currencies.
We expect that a majority of our revenue will continue to be generated
in U.S. dollars for the foreseeable future and that a portion of our expenses,
including labor costs as well as capital and operating expenditures, will
continue to be denominated in Canadian dollars. If the Canadian dollar
appreciates against the U.S. dollar, our results of operations could be
materially adversely affected.
Costs and Expenses
Our costs and expenses consist of selling and marketing, research and
development, depreciation and amortization, general and administrative,
purchased in-process research and development, consulting and systems
integration and cost of hardware sold. Our selling and marketing expenses
consist primarily of employee salaries and commissions, and include related
travel, public relations and corporate communications costs and trade shows,
marketing programs and market research. Research and development expenses
consist primarily of employee salaries, sponsorship of cryptographic research
activities at various universities, participation in various cryptographic,
wireless and eCommerce standards associations and related travel and other
costs. Depreciation and amortization represents the allocation to income of the
cost of fixed assets and intangibles over their estimated useful lives. General
and administrative expenses consist primarily of salaries and other
personnel-related expenses for executive, financial and administrative
personnel. Purchased in-process research and development expenses represent the
value of in-process projects under development acquired in a business
combination for which technological feasibility has not been established.
Consulting and systems integration expenses consist primarily of salaries and
travel. Our cost of hardware sold consists primarily of the component cost of
our hardware products manufactured by third parties to our specifications as
well as the procured costs of third-party hardware.
In anticipation of business growth, we expect to incur significantly
higher selling and marketing, research and development, and general and
administrative expenses and capital expenditures in subsequent periods. We may
not continue to grow at a pace that will support these 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.
Net Losses
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 operating losses on both an annual and quarterly basis for at least
the next few years as we grow our business by hiring additional personnel and
increase marketing and capital expenditures. Furthermore, given the rapidly
evolving nature of our business and fluctuations in the timing of our sales, our
operating results are difficult to forecast and, accordingly, our historical
financial results may not be meaningful assessments of our future business
operations or prospects. We believe that other factors will be more significant
indicators of our future business operations or prospects, including the pace of
deployment of mCommerce products and services, the acceptance of ECC as a
cryptographic standard and the extent and timing of our royalty revenues.
We pay taxes in accordance with U.S. federal, state and local tax laws
and Canadian federal, provincial and municipal tax laws. We do not expect to pay
any significant corporate income taxes in Canada in the foreseeable future
because we have significant Canadian tax credits and loss carry-forwards. Our
effective tax rate in the fiscal years ended April 30, 2000 and 1999 was
approximately 1.9% and (0.6)%, respectively.
Acquisitions
On July 29, 1998, we acquired all of the outstanding common shares of
Consensus, of Berkeley, California, a supplier of applied security development
tools and the manufacturer of the SSL Plus toolkit, a widely deployed toolkit
for the secure sockets layer, or SSL, protocol. SSL is the dominant security
protocol on the Internet,
- 31 -
specifying session-based encryption and authentication, and is used in virtually
all Internet browsers and commerce servers. The acquisition was completed for
cash consideration of approximately $3.0 million, plus the issuance of 1,894,622
of our common shares. We also converted outstanding stock options of Consensus
to options to acquire 799,818 of our common shares. The total consideration for
the acquisition was approximately $24.5 million. On November 24, 1998, we
acquired all of the outstanding common stock of Uptronics Incorporated, or
Uptronics, of Sunnyvale, California, a provider of cryptographic consulting and
security systems integration services to OEMs for a cash consideration of
approximately $0.5 million and the issuance of 431,344 of our common shares. The
total consideration was approximately $2.0 million. On January 26, 2000, we
acquired all the outstanding shares of common stock of Trustpoint of Mountain
View, California, a developer of public-key infrastructure, or PKI, products.
OEMs use PKI products to develop applications with the digital certificate
service built-in. The principal benefit to us of this acquisition was that we
acquired Trustpoint's software and hired Trustpoint's four employees. The
acquisition was completed with the issuance of 201,120 of our common shares. We
also converted outstanding stock options of Trustpoint into options to acquire
98,884 of our common shares. The total consideration for the acquisition was
approximately $10.5 million. These acquisitions were accounted for by the
purchase method and the results of operations were included in our consolidated
statements of operations from the dates of acquisition.
Results of Operations
Our consolidated financial statements contained in this Form 10-K are
reported in U.S. dollars and are presented in accordance with U.S. GAAP.
Although we have experienced substantial growth in revenues in recent
periods, we have incurred substantial operating losses since our inception and
we may incur substantial operating losses in the foreseeable future. As of April
30, 2000, we had an accumulated deficit of approximately $54.3 million. We
expect to incur additional losses for at least the next few years, and we may
never achieve profitability. We intend to invest heavily 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 presented in
accordance with U.S. GAAP as a percentage of revenue.
Year Ended April 30,
--------------------
1996 1997 1998 1999 2000
------ ------ ------ ------ ------
Consolidated Statement of Operations Data: (%) (%) (%) (%) (%)
Revenues....................................... 100 100 100 100 100
Costs and expenses:
Selling and marketing........................ 108 188 399 151 55
Research and development..................... 116 224 310 80 37
Depreciation and amortization................ 13 12 45 125 65
General and administrative................... 54 235 224 106 59
Purchased in-process research and development -- -- -- 28 4
Consulting and systems integration........... -- -- -- 15 17
Cost of hardware sold........................ 30 22 28 3 5
Interest income (expense)...................... 8 24 78 25 (3)
Loss before income taxes....................... (213) (557) (828) (383) (145)
Income taxes................................... (12) (10) 14 (2) 3
Net loss....................................... (201) (547) (842) (381) (148)
Fiscal Year Ended April 30, 2000 Compared to Fiscal Year Ended April 30, 1999
Revenue. 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 a 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, a trend
that we believe will continue. Hardware sales grew 95% to $0.8 million for
fiscal 2000, but
- 32 -
decreased as a percentage of revenue to 7% versus 10% in fiscal 1999. We
anticipate that hardware sales will remain at this percentage level for the
foreseeable future.
Selling and Marketing. Selling and marketing expenses were $6.6 million
for the year ended April 30, 2000 versus $6.1 million for the same period in
fiscal 1999. We anticipate this area to increase considerably as we add more
personnel and expand into Europe and the Asia Pacific region.
Research and Development. We have capitalized certain costs associated
with the filing of approximately sixty 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 for fiscal 2000 increased 37% relative to
fiscal 1999, to $4.4 million as a result of new product development in the
public-key infrastructure area. We expect that these expenses will continue to
increase in the foreseeable future as we add additional engineering resources
and continue to grow our technical capabilities to support the growth of our
business.
Depreciation and Amortization. Depreciation and amortization increased
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 relating to our acquisitions of Consensus and
Uptronics and partial year amortization expense relating to our acquisition of
TrustPoint while our results for fiscal 1999 included only partial year
amortization expenses relating to our acquisitions of Consensus and Uptronics.
We acquired Consensus and Uptronics during fiscal 1999 and TrustPoint during
fiscal 2000.
General and Administrative. 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.
Purchased In-process Research and Development. For fiscal 2000, we
recorded a charge for purchased in-process research and development as a result
of our acquisition of Trustpoint. In connection with this acquisition, 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 and was expensed in fiscal 2000. 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.
Consulting and Systems Integration. 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, 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. We expect that this trend will
continue as we continue to add resources to this group.
Cost of Hardware Sold. Cost of hardware sold increased 363% in fiscal
2000 to approximately $0.6 million from $0.1 million in fiscal 1999. This
increase is primarily due to higher hardware sales. This increase is also
attributable to a shift in product mix with a greater proportion of hardware
sales being generated by sales of higher cost third party procured hardware.
Interest and Other Income (Expense). For fiscal 2000, interest expense
was $0.4 million compared to interest income of $1.0 million for fiscal 1999.
This decrease was a result of 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. Income tax expense was $0.3 million for fiscal 2000
compared to a recovery of $0.1 million in fiscal 1999, which arose due to the
receipt of Scientific Research and Experimental Development Tax Credits in
- 33 -
Canada. Income taxes were solely a result of our operations in the United
States, including those of Consensus and Uptronics. We have significant tax
credits and tax loss carry-forwards in Canada.
Net Loss. 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 ($0.42 per share basic and diluted), an 18% decrease
over $11.4 million ($0.55 per share basic and diluted) for fiscal 1999.
Fiscal Year Ended April 30, 1999 Compared to Fiscal Year Ended April 30, 1998
Revenue. Revenue for fiscal 1999 was $4.0 million, a 228% increase from
approximately $1.2 million in fiscal 1998. The increase was primarily
attributable to increases in software licensing and consulting and systems
integration revenue. Software licensing revenue increased to $2.7 million in
fiscal 1999 from $0.5 million in fiscal 1998, a 397% increase. Significant
software licensing revenue growth was evident in both the ECC-based Security
Builder product as well as the SSL Plus product acquired through the Consensus
acquisition. In addition, we completed and released SSL Plus 3.0, a new version
of SSL Plus which uses the elliptic curve algorithm in addition to the RSA
algorithm.
