-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, SvUq5HyBlfZ9XOaWZjOXznzQBVvKuGJiXRIedkTKBpoeknFxgxiHrDfm2mX3itnA 894CJohN/0X0pChDwWc2sQ== /in/edgar/work/20000731/0000950005-00-000834/0000950005-00-000834.txt : 20000921 0000950005-00-000834.hdr.sgml : 20000921 ACCESSION NUMBER: 0000950005-00-000834 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 13 CONFORMED PERIOD OF REPORT: 20000430 FILED AS OF DATE: 20000731 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CERTICOM CORP CENTRAL INDEX KEY: 0001075710 STANDARD INDUSTRIAL CLASSIFICATION: [7371 ] FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-15010 FILM NUMBER: 682593 BUSINESS ADDRESS: STREET 1: 200 MATHESON BOULEVARD WEST CITY: MISSISSAUGA STATE: A6 BUSINESS PHONE: 9055074220 10-K 1 0001.txt FORM 10-K ================================================================================ 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 -------------- 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) -------------- 25801 Industrial Boulevard, Hayward, CA 94545 (Address of principal executive offices) Registrant's telephone number, including area code: (510) 780-5400 -------------- 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. ================================================================================ 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. - i - 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 - --------------------------------------- (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. - 1 - 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. - 2 - 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. - 3 - 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 - 4 - 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. - 5 - 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; - 6 - 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. - 7 - 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 - 8 - 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: - 9 - 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 - 11 - 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. - 12 - 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. - 13 - 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 - --------------------------------------- (1) Member of the Audit Committee (2) Member of the Compensation Committee as of May 2000
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 -- -- -- -- 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 $1,528,600. (2) Richard P. Dalmazzi was appointed our President, Chief Executive Officer and Director on November 30, 1999. (3) Philip C. Deck resigned as our Chief Executive Officer on November 30, 1999. (4) Bruce A. MacInnis resigned as our Vice President Finance & Administration, Chief Financial Officer and Secretary in February, 2000, and was replaced by Richard D. Brounstein.
- 40 - Option Grants During the Fiscal Year Ended April 30, 2000 The following table sets forth information concerning options which were granted to each of the Named Executive Officers during the fiscal year ended April 30, 2000.
Potential Realizable % of Total Value of Assumed Securities Options Annual Rate of Stock Under Granted to Exercise or Price Appreciation for Options Employees in Base Price Option Term (2)(3) Granted Fiscal ($/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 (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. $1.00.
Aggregated Option Exercises During the Fiscal Year Ended April 30, 2000 and Fiscal Year-End Option Values The following table sets forth information concerning the exercise of options during the fiscal year ended April 30, 2000 by each of the Named Executive Officers and the fiscal year-end value of unexercised options and SARs, on an aggregated basis.
Number of Shares Value Number of Shares Value of Unexercised In-The- Acquired on Realized Underlying Unexercised Money Options At April 30, Name Exercise ($) (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 (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.
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% - -------------------- (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.
- 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 ======= ======= See notes to consolidated financial statements.
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 ======== ======== ======== (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.
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 ========== ======== ======== ========= ======== ======= See notes to consolidated financial statements.
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 ======== ======== ======== See notes to consolidated financial statements.
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 - --------------------------------- ------------------ ------------------- ----------------- --------------- (1) Uncollectible accounts written off, net of recoveries
EX-3.1 2 0002.txt RESTATED ARTICLES OF CONTINUANCE BUSINESS CORPORATIONS ACT (Section 174) RESTATED ARTICLES OF CONTINUANCE Form 6-01 - -------------------------------------------------------------------------------- 1. Name of Corporation: CERTICOM CORP. - -------------------------------------------------------------------------------- 2. The classes and any maximum number of shares that the corporation is authorized to issue: One class of an unlimited number of shares designated as Common Shares without par or nominal value and one class of an unlimited number of shares designated as Preference Shares without par or nominal value, issuable in series. The rights, privileges, restrictions and conditions attaching to the shares are as set out in Schedule A attached hereto. - -------------------------------------------------------------------------------- 3. Restrictions if any on share transfers: None - -------------------------------------------------------------------------------- 4. Number (or minimum or maximum number) of directors: Not less than 3 and not more than 11, with such number of directors within such range to be determined by the directors of the Corporation. - -------------------------------------------------------------------------------- 5. Restrictions if any on businesses the corporation may carry on: None - -------------------------------------------------------------------------------- 6. Other provisions if any: (1) The directors of the Corporation may, between annual general meetings of the Corporation, appoint one or more additional directors to serve until the next annual general meeting but the number of additional directors shall not at any time exceed one third of the number of directors who held office at the expiration of the last annual general meeting, and in no event shall the total number of directors exceed the maximum number of directors fixed pursuant to paragraph 4 of these Restated Articles of Continuance. (2) Meetings of shareholders may be held at such place or places as the directors in their absolute discretion may determine from time to time. - 2 - (3) The shareholders of the Corporation shall not be entitled to cumulative voting on any class or series of shares issued by the Corporation. - ------------------------------------------------------------------------------ THE FOREGOING RESTATED ARTICLES OF CONTINUANCE CORRECTLY SET OUT WITHOUT SUBSTANTIVE CHANGE THE CORRESPONDING PROVISIONS OF THE ARTICLES OF CONTINUANCE AS AMENDED AND SUPERSEDE THE ORIGINAL ARTICLES OF CONTINUANCE . - -------------------------------------------------------------------------------- 7. Date Signature Title Vice-President, Finance & Administration, November 15, 1999 Bruce A. MacInnis Chief Financial Officer and Secretary - ------------------------------------------------------------------------------ SCHEDULE "A" 1. The rights, privileges, restrictions and conditions attaching to the Common Shares are as follows: (a) Dividends The holders of the Common Shares, subject to the rights of the holders of the Preference Shares, but in priority to all other shares ranking junior to the Common Shares shall be entitled to receive and the Corporation shall pay thereon, dividends as and when declared by the Board of Directors of the Corporation out of the assets of the Corporation properly applicable to the payment of dividends. (b) Voting Rights The holders of the Common Shares shall be entitled to receive notice of and to attend any meeting of the shareholders of the Corporation and shall be entitled to one vote in respect to each Common Share held at such meetings, except meetings at which the holders of a particular class of shares other than the Common Shares are entitled to vote separately as a class. (c) Liquidation, Dissolution or Winding-up In the event of the liquidation, dissolution or winding-up of the Corporation or other distribution of property of the Corporation among shareholders for the purposes of winding-up its affairs, the holders of the Common Shares shall, subject to the rights of the holders of the Preference Shares, be entitled to receive the assets and property of the Corporation. 2. The rights, privileges, restrictions and conditions attaching to the Preference Shares are as follows: (a) Each series of Preference Shares shall be without par value, shall consist of such number of shares as shall before issuance thereof be fixed by the directors who shall at the same time determine the designation, rights, privileges, restrictions and conditions attaching to the Preference Shares of each such series including, without limiting the generality of the foregoing, the rate of preferential dividends, whether dividends shall be cumulative or non-cumulative, the dates of payment thereof, whether the shares shall be redeemable and if so the redemption price and the terms and conditions of redemption, any voting rights, any conversion rights, any sinking fund, purchase fund or other provisions attaching thereto, and the amount payable on return of capital in the event of the liquidation, dissolution or winding up of the Corporation. (b) The Preference Shares of any series shall be entitled to such preferences over the Common Shares and any other shares ranking junior to the Preference Shares with respect to the payment of dividends and all amounts payable on return of capital in the event of the liquidation, dissolution or winding up of the Corporation as may be determined by the directors when authorizing the respective series. (c) The holders of the Preference Shares shall not be entitled to receive notice of or to attend or to vote at any meeting of shareholders of the Corporation provided, however, that notwithstanding the foregoing provisions of this paragraph: (i) the holders of any series of the Preference Shares shall be entitled to receive notice of and to vote at meetings of shareholders of the Corporation to the extent specifically provided in the rights and privileges to be attached to such series, and (ii) the holders of the Preference Shares or of any series thereof shall be entitled to vote separately as a class or as a series in respect of any matter for which a separate vote is specifically provided in the Business Corporations Act (Yukon) or any successor statute thereto. BUSINESS CORPORATIONS ACT (Section 190) ARTICLES OF CONTINUANCE Form 3-01 - -------------------------------------------------------------------------------- 1. Name of Corporation: CERTICOM CORP. - -------------------------------------------------------------------------------- 2. The classes and any maximum number of shares that the corporation is authorized to issue: One class of an unlimited number of shares designated as Common Shares without par or nominal value and one class of an unlimited number of shares designated as Preferred Shares without par or nominal value. The rights, privileges, restrictions and conditions attaching to the shares are as set out in Schedule A attached hereto. - -------------------------------------------------------------------------------- 3. Restrictions if any on share transfers: None - -------------------------------------------------------------------------------- 4. Number (or minimum or maximum number) of directors: Not less than 3 and not more than 11, with such number of directors within such range to be determined by the directors of the Corporation. - -------------------------------------------------------------------------------- 5. Restrictions if any on businesses the corporation may carry on: None - -------------------------------------------------------------------------------- 6. If change of name effected, previous name: Not applicable - -------------------------------------------------------------------------------- 7. Details of incorporation: The Corporation was incorporated in Ontario on March 20, 1985 under the name Cryptech Systems Inc. The name of Cryptech Systems Inc. was changed to Certicom Corp. on October 13, 1995. - ------------------------------------------------------------------------------ 8. Other provisions if any: (1) The directors of the Corporation may, between annual general meetings of the Corporation, appoint one or more additional directors to serve until the next annual general meeting but the number of additional directors shall not at any time exceed one third of the number of directors who held office at the expiration of the last annual general meeting, and in no event shall the total number of directors exceed the maximum number of directors fixed pursuant to paragraph 4 of these Articles of Continuance. - 2 - (2) Meetings of shareholders may be held at such place or places as the directors in their absolute discretion may determine from time to time. (3) The shareholders of the Corporation shall not be entitled to cumulative voting on any class or series of shares issued by the Corporation. - -------------------------------------------------------------------------------- 9. Date Signature Title Vice-President, Finance & Administration, August 6, 1999 Bruce A. MacInnis Chief Financial Officer and Secretary - -------------------------------------------------------------------------------- SCHEDULE "A" 1. The rights, privileges, restrictions and conditions attaching to the Common Shares are as follows: (a) Dividends The holders of the Common Shares, subject to the rights of the holders of the Preferred Shares, but in priority to all other shares ranking junior to the Common Shares shall be entitled to receive and the Corporation shall pay thereon, dividends as and when declared by the Board of Directors of the Corporation out of the assets of the Corporation properly applicable to the payment of dividends. (b) Voting Rights The holders of the Common Shares shall be entitled to receive notice of and to attend any meeting of the shareholders of the Corporation and shall be entitled to one vote in respect to each Common Share held at such meetings, except meetings at which the holders of a particular class of shares other than the Common Shares are entitled to vote separately as a class. (c) Liquidation, Dissolution or Winding-up In the event of the liquidation, dissolution or winding-up of the Corporation or other distribution of property of the Corporation among shareholders for the purposes of winding-up its affairs, the holders of the Common Shares shall, subject to the rights of the holders of the Preferred Shares, be entitled to receive the assets and property of the Corporation. 2. The rights, privileges, restrictions and conditions attaching to the Preferred Shares shall be as follows: (a) Cumulative Dividends: The holders of the Preferred Shares, in priority to the holders of the Common Shares, shall be entitled to receive and the Corporation shall pay thereon, as and when declared by the board of directors of the Corporation out of the assets of the Corporation properly applicable to the payment of dividends, fixed preferential cumulative cash dividends at the rate of $0.0625 per Preferred Share per calendar quarter. Such dividends shall accrue on a per diem basis and be cumulative from the date of issue of the Preferred Shares and are payable on March 31, June 30, September 30 and December 31 in each year. If on any dividend payment date the dividend payable on such date is not paid in full on all the Preferred Shares then issued and outstanding, such dividend, or the unpaid part thereof, shall be paid at a subsequent date or dates in priority to dividends on the Common Shares. The holders of Preferred Shares shall not be entitled to any dividends other than or in excess of the preferential cumulative cash dividends hereinbefore provided. - 2 - (b) Dividends Preferential: Except with the consent in writing of the holders of all the Preferred Shares outstanding, no dividend shall at any time be declared and paid on or set apart for payment on the Common Shares in any financial year unless and until (i) the accrued preferential cumulative cash dividends on all the Preferred Shares outstanding have been declared and paid or set apart for payment, and (ii) the Corporation shall have satisfied any request for the redemption of Preferred Shares pursuant to clause 2(d). (c) Participation upon Liquidation, Dissolution or Winding-Up: In the event of the liquidation, dissolution or winding-up of the Corporation or other distribution of assets of the Corporation among its shareholders for the purpose of winding-up its affairs, the holders of the Preferred Shares shall be entitled to receive from the assets of the Corporation the sum of $10.00 per Preferred Share held by them respectively plus all unpaid dividends which shall have accrued thereon and which shall be treated as accruing to, but not including, the date of such distribution before any amount shall be paid or any assets of the Corporation distributed to the holders of any other class of shares of the Corporation. After payment to the holders of the Preferred Shares of the amount so payable to them as above provided they shall not be entitled to share in any further distribution of the assets of the Corporation. (d) Retraction at Option of Holder: The holders of Preferred Shares shall be entitled to require the Corporation to redeem, subject to the requirements of the Business Corporations Act (Yukon) as now enacted or as the same may from time to time be amended, re-enacted or replaced, 33*% of the aggregate issued and outstanding Preferred Shares on February 28, 1997 on and after each of March 31, 1997, March 31, 1998 and March 31, 1999 (the "Retraction Date") as provided herein by tendering to the Corporation at its registered office a share certificate or certificates representing the Preferred Shares which the holders desire to have the Corporation redeem together with a request in writing (the "Request") specifying the number of Preferred Shares that the holder desires to have redeemed by the Corporation. The Request may be given to the Corporation not more than 30 days prior to a Retraction Date and at any time thereafter up to March 31, 2000. If at any time the Corporation receives Requests to redeem more Preferred Shares than it is required to redeem hereunder, Preferred Shares shall be redeemed pro rata as between the persons from whom the Corporation has received such Requests. Upon receipt of a share certificate or certificates representing the Preferred Shares which the holder desires to have the Corporation redeem together with the Request the Corporation shall on the later of the Retraction Date and 10 days after its receipt of the Request redeem such Preferred Shares by paying to such holder an amount equal to $10.00 plus all unpaid dividends which shall have accrued thereon and which shall be treated as accruing to, but not including, the date of such redemption, the whole constituting and being hereunder referred to as the ("Retraction Amount"), for each such Preferred Share being redeemed. Such payment shall be made by certified cheque payable at par at any branch of the Corporation's bankers for the time being in Canada (or, with the - 3 - consent of the holder, by any other means of immediately available funds). If a part only of the shares represented by any certificate are redeemed a new certificate for the balance shall be issued at the expense of the Corporation. The said Preferred Shares shall be redeemed on the later of the Retraction Date and 10 days after receipt of the Request and from and after such date the holder of such shares shall cease to be entitled to dividends and shall not be entitled to exercise any of the rights of a holder of Preferred Shares in respect thereof unless payment of the Retraction Amount is not made on the later of the Retraction Date and 10 days after receipt of the Request, in which event the rights of the holder of the said Preferred Shares shall remain unaffected. (e) Idem: If a holder of Preferred Shares shall have required the Corporation to redeem all or any of the Preferred Shares held by such holder and the Corporation cannot redeem the said Preferred Shares on the Retraction Date without thereby contravening the Business Corporations Act (Yukon) as now enacted or as the same may from time to time be amended, re-enacted or replaced, the Corporation shall redeem the said Preferred Shares, or at the option of the holder as many as then legally permitted, and the balance as soon as it is lawfully able to do so and until all the said Preferred Shares are so redeemed the rights of the holder thereof shall remain unaffected, provided that the said holder may at any time by notice in writing tendered to the Corporation at its registered office withdraw the request that the said Preferred Shares be redeemed in which event the Corporation shall return to the said holder the share certificate or certificates representing the said Preferred Shares which had been tendered to the Corporation. (f) Redemption by Corporation: The Corporation may, upon giving notice as hereinafter provided, redeem on each of March 31, 1997, March 31, 1998 and March 31, 1999 (the "Redemption Date") 33*% of the Preferred Shares held by holders of Preferred Shares on February 28, 1997 on payment of $10.00 for each share to be redeemed plus all unpaid dividends which shall have accrued thereon and which shall be treated as accruing to, but not including, the date of such redemption, the whole constituting and being herein referred to as the "Redemption Amount". (g) Idem: In the case of redemption of Preferred Shares, under the provisions of clause (f) hereof, the Corporation shall at least 21 days (or, if all of the holders of the Preferred Shares consent, such shorter period to which they may consent) prior to the Redemption Date mail (or, with the consent of any particular holder, otherwise deliver) to each person who at the date of mailing (or delivery, as the case may be) is a holder of Preferred Shares to be redeemed a notice in writing of the intention of the Corporation to redeem such Preferred Shares. Such notice shall (subject to the consent of any particular holder referred to above) be mailed by letter, postage prepaid, addressed to each such holder at his address as it appears on the records of the Corporation or in the event of the address of any such holder; not so appearing then to the last known address of such holder; provided, however, that accidental - 4 - failure to give any such notice to or more of such holders shall not affect the validity of such redemption. Such notice shall set out the Redemption Amount, the Redemption Date and the number of Preferred Shares to be redeemed. On the Redemption Date, the Corporation shall pay or cause to be paid to or to the order of the holders of the Preferred Shares to be redeemed the Redemption Amount thereof on presentation and surrender at the registered office of the corporation or any other place designated in such notice of the certificates representing the Preferred Shares called for redemption. Such payment shall be made by certified cheque payable at par at any branch of the Corporation's bankers in Canada (or, with the consent of any particular holder, by any other means of immediately available funds). If a part only of the shares represented by any certificate are redeemed a new certificate for the balance shall be issued at the expense of the Corporation. From and after the Redemption Date in any such notice the holders of the Preferred Shares called for redemption shall cease to be entitled to dividends and shall not be entitled to exercise any of the rights of holders of Preferred Shares in respect thereof unless payment of the Redemption Amount is not made upon presentation of certificates in accordance with the foregoing provisions, in which case the rights of the holders of the said Preferred Shares shall remain unaffected. The Corporation shall have the right at any time after the mailing (or delivery, as the case may be) of notice of its intention to redeem any Preferred Shares to deposit the Redemption Amount of the shares so called for redemption or of such of the said shares represented by certificates as have not at the date of such deposit been surrendered by the holders thereof in connection with such redemption to a special account in any chartered bank or in any trust company in Canada, named in such notice, to be paid without interest to or to the order of the respective holders of such Preferred Shares called for redemption upon presentation and surrender to such bank or trust company of the certificates representing the same, and upon such deposit being made or upon the date specified for redemption in such notice, whichever is the later, the Preferred Shares in respect whereof such deposit shall have been made shall be redeemed and the rights of the holders thereof after such deposit or such redemption date, as the case may be, shall be limited to receiving without interest their proportionate part of the total Redemption Amount so deposited against presentation and surrender of the said certificates held by them respectively and any interest allowed on such deposit shall belong to the Corporation. (h) Voting Rights: The holders of the Preferred Shares shall be entitled to receive notice of and to attend any meeting of the shareholders of the Corporation, but shall not be entitled to vote at any such meeting. EX-3.2 3 0003.txt BY-LAW NO. 1 BY-LAW NO.1 A by-law relating generally to the transaction of the business and affairs of CERTICOM CORP. (hereinafter referred to as the "Corporation") DIRECTORS 1. Calling of and notice of meetings - Meetings of the board shall be held at such time and on such day as the Chairman, President, Secretary or any two directors may determine. Notice of meetings of the board shall be given to each director not less than 48 hours before the time when the meeting is to be held. Each newly elected board may without notice hold its first meeting for the purposes of organization and the appointment of officers immediately following the meeting of shareholders at which such board was elected. 2. Place of meetings - Meetings of the board may be held at any place within or outside Canada and in any financial year of the Corporation it shall not be necessary for a majority of the meetings of the board to be held at a place within Canada. 3. Votes to govern - At all meetings of the board every question shall be decided by a majority of the votes cast on the question; and in case of an equality of votes the chairman of the meeting shall not be entitled to a second or casting vote. 4. Interest of directors and officers generally in contracts - No director or officer shall be disqualified by his office from contracting with the Corporation nor shall any contract or arrangement entered into by or on behalf of the Corporation with any director or officer or in which any director or officer is in any way interested be liable to be voided nor shall any director or officer so contracting or being so interested be liable to account to the Corporation for any profit realized by any such contract or arrangement by reason of such director or officer holding that office or of the fiduciary relationship thereby established; provided that the director or officer shall have complied with the provisions of the Business Corporations Act. DIRECTORS' AND SHAREHOLDERS' MEETINGS 5. Quorum - At any meeting of the directors, a quorum shall be a majority of the directors then in office and at any meeting of shareholders, a quorum shall be three (3) shareholders represented in person or by proxy and holding not less than 35% of the votes attaching to all voting shares of the capital of the Corporation; provided that if a meeting of the board of directors or shareholders is properly called and notice given and the number of - 2 - directors and shareholders, as the case may be, is not sufficient for a quorum, then the chairman of the meeting may specify a date which is not less than ten (10) days hence and not more than thirty (30) days hence for the meeting to be reconvened and at that meeting, in the case of a meeting of the board, a quorum shall be three (3) directors and, in a case of a meeting of the shareholders, a quorum shall be two (2) shareholders, holding not less than 20% of the votes attaching to all voting shares of the capital of the Corporation, and notice of such new meeting date shall be given to all directors or shareholders, as the case may be, entitled to vote at such meeting. 