During fiscal 1999, we adjusted our business strategy to provide a
wider range of security products and services to OEM customers. This shift in
strategy is evident in the growth of our consulting and systems integration
revenue, which grew to $1.0 million in fiscal 1999 from less than $0.1 million
the previous fiscal year. Revenue from hardware sales declined in fiscal 1999 to
$0.4 million from $0.6 million the previous fiscal year.
Selling and Marketing. During fiscal 1999, we continued to expand our
sales and marketing operation based in California, both internally and through
the acquisitions of Consensus and Uptronics. As a result of the growth of this
operation, selling and marketing expenses increased 24% to $6.1 million in
fiscal 1999 from $4.9 million in fiscal 1998.
Research and Development. Research and development costs decreased 15%
in fiscal 1999 to approximately $3.2 million, from $3.8 million in the previous
fiscal year. This decline was due to a decrease in headcount and a decreased use
of technical contractors.
Depreciation and Amortization. In connection with the acquisitions of
Consensus and Uptronics, we acquired intangibles of $26.3 million, and amortized
$4.1 million of this amount in fiscal 1999. As a result, our depreciation and
amortization expense was $5.1 million in fiscal 1999 compared to $0.6 million in
fiscal 1998.
General and Administrative. In fiscal 1999, general and administrative
expenses increased 55% to $4.3 million versus $2.8 million in the previous
fiscal year. The primary reason for this increase was the addition of
administrative headcount to support our growing operations in California, along
with associated payroll taxes, benefits and overheads.
Purchased In-process Research and Development. For the year ended April
30, 1999, we recorded a charge for purchased in-process research and development
as a result of our acquisition of Consensus. In connection with the acquisition,
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 $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. There was no purchased in-process research and development charge in
1998 as the Company did not make any acquisitions in that period.
Consulting and Systems Integration. The consulting and systems
integration group resulted from the acquisition of Uptronics during the year.
- 34 -
Cost of Hardware Sold. Cost of hardware sold declined 64% in fiscal
1999 to $0.1 million from $0.3 million the previous year. This reduction was
primarily due to lower hardware sales and lower unit costs in the Certifax
business.
Interest Income (Expense). In fiscal 1999, interest income was
approximately $1.0 million, unchanged from fiscal 1998.
Income Taxes. Income tax recovery was $0.1 million in fiscal 1999
compared to an expense of $0.2 million in fiscal 1998. The recovery occurred due
to the receipt of Scientific Research and Experimental Development Tax Credits
in Canada. Income taxes were solely a result of our operations in the United
States. We have significant tax credits and tax loss carry-forwards in Canada.
Prior to our listing on The Toronto Stock Exchange, we were eligible
for refundable Scientific Research and Experimental Development Tax Credits in
Canada. Due to the uncertainty surrounding the reimbursement of these tax
credits by various taxation authorities, we accrued a lesser tax credit than the
amount which we claimed in filing our income tax returns. During fiscal 1999, we
received $0.5 million of these refundable tax credits in excess of amounts which
we had accrued in previous years, and we took this amount into income during
fiscal 1999. Our income tax expenses are net of Scientific Research and
Experimental Development Tax Credits in Canada.
Net Loss. Our net loss increased 48% in fiscal 1999 to $15.4 million
($0.73 per share basic and diluted) compared to $10.4 million ($0.57 per share
basic and diluted) in the previous fiscal year. This increase was predominantly
attributable to the amortization of acquisition-related intangibles, which
amounted to $4.1 million in fiscal 1999 compared to zero in fiscal 1998. The
loss before interest income, depreciation and amortization, and taxes amounted
to $11.4 million in fiscal 1999 ($0.55 per share basic and diluted), an 8%
increase over $10.6 million ($0.58 per share basic and diluted) for fiscal 1998.
Financial Condition, Liquidity and Capital Resources
From our inception until December, 1995, we financed our operations
primarily through private placements. In December, 1995, we completed our
initial public offering in Canada, which raised net proceeds of $6.0 million. In
fiscal 1997, we raised $13.1 million through a private placement of our equity
securities. In fiscal 1998, we raised $30.5 million through two private
placements of our equity securities.
In fiscal 1999, our operations used $9.3 million of cash, the
acquisitions of Consensus and Uptronics used $4.4 million in cash, and our
investment in fixed assets and patents used $1.9 million in cash. These
expenditures were offset by cash proceeds from investing activities of $16.1
million as a result of the sales and maturities of marketable securities. Total
cash increase for the year was $0.8 million, and cash and cash equivalents and
marketable securities at April 30, 1999 were $14.1 million.
In fiscal 2000, our operations used $11.7 million of cash. Our
investment in fixed assets and patents used $4.3 million in cash. These
expenditures were offset by cash proceeds from investing activities of $10.1
million as a result of investing in marketable securities.
In May, 2000, we completed a public offering of 2,500,000 common shares
in the United States and Canada. Our net proceeds from the offering were $51.5
million. On April 27, 2000, we borrowed $10 million from Sand Hill Capital II,
LP, or Sand Hill, at the U.S. prime rate of interest plus 3%. As partial
consideration for making advances to us under this credit facility, we granted
Sand Hill warrants to purchase 30,000 of our common shares with an exercise
price of Cdn. $38.13 per share for a period of five years from the date of
grant. We repaid the loan and interest on May 5, 2000, using a portion of the
proceeds received from our public offering, and terminated this facility. Total
cash increase for the year was $9.1 million, and cash and cash equivalents and
marketable securities at April 30, 2000 were $13.1 million.
We lease all of our office premises and certain furniture and equipment
under operating leases which require, in the aggregate, minimum payments of $2.1
million in fiscal 2001. The leases for our offices in the United States and
Canada expire in 2006 and 2009, respectively. Our equipment leases expire in
2009.
- 35 -
We believe that, in the future, it may be advisable to augment our cash
in order to fund our activities. Therefore, we will consider raising cash
whenever market conditions are favorable. Such capital may be raised through
additional public or private financing, as well as collaborative relationships,
borrowings and other available sources.
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 the build-up of our Mobile Trust Certificate
Authority service; progress of our research and development programs; whether we
acquire interests in products currently held by 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 agreements; and
administrative and legal expenses. However, we believe our cash and cash
equivalents and marketable securities position at April 30, 2000, with the
addition of the proceeds from our May, 2000 public offering referred to above,
is sufficient to meet our short-term liquidity needs. 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 additional funds by
issuing additional equity securities, dilution to then existing shareholders may
result. If adequate funds are not available, we may be required to significantly
curtail one or more of our research and development programs or
commercialization efforts or obtain funds through arrangement with collaborative
partners or others on less favorable terms than might otherwise be available.
Recent Accounting Pronouncements
In June, 1998, the 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 the Company to measure all derivatives at fair value and to recognize
them on the balance sheet as an asset or liability, depending on the Company's
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. The Company will adopt SFAS No. 133 no later than the
first quarter of fiscal year 2002. Adoption of the new method of accounting for
derivatives and hedging activities is not expected to have a material impact on
the Company's financial position.
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 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 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. Although, the company has not fully assessed
the implications of SAB 101, management does not believe the adoption of the
statement will have a significant impact on the Company's consolidated financial
position, results of operations or cash flows"
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation, an interpretation of APB
Opinion No. 25, which among other things would, require variable-award
accounting for repriced options from the date the option is repriced until the
date of exercise. This interpretation is effective July 1, 2000, but certain
conclusions in this Interpretation cover specific events that occur after either
December 15, 1998, or January 12, 2000. On March 17, 1999, we repriced certain
options to purchase 382,914 shares of common stock. Because these options were
repriced after December 15, 1998, they are covered by the Interpretation.
Accordingly, these options would be accounted for as variable until the date
they are exercised, forfeited or expire unexercised. The portion of the options'
intrinsic value at July 1, 2000 that is attributable to the remaining vesting
period will be recognized over the future period. However, if the stock price
subsequently declines below the stock price at July 1, 2000, compensation cost
would be reduced proportionately. Additional compensation cost would be measured
for the full amount of any increases in stock price after the effective date and
will be recognized over the remaining vesting period. Any adjustment to the
compensation cost for further changes in stock price after the options vest will
be recognized immediately.
- 36 -
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Foreign Exchange Risk
Currency fluctuations may materially adversely affect us. A substantial
portion of our operating expenses are paid in currencies other than U.S.
dollars. 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. Operating expenses incurred in fiscal 2000 in currencies other than the
U.S. dollar represented approximately 33% of our total operating expenses.