6. Casting Vote - In the case of an equality of votes at any meeting of shareholders the chairman of the meeting shall not be entitled to a second or casting vote. INDEMNIFICATION 7. Indemnification of directors and officers - The Corporation shall indemnify a director or officer of the Corporation, a former director or officer of the Corporation or a person who acts or acted at the Corporation's request as a director or officer of a body corporate of which the Corporation is or was a shareholder or creditor, and his heirs and legal representatives to the extent permitted by the Business Corporations Act. 8. Indemnity of others - Except as otherwise required by the Business Corporations Act and subject to paragraph 7, the Corporation may from time to time indemnify and save harmless any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that he is or was an employee or agent of the Corporation, or is or was serving at the request of the Corporation as a director, officer, employee, agent of or participant in another body corporate, partnership, joint venture, trust or other enterprise, against expenses (including legal fees), judgments, fines and any amount actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted honestly and in good faith with a view to the best interests of the Corporation and, with respect to any criminal or administrative action or proceeding that is enforced by a monetary penalty, had reasonable grounds for believing that his conduct was lawful. The termination of any action, suit or proceeding by judgment, order, settlement or conviction shall not, of itself, create a presumption that the person did not act honestly and in good faith with a view to the best interests of the Corporation and with respect to any criminal or administrative action or proceeding that is enforced by a monetary penalty, had no reasonable grounds for believing that his conduct was lawful. 9. Right of indemnity not exclusive - The provisions for indemnification contained in the by-laws of the Corporation shall not be deemed exclusive of any other rights to which any person seeking indemnification may be entitled under any agreement, vote of shareholders or directors or otherwise, both as to action in his official capacity and as to action in another - 3 - capacity, and shall continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs and legal representatives of such a person. 10. No liability of directors or officers for certain matters - To the extent permitted by law, no director or officer for the time being of the Corporation shall be liable for the acts, receipts, neglects or defaults of any other director or officer or employee or for joining in any receipt or act for conformity or for any loss, damage or expense happening to the Corporation through the insufficiency or deficiency of title to any property acquired by the Corporation or for or on behalf of the Corporation or for the insufficiency or deficiency of any security in or upon which any of the moneys of or belonging to the Corporation shall be placed out or invested or for any loss or damage arising from the bankruptcy, insolvency or tortuous acts of any person, firm or body corporate with whom or which any moneys, securities or other assets belonging to the Corporation shall be lodged or deposited or for any loss, conversion, misapplication or misappropriation of or any damage resulting from any dealings with any moneys, securities or other assets belonging to the Corporation or for any other loss, damage or misfortune whatever which may happen in the execution of the duties of his respective office or trust or in relation thereto unless the same shall happen by or through his failure to act honestly and in good faith with a view to the best interests of the Corporation and in connection therewith to exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances. If any director or officer of the Corporation shall be employed by or shall perform services for the Corporation otherwise than as a director or officer or shall be a member of a firm or a shareholder, director or officer of a body corporate which is employed by or performs services for the Corporation, the fact of his being a director or officer of the Corporation shall not disentitle such director or officer or such firm or body corporate, as the case may be, from receiving proper remuneration for such services. BANKING ARRANGEMENTS, CONTRACTS, ETC. 11. Banking arrangements - The banking business of the Corporation, or any part thereof, shall be transacted with such banks, trust companies or other financial institutions as the board may designate, appoint or authorize from time to time by resolution and all such banking business, or any part thereof, shall be transacted on the Corporation's behalf by such one or more officers and/or other persons as the board may designate, direct or authorize from time to time by resolution and to the extent therein provided. 12. Execution of instruments - Contracts, documents or instruments in writing requiring execution by the Corporation shall be signed by any two officers or directors, and all contracts, documents or instruments in writing so signed shall be binding upon the Corporation without any further authorization or formality. The board is authorized from time to time by resolution to appoint any officer or officers or any other person or persons on behalf of the Corporation to sign and deliver either contracts, documents or instruments in writing generally or to sign either manually or by facsimile signature and deliver specific - 4 - contracts, documents or instruments in writing. The term "contracts, documents or instruments in writing" as used in this by-law shall include deeds, mortgages, charges, conveyances, powers of attorney, transfers and assignments of property of all kinds including specifically but without limitation transfers and assignments of shares, warrants, bonds, debentures or other securities and all paper writings. MISCELLANEOUS 13. Invalidity of any provisions of this by-law - The invalidity or unenforceability of any provision of this by-law shall not affect the validity or enforceability of the remaining provisions of this by-law. 14. Omissions and errors - The accidental omission to give any notice to any shareholder, director, officer or auditor or the non-receipt of any notice by any shareholder, director, officer or auditor or any error in any notice not affecting the substance thereof shall not invalidate any action taken at any meeting held pursuant to such notice or otherwise founded thereon. INTERPRETATION 15. Interpretation - In this by-law and all other by-laws of the Corporation words importing the singular number only shall include the plural and vice versa; words importing the masculine gender shall include the feminine and neuter genders; words importing persons shall include an individual, partnership, association, body corporate, executor, administrator or legal representative and any number or aggregate of persons; "articles" include the original or restated articles of incorporation, articles of amendment, articles of amalgamation, articles of continuance, articles of reorganization, articles of arrangement and articles of revival; "board" shall mean the board of directors of the Corporation; Business Corporations Act shall mean the Business Corporations Act, R.S.Y. 1986, c.15 as amended from time to time or any Act that may hereafter be substituted therefor; and "meeting of shareholders" shall mean and include an annual meeting of shareholders and a special meeting of shareholders. REPEAL 16. Repeal - All previous by-laws of the Corporation are repealed as of the coming into force of this by-law provided that such repeal shall not affect the previous operation of any by-law so repealed or affect the validity of any act done or right, privilege, obligation or liability acquired or incurred under or the validity of any contract or agreement made pursuant to any such by-law prior to its repeal. All officers and persons acting under any by- law so repealed shall continue to act as if appointed by the directors under the provisions of this by-law or the Business Corporations Act until their successors are appointed. EX-10.1 4 0004.txt AMENDED LEASE AGREEMENT 10/17/1998 NET LEASE BASIC LEASE INFORMATION DATE: October 30, 1998 LANDLORD: The Multi-Employer Property Trust, a trust organized under 12 C.F.R. Section 9.18 TENANT: Certicom Corp., a Delaware corporation PREMISES: All of the Building located at 25801 Industrial Blvd., Hayward, California PROPERTY: Mt. Eden Business Park, Hayward, California USE: General Office and Administrative Purposes, including computer hardware and software development TERM: Approximately Seven (7) Years ESTIMATED COMMENCEMENT DATE: January 15, 1999 INITIAL BASE RENT: $53,568.75 TENANT'S PERCENTAGE SHARE: 100% SECURITY DEPOSIT: $75,000 & Letter of Credit described in Section 17 GUARANTOR: Certicom Corp. an Ontario corporation BROKERS: CB Commercial Real Estate Group Inc.; Colliers Parish International Inc; Presco ADDRESS FOR NOTICES: Landlord: The Multi-Employer Property Trust c/o Riggs & Company 808 17th Street N.W. Washington, D.C. 20006 Attn: Patrick O. Mayberry Tenant: Certicom Corp. 200 Matheson Blvd. W Mississauga, Ontario Canada L5R 3L7 After Commencement Date: To Tenant at the Premises LANDLORD'S CONTRIBUTION TO TENANT IMPROVEMENTS: $857,100.00 LANDLORD'S INITIALS: TENANT'S INITIALS: M?? BM - ----------------------- --------------------------- TABLE OF CONTENTS Page ---- 1. Premises. 1 2. Term. 1 3. Rent 1 4. Base Rent 2 5. Operating Expenses 2 6. Proration of Rent 4 7. Tenant Improvements 4 8. Use of the Premises 5 9. Alterations 7 10. Repairs 8 11. Damage or Destruction 8 12. Eminent Domain 9 13. Indemnity and Insurance 10 14. Assignment or Sublet 12 15. Default 15 16. Landlord's Right to Perform Tenant's Covenants 16 17. Security Deposit; Letter of Credit 16 18. Surrender of Premises 18 19. Holding Over 18 20. Access to Premises 19 21. Signs 19 22. Subordination 20 23. Transfer of the Property 20 24. Estoppel Certificates; Financial Statements 21 25. Mortgagee Protection 21 26. Attorney's Fees 21 27. Brokers 21 28. Parking 22 29. Utilities and Services 22 30. Intentionally Deleted 22 31. Acceptance 22 32. Use of Building Name 22 33. Recording 23 34. Quitclaim 23 35. Notices 23 36. Landlord's Exculpation 23 37. Additional Structures 23 38. Consents and Approvals 24 39. General 24 40. Renewal Option 25 EXHIBIT "A": Premises and Business Park Site Plan EXHIBIT "B": Tenant Improvements EXHIBIT "C": Commencement Date Memorandum EXHIBIT "D": Rules and Regulations EXHIBIT "E": Form of Tenant Estoppel Certificate EXHIBIT "F": Appraisal Procedure NET LEASE THIS LEASE, which is effective as of the date set forth in the Basic Lease Information, is entered by Landlord and Tenant, as set forth in the Basic Lease Information. Terms which are capitalized in this Lease shall have the meanings set forth in the Basic Lease Information. 1. Premises. Landlord leases to Tenant, and Tenant leases from Landlord, the Premises described in the Basic Lease Information (as shown on Exhibit A), together with the right in common to use the Common Areas. The Common Areas shall mean the areas and facilities within the land shown on Exhibit A (the "Land") and within the Building identified in the Basic Lease Information (the "Building") and within all other buildings and improvements now or hereafter located on the Land, provided and designated by Landlord for the general use, convenience or benefit of Tenant and other tenants and occupants of the Property (e.g., restrooms; janitorial, telephone and electrical closets; sidewalks; driveways, public lobbies, entrances and stairs; and unreserved parking areas). The Common Areas shall include the Cultural Center delineated on Exhibit A (the "Cultural Center"); provided, however, that Landlord may from time to time prescribe rules and regulations for use of and access to the Cultural Center by Tenant and other tenants of the Property. Without limitation of the provisions of any such rules and regulations, Tenant acknowledges that (i) no tenant of the Property (including Tenant) shall have exclusive rights to use the Cultural Center, (ii) on up to ten (10) occasions each calendar year some or all of the tenants of the Property (including Tenant) may be excluded from use of the Cultural Center, (iii) access to the Cultural Center shall be restricted by means of a locked gate or other apparatus daily from 6:00 p.m. to 8:00 a.m. Landlord reserves the right to make changes to the Common Areas. The Building and such other buildings and improvements now or hereafter located on the Land are collectively referred to in this Lease as the "Buildings". The Land, the Buildings and the Common Areas are collectively referred to in this Lease as the "Property" or the "Real Property". 2. Term. a. Lease Term. The term of this Lease (the "Term") shall commence on the date (the "Commencement Date") which is the later to occur of (x) January 15, 1999, or (y) Substantial Completion of the Tenant Improvements. "Substantial Completion of the Tenant Improvements" shall be deemed to have occurred when the Tenant Improvements (as defined in Exhibit B) have been completed in accordance with Final Plans (as defined in Exhibit B), subject only to the completion or correction of Punch List Items. "Punch List Items" shall mean incomplete or defective work or materials in the Tenant Improvements which do not materially impair Tenant's use of the Premises for the conduct of Tenant's business therein. The Term shall end on the last day of the calendar month in which the seventh (7th) annual anniversary of the Commencement Date occurs (the "Expiration Date"). Notwithstanding the foregoing, if the Commencement Date is delayed due to Tenant Delay (as defined in Exhibit B), then for purposes of determining the commencement of Tenant's obligation to pay Base Rent and Operating Expenses pursuant to Sections 4 and 5 below, the Commencement Date shall be deemed accelerated by the period of Tenant Delay. b. Premises Not Delivered. If, for any reason, the Commencement Date does not occur by the Estimated Commencement Date, the failure shall not affect the validity of this Lease, or the obligations of Tenant under this Lease, and Landlord shall not be subject to any liability. c. Commencement Date Memorandum. When the Commencement Date is determined, the parties shall execute a Commencement Date Memorandum, in the form attached hereto as Exhibit C, setting forth the Commencement Date and the Expiration Date. d. Early Entry. If Tenant is permitted by Landlord to enter the Premises prior to the Commencement Date for the purpose of fixturing or any purpose other than the conduct of Tenant's business, the entry shall 1 be subject to all the terms and provisions of this Lease, except that Tenant's obligation to pay Base Rent and Operating Expenses shall not commence until the Commencement Date. Without limitation, in no event will Landlord consent to such early access if Landlord shall reasonably determine that the same might delay or interfere with Landlord's construction of the Tenant Improvements, or increase the cost of the Tenant Improvements. 