Interest Rate Risk
We hold a significant portion of our cash in interest-bearing
instruments and are exposed to the risk of changing interest rates and its
effect on future earnings. Generally, if interest rates decrease, our interest
income would also decrease. We do not use any derivative instruments to reduce
our exposure to interest rate fluctuations.
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
None.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
Except as indicated below, the following table sets forth, as of April
30, 2000, the names, ages and positions of our directors and executive officers:
Name Age Position with Certicom
- ---- --- ----------------------
Richard P. Dalmazzi................. 45 President, Chief Executive Officer and Director
Scott A. Vanstone................... 52 Founder, Chief Cryptographer and Director
Richard M. Depew.................... 39 Executive Vice President, Field Operations
Richard D. Brounstein............... 50 Senior Vice President, Finance, Chief Financial Officer
and Secretary
Robert L. Williams.................. 43 Senior Vice President, Product Development
Timothy M. Dierks................... 31 Chief Technology Officer
Stewart C. Noyce.................... 38 Vice President, Marketing
Philip C. Deck...................... 37 Chairman of the Board
Bernard W. Crotty(1)(2)............. 38 Director
- 37 -
William T. Dodds(1)(2).............. 52 Director
Erling E. Rasmussen................. 57 Director
Louis E. Ryan(1).................... 45 Director
William J. Stewart(2).............. 39 Director
<FN>
- ---------------------------------------
(1) Member of the Audit Committee
(2) Member of the Compensation Committee as of May 2000
</FN>
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., assisted in founding us in March, 1985 and
was appointed our Chief Cryptographer in January, 1995. Dr. Vanstone is also a
professor of Mathematics and Computer Science, an Executive Director of the
Centre of Applied Cryptography, and the holder of the NSERC/Pitney Bowes Senior
Chair of Applied Cryptography at the University of Waterloo.
Richard M. Depew was appointed our Executive Vice President, Field
Operations in February, 2000. From July, 1998 to February, 2000, Mr. Depew
served as our Vice President, Worldwide Sales. Prior to joining Certicom, Mr.
Depew was Vice President of Sales 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 was appointed our Senior Vice President, Finance,
Chief Financial Officer and Secretary in February, 2000. 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.
Robert L. Williams was appointed our Senior Vice President, Product
Development in November, 1999. 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.
Stewart C. Noyce has served as our Vice President, Marketing since
November, 1998. Prior to joining us, Mr. Noyce served as a Principal at TruNorth
Consulting from June, 1997 to October, 1998. From October, 1996 to May, 1997, he
was Director, Product Management at Phone.com. From November, 1992 to May, 1996,
he was Director, Product Management at Geoworks Corporation.
- 38 -
Philip C. Deck has served as our Chairman since January, 1996. From
September, 1998 to November, 1999, Mr. Deck also served as our Chief Executive
Officer. From February, 1997 to September, 1998, he served as our Chairman,
President and Chief Executive Officer. From January, 1996 to February, 1997, Mr.
Deck served as our Chairman. From April, 1994 to January, 1996, Mr. Deck was our
President and Chief Executive Officer.
Bernard W. Crotty has served on our board since October 16, 1996. Mr.
Crotty was Counsel with Gibson, Dunn & Crutcher LLP, in Los Angeles from April,
1998 to March, 2000. From February, 1994 to April 1, 1998, he was a partner with
McCarthy Tetrault, Barristers & Solicitors in Toronto, Ontario.
William T. Dodds has been a member of our board since February 10,
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.
Erling E. Rasmussen has served on our board since August 25, 1997. He
is the Corporate Vice President and Director of Technology Motorola, Inc.'s
Systems Solutions Group.
Louis E. Ryan has been a member of our board since October 16, 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.
William J. Stewart has been a member of our board since October 16,
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.
- 39 -
Item 11. EXECUTIVE COMPENSATION
The following table sets forth, for the fiscal year ended April 30,
2000, all compensation of the Chief Executive Officer, former Chief Executive
Officer and current Chairman of the Board and each of our three other most
highly compensated executive officers who earned more than $100,000 in fiscal
2000 and were serving as executive officers as of April 30, 2000. In addition,
it includes our current Senior Vice President Finance, Chief Financial Officer
and Secretary and one of our former executive officers who was not an executive
officer on or after April 30, 2000 (collectively, all such current executive
officers and former executive officer are the "Named Executive Officers").
Summary Compensation Table
Long-Term
Annual Compensation(1) Compensation
------------------- ------------
Name and Principal Position Bonus/ Other Annual Securities
- --------------------------- Fiscal Salary Commission Compensation Underlying
Year ($) ($) ($) Options (#)
---- --- --- --- -----------
Richard P. Dalmazzi(2) 2000 217,920 68,532 6,000 260,000
President and Chief Executive 1999 180,000 70,000 8,880 120,000
Officer 1998 122,788 33,333 5,000 280,000
Philip C. Deck(3) 2000 187,119 -- 6,105 100,000
Chairman of the Board 1999 171,233 -- 6,145 180,000
1998 147,260 -- 8,977 240,000
Bruce A. MacInnis(4) 2000 112,271 47,875 5,903 40,000
Former Vice President Finance 1999 102,740 34,247 5,770 60,000
and Administration, Chief 1998 95,890 24,658 5,770 52,000
Financial Officer and
Secretary
Richard D. Brounstein(4) 2000 41,170 -- -- 220,000
Senior Vice President 1999 -- -- -- --
Finance, Chief Financial 1998 -- -- -- --
Officer and Secretary
Scott A. Vanstone 2000 124,519 -- 6,532 100,000
Chief Cryptographer 1999 109,589 -- 5,403 120,000
1998 85,616 -- 10,806 100,000
Richard M. Depew 2000 135,000 121,111 6,000 160,000
Executive Vice President, 1999 99,141 31,157 4,500 40,000
Field Operations 1998 -- -- -- --
<FN>
Notes:
(1) The aggregate compensation paid by us to all of our directors and executive officers (14 persons) for
the fiscal year ended April 30, 2000 was $1,528,600.
(2) Richard P. Dalmazzi was appointed our President, Chief Executive Officer and Director on November 30,
1999.
(3) Philip C. Deck resigned as our Chief Executive Officer on November 30, 1999.
(4) Bruce A. MacInnis resigned as our Vice President Finance & Administration, Chief Financial Officer and
Secretary in February, 2000, and was replaced by Richard D. Brounstein.
</FN>
- 40 -
Option Grants During the Fiscal Year Ended April 30, 2000
The following table sets forth information concerning options which
were granted to each of the Named Executive Officers during the fiscal year
ended April 30, 2000.
Potential Realizable
% of Total Value of Assumed
Securities Options Annual Rate of Stock
Under Granted to Exercise or Price Appreciation for
Options Employees in Base Price Option Term (2)(3)
Granted Fiscal ($/Common --------------------
Name (#) Year(1) Share) Expiration Date 5% ($) 10% ($)
---- --- ------- ------ --------------- ------ -------
Richard P. Dalmazzi 40,000 1.44% $4.39 May 12, 2004 $ 48,875 $ 108,002
220,000 7.90% 16.13 November 30, 2004 987,375 2,181,841
Philip C. Deck 100,000 3.59% 4.39 May 12, 2004 122,188 270,004
Bruce A. MacInnis 40,000 1.44% 4.39 May 12, 2004 48,875 108,002
Richard D. Brounstein 220,000 7.90% 38.17 February 7, 2005 2,336,616 5,163,310
Scott A. Vanstone 100,000 3.59% 4.39 May 12, 2004 122,188 270,004
Richard M. Depew 40,000 1.44% 4.39 May 12, 2004 48,875 108,002
40,000 1.44% 3.94 August 17, 2004 43,800 96,786
80,000 2.87% 18.75 December 10, 2004 417,320 922,168
<FN>
(1) Based on a total of 2,783,866 option shares granted to our employees,
directors and consultants during fiscal 2000.
(2) 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 the Company's 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.
(3) The stock price and the option exercise price are based on our 2000 fiscal
year average rate, U.S. $0.6804 per Cdn. $1.00.
</FN>
Aggregated Option Exercises During the Fiscal Year Ended April 30, 2000 and
Fiscal Year-End Option Values
The following table sets forth information concerning the exercise of
options during the fiscal year ended April 30, 2000 by each of the Named
Executive Officers and the fiscal year-end value of unexercised options and
SARs, on an aggregated basis.