3. Rent. As used in this Lease, the term "Rent" shall include: (i) the Base Rent; (ii) Operating Expenses payable by Tenant pursuant to Section 5 below; and (iii) all other amounts which Tenant is obligated to pay under the terms of this Lease. All amounts of money payable by Tenant to Landlord shall be paid without prior notice or demand, deduction or offset. If any installment of Base Rent is not paid by Tenant by the fifth (5th) day of the month, or if any payment of Operating Expenses or any other amount payable by Tenant is not paid within five (5) days of the due date thereof, Tenant shall pay to Landlord a late payment charge equal to five percent (5%) of the amount of the delinquent amount, in addition to the amount of Rent then owing, regardless of whether a notice of default or notice of termination has been given by Landlord. In addition to the five percent (5%) late charge, any Base Rent, Operating Expenses or other amounts owing hereunder which are not paid within five (5) days after the date they are due shall thereafter bear interest at the rate ("Interest Rate") which is the lesser of eighteen percent (18%) per annum or the maximum rate permitted by applicable law. Notwithstanding the foregoing, Landlord shall give Tenant notice of non-payment and three (3) days from receipt of such notice to cure such non-payment twice in any calendar year before assessing such late fees and/or interest in such calendar year. 4. Base Rent. a. Initial Base Rent. Commencing on the Commencement Date, and thereafter on the first day of each calendar month of the Term, Tenant shall pay Base Rent to Landlord (or other entity designated by Landlord), in advance, at Landlord's address for notices (as set forth in the Basic Lease Information) or at such other address as Landlord may designate. The Initial Base Rent shall be the amount set forth in the Basic Lease Information. Base Rent payable hereunder for the first full calendar month after Tenant's obligation to pay Base Rent commences shall be paid upon Tenant's execution of this Lease. b. Base Rent Adjustment. Commencing on the first day of the 37th full calendar month of the Term, the Base Rent shall increase to $56,831.09 per month, and shall be payable in such amount through the end of the 60th full calendar month of the Term. Commencing on the first day of the 61st full calendar month of the Term, the Base Rent shall increase to $60,292.10 per month, and shall be payable in such amount through the Expiration Date. 5. Operating Expenses. a. Operating Expenses. Tenant shall pay Tenant's Percentage Share of Operating Expenses incurred by Landlord during each calendar year falling in whole or in part during the Term. b. Operating Expenses. The term "Operating Expenses" shall include all reasonable expenses and costs of every kind and nature, except as provided in the next paragraph, which Landlord shall pay or become obligated to pay because of or in connection with the ownership, management, administration, maintenance, repair and operation of the Premises, the Buildings, the Common Areas and the balance of the Property, to the extent allocable to the Building in which the Premises is located. The allocation of Operating Expenses to the Building shall be made on the same ratio that the rentable square footage of the Building bears to the aggregate rentable square footage of all buildings in the Business Park (assuming for such purpose that all buildings in the Business Park, as shown on Exhibit A attached hereto, are fully constructed); except where Landlord shall reasonably determine, for good cause, that the nature of any given 2 Operating Expense requires that it be allocated in another reasonable manner. Operating Expenses shall include, without limitation, the following: (i) all impositions relating to the Real Property, including Real Property Taxes (as defined in Section 5.d.); (ii) premiums for insurance relating to the Real Property, including as set forth in Sections 13.b., 13.d. and 13.i., and insurance deductibles paid by Landlord; (iii) wages, salaries, bonuses and expenses and benefits (including hospitalization, medical, surgical, retirement plan, pension plan, union dues, life insurance, including group life insurance, welfare and other fringe benefits, and vacation, holidays and other paid absence benefits, and costs of uniforms) of all on-site and off-site employees of Landlord or its agents, a the rank of property manager or below, engaged in operation, management, administration, maintenance, repair and security of the Real Property, including, without limitation, administrative, management and accounting personnel and the individual(s) responsible for management of the Property, and payroll, social security, workers' compensation, unemployment and similar taxes with respect to such employees of Landlord or its agents, and the cost of providing disability or other benefits imposed by law or otherwise, with respect to such employees; (iv) costs of all supplies, materials and equipment rentals used in operations; (v) all maintenance, janitorial, security and service costs; (vi) a management fee not to exceed 4% of all gross revenues from the Real Property, including revenues attributable to Tenant's and other tenants' payments of Operating Expenses; (vii) legal and accounting expenses, including the cost of audits by certified public accountants; (viii) all repair, painting and maintenance costs relating to the Real Property and its Common Areas, including sidewalks, landscaping, service areas, mechanical rooms, parking areas, Building exterior and driveways; (ix) all charges for heat, water, gas, steam, fuel, electricity and other utilities used or consumed in the Buildings and Common Areas; (x) costs of repairs, replacements, and general maintenance to and of the Building Systems and the Base Building Components (as such terms are defined in Sections 9.a. and 10.a.; respectively, below); (xi) the costs of capital improvements, capital replacements, capital repairs, capital equipment, and capital tools and devices installed or paid for by Landlord and intended to reduce other Operating Expenses or required to comply with Legal Requirements (as defined in Section 8.c. below) or intended for the protection of the health and safety of the occupants of the Property; and (xii) Landlord's costs of maintaining the Cultural Center, which costs shall be deemed, for purposes of this Lease, the sum of $60,000.00, as such sum shall be increased on January 30, 1999 and each January 30th thereafter (each, an "Adjustment Date"), by the percentage increase in the Index over the one (1) year period ending on the date on which the Index is published in the month immediately preceding the Adjustment Date. With respect to any costs included in Operating Expenses under clause (x) which are capital expenditures, as determined by Landlord in accordance with generally accepted accounting principles consistently applied, and with respect to the costs of items included in Operating Expenses under clause (xi), such costs shall be amortized over a period determined by Landlord, together with interest on the unamortized balance at a rate per annum equal to three (3) percentage points over the Treasury Rate charged at the time such item is constructed or acquired, or at such higher rate as may have been paid by Landlord on funds borrowed for the purpose of acquiring or constructing such item, but in either case not more than the maximum rate permitted by law at the time such item is acquired or constructed. As used herein, "Treasury Rate" means the six-month United States treasury bill rate in effect from time to time by the San Francisco Main Office of Bank of America, NT&SA (or any successor bank thereto), or if there is no such rate, the rate quoted by such bank in pricing ninety day commercial loans to substantial commercial borrowers. The term "Index" as used herein shall mean the Consumer Price Index for All Urban Consumers (1982-84 = 100) San Francisco-Oakland-San Jose, California, All Items, published by the Bureau of Labor Statistics of the U.S. Department of Labor. If the Bureau of Labor Statistics ceases to publish the above Index, or if the above Index is otherwise renamed, discontinued or superseded, the parties agree that the Bureau of Labor Statistics or any successor governmental agency thereto will be the sole judge of the comparability of successive indexes, but if no succeeding index is published, the calculations under this Lease based on the Index shall be made using the most closely comparable statistics on the purchasing power of the consumer dollar as published by a responsible financial authority and selected by Landlord. 3 Operating Expenses shall not include the following: (i) depreciation on the Buildings or equipment or systems therein; (ii) debt service; (iii) rental under any ground or underlying lease; (iv) attorneys' fees and expenses incurred in connection with lease negotiations or disputes with past, current or prospective Building tenants; (v) the cost of decorating, improving for tenant occupancy, painting or redecorating portions of the Buildings to be demised to tenants; (vi) advertising expenses; (vii) costs reimbursed by insurance proceeds; or (viii) real estate broker's or other leasing commissions. The parties agree that statements in this Lease to the effect that Landlord is to perform certain of its obligations hereunder at its own or sole cost and/or expense shall not be interpreted as excluding any cost from Operating Expenses if such cost is an Operating Expense pursuant to the terms of this Section 5.b. c. Monthly Increments; Adjustment. Promptly following the commencement of the Term and prior to the commencement of each subsequent calendar year (or as soon thereafter as practicable), Landlord shall estimate the Operating Expenses payable by Tenant for such calendar year pursuant to this Section. Tenant shall pay to Landlord, on the first day of each month, in advance, one-twelfth (1/12) of Landlord's estimated amount. If at any time during the course of the year Landlord determines that the Operating Expenses payable by Tenant will vary from the then estimated amount, by notice to Tenant Landlord may revise the amount payable by Tenant during the balance of the calendar year such that the total estimated additional amount due from Tenant for such calendar year is paid by Tenant during the balance of the calendar year in equal monthly amounts. Within ninety (90) days (or as soon thereafter as practicable) after the close of each calendar year, Landlord shall provide Tenant with a statement to account for any difference between the actual and the estimated Operating Expenses for the previous year. Landlord's annual statement shall be final and binding upon Landlord and Tenant unless, within ninety (90) days after delivery thereof to Tenant, Landlord shall revise or Tenant shall contest any item therein by written notice to the other, specifying each item revised or contested and the reason therefor. Notwithstanding the foregoing, the Real Property Taxes included in any such annual statement may be modified by any subsequent adjustment or retroactive application of Real Property Taxes affecting the calculation of Operating Expenses. If Tenant has overpaid the amount of Operating Expenses owing pursuant to this Section, Landlord shall credit the overpayment against Tenant's next payments due under this Section 5. If Tenant has underpaid the amount of Operating Expenses owing pursuant to this Section, Tenant shall pay the amount of the underpayment to Landlord within thirty (30) days after Tenant's receipt of Landlord's statement. If all of the buildings in the Business Park shown on Exhibit A attached hereto are not fully constructed during any calendar year, or if the rentable area of all such buildings or of the Building is not fully occupied during any calendar year, Operating Expenses for such calendar year shall be adjusted to equal Landlord's reasonable estimate of the Operating Expenses which would have been incurred during such calendar year if all buildings in the Business Park were constructed and the total rentable area of all such buildings and the Building were occupied, and such adjusted Operating Expenses shall be allocated to the Building as provided in Section 5.b. above. d. Definition of Real Property Taxes. The term "Real Property Taxes" shall mean any ordinary or extraordinary form of assessment or special assessment, license fee, rent tax, levy, penalty (if a result of Tenant's delinquency), or tax (other than net income, estate, succession, inheritance, transfer or franchise taxes), imposed by any authority having the direct or indirect power to tax, or by any city, county, state or federal govermnent for any maintenance or improvement or other district or division thereof. The term shall include all transit charges, housing fund assessments, real estate taxes and all other taxes relating to the Premises, Building and/or Property, all other taxes which may be levied in lieu of real estate taxes, all assessments, assessment bonds, levies, fees, and other governmental charges (including, but not limited to, charges for traffic facilities, improvements, child care, water services studies and improvements, and fire services studies and improvements) for amounts necessary to be expended because of govemmental orders, whether general or special, ordinary or extraordinary, unforeseen as well as foreseen, of any kind and nature for public improvement, services, benefits or any other purposes which are assessed, levied, confirmed, imposed or become a lien upon the Premises, Building or Property or become payable during the Term. 4 e. Acknowledgment of Parties. It is acknowledged by Landlord and Tenant that Proposition 13 was adopted by the voters of the State of California in the June, 1978 election, and that assessments, taxes, fees, levies and charges may be imposed by governmental agencies for such purposes as fire protection, street, sidewalk, road, utility construction and maintenance, refuse removal and for other governmental services which formerly may have been provided without charge to property owners or occupants. It is the intention of the parties that all new and increased assessments, taxes, fees, levies and charges due to Proposition 13 or any other cause are to be included within the definition of Real Property Taxes for purposes of this Lease. f. Taxes on Tenant Improvements and Personal Property. Notwithstanding any other provision hereof, Tenant shall pay the full amount of any increase in Real Property Taxes during the Term resulting from any and all Alterations (as defined in Section 9.a. below) of any kind whatsoever placed in, on or about the Premises for the benefit of, at the request of, or by Tenant. Tenant shall pay, prior to delinquency, all taxes assessed or levied against Tenant's personal property, equipment, furniture or fixtures (collectively, "Personal Property") in, on or about the Premises. When possible, Tenant shall cause its Personal Property to be assessed and billed separately from the real or personal property of Landlord. Tenant recognizes that pursuant to Section 107.6 of the California Revenue and Taxation Code Tenant's possessory interest under this Lease may be subject to property taxation based on the full cash value, as defined in Sections 110 and 110.1 of the California Revenue and Taxation Code. g. Fiscal Year. Landlord shall have the right to account and bill for Operating Expenses on the basis of a fiscal year, rather than a calendar year as set forth above, and to revise such fiscal year from time to time, provided that Landlord follows generally accepted accounting principles consistently applied in connection therewith. h. Net Lease. This shall be a Net Lease and Base Rent shall be paid to Landlord absolutely net of all costs and expenses except as expressly herein provided. The provisions for Tenant's payment of Tenant's Percentage Share of Operating Expenses are intended to pass on to Tenant and reimburse Landlord for Tenant's Percentage Share of all costs and expenses associated with the Real Property, except as expressly provided in this Lease. 6. Proration of Rent. If the Commencement Date is not the first day of a calendar month, or if the end of the Term is not the last day of a calendar month, Base Rent payable by Tenant pursuant to Section 4, and Operating Expenses payable by Tenant pursuant to Section 5, shall be prorated on a daily basis (based upon a thirty (30) day month) for such fractional month. The termination of this Lease shall not affect the obligations of Landlord and Tenant pursuant to Section 5.c. which are to be performed after the termination. 7. Tenant Improvements. Landlord agrees to construct within the Premises certain improvements to the Premises ("Tenant Improvements") pursuant to the terms of Exhibit B. Subject to completion of the Tenant Improvements (including, without limitation, the Punch List Items with respect thereto), the Premises shall be delivered to Tenant in its then "as-is" condition, and Landlord shall not have any obligation to make or pay for any alterations, additions, improvements or repairs to prepare the Premises for Tenant's occupancy. The foregoing shall not relieve Landlord from responsibility for correcting any latent defects in the construction of the Tenant Improvements, provided that written notice thereof is given by Tenant to Landlord within one (1) year from the Commencement Date. 8. Use of the Premises. a. Use. The Premises shall be used solely for the use set forth in the Basic Lease Information and for no other use or purpose. Tenant shall not do or suffer or permit anything to be done in or about the Premises or the Real Property which will in any way obstruct or interfere with the rights of other tenants or occupants of the Building or injure or annoy them, or use or suffer or permit the Premises to be used for any immoral, unlawful or objectionable purpose, nor shall Tenant cause, maintain, suffer or permit any nuisance 5 in, on or about the Premises or the Real Property. Without limiting the foregoing, Tenant shall not permit any odors, smoke, dust, gas, substances, noise or vibration to emanate from the Premises, and no loudspeakers or other similar device which can be heard outside the Premises shall, without the prior written approval of Landlord, be used in or about the Premises. Tenant shall not commit or suffer to be committed any waste in, to or about the Premises. Tenant agrees not to employ any person, entity or contractor for any work in the Premises (including moving Tenant's equipment and furnishings in, out or around the Premises) whose presence may give rise to a labor or other disturbance in the Building and, if necessary to prevent such a disturbance in a particular situation, Landlord may require Tenant to employ union labor for the work. b. Rules and Regulations: CC&R's. Tenant shall comply with the Rules and Regulations attached hereto as Exhibit D, as the same may be modified from time to time by Landlord upon prior notice to Tenant (the "Rules"), to the extent Landlord the Rules are not in conflict with the other provisions of this Lease. In addition, Tenant shall comply with any covenants, conditions and restrictions ("CC&R's") applicable to the Real Property, and all rules, regulations and restrictions imposed by any association formed pursuant to the CC&R's, in each case to the extent Landlord has delivered a copy thereof to Tenant and the same are not in conflict with the provisions of this Lease. c. Compliance. Tenant shall not permit the Premises to be used in violation of or in conflict with, and at its sole cost and expense shall promptly comply with, all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which hereinafter may be in force, with the requirements of any board of fire underwriters or other similar board now or hereafter constituted, with any direction or occupancy certificate issued pursuant to any law by any public officer or officers, as well as the provisions of all recorded documents affecting the Premises (all of the foregoing, collectively, "Legal Requirements"), insofar as any thereof relate to or affect the condition, use or occupancy of the Premises, and Tenant shall perform all work to the Premises and other portions of the Real Property required to effect such compliance (or, at Landlord's election, Landlord may perform such work at Tenant's expense). The judgement of any court of competent jurisdiction or the admission of Tenant in any actions against Tenant, whether Landlord be a party thereto or not, that Tenant has so violated any such law, statute, ordinance, rule, regulation or requirement, shall be conclusive of such violation as between Landlord or Tenant. In no event shall the foregoing, or any other provisions of this Lease, impose any obligation or liability upon Tenant to perform any work or otherwise remedy any non-compliant condition to the extent that such work or condition arises by reason of Landlord's failure to construct the Tenant Improvements and Landlord's Work (as defined in Exhibit B) in compliance with all Legal Requirements. d. Hazardous Materials. Tenant shall not cause or permit the storage, use, generation, release, handling or disposal (collectively, "Handling") of any Hazardous Materials (as defined below), in, on, or about the Premises or the Real Property by Tenant or any agents, employees, contractors, licensees, subtenants, customers guests or invitees of Tenant (collectively with Tenant, "Tenant Parties"), except that Tenant shall be permitted to use in the Premises in a normal and customary manner normal quantities of office supplies or products (such as copier fluids or cleaning supplies) customarily used in the conduct of general business office activities ("Common Office Chemicals"), provided that the Handling of such Common Office Chemicals shall comply at all times with all Legal Requirements, including Hazardous Materials Laws (as defined below). Upon Landlord's request from time to time, Tenant shall provide to Landlord a complete written inventory of all Hazardous Materials which Tenant anticipates using or storing on, or discharging from , the Premises along with copies of all reports, permits and business plans filed with any federal, state, local or other governmental agency. Tenant shall update the inventory as frequently as required to reflect any material changes to the items required to be disclosed therein. Tenant shall be solely responsible for and shall indemnify, defend and hold Landlord and all other Indemnitees (as defined in Section 13.a. below), harmless from and against all Claims (as defined in Section 13.a. below), arising out of or in connection with, or otherwise relating to (i) any Handling of Hazardous Materials by any Tenant Party or Tenant's breach of its obligations hereunder, or (ii) any removal, cleanup, or restoration work and 6 materials necessary to return the Real Property or any other property of whatever nature located on the Real Property to their condition existing prior to the Handling of Hazardous Materials in, on or about the Premises by any Tenant Party. Tenant shall promptly provide Landlord with copies of all notices received by it, including, without limitation, any notice of violations, notice of responsibility or demand for action from any federal, state or local authority or official in connection with the presence of Hazardous Materials in or about the Premises or any other portion of the Property. In the event of any release of Hazardous Materials upon the Premises or any other portion of the Property, or upon adjacent lands, if caused by Tenant or any other Tenant Party, Tenant shall promptly remedy the problem in accordance with all applicable Legal Requirements. For purposes of this Lease, "Hazardous Materials" means any explosive, radioactive materials, hazardous wastes, or hazardous substances, including without limitation asbestos containing materials, PCB's, CFC's, or substances defined as "hazardous substances" in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601-9657; the Hazardous Materials Transportation Act of 1975, 49 U.S.C. Section 1801-1812; the Resource Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901-6987; or any other Legal Requirement regulating, relating to or imposing liability or standards of conduct concerning any such materials or substances now or at any time hereafter in effect (collectively, "Hazardous Materials Laws"). Tenant's obligations under this Section 8.d. shall survive the expiration or other termination of this Lease. 9. Alterations. a. Alterations. Tenant shall not make any alteration, addition or improvement in, to or upon the Premises ("Alteration") without the prior written consent of Landlord in each instance, which consent shall not be unreasonably withheld with respect to proposed Alterations which (i) are not structural in nature, (ii) do not affect the Base Building Components, (iii) are, in Landlord's opinion, compatible with the Building and the balance of the Real Property and the Building's mechanical, plumbing, electrical, heating/ventilation/air conditioning, communication, security and fire and other life safety systems (collectively, the "Building Systems"), and (iv) in Landlord's opinion will not interfere with the use and occupancy of any other portion of the Building or the Real Property by any other tenant or permitted occupant thereof. Tenant shall give Landlord not less than ten (10) days' prior written notice of any Alteration Tenant desires to make. Any Alterations as to which Landlord shall consent shall be made only by contractors approved in advance, in writing by Landlord, which approval shall not be unreasonably withheld; provided, however, that Landlord may, in its sole discretion, specify the engineers and contractors to perform any work relating to or affecting the Building Systems or the Base Building Components. Tenant shall comply with all Legal Requirements applicable to each Alteration and shall deliver to Landlord a complete set of "as built" plans and specifications for each Alteration. Any work to the balance of the Building or Real Property related to or affected or triggered by Tenant's Alterations shall be performed by Tenant at Tenant's expense (or, at Landlord's election, Landlord may perform such work at Tenant's expense). Tenant shall be solely responsible for maintenance and repair of all Alterations made by Tenant. Tenant shall pay Landlord on demand (whether prior to or during the course of construction) an amount (the "Alteration Fee") equal to five percent (5%) of the total cost of each Alteration (and for purposes of calculating the Alteration Fee, such cost shall include architectural and engineering fees, but shall not include permit fees) as compensation to Landlord for miscellaneous costs incurred by Landlord in connection with the Alteration. In addition, Tenant shall reimburse Landlord for all third party fees paid by Landlord in connection with reviewing the proposed Alterations (whether or not the proposed Alterations are ultimately approved by Landlord or made by Tenant), including, without limitation, Landlord's architectural and engineering fees. All Alterations shall be performed diligently and in a first-class workmanlike manner and in accordance with plans and specifications approved by Landlord, and shall comply with Landlord's construction procedures and requirements for the Building (including Landlord's requirements relating to insurance and contractor qualifications and scheduling of the work). b. Liens. If, because of any act or omission of Tenant or anyone claiming by, through, or under Tenant, any mechanic's lien or other lien is filed against the Premises or any other portion of the Real 7 Property or against other property of Landlord (whether or not the lien is valid or enforceable), Tenant shall, at its own expense, cause it to be discharged of record within a reasonable time, not to exceed ten (10) days, after the date of the filing. In addition, Tenant shall defend and indemnify Landlord and hold it harmless from any and all Claims resulting from the lien. Without limitation of Landlord's other remedies, Landlord shall have the rights under Section 16 below if any such lien is not timely discharged by Tenant. c. Ownership of Alterations. All Alterations shall immediately become Landlord's property. Except as provided in Section 9.d., Landlord may require Tenant, at Tenant's sole expense and by the end of the Term, to remove any Alterations and to restore the Premises to its condition prior to the Alteration. d. Request Regarding Removal Obligation. At the time that Tenant requests Landlord's consent to any Alteration, Tenant may request that Landlord notify Tenant if Landlord will require Tenant, at Tenant's sole expense, to remove any or all of the Alteration by the end of the Term, and to restore the Premises to its condition prior to the Alteration. Unless Landlord shall have expressly agreed in writing not to require such removal and restoration, Landlord's election right under Section 9.c. shall continue through the end of the Term as to such Alterations. 