Number
of Shares Value Number of Shares Value of Unexercised In-The-
Acquired on Realized Underlying Unexercised Money Options At April 30,
Name Exercise ($) (1) Options At April 30, 2000 2000($)(2)
---- -------- ------- ------------------------- ----------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Richard P. Dalmazzi 50,000 $738,336 167,500 492,500 $3,512,360 $7,836,707
Philip C. Deck -- -- 181,316 259,862 3,765,719 5,545,948
Bruce A. MacInnis 62,958 1,355,764 54,480 93,878 1,135,201 2,006,127
Richard D. Brounstein -- -- -- 220,000 -- --
- 41 -
Number
of Shares Value Number of Shares Value of Unexercised In-The-
Acquired on Realized Underlying Unexercised Money Options At April 30,
Name Exercise ($) (1) Options At April 30, 2000 2000($)(2)
---- -------- ------- ------------------------- ----------
Exercisable Unexercisable Exercisable Unexercisable
----------- ------------- ----------- -------------
Scott A. Vanstone 50,000 1,850,688 187,156 205,436 4,017,766 4,378,316
Richard M. Depew -- -- 17,500 182,500 357,646 2,707,551
<FN>
(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 2000 fiscal year average rate, U.S. $0.6804 per Cdn.
$1.00.
(2) Based upon the market price of $25.51 per share, which was the U.S.$
equivalent of the closing price of our common shares on The Toronto Stock
Exchange on the last trading day of our 2000 fiscal year, less the option
exercise price payable per share.
</FN>
Employment Contracts
Philip C. Deck performs his duties as Chairman of our Company in our
Mississauga, Ontario office pursuant to an Employment Agreement as of November
30, 1999 which expires on May 15, 2003. In the event that any person acquires
more than 50% of our outstanding voting securities, then all of Mr. Deck's
options and other rights to acquire our securities shall vest immediately.
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. 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.
Richard D. Brounstein performs 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.
- 42 -
Compensation of Directors
Each of our directors who is not a full-time employee of our Company 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 travelling and other out-of-pocket expenses) at the
rate of $10,000 per annum plus an additional $1,000 for each meeting of the
board of directors attended. In addition, each director so entitled to receive
remuneration is granted options vesting so as to permit the purchase of 20,000
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 so entitled to receive remuneration are also granted options in
relation to an additional 10,000 common shares in respect of each committee of
the board of directors of which they are a member or for which they perform the
functions based on the foregoing market price or the payment of $2,500 per
committee in lieu thereof. Such options vest over a period of one year. Bernard
W. Crotty, a director of our Company, was formerly Counsel with Gibson, Dunn &
Crutcher LLP, a law firm which performed legal services for us over the course
of our fiscal year ended April 30, 2000. From time to time, Mr. Crotty
personally provides legal services to us for which he is compensated.
Employee Benefit Plans
We have three stock option plans and one stock purchase plan pursuant
to which our common shares may be issued. As of April 30, 2000, options to
acquire 5,155,300 common shares at an average exercise price of $12.36 per share
were outstanding.
As of April 30, 2000, there were outstanding options to acquire 222,648
shares of our common stock that were granted pursuant to our original stock
option plan (the "Original Plan"). Options to acquire a total of 151,604 of
these shares were granted to our executive officers and directors. The options
issued under the Original Plan have a term of five years and become exercisable
at a rate of 33% during each twelve-month period following the first anniversary
from the date of grant of the option. These options become immediately
exercisable in the event that any person acquires 90% of the common shares. In
connection with the listing of our common shares on the TSE on June 17, 1997, we
agreed with such stock exchange that we would not grant any further options
under the Original Plan.
The Certicom Corp. 1997 Stock Option Plan (the "1997 Plan") permits
stock options to be granted which have a term of not greater than five years.
The options issued under the 1997 Plan become exercisable at a rate of one
quarter of the total amount granted on the first anniversary of a grant and a
further 2.0833% each month after the initial one-year period. No more than
6,000,000 common shares may be issued under the 1997 Plan. During the fiscal
year ended April 30, 2000, we granted options under the 1997 Plan to acquire a
total of 1,230,000 common shares to our executive officers at an average price
of $14.87 per common share. Additionally, pursuant to the 1997 Plan, we granted
options to acquire 1,553,866 common shares to individuals other than executive
officers.
On April 27, 2000, our shareholders adopted the Certicom Corp. 2000
United States Stock Plan (the "2000 Plan") and the Certicom Corp. Employee Stock
Purchase Plan (the "Stock Purchase Plan"). Under the 2000 Plan, options may be
granted to our directors, officers, employees and consultants who are United
States residents on the date of the grant. Unless otherwise determined by the
plan administrator, options issued under the 2000 Plan become exercisable at a
rate of one quarter of the total amount granted on the first anniversary of a
grant and a further 2.0833% each month after the initial one-year period. An
option may have a term up to 10 years. No more than 2,000,000 common shares may
be issued under the 1997 Plan. Under the terms of the 2000 Plan, we are also
permitted to grant stock purchase rights. As of April 30, 2000, there were no
options outstanding under the 2000 Plan.
The Stock Purchase Plan permits eligible employees who participate in
the plan to acquire our common shares at the lesser of 85% of the fair market
value of the common shares on the first business day of each offering period or
85% of the fair market value of the common shares on the last business day of a
purchase period. An offering period is a 12-month period that begins on July 1
and January 1 of each year. Each offering period consists of two purchase
periods which end on the following June 30 and December 31. The first offering
period under the Stock Purchase Plan began on July 1, 2000. Up to 1,000,000
common shares may be issued under the Stock Purchase Plan.
- 43 -
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 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, subject to
reconfirmation by shareholders at every third annual meeting of our
shareholders.
- 44 -
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the
beneficial ownership of our common shares as of April 30, 2000. To our
knowledge, no person beneficially owns 5% or more of our common shares. The
information is provided with respect to:
o each of our directors;
o each of our Named Executive Officers; and
o all of our directors, Named Executive Officers and other
executive officer as a group (14 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 23,087,866 shares of common
stock outstanding as of April 30, 2000. Shares of common stock subject to
options exercisable on or before June 29, 2000 (within 60 days of April 30,
2000) 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.
Number of Percentage of Shares
Name and Address of Beneficial Owner(1) Shares Beneficially Owned
--------------------------------------- ------ ------------------
Philip C. Deck (2) 582,872 2.50%
Scott A. Vanstone (3) 222,742 *
Richard P. Dalmazzi (4) 195,000 *
Louis E. Ryan (5) 116,058 *
Bernard W. Crotty (6) 80,582 *
William J. Stewart (7) 53,914 *
Richard M. Depew (8) 30,000 *
William T. Dodds (9) 16,104 *
Erling E. Rasmussen -- *
Richard D. Brounstein -- *
Bruce A. MacInnis (10) 26,430 *
------
All directors, Named Executive
Officers and other executive officer
as a group (14 persons) (11) 1,569,990 6.47%
<FN>
- --------------------
(1) The address of each of Messrs. Deck, Vanstone, MacInnis and Dodds is c/o
Certicom Corp., 5520 Explorer Drive, Mississauga, Ontario L4W 5L1 Canada.
The address of each of Messrs. Dalmazzi, Ryan, Crotty, Stewart, Depew,
Rasmussen and Brounstein is c/o Certicom Corp., 25801 Industrial
Boulevard, Hayward, CA 94545.
(2) Includes options that are exercisable with respect to 220,650 shares on or
before June 29, 2000.
(3) Includes options that are exercisable with respect to 222,742 shares on or
before June 29, 2000.
(4) Includes options that are exercisable with respect to 195,000 shares on or
before June 29, 2000.
(5) Includes options that are exercisable with respect to 116,058 shares on or
before June 29, 2000.
(6) Includes options that are exercisable with respect to 80,582 shares on or
before June 29, 2000.
(7) Includes options that are exercisable with respect to 53,914 shares on or
before June 29, 2000.
(8) Includes options that are exercisable with respect to 30,000 shares on or
before June 29, 2000.
(9) Includes options that are exercisable with respect to 16,104 shares on or
before June 29, 2000.
(10) Includes options that are exercisable with respect to 26,430 shares on or
before June 29, 2000.
(11) Includes options that are exercisable with respect to 1,185,268 shares on
or before June 29, 2000.
</FN>
- 45 -
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
1. Consolidated Financial Statements
The following consolidated financial statements are filed as part of
this report:
Page
----
o Consolidated Balance Sheets as at April 30, 1999 and 2000 F-3
o Consolidated Statements of Operations for each of the years
ended April 30, 1998, 1999 and 2000 F-4
o Consolidated Statements of Shareholders' Equity for the years
ended April 30, 1998, 1999 and 2000 F-5
o Consolidated Statements of Cash Flows for the years ended
April 30, 1998, 1999 and 2000 F-6
o Notes to Consolidated Financial Statements F-7
2. Consolidated Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts and Reserves
3. Reports on Form 8-K
None.
4. Exhibits
Index to Exhibits
Exhibit Number Description
- -------------- -----------
3.1 Restated Articles of Continuance of the Company
3.2 By-laws of the Company
4.1 Specimen Certificate for Common Shares of the Company
(incorporated by reference to the Company's Registration
Statement on Form 8-A, dated March 14, 2000)
10.1 Lease Agreement, dated October 30, 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
10.2 Lease Agreement, dated March 29, 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
10.3 Lease Agreement, dated December 7, 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
- 46 -
10.4 Certicom Corp. Stock Option Plan (incorporated by reference to
the Company's Registration Statement filed on Form S-8, dated
May 2, 2000)
10.5 1997 Employee Stock Purchase Plan (incorporated by reference
to the Company's Registration Statement filed on Form S-8,
dated May 2, 2000)
10.6 Certicom Corp. 2000 United States Stock Plan (incorporated by
reference to the Company's Registration Statement filed on
Form S-8, dated May 17, 2000)
10.7 Certicom Corp. 2000 Employee Stock Purchase Plan (incorporated
by reference to the Company's Registration Statement filed on
Form S-8, dated May 17, 2000)
10.8 Employment Agreement, dated November 20, 1999, between
Certicom Corp. and Richard P. Dalmazzi
10.9 Employment Agreement, dated May 1, 1999, between Certicom
Corp. and Dr. Scott A. Vanstone
10.10 Employment Agreement, dated February 7, 2000, between Certicom
Corp. and Richard D. Brounstein
21.1 List of Subsidiaries
22.1 Published Report Regarding Matters Submitted to Vote of
Security Holders
23.1 Independent Auditors' Consent
24.1 Power of Attorney (included on page 48 of this Form 10-K)
27.1 Financial Data Schedule
- 47 -
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 31st day of
July, 2000.
Certicom Corp.
By:/s/ Richard P. Dalmazzi
---------------------------
Richard P. Dalmazzi
President,
Chief Executive Officer
Each person whose signature appears below constitutes and appoints
Richard P. Dalmazzi and Richard D. Brounstein 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 Officer July 31, 2000
- -------------------------------------- and Director (Principal Executive Officer)
Richard P. Dalmazzi
/s/ Richard D. Brounstein Chief Financial Officer, Senior Vice July 31, 2000
- -------------------------------------- President, Finance and Secretary (Principal
Richard D. Brounstein Financial and Accounting Officer)
/s/ Scott A. Vanstone Director July 31, 2000
- --------------------------------------
Scott A. Vanstone
/s/ Philip C. Deck Director July 31, 2000
- --------------------------------------
Philip C. Deck
/s/ Bernard W. Crotty Director July 31, 2000
- --------------------------------------
Bernard W. Crotty
/s/ William T. Dodds Director July 31, 2000
- --------------------------------------
William T. Dodds
/s/ Erling E. Rasmussen Director July 31, 2000
- --------------------------------------
Erling E. Rasmussen
/s/ Louis E. Ryan Director July 31, 2000
- --------------------------------------
Louis E. Ryan
/s/ William J. Stewart Director July 31, 2000
- --------------------------------------
William J. Stewart
- 48 -
CERTICOM CORP. AND SUBSIDIARIES
Consolidated Financial Statements as of April 30, 1999 and 2000
and for the Years Ended April 30, 1998, 1999 and 2000
and Independent Auditors' Report
CERTICOM CORP. AND SUBSIDIARIES
Index to Consolidated Financial Statements
Page
Independent Auditors' Report................................................................................. F-2
Consolidated Balance Sheets as of April 30, 1999 and 2000.................................................... F-3
Consolidated Statements of Operations for the Years Ended April 30, 1998, 1999 and 2000...................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended April 30, 1998, 1999 and 2000............ F-5
Consolidated Statements of Cash Flows for the Years Ended April 30, 1998, 1999 and 2000...................... F-6
Notes to Consolidated Financial Statements for the Years Ended April 30, 1998, 1999 and 2000................. F-7
F-1
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Shareholders of Certicom Corp.
We have audited the accompanying consolidated balance sheets of Certicom Corp.
and its subsidiaries as at April 30, 2000 and 1999 and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three 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 1999, and the results of their operations and their
cash flows for each of the three 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 principals generally accepted in the United States of
America. We expect to report separately to the shareholders of the Company on
financial statements for the same period prepared in accordance with accounting
principals generally accepted in Canada.
/s/ DELOITTE & TOUCHE LLP
- -------------------------
Chartered Accountants
Toronto, Canada
June 13, 2000
F-2
CERTICOM CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands of U.S. dollars)
April 30,
--------------------------
ASSETS 1999 2000
---- ----
Current assets:
Cash............................................................................ $ 1,400 $10,508
Marketable securities, available for sale....................................... 12,678 2,550
Accounts receivable (net of allowance for doubtful accounts of $13 and $161).... 1,452 3,862
Unbilled receivables............................................................ 624 2,115
Inventories..................................................................... 396 218
Prepaid expenses and deposits................................................... 641 1,740
------- -------
Total current assets................................................... 17,191 20,993
Property and equipment, net....................................................... 2,837 5,213
Patents........................................................................... 518 873
Acquired intangibles (net of accumulated amortization of $4,280 and $10,586)...... 21,069 24,437
------- -------
Total assets...................................................................... $41,615 $51,516
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 521 $ 974
Accrued liabilities............................................................. 986 2,107
Income taxes payable............................................................ 220 430
Deferred revenue................................................................ 402 909
Note payable.................................................................... - 10,000
------- -------
Total current liabilities.............................................. 2,129 14,420
Lease inducements................................................................. 315 1,105
------- -------
Total liabilities...................................................... 2,444 15,525
------- -------
Commitments and contingencies (Note 11)
Shareholders' equity:
Common stock, no par value; shares authorized: unlimited;
shares issued and outstanding: 21,823,754 and 23,087,866...................... 67,840 80,859
Additional paid-in capital...................................................... 10,266 11,922
Accumulated other comprehensive loss............................................ (2,511) (2,497)
Deficit......................................................................... (36,424) (54,293)
------- -------
Total shareholders' equity............................................. 39,171 35,991
------- -------
Total liabilities and shareholders' equity........................................ $41,615 $51,516
======= =======
<FN>
See notes to consolidated financial statements.
</FN>
F-3
CERTICOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands of U.S. dollars, except per share data)
Years Ended April 30,
-------------------------------------
1998 1999 2000
---- ---- ----
Revenues........................................................................ $ 1,233 $ 4,042 $ 12,040
Costs and expenses:
Selling and marketing......................................................... 4,918 6,087 6,616
Research and development...................................................... 3,820 3,240 4,446
Depreciation and amortization................................................. 561 5,063 7,861
General and administrative.................................................... 2,762 4,277 7,099
Purchased in-process research and development................................. - 1,151 535
Systems integration........................................................... - 587 2,080
Cost of hardware sold......................................................... 349 125 579
-------- -------- --------
Total costs and expenses............................................. 12,410 20,530 29,216
-------- -------- --------
Operating loss.................................................................. (11,177) (16,488) (17,176)
Interest income (expense), net.................................................. 965 1,015 (359)
-------- -------- --------
Loss before income taxes........................................................ (10,212) (15,473) (17,535)
Income taxes.................................................................... 167 (92) 334
-------- -------- --------
Net loss........................................................................ (10,379) (15,381) (17,869)
Other comprehensive income (loss):
Unrealized gain (loss) on marketable securities, available for sale........... 16 (18) 14
Foreign currency translation adjustment....................................... (1,118) (1,052) -
-------- -------- --------
Comprehensive loss.............................................................. $(11,481) $(16,451) $(17,855)
======== ======== ========
Basic and diluted net loss per common share (1)................................. $ (0.57) $ (0.73) $ (0.80)
======== ======== ========
Shares used in computing basic and diluted net loss per share (1)............... 18,317 21,033 22,255
======== ======== ========
<FN>
(1) Share and per share amounts have been retroactively adjusted to reflect the two-for-one stock split which was
effective July 12, 2000
See notes to consolidated financial statements.
</FN>
F-4
CERTICOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years Ended April 30, 1998, 1999 and 2000
(In thousands of U.S. dollars, except number of shares)
Accumulated Total
Common Stock Additional Other Share-
---------------------- Paid-in Comprehensive holders'
Shares Amount Capital Deficit Loss Equity
------ ------ ------- ------- ---- ------
Balances, May 1, 1997.............................. 15,992,038 $ 23,103 $ 344 $ (10,664) $ (339) $12,444
Net loss........................................... - - - (10,379) - (10,379)
Exercise of employee options....................... 773,834 1,168 - - - 1,168
Exercise of underwriter options.................... 97,600 104 - - - 104
Private placements................................. 1,000,000 6,289 3,464 - - 9,753
Issue of common shares on exercise of
special warrants................................. 1,500,000 20,551 163 - - 20,714
Stock compensation................................. - - 333 - - 333
Net unrealized gain on marketable securities,
available for sale............................... - - - - 16 16
Foreign currency translation adjustment............ - - - - (1,118) (1,118)
---------- -------- -------- --------- -------- -------
Balances, April 30, 1998........................... 19,363,472 51,215 4,304 (21,043) (1,441) 33,035
Net loss........................................... - - - (15,381) - (15,381)
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 (36,424) (2,511) 39,171
Net loss........................................... - - - (17,869) - (17,869)
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 $ (54,293) $ (2,497) $35,991
========== ======== ======== ========= ======== =======
<FN>
See notes to consolidated financial statements.
</FN>
F-5
CERTICOM CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of U.S. dollars)
Years Ended April 30,
----------------------------------------
1998 1999 2000
---- ---- ----
Cash flows from operating activities:
Net loss................................................................... $(10,379) $(15,381) $(17,869)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................................ 561 959 1,555
Amortization of acquired intangibles..................................... - 4,104 6,306
Write-off of purchased in-process research and development............... - 1,151 535
Stock compensation....................................................... 333 311 318
Changes in assets and liabilities:
Accounts receivable and unbilled receivables........................... (294) (1,461) (3,901)
Inventories............................................................ 102 (174) 178
Investment tax credits receivable...................................... 7 266 -
Prepaid expenses and deposits.......................................... (522) 41 (1,102)
Accounts payable....................................................... (19) 32 453
Accrued liabilities.................................................... 205 513 1,084
Income taxes payable................................................... 143 77 210
Deferred revenue....................................................... 7 277 507
-------- -------- --------
Net cash used in operating activities............................. (9,586) (9,285) (11,726)
-------- -------- --------
Cash flows from investing activities:
Business acquisitions (net of cash acquired)............................... - (4,443) 182
Purchase of property and equipment......................................... (1,605) (1,722) (3,902)
Patents.................................................................... (190) (217) (355)
Purchase of marketable securities, available for sale...................... (117,017) (91,445) (4,855)
Sales and maturities of marketable securities, available for sale.......... 87,170 107,554 14,983
-------- -------- --------
Net cash (used in) provided by investing activities............... (31,642) 9,727 6,053
-------- -------- --------
Cash flows from financing activities:
Issuance of common shares.................................................. 31,739 266 3,971
Note payable............................................................... - - 10,000
Repurchase of debenture payable............................................ (23) (22) -
Redemption of mandatorily redeemable preferred shares...................... (219) (209) -
Lease inducements.......................................................... - 315 931
-------- -------- --------
Net cash provided by financing activities......................... 31,497 350 14,902
-------- -------- --------
Effect of exchange rates on cash............................................. (757) (20) (121)
-------- -------- --------
(Decrease) increase in cash and equivalents.................................. (10,758) 772 9,108
Cash and equivalents, beginning of year...................................... 11,386 628 1,400
-------- -------- --------
Cash and equivalents, end of year............................................ $ 628 $ 1,400 $ 10,508
======== ======== ========
Supplemental disclosure of cash flow information -
Cash paid for income taxes................................................. $ - $ 117 $ -
======== ======== ========
Noncash investing and financing activities -
Issue of common shares and options on business acquisitions................ $ - $ 22,010 $ 10,386
======== ======== ========
<FN>
See notes to consolidated financial statements.
</FN>
F-6
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1998, 1999 and 2000
1. Description of Business and Significant Accounting Policies
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 cryptographic
technology and security protocol licensing, cryptographic consulting,
information security architecture and design, and the sale of security
hardware products such as smart cards and PC cards.
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").
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.
Accounting 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.
Cash Equivalents - For the purposes of the consolidated statements of cash
flows, cash equivalents are defined as highly liquid investments with
maturities of three months or less.
Marketable Securities - The Company follows the provisions of SFAS No.
115, Accounting for Certain Investments in Debt and Equity Securities. The
Statement 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 shareholders' equity until realized.
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 are recorded at the lower of cost, on a first-in, first-out
basis, and net realizable value.
Property and Equipment is recorded at cost. Depreciation and amortization
is provided for 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
Lab equipment - Straight-line over three years
Leasehold improvements - Straight-line over the term of the lease
F-7
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1998, 1999 and 2000 (Continued)
Lease Inducements are amortized to income on a straight-line basis over
the term of the lease.
Patents are recorded at cost and are amortized over three years on a
straight-line basis.
Acquired Intangibles represent customer lists, trademarks, workforce, in
process research and development, purchased technology and goodwill
arising on business acquisitions and are being 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.
Long-Lived Assets - The Company follows the provisions of SFAS No. 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.
Revenue Recognition and Deferred Revenues - The Company recognizes revenue
in accordance with applicable accounting regulations, including American
Institute of Certified Public Accountants (AICPA) Statement of Position
(SOP) 97-2, Software Revenue Recognition, as amended.
Revenue from sales of products is recognized when a contract has been
executed, the product has been shipped, the sales price is fixed and
determinable, and collection of the resulting receivable is probable.
Revenue earned on software arrangements involving multiple elements (i.e.,
software products, upgrades/enhancements, post contract customer support,
installation, training etc.) is allocated to each element based on vendor
specific objective evidence of relative fair value of the elements. The
revenue allocated to post contract support is recognized ratably over the
term of the support and revenue allocated to service elements (such as
training and installation) is recognized as the services are performed.
When arrangements contain multiple elements and vendor specific objective
evidence exists for all undelivered elements, the Company recognizes
revenue for the delivered elements using the residual method. For
arrangements containing multiple elements wherein vendor specific
objective evidence does not exist for all undelivered elements, revenue
for the delivered and undelivered elements is deferred until vendor
specific objective evidence exists or all elements have been delivered.
Research and Product Development - The Company expenses all research and
development costs as they are incurred. Scientific research tax credits
are recognized at the time the related costs are incurred and recovery is
reasonably assured.
Stock-Based Compensation - The Company follows the provisions of APB
Opinion No. 25, which requires compensation cost for stock-based employee
compensation plans to be measured based on any difference on the grant
date between the quoted market price of the 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. The adjustment
resulting from translating the financial statements is reflected as a
component of comprehensive earnings.
F-8
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1998, 1999 and 2000 (Continued)
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 as well as unrealized foreign exchange gains and losses
are included in income in the year in which they occur.
Income Taxes - The Company follows the provisions of SFAS No. 109,
Accounting for Income Taxes, which requires an asset and liability
approach to financial accounting for income taxes.
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 antidilutive.
Fair Value of Financial Instruments - The carrying value of financial
assets and liabilities approximate their carrying value, 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 consists 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, 2000, one customer
accounted for 17% of total accounts receivable (1999 - nil).
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 June 1998, the Financial Accounting
Standards Board (FASB) issued SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities ("SFAS 133"). SFAS 133 establishes
accounting and reporting standards for derivative instruments, including
certain derivative instruments embedded in other contracts and for hedging
activities. SFAS 133 requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and
measure those instruments at fair value. The impact of adopting SFAS 133,
which is effective for all fiscal quarters of the Company's fiscal year
beginning May 1, 2001, has not been determined.
F-9
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1998, 1999 and 2000 (Continued)
In March 2000, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 101A, Amendment: Revenue Recognition in Financial
Statements. SAB 101A amends Staff Accounting Bulletin No. 101 (SAB 101),
Revenue Recognition in Financial Statements, to defer the implementation
date of SAB 101 for registrants with fiscal years that begin between
December 16, 1999 and March 15, 2000. SAB 101 provides guidance on the
recognition, presentation and disclosure of revenue in financial
statements of all public registrants. Changes in the Company's revenue
recognition policy resulting from the interpretation of SAB 101 would be
reported as a change in accounting principle. The change in the revenue
recognition policy could result in a cumulative adjustment in the quarter
the Company adopts SAB 101. Although the Company has not fully assessed
the implications of SAB 101, management does not believe the adoption of
this statement will have a significant impact on the Company's
consolidated financial position, results of operations or cash flows.
In March 2000, the FASB issued Interpretation No. 44, Accounting for
Certain Transactions involving Stock Compensation, an interpretation of
APB Opinion No. 25, which, among other things, would require
variable-award accounting for repriced options from the date the option is
repriced until the date of exercise. This interpretation is effective July
1, 2000, but certain conclusions in this Interpretation cover specific
events that occur after either December 15, 1998, or January 12, 2000. On
March 17, 1999, the Company repriced certain options to purchase 765,828
shares of common stock. Beginning July 1, 2000, these options will be
subject to variable award accounting under the Interpretation.
Reclassifications - Certain reclassifications have been made in the 1998
and 1999 financial statement presentation to conform to the 2000
presentation. These reclassifications had no effect on net loss or
stockholders' equity.
2. Acquisitions
During the years ended April 30, 2000 and 1999 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.
F-10
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1998, 1999 and 2000 (Continued)
Acquisition of Consensus Development Corporation
On July 29, 1998, Certicom acquired all of the outstanding common shares
of Consensus Development Company, a corporation based in Berkeley,
California. Consensus licenses SSL Plus, a developer's toolkit for
integrating security for the Secure Socket Layer (SSL) security protocol.
Details of the consideration and the fair values of the net assets
acquired are as follows (U.S. dollars in thousands):
Net assets acquired:
Noncash working capital (net of cash of $19).................................. $ (114)
Property and equipment........................................................ 178
Noncurrent liabilities........................................................ (18)
Purchased in-process research and development charged to operations........... 1,151
Purchased technology.......................................................... 4,925
Other acquired intangibles.................................................... 1,116
Goodwill...................................................................... 17,299
--------
Total net assets acquired....................................................... $ 24,537
========
Consideration:
Cash.......................................................................... $ 3,032
Common shares (1,894,622 shares issued)....................................... 14,770
Options to acquire 799,818 common shares...................................... 5,919
Acquisition costs............................................................. 816
--------
Total consideration............................................................. $ 24,537
========
The valuations of purchased in-process research and development, other
acquired intangibles and purchased technology were based upon independent
appraisals received from third parties. Based upon the valuation,
management estimates that $1,151,000 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 on-going research projects for which technological
feasibility had not been achieved and assessing the anticipated date of
completion of the research and development effort. The value of the
in-process research and development was determined by estimating the costs
to develop the in-process research and development into commercially
feasible products, and estimating the net present value of cash flows
expected to result from the product. 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 resulting
net cash flows only from the percentage of research and development
efforts complete at the date of acquisition were used to determine the
value of the in-process research and development. 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.
Other acquired intangibles include the fair value of trademarks, customer
base and workforce.
F-11
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1998, 1999 and 2000 (Continued)
The value assigned to purchased technology was determined by discounting
the expected future cash flows of the existing developed technologies,
taking into account the characteristics and applications of the product,
the size of existing markets, growth rates of existing and future markets
as well as an evaluation of past and anticipated product-life cycles.
Acquisition of Uptronics, Inc.
On November 24, 1998, Certicom acquired all of the outstanding common
shares of Uptronics, Inc., a corporation based in Sunnyvale, California.
Uptronics, Inc. provides cryptographic consulting and security systems
integration services to OEMs. Details of the consideration and the fair
values of the net assets acquired are as follows (U.S. dollars in
thousands):
Net assets acquired:
Noncash working capital (net of cash of $32).......................... $ 64
Property and equipment................................................ 28
Other acquired intangibles............................................ 556
Goodwill.............................................................. 1,318
------
Total net assets acquired............................................... $1,966
======
Consideration:
Cash.................................................................. $ 476
Common shares (431,344 shares issued)................................. 1,321
Acquisition costs..................................................... 169
------
Total consideration..................................................... $1,966
======
Acquired intangibles include the fair value of workforce and customer
base.
F-12
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1998, 1999 and 2000 (Continued)
Acquisition of Trustpoint
On January 26, 2000, Certicom 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 Original Equipment
Manufacturers (OEMs) 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 (U.S. dollars in thousands):
Net assets acquired
Noncash working capital (net of cash of $302)........................ $ (34)
Property and equipment............................................... 29
Purchased in-process research and development charged to operations.. 535
Other acquired intangibles........................................... 343
Goodwill............................................................. 9,633
-------
Total net assets acquired.............................................. $10,506
=======
Consideration:
Common shares (201,120 shares issued)................................ $ 7,306
Options to acquire 98,884 common shares.............................. 3,080
Acquisition costs.................................................... 120
-------
Total consideration.................................................... $10,506
=======
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
estimates 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 value of the in-process research and
development was determined by estimating the costs to develop the
in-process research and development into commercially feasible products,
and estimating the net present value of cash flows expected to result from
the product. 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 resulting net cash flows only from the
percentage of research and development efforts complete at the date of
acquisition were used to determine the value of the in-process research
and development. 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.
Acquired intangibles include the fair value of workforce, customer base,
and trademarks.
Unaudited Pro Forma Financial Information
The following table represents unaudited consolidated pro forma
information as if the acquisitions of Consensus and Trustpoint 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
F-13
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1998, 1999 and 2000 (Continued)
would have occurred had the acquisitions been in effect for the entire
specified periods. The pro forma combined results include the effects of
the purchase price allocation on amortization of acquired intangibles (in
thousands of U.S. dollars, except per share data).
Years Ended April 30,
----------------------
1999 2000
---- ----
Pro forma revenue ....................................... $ 4,932 $ 12,764
Pro forma net loss ...................................... $(19,663) $(19,456)
Pro forma net loss per share - basic and diluted ........ $ (0.89) $ (0.87)
Number of shares used in calculation - basic and diluted. 22,034 22,404
Unaudited pro forma consolidated results after giving effect to the
acquisition of Uptronics, Inc. would not have been materially different
from the reported amount for either year.
3. Marketable Securities, Available for Sale
The following table summarizes the Company's investment in marketable
securities (in thousands of U.S. dollars):
April 30, 1999
-----------------------------------------------
Gross Gross
Carrying Unrealized Unrealized Fair
Value Gains Losses Value
----- ----- ------ -----
Bonds......................... $12,561 $ 32 $ - $12,593
Other......................... 119 - 34 85
------- ---- ---- -------
$12,680 $ 32 $ 34 $12,678
======= ==== ==== =======
April 30, 2000
-------------------------------------
Gross
Carrying Unrealized Fair
Value Gains Value
----- ----- -----
Bonds ............................. $1,394 $ 4 $1,398
Commercial paper .................. 1,131 8 1,139
Other ............................. 13 - 13
------ ------ ------
$2,538 $ 12 $2,550
====== ====== ======
F-14
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1998, 1999 and 2000 (Continued)
4. Property and Equipment
Property and equipment consist of the following (U.S. dollars
in thousands):
April 30,
----------------------
1999 2000
---- ----
Furniture and fixtures ............................. $ 767 $ 724
Computer equipment ................................. 2,087 2,717
Software ........................................... 325 1,649
Lab equipment ...................................... 24 24
Leasehold improvements ............................. 1,549 3,532
------- -------
Total cost ......................................... 4,752 8,646
Accumulated depreciation and amortization .......... (1,915) (3,433)
------- -------
$ 2,837 $ 5,213
======= =======
5. Note Payable
On April 27, 2000, the Company entered into an agreement with Sand Hill
Capital II, LP ("Sand Hill") for a line of credit of $15,000,000 bearing
interest at 12%. At year end, the Company had borrowed $10,000,000 against
this line. In connection with the financing, the Company also issued
30,000 share purchase warrants which entitle Sand Hill to purchase 30,000
common shares of the Company for Cdn$38.13 until April 27, 2005. The
amount borrowed was repaid in May, 2000, and the line of credit facility
was terminated.
6. Common Shares
Authorized capital
As of April 30, 2000, the Company's authorized share capital consists of
an:
Unlimited number of common shares, no par value
Unlimited number of preference shares
In August 1999, the articles 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.
F-15
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1998, 1999 and 2000 (Continued)
7. Stock Incentive Plans
Employee Stock Option Plans
The Company's 1997 Stock Option Plan (the "New 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 New Plan may not exceed
6,000,000. Subject to the discretion of the Board or an option committee,
options granted under the New Plan have a term of 5 years from the date of
grant and vest as to 25% of the common shares subject to such option one
year after the date of the grant of the option, and a further 2.0833% of
the common shares subject to such option 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.
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 as to 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. In connection with the listing of its common shares on The
Toronto Stock Exchange on June 17, 1997, the Company agreed with such
stock exchange that it would not grant any further options under the
original plan.
On April 27, 2000, the Company's shareholders approved a new stock option
plan (the "U.S. Plan") for employees who are residents of the United
States. The total number of common shares reserved for issuance under the
U.S. Plan may not exceed 2,000,000. Subject to the discretion of the Board
or an option committee, options granted under the U.S. Plan have a term of
five years from the date of grant and vest as to 25% of the common shares
subject to such option one year after the date of the grant of the option,
and a further 2.0833% of the common shares subject to such option 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.
F-16
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1998, 1999 and 2000 (Continued)
The following table summarizes information about stock options outstanding
at April 30, 2000:
Options Outstanding
-------------------------------------------- Options Vested
Weighted -----------------------------
Range Average Weighted Weighted
of Remaining Average Average
Exercise Number Contractual Exercise Number Exercise
Prices Outstanding Life (Years) Price Exercisable Price
------ ----------- ------------ ----- ----------- -----
$ 1.86 - $ 3.38 850,172 3.44 $ 3.00 305,508 $ 2.88
$ 3.39 - $ 5.07 2,142,180 2.96 4.70 608,750 4.56
$ 5.08 - $ 6.76 593,682 3.12 5.64 300,718 5.53
$ 6.77 - $33.78 814,400 4.69 17.36 - -
$33.79 - $78.03 754,866 4.80 44.51 5,000 34.16
--------- ------ --------- ------
5,155,300 3.60 $12.36 1,219,976 $ 4.50
========= ====== ========= ======
Changes for the employee stock option plans during the years ended April
30, 2000, 1999 and 1998 were as follows:
Years Ended April 30,
-----------------------------------------------------------------
1998 1999 2000
--------------------- ---------------------- --------------------
Weighted Weighted Weighted
Number Average Number Average Number Average
of Exercise of Exercise of Exercise
Shares Price Shares Price Shares Price
------ ----- ------ ------ ------ -----
Options outstanding, beginning of year ....... 2,637,030 $ 6.30 3,512,562 $ 7.11 3,603,198 $ 4.46
Options granted .............................. 1,899,880 11.24 1,681,300 3.89 2,783,866 19.37
Options exercised ............................ (774,034) (1.49) (96,678) (2.56) (850,000) (4.48)
Options canceled ............................. (250,314) (9.34) (770,660) (7.48) (381,764) (5.31)
Options canceled for reissuance .............. - - (2,843,584) (9.74) - -
Options reissued ............................. - - 2,120,258 5.06 - -
--------- ------ ---------- ------ ---------- ------
Options outstanding, end of year ............. 3,512,562 $ 7.11 3,603,198 $ 4.46 5,155,300 $12.36
========= ====== ========== ====== ========== ======
Options exercisable, end of year ............. 526,222 $ 7.39 376,618 $ 4.26 1,219,976 $ 4.50
========= ====== ========== ====== ========== ======
Weighted average fair value of options granted
during the year ............................ $ 5.40 $ 1.91 $ 19.71
========= ========== ===========
Accounting for Stock-Based Compensation
As a result of the Company applying APB No. 25, SFAS No. 123, Accounting
for Stock-Based Compensation, requires disclosure of 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.
F-17
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1998, 1999 and 2000 (Continued)
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 amounts):
Years Ended April 30,
----------------------------------------
1998 1999 2000
---- ---- ----
Net loss:
As reported.......................................... $(10,379) $(15,381) $(17,869)
Pro forma............................................ $(15,112) $(22,395) $(27,913)
Basic and diluted net loss per common share:
As reported.......................................... $ (0.57) $ (0.73) $ (0.80)
Pro forma............................................ $ (0.83) $ (1.07) $ (1.25)
As SFAS No. 123 has not been applied to options granted prior to May 1,
1995, the resulting pro forma compensation cost may not be representative
of that to be expected in future years.
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,
----------------------------------------
1998 1999 2000
---- ---- ----
Expected life (years).................................. 4 4 4
Risk free interest rate................................ 4.99% 5.08% 6.02%
Expected volatility.................................... 60.00% 60.00% 91.00%
Dividend yield......................................... - - -
During the year ended April 30, 1997 certain option grants were made at
prices significantly below the market price. The excess of market price
over the exercise price is being amortized over the vesting period of the
related options.
Conversion of Stock Options
As described in Note 2, the Company assumed certain options in conjunction
with the acquisition of Consensus and converted these to 799,818 options
of the Company at a weighted average exercise price of $0.42 per share.
During the years ended April 30, 2000 and 1999, 204,072 and 49,788 of such
options were exercised. The amounts relating to options exercised during
the year were transferred from additional paid-in capital to common
shares.
Stock Option Repricing
On March 17, 1999, the Board of Directors approved the exchange of
1,106,240 options to acquire common shares for options to acquire an
aggregate of 382,914 common shares having a lower exercise price of $5.44
per share equal to the quoted market price of the shares. All of these
options were held by directors and/or senior officers of the Company.
Beginning July 1, 2000, these options will be subject to variable-award
accounting under FASB Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, an Interpretation of APB
Opinion No. 25.
F-18
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1998, 1999 and 2000 (Continued)
On August 17, 1998, the Board of Directors approved the exchange of
1,737,344 options to acquire common shares for the same number of options
having a lower exercise price of $4.98 per share equal to the quoted
market price of the shares. All of these options were held by employees
(excluding directors and/or senior officers of the Company).
8. Income Taxes
The tax effect of significant temporary differences representing deferred
tax assets is as follows (in thousands of U.S. dollars):
Years Ended April 30,
------------------------------------------
1998 1999 2000
---- ---- ----
Deferred tax assets:
Operating loss carryforwards......................... $ 7,650 $ 11,729 $ 14,442
Research and development tax credit carryforwards.... 450 647 638
Research expenditures deducted for accounting but
capitalized for tax................................ 22 423 579
Provincial superallowance............................ 227 270 266
Fixed assets......................................... (160) 182 653
Lease inducement..................................... - - 164
Other................................................ 226 166 279
------- -------- --------
Net deferred tax assets................................ 8,415 13,417 17,021
Valuation allowance.................................... (8,415) (13,417) (17,021)
------- -------- --------
$ - $ - $ -
======= ======== ========
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,
------------------------------------------
1998 1999 2000
---- ---- ----
Statutory rate......................................... 44.6% 44.6% 44.6%
Permanent differences.................................. (0.4) (0.2) (0.5)
Net operating loss carryforwards....................... (44.2) (44.4) (44.1)
Foreign taxes.......................................... 1.6 0.7 1.9
Scientific research investment tax credit.............. - (1.3) -
------- -------- --------
Effective tax rate..................................... 1.6% (0.6)% 1.9%
======= ======== ========
The Company has certain non-capital losses of $32,366,000 and investment
tax credits of $623,000 available in Canada, which can be applied against
future taxable income and future taxes payable, respectively, and which
expire from 2001 to 2009.
In addition, at April 30, 2000, the Company had an unclaimed scientific
and research and experimental development expenditure pool balance of
approximately $1,566,000 which can be applied against future taxable
income.
F-19
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1998, 1999 and 2000 (Continued)
9. Segmented 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,
----------------------------------------
1998 1999 2000
---- ---- ----
Software license revenue............................... $ 536 $2,665 $ 9,259
Consulting revenue..................................... 71 971 1,988
Hardware revenue....................................... 626 406 793
------ ------ -------
$1,233 $4,042 $12,040
====== ====== =======
Information about the Company's geographic operations is given below (in
thousands of U.S. dollars):
Years Ended April 30,
----------------------------------------
1998 1999 2000
---- ---- ----
Sales:
United States........................................ $ 562 $3,072 $10,971
Canada............................................... 623 588 494
Europe and other..................................... 48 382 575
------ ------ -------
$1,233 $4,042 $12,040
====== ====== =======
Years Ended April 30,
1999 2000
---- ----
Total long-lived assets:
United States....................................................... $22,761 $27,222
Canada.............................................................. 1,663 3,301
------- -------
$24,424 $30,523
======= =======
F-20
CERTICOM CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended April 30, 1998, 1999 and 2000 (Continued)
11. Commitments and Contingencies
At April 30, 2000 the Company has operating leases for office and research
premises and furniture and equipment with the following minimum annual
rental payments (in thousands of U.S. dollars):
Years Ending
April 30,
---------
2001.......................................................... $ 2,124
2002.......................................................... 2,417
2003.......................................................... 2,330
2004.......................................................... 2,370
2005.......................................................... 2,390
Thereafter.......................................................... 5,316
-------
$16,947
=======
Rental expense under operating leases amounted to $208,000 in 1998,
$438,000 in 1999 and $1,520,000 in 2000.
The Company has an outstanding letter of guarantee of approximately
$1,028,000 in respect of a lease for its office premises.
12. Subsequent Event
On May 3, 2000, the Company completed a public offering of 2,500,000
common shares in the United States of America and Canada for net proceeds
of $51,500,000.
* * * * *
F-21
Schedule II--Valuation and Qualifying Accounts and Reserves
For the years ended April 30, 1998, 1999 and 2000 (U.S. dollars in thousands)
- --------------------------------- ------------------ ------------------- ----------------- ---------------
Balance at Additions Charged
beginning of to Costs and Deductions Balance at
Descriptions period Expenses write-offs (1) end of period
- --------------------------------- ------------------ ------------------- ----------------- ---------------
Year end 4/30, 1998 7 7 -- 14
- --------------------------------- ------------------ ------------------- ----------------- ---------------
Year end 4/30, 1999 14 41 42 13
- --------------------------------- ------------------ ------------------- ----------------- ---------------
Year end 4/30, 2000 14 147 -- 161
- --------------------------------- ------------------ ------------------- ----------------- ---------------
<FN>
(1) Uncollectible accounts written off, net of recoveries
</FN>