10. Repairs. a. Landlord's Repairs. Landlord shall maintain the roof, foundations, floor slabs and exterior walls of the Building (collectively, the "Base Building Components") in good condition and repair, reasonable wear and tear excepted. The term walls as used herein shall not include windows, glass or plate glass, doors, special store fronts or office entries. The term roof as used herein shall not include skylights, smoke hatches or roof vents. Landlord shall also maintain in good condition and repair, reasonable wear and tear excepted, the Common Areas, including, but not limited to, the landscaped areas, parking areas and driveways. Tenant shall reimburse Landlord for Landlord's costs of complying with its obligations under this Section 10 in accordance with Section 5 above, provided, however, that any damage caused by or repairs necessitated by any act of Tenant or any other Tenant Party may be repaired by Landlord at Landlord's option and at Tenant's expense. Tenant shall give Landlord prompt written notice of any repairs required of Landlord pursuant to this Section 10, after which notice Landlord shall have reasonable opportunity to perform the same. b. Tenant's Repairs. Tenant shall, at Tenant's expense, maintain all parts of the Premises in a good, clean and secure condition, promptly making all necessary repairs and replacements including, but not limited to, all windows, glass or plate glass, doors and any special store fronts or office entries, walls and wall finishes, floor covering, Building Systems, truck doors, dock bumpers, dock plates and levelers, plumbing work and fixtures, downspouts, skylights, smoke hatches, roof vents and utility equipment, in each case to the extent the same are located within or exclusively serve the Premises. Tenant shall, at Tenant's expense, also perform necessary pest extermination and regular removal of trash and debris. Landlord shall, at Tenant's expense, enter into a regularly scheduled preventive maintenance/service contract with a maintenance contractor for servicing all hot water, heating and air conditioning systems and equipment within or serving the Premises. Tenant shall not damage any demising wall or disturb the integrity and support provided by any demising wall and shall, at its sole expense, immediately repair any damage to any demising wall caused by Tenant or its employees, agents or invitees or any other Tenant Party. Tenant hereby waives all right to make repairs at the expense of Landlord or in lieu thereof to vacate the Premises and its other similar rights as provided in Califomia Civil Code Sections 1932(1), 1941 and 1942 or any other Legal Requirement (whether now or hereafter in effect). 11. Damage or Destruction. a. Landlord's Obligation to Rebuild. If the Premises are damaged or destroyed, Landlord shall promptly and diligently repair the Premises unless Landlord has the option to terminate this Lease as 8 provided herein, and Landlord elects to terminate. b. Right to Terminate. Landlord shall have the option to terminate this Lease if the Premises or the Building is destroyed or damaged by fire or other casualty, regardless of whether the casualty is insured against under this Lease, if Landlord reasonably estimates that the repair of the Premises or the Building cannot be completed within one hundred eighty (180) days after the casualty. Landlord shall also have the right to terminate this Lease if the repair is not fully covered by insurance maintained (or required to be maintained) by the Landlord pursuant to this Lease other than by reason of the deductible amounts under Landlord's insurance policies. Tenant shall have the option to terminate this Lease if the Premises is damaged or destroyed by fire or other casualty, and Landlord reasonably estimates that the repair of the Premises cannot be completed within one (1) year after the casualty. Landlord shall notify Tenant of Landlord's reasonable repair period estimate within (60) days after the casualty. If a party desires to exercise the right to terminate this Lease as a result of a casualty, the party shall exercise the right by giving the other party written notice of its election to terminate within thirty (30) days after delivery of Landlord's repair period estimate, in which event this Lease shall terminate fifteen (15) days after the date of the terminating party's notice. If neither Landlord nor Tenant exercises the right to terminate this Lease, this Lease shall continue in full force and effect and Landlord shall promptly commence the process of obtaining necessary permits and approvals, and shall commence repair of the Premises or the Building as soon as practicable and thereafter prosecute the repair diligently to completion. c. Limited Obligation to Repair. Landlord's obligation, should Landlord elect or be obligated to repair or rebuild, shall be limited to the Building shell and any tenant improvements in the Premises which are constructed and paid for by Landlord pursuant to Exhibit B. Tenant, at its option and expense, shall replace or fully repair all trade fixtures, equipment, Alterations and other improvements installed by Tenant and existing at the time of the damage or destruction. d. Abatement of Rent. In the event of any damage or destruction to the Premises which does not result in termination of this Lease, the Base Rent shall be temporarily abated proportionately to the degree the Premises are untenantable as a result of the damage or destruction, commencing from the date of the damage or destruction and continuing during the period required by Landlord to substantially complete its repair and restoration of the Premises; provided, however, that nothing herein shall preclude Landlord from being entitled to collect the full amount of any rent loss insurance proceeds. Tenant shall not be entitled to any compensation or damages from Landlord for loss of the use of the Premises, damage to Tenant's Personal Property or any inconvenience occasioned by any damage, repair or restoration. Tenant hereby waives the provisions of Section 1932, Subdivision 2, and Section 1933, Subdivision 4, and Sections 1941 and 1942 of the California Civil Code, and the provisions of any similar Legal Requirement (whether now or hereafter in effect). e. Insurance Proceeds. If this Lease is terminated, Landlord may keep all the insurance proceeds resulting from the damage payable pursuant to insurance coverage maintained by Landlord, and Tenant shall have no claims thereto. 12. Eminent Domain. If all or any material part of the Premises or balance of the Real Property is taken for public or quasi-public use by a governmental authority under the power of eminent domain or is conveyed to a governmental authority in lieu of such taking (a "taking"), Landlord may terminate this Lease by written notice to Tenant within thirty (30) days after the taking. If all or any material part of the Premises is taken, and if the taking causes the remaining part of the Premises to be untenantable and inadequate for use by Tenant for the purpose for which they were leased, then Tenant, at its option and by giving notice within fifteen (15) days after the taking, may terminate this Lease as of the date Tenant is required to surrender possession of the Premises. If part of the Premises is taken but the remaining part is tenantable and adequate for Tenant's use, then this Lease shall be terminated as to the part taken as of the date Tenant is required to surrender possession, and, unless Landlord shall have terminated this Lease 9 pursuant to the foregoing provisions, Landlord shall make such repairs, alterations and improvements as may be necessary to render the part not taken tenantable, and the Base Rent shall be reduced in proportion to the part of the Premises taken. All compensation awarded for the taking shall be the property of Landlord without any deduction therefrom for any estate of Tenant, and Tenant hereby assigns to Landlord all its right, title and interest in and to the award. Tenant shall have the right, however, to recover from the governmental authority, but not from Landlord, such compensation as may be awarded to Tenant on account of the interruption of Tenant's business, moving and relocation expenses and removal of Tenant's Personal Property, provided that any such award to Tenant will not reduce the award which would otherwise be made to Landlord. 13. Indemnity and Insurance. a. Indemnity. Tenant shall hold Landlord and its constituent shareholders, partners, members or other owners, and all of their agents, contractors, servants, officers, directors, employees and licensees (collectively with Landlord, the "Indemnitees") harmless from and indemnify the Indemnitees against any and all claims, liabilities, damages, costs and expenses, including reasonable attorneys' fees and costs incurred in defending against the same (collectively, "Claims"), to the extent arising from (a) the acts or omissions of Tenant or any other Tenant Party in, on or about the Real Property, or (b) any construction or other work undertaken by or on behalf of Tenant in, on or about the Premises, whether prior to or during the Term, or (c) any accident, injury or damage, howsoever and by whomsoever caused, to any person or property, occurring in, on or about the Premises; except to the extent such Claims are caused by the negligence or willful misconduct of Landlord or its authorized representatives. In case any action or proceeding be brought against any of the Indemnitees by reason of any such Claim, Tenant, upon notice from Landlord, covenants to resist and defend at Tenant's sole expense such action or proceeding by counsel reasonably satisfactory to Landlord. The provisions of this Section 13.a. shall survive the expiration or earlier termination of this Lease with respect to any injury, illness, death or damage occurring prior to such expiration or termination. b. Fire and Extended Coverage. Landlord shall procure and maintain in full force and effect with respect to the Building (including any tenant improvements in the Premises constructed and paid for by Landlord pursuant to Exhibit B) a policy or policies of all risk insurance (including sprinkler, vandalism and malicious mischief coverage, and any other endorsements desired by the Landlord or required by the holder of any fee or leasehold mortgage on the Real Property, but excluding, at Landlord's option, the insurance described in Section 13.i. below) in such amount as Landlord shall determine, but in an amount at least equal to eighty percent (80%) (or such greater percentage as shall be required to preclude Landlord from being deemed a coinsurer)) of the full replacement cost (including debris removal, and demolition, but excluding the land and the footings, foundations and installations below the basement level) thereof. Such insurance, and all other insurance maintained by Landlord under this Lease, shall be for the sole benefit of Landlord, and the proceeds therefrom shall be under Landlord's sole control. c. Public Liability. Tenant, at its own cost and expense, shall keep and maintain in full force and effect during the Term the following insurance coverages, written by an insurance company licensed by and admitted to issue insurance in the State of California, with a general policyholders' rating of "A" or better and a financial size ranking of "Class X" or higher, in the most recent edition of Best's Insurance Guide, in the form customary to the locality, (i) commercial general liability insurance, including contractual liability coverage, insuring Tenant's activities with respect to the Premises and/or the Building against loss, damage or liability for personal injury or death of any person or loss or damage to property occurring in, upon or about the Premises, with a minimum coverage of One Million Dollars ($1,000,000) per occurrence/Two Million Dollars ($2,000,000) general aggregate, plus a Five Million Dollar ($5,000,000) per occurrence/general aggregate umbrella, (ii) fire damage legal liability insurance and personal/advertising injury insurance (which shall not be subject to the contractual liability exclusion), each in the minimum amount of One Million Dollars ($1,000,000), (iii) medical payments insurance in the minimum amount of 10 Five Thousand Dollars ($5,000), (iv) worker's compensation insurance in statutory amounts, and (v) if Tenant operates owned, leased or non-owned vehicles on the Property, comprehensive automobile liability insurance with a minimum coverage of $1,000,000 per occurrence, Two Million Dollars ($2,000,000) general aggregate; provided, however, that if, at any time during the Term, Tenant shall have in full force and effect a blanket policy of public liability insurance with the same coverage for the Premises as described above, as well as coverage of other premises and properties of Tenant, or in which Tenant has some interest, the blanket insurance shall satisfy the requirement hereof and be endorsed to separately apply to the Premises. d. Rental Abatement Insurance. Landlord may keep and maintain in full force and effect during the Term rental abatement insurance against abatement or loss of rents with respect to the Real Property in such amount as determined by Landlord. e. Insurance Certificates. Tenant shall furnish to Landlord, on or before the Commencement Date and thereafter within thirty (30) days prior to the expiration of each policy, an original certificate of insurance issued by the insurance carrier of each policy of insurance carried by Tenant pursuant to this Section 13. The certificates shall expressly provide that the policies shall not be cancelable or subject to reduction of coverage or otherwise be subject to modification except after thirty (30) days' prior written notice to the parties named as insureds. Landlord, its successors and assigns, and any nominee of Landlord holding any interest in the Premises, including, without limitation, any ground lessor or the holder of any fee or leasehold mortgage, shall be named as an additional insured under each policy of insurance maintained by Tenant pursuant to this Lease. The policies and certificates shall further provide that the coverage shall be primary, and that any coverage carried by Landlord shall be secondary and noncontributory with respect to Tenant's policy. f. Tenant's Failure. If Tenant fails to maintain any insurance required by this Lease, Tenant shall be liable for any loss or cost resulting from the failure. This Section shall not be deemed to be a waiver of any of Landlord's rights and remedies under any other provision of this Lease. g. Waiver of Subrogation. Any policy or policies of fire, extended coverage or similar casualty insurance which either party obtains in connection with the Building, the Premises, or Tenant's Personal Property shall include a clause or endorsement denying the insurer any rights of subrogation against the other party (and the other parties named as additional insureds pursuant to Section 13.e. above) to the extent rights have been waived by the insured prior to the occurrence of injury or loss. Landlord and Tenant each waives any rights of recovery against the other (and the other parties named as additional insureds pursuant to Section 13.e. above) for injury or loss due to hazards insurable by policies of fire, extended coverage or similar casualty insurance, regardless of whether such insurance policies or coverage shall actually have been obtained by the party granting such waiver, and regardless of the cause of such fire or casualty, including the negligence of the party benefiting from such waiver. Because this Section 13.g will preclude the assigmnent of any claim mentioned in it by way of subrogation or otherwise to an insurance company or any other person, each party to this Lease agrees immediately to give to each of its insurance companies written notice of the terms of the mutual waivers contained in this Section 13.g and to have the insurance policies properly endorsed, if necessary, to prevent the invalidation of the insurance coverages by reason of the mutual waivers contained in this Section 13.g. h. Tenant's Property and Fixtures. Tenant shall assume the risk of damage to any of Tenant's furniture, equipment, machinery, goods, supplies or fixtures or other Personal Property, and to any Alterations which Tenant may make to the Premises, and shall insure the same throughout the Term, for their full replacement cost, under insurance policies reasonably satisfactory to Landlord (certificates of which shall be delivered to Landlord as set forth above in Section 13.e). Tenant hereby releases Landlord from any obligation to insure the foregoing items and from any liability for loss of or damage to such items, regardless of cause. 11 i. Earthquake and Flood Insurance. In addition to any other insurance policies carried by Landlord in connection with the Building, Landlord may elect to procure and maintain in full force and effect during the Term with respect to the Building a policy of earthquake/volcanic action and flood and/or surface water insurance, including rental value insurance against abatement or loss of rent in the case of damage or loss covered under the earthquake/volcanic and flood and/or surface water insurance, in an amount up to one hundred percent (100%) of the full replacement cost (including debris removal and demolition) of the Building. 14. Assignment or Sublet. a. Tenant shall not assign this Lease or sublet the Premises or any portion thereof without the prior written consent of Landlord in each instance, which consent shall not, subject to Landlord's rights under clause (i) below, be unreasonably withheld. If Tenant desires to assign this Lease or to sublet the Premises, or any part thereof, Tenant shall give to Landlord written notice of its intent at least sixty (60) days in advance of the date on which Tenant desires to assign or sublet the Premises, which notice shall designate the terms of the proposed assignment or sublet, the identity of the proposed assignee or sublessee, and shall be accompanied by financial statements of such proposed assignee or sublessee and such other information regarding such party and its business and reputation as shall be required by Landlord to evaluate the proposed assignment or sublet. Landlord shall have thirty (30) days after receipt of Tenant's written notice and the above specified information within which to notify Tenant in writing that Landlord elects to (i) terminate this Lease, in the case of a proposed assignment, or to terminate this Lease as to that portion of the Premises to be sublet, in the case of a proposed sublet, (ii) consent to the proposed assignment or sublet as described in Tenant's notice, or (iii) reasonably refuse to consent to Tenant's proposed assignment or sublet, stating the reasons for such refusal. If Landlord fails to notify Tenant in writing of its election within the thirty (30) day period, Landlord shall be deemed to have made the election in clause (iii) above. No consent by Landlord to any assignment or sublet shall be deemed to be a consent to a use not permitted under this Lease, to any act in violation of this Lease or to any subsequent assignment or sublet. No assignment or sublet by Tenant shall relieve Tenant of any liability theretofore or thereafter arising under this Lease. Any attempted assignment or sublet by Tenant in violation of the terms and covenants of this Section shall be void. During the first six (6) months of the Term, the sixty (60) and thirty (30) day periods in the preceding paragraph shall each be reduced to ten (10) days. Notwithstanding the provisions of the foregoing paragraph, Landlord shall not have the termination option described in clause (i) of the preceding paragraph as to any sublease proposed by Tenant which will terminate three (3) years or earlier from the Commencement Date, unless the space subject to such sublease, taken together with all other portions of the Premises subject to any sublease, would exceed fifty percent (50%) of the total Premises then demised under this Lease. In addition, Landlord shall not have the termination option described in clause (i) of the preceding paragraph as to any sublease proposed by Tenant if, within ten (10) days after Tenant's receipt of notice from Landlord that Landlord is exercising such termination right, Tenant withdraws its request for Landlord's consent to such sublease. If Tenant shall propose to assign this Lease effective as of a date which is during the first two (2) years of the Term, or if Tenant shall propose to sublease any portion of the Premises effective as of a date which is during the first two (2) years of the Term and the term of such sublease is for more than three (3) years, due to the potential material adverse affect such proposed transaction would have on Landlord's ability to lease the balance of the Real Property, Landlord's refusal to consent to any such proposed transaction shall be deemed reasonable (without limitation of any other reasonable grounds Landlord may have for refusing to consent to any assignment or subletting). b. Processing Expenses. Tenant shall pay to Landlord, as Landlord's cost of processing each 12 proposed assignment or subletting (whether or not the same is ultimately approved by Landlord or consummated by Tenant), an amount equal to the sum of (i) Landlord's reasonable attorneys' and other professional fees, plus (ii) the sum of $1000.00 for the cost of Landlord's administrative, accounting and clerical time (collectively, "Processing Costs"). Notwithstanding anything to the contrary herein, Landlord shall not be required to process any request for Landlord's consent to an assignment or subletting until Tenant has paid to Landlord the amount of Landlord's estimate of the Processing Costs. When the actual amount of the Processing Costs is determined, it shall be reconciled with Landlord's estimate, and any payments or refunds required as a result thereof shall promptly thereafter be made by the parties. c. Consideration to Landlord. In the event of any assignment or sublease, whether or not requiring Landlord's consent, Landlord shall be entitled to receive, as additional rent hereunder, seventy-five percent (75%) of any consideration (including, without limitation, payment for leasehold improvements and any "Leasehold Profit" as defined below) paid by the assignee or subtenant for the assignment or sublease and, in the case of a sublease, the excess of the amount of rent paid for the sublet space by the subtenant over the amount of Monthly Base Rent under Section 4 above and Operating Expenses under Section 5 above attributable to the sublet space for the corresponding month; except that Tenant may recapture, on an amortized basis over the term of the sublease or assignment, any brokerage commissions paid by Tenant in connection with the subletting or assignment (not to exceed commissions typically paid in the market at the time of such subletting or assignment), Tenant's reasonable costs of advertising the space for sublease or assignment, any improvement allowance paid by Tenant to the subtenant or assignee, and any improvement costs paid by Tenant solely to prepare the space for the assignment or sublet.. "Leasehold Profit" shall be the value allocated to the leasehold between the parties to the assignment or sublease, but in no event less than the excess of the present value of the fair market rent of the Premises for the remaining term of this Lease after such assignment or sublease, over the Base Rent payable hereunder for such remaining term, as reasonably determined by Landlord. Upon Landlords request, Tenant shall direct any subtenant or assignee to pay the directly to Landlord the amounts due to it pursuant to this Section 14.c. on account of such sublease or assignment. If there is more than one sublease under this Lease, the amounts (if any) to be paid by Tenant to Landlord pursuant to this Section 14.c. shall be separately calculated for each sublease and amounts due Landlord with regard to any one sublease may not be offset against rental and other consideration pertaining to or due under any other sublease. d. Documentation. No permitted assignment or subletting by Tenant shall be effective until there has been delivered to Landlord a fully executed counterpart of the assignment or sublease which expressly provides that (i) in the case of a sublease, the subtenant may not assign its sublease or further sublet the sublet space without Landlord's prior written consent, (ii) in the case of an assignment, the assignee assumes all of Tenant's obligations under this Lease arising on or after the date of the assignment, and (iii) in the case of a sublease, the subtenant agrees to be and remain jointly and severally liable with Tenant to Landlord for the payment of Rent pertaining to the sublet space in the amount set forth in the sublease, and for the performance of all of the terms and provisions of this Lease pertaining to the sublet space. In addition to the foregoing, no assignment or sublease by Tenant shall be effective until there has been delivered to Landlord a fully executed counterpart of Landlord's consent to assignment or sublease form, as applicable. The failure or refusal of a subtenant or assignee to execute any such instrument shall not release or discharge the subtenant or assignee from its liability as set forth above. Notwithstanding the foregoing, no subtenant or assignee shall be permitted to occupy the Premises unless and until such subtenant or assignee provides Landlord with certificates evidencing that such subtenant or assignee is carrying all insurance coverage required of it under this Lease. e. No Merger. Without limiting any of the provisions of this Section 14, the voluntary or other surrender of this Lease by Tenant, or a mutual cancellation by Landlord and Tenant, shall not work a merger, and shall, at the option of Landlord, terminate all or any existing subleases or subtenancies or, at the option of Landlord, operate as an assignment to Landlord of any or all such subleases or subtenancies. If Landlord does elect that such surrender or cancellation operate as an assignment of such subleases or subtenancies, 13 Landlord shall in no way be liable for any previous act or omission by Tenant under the subleases or for the return of any deposit(s) under the subleases that have not been actually delivered to Landlord, nor shall Landlord be bound by any sublease modification(s) executed without Landlord's consent or for any advance rental payment by the subtenant in excess of one month's rent. f. Indirect Assignments. For purposes of this Section 14, the following events shall be deemed an assignment or sublease, as appropriate: (i) the issuance of equity interests (whether stock, partnership interests or otherwise) in Tenant or any subtenant or assignee, or any entity controlling any of them, to any person or group of related persons, in a single transaction or a series of related or unrelated transactions, such that, following such issuance, such person or group shall have Control (as defined below) of Tenant or any subtenant or assignee; (ii) a transfer of Control of Tenant or any subtenant or assignee, or any entity controlling any of them, in a single transaction or a series of related or unrelated transactions (including, without limitation, by consolidation, merger, acquisition or reorganization), except that the transfer of outstanding capital stock or other listed equity interests by persons or parties other than "insiders" within the meaning of the Securities Exchange Act of 1934, as amended, through the "over-the-counter" market or any recognized national or intemational securities exchange, shall not be included in determining whether Control has been transferred; (iii) a reduction of Tenant's assets to the point that this Lease and/or other leases are substantially Tenant's only asset(s); or (iv) a change or conversion in the form of entity of Tenant, any subtenant or assignee, or any entity controlling any of them, which has the effect of limiting the liability of any of the partners, members or other owners of such entity. "Control" shall mean direct or indirect ownership of 50% or more of all of the voting stock of a corporation or 50% or more of the voting legal or equitable interest in any other business entity, or the power to direct the management and operations of any entity (by equity ownership, contract or otherwise). g. Affiliates; Successors. Notwithstanding anything to the contrary in Section 14.a or Section 14.c., but subject to the other provisions of this Section 14, Tenant may assign this Lease or sublet the Premises or any portion thereof, without Landlord's consent, to any partnership, corporation or other entity which controls, is controlled by, or is under common control with Tenant (control being defined for such purposes as ownership of 50% or more of all of the voting stock of a corporation or 50% or more of the voting legal or equitable interest in any other business entity, and the power to direct the management and operations of, the relevant entity) (an "Affiliate") or to any partnership, corporation or other entity resulting from a merger or consolidation with Tenant or which acquires all or substantially all of Tenant's assets (through a transfer of assets or equity interests in Tenant) as a going concern and such assets include substantial assets other than this Lease (a "Successor"), provided that (i) Landlord receives at least ten (10) days' prior written notice of the assignment or subletting, in which Tenant shall expressly confirm that Tenant remains primarily liable (together with the assignee in the event of an assignment) for all of the obligations of the Tenant under this Lease, (ii) in the case of an assignment to a Successor, the Successor's net worth is not less than Tenant's net worth immediately prior to such assignment (or series of transactions of which such assignment is a part), (iii) in the case of a subletting or assignment to an Affiliate, the Affiliate remains an Affiliate for the duration of the subletting or the balance of the term in the event of an assignment, (iv) Landlord receives a fully executed copy of the assignment or sublease agreement between Tenant and the Affiliate or Successor at least ten (10) days prior to the effective date of such assignment or sublease, in which the Affiliate or Successor, as the case may be, assumes (in the event of an assignment) all of Tenant's obligations under this Lease, and agrees (in the event of a sublease) that such subtenant will, at Landlord's election, attorn directly to Landlord in the event that this Lease is terminated for any reason, and (v) in the case of an assignment, the essential purpose of such assignment is to transfer an active, ongoing business with substantial assets in addition to this Lease, and in the case of an assignment or sublease the transaction is for legitimate business purposes unrelated to this lease and the transaction is not a subterfuge by Tenant to avoid it obligations under this Lease or the restrictions on assignment and subletting contained herein. 14 15. Default. a. Tenant's Default. A material breach of this Lease by Tenant shall exist if any of the following events (severally, "Event of Default"; collectively, "Events of Default") shall occur: (i) if Tenant shall have failed to pay Base Rent, Tenant's Percentage Share of increased Operating Expenses, or any other sum required to be paid hereunder when due, including any interest due under Section 3; (ii) if Tenant shall have failed to perform any term, covenant or condition of this Lease except those requiring the payment of money, and Tenant shall have failed to cure the breach within fifteen (15) days after written notice from Landlord if the breach could reasonably be cured within the fifteen (15) day period; provided, however, if the failure could not reasonably be cured within the fifteen (15) day period, then Tenant shall not be in default unless it has failed to promptly commence and thereafter continue to make diligent and reasonable efforts to cure the failure as soon as practicable as reasonably determined by Landlord; (iii) if Tenant shall have assigned its assets for the benefit of its creditors; (iv) if the sequestration of, attachment of, or execution on, any material part of the property of Tenant or on any property essential to the conduct of Tenant's business shall have occurred, and Tenant shall have failed to obtain a return or release of the property within thirty (30) days thereafter, or prior to sale pursuant to any sequestration, attachment or levy, whichever is earlier; (v) if Tenant shall have failed to continuously and uninterruptedly conduct its business in the Premises, or shall have abandoned or vacated the Premises; (vi) if a court shall have made or entered any decree or order adjudging Tenant to be insolvent, or approving as properly filed a petition seeking reorganization of Tenant, or directing the winding up or liquidation of Tenant, and the decree or order shall have continued for a period of thirty (30) days; (vii) if Tenant shall make or suffer any transfer which constitutes a fraudulent or otherwise avoidable transfer under any provision of the federal Bankruptcy Laws or any applicable state law; or (viii) if Tenant shall have failed to comply with the provisions of Sections 23 or 25 of this Lease within the time periods stated therein. An Event of Default shall constitute a default under this Lease. b. Remedies Upon Tenant's Default. Upon an Event of Default, Landlord shall have the following remedies, in addition to all other rights and remedies provided by law, equity, statute or otherwise provided in this Lease, to which Landlord may resort cumulatively or in the alternative: (i) Landlord has the remedy described in California Civil Code Section 1951.4 (a landlord may continue the lease in effect after the tenant's breach and abandonment and recover rent as it becomes due, if the tenant has the right to sublet and assign subject only to reasonable limitations), and may continue this Lease in full force and effect, and this Lease shall continue in full force and effect as long as Landlord does not terminate Tenant's right to possession, and Landlord shall have the right to collect Rent when due. During the period Tenant is in default, Landlord may enter the Premises and relet it, or any part of it, to third parties for Tenant's account, provided that any Rent in excess of the Rent due hereunder shall be payable to Landlord. Tenant shall be liable immediately to Landlord for all costs Landlord incurs in reletting the Premises, including, without limitation, brokers' commissions, expenses of cleaning and redecorating the Premises required by the reletting and like costs. Reletting may be for a period shorter or longer than the remaining Term of this Lease. Tenant shall pay to Landlord the Rent and other sums due under this Lease on the dates the Rent is due, less the Rent and other sums Landlord receives from any reletting. No act by Landlord allowed by this Subsection (i) shall terminate this Lease unless Landlord notifies Tenant in writing that Landlord elects to terminate this Lease. (ii) Landlord may terminate Tenant's right to possession of the Premises at any time by giving written notice to that effect. No act by Landlord other than giving written notice to Tenant of such termination shall terminate this Lease. Acts of maintenance, efforts to relet the Premises or the appointment of a receiver on Landlord's initiative to protect Landlord's interest under this Lease shall not constitute a termination of Tenant's right to possession. On termination, Landlord shall have the right to remove all personal property of Tenant and store it at Tenant's cost and to recover from Tenant as damages: (a) the worth at the time of award of unpaid Rent and other sums due and payable which had been earned at the 15 time of termination; plus (b) the worth at the time of award of the amount by which the unpaid Rent and other sums due and payable which would have been payable after termination until the time of award exceeds the amount of the Rent loss that Tenant proves could have been reasonably avoided; plus (c) the worth at the time of award of the amount by which the unpaid Rent and other sums due and payable for the balance of the Term after the time of award exceeds the amount of the Rent loss that Tenant proves could be reasonably avoided; plus (d) any other amount necessary to compensate Landlord for all the detriment proximately caused by Tenant's failure to perform Tenant's obligations under this Lease, or which, in the ordinary course of things, would be likely to result therefrom, including, without limitation, any costs or expenses incurred by Landlord: (1) in retaking possession of the Premises, including reasonable attorneys' fees and costs therefor; (2) maintaining or preserving the Premises for reletting to a new tenant, including repairs or alterations to the Premises for the reletting; (3) leasing commissions; (4) any other costs necessary or appropriate to relet the Premises; and (5) at Landlord's election! such other amounts in addition to or in lieu of the foregoing as may be permitted from time to time by California Civil Code Section 1951.2 or any other laws of the State of California. The "worth at the time of award" of the amounts referred to in Subsections (ii)(a) and (ii)(b) is computed by allowing interest at the lesser of eighteen percent (18%) per annum or the maximum rate permitted by law, on the unpaid Rent and other sums due and payable from the date due through the date of award. The "worth at the time of award" of the amount referred to in Subsection (ii)(c) is computed by discounting the amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award, plus one percent (1%). Tenant waives redemption or relief from forfeiture under California Code of Civil Procedure Sections 1174 and 1179, or under any other present or future law, if Tenant is evicted or Landlord takes possession of the Premises by reason of any default of Tenant hereunder. c. Landlord's Default. Landlord shall not be deemed to be in default in the performance of any obligation required to be performed by Landlord hereunder unless and until Landlord has failed to perform the obligation within thirty (30) days after receipt of written notice by Tenant to Landlord specifying the obligation Landlord has failed to perform; provided, however, that if the nature of Landlord's obligation is such that more than thirty (30) days are required for its performance, then Landlord shall not be deemed to be in default if Landlord shall commence the performance of such obligation within the thirty (30) day period and thereafter shall diligently prosecute the same to completion. 16. Landlord's Right to Perform Tenant's Covenants. If Tenant shall at any time fail to make any payment or perform any other act on its part to be made or performed under this Lease, Landlord may, but shall not be obligated to, make the payment or perform any other act to the extent Landlord may deem desirable and, in connection therewith, pay expenses and employ counsel. Any payment or performance by Landlord shall not waive or release Tenant from any obligations of Tenant under this Lease. All sums so paid by Landlord, and all penalties, interest and costs in connection therewith, shall be due and payable by Tenant on the next day after any payment by Landlord, together with interest thereon at the Interest Rate, from that date to the date of payment thereof by Tenant to Landlord, plus collection costs and attorneys' fees. Landlord shall have the same rights and remedies for the nonpayment thereof as in the case of default in the payment of Base Rent. 17. Security Deposit;: Letter of Credit. a. Security Deposit. Tenant has deposited with Landlord the Security Deposit, in the amount specified in the Basic Lease Information, as security for the full and faithful performance of every provision of this Lease to be performed by Tenant. If Tenant defaults with respect to any provision of this Lease, Landlord may use, apply or retain all or any part of the Security Deposit for the payment of any Rent or other sum in default, for the payment of any amount which Landlord may expend or become obligated to expend by reason of Tenant's default, or for any loss or damage which Landlord may suffer by reason of 16 Tenant's default; provided, however, that the Security Deposit shall not be deemed an advance rent deposit or an advance payment of any kind, or a measure or limitation of Landlord's damages or constitute a bar or defense to any of the Landlord's other remedies under this Lease or at law upon Tenant's default. If any portion of the Security Deposit is used or applied, Tenant shall deposit with Landlord, within ten (10) days after written demand therefor, cash in an amount sufficient to restore the Security Deposit to its original amount. Landlord shall not be required to keep the Security Deposit separate from its general funds, and Tenant shall not be entitled to interest on the Security Deposit. Upon the expiration or earlier termination of this Lease, and Tenant's fulfillment of all of its obligations hereunder (including any obligations which survive such expiration or earlier termination), Landlord shall return the Security Deposit (or the balance thereof after application as aforesaid) to Tenant. b. Letter of Credit. In addition to the Security Deposit made by Tenant pursuant to Section 17.a., concurrently with Tenant's execution and delivery of this Lease to Landlord, Tenant has delivered to Landlord the Letter of Credit described below as security for Tenant's performance of all of Tenant's covenants and obligations under this Lease; provided, however, that neither the Letter of Credit nor any proceeds therefrom (the "Letter of Credit Proceeds") shall be deemed an advance rent deposit or an advance payment of any other kind, or a measure or limitation of Landlord's damages or constitute a bar or defense to any of the Landlord's other remedies under this Lease or at law upon Tenant's default. The Letter of Credit shall be maintained in effect from the date of this Lease through ninety (90) days after the expiration or earlier termination of the Term, and on or prior to the expiration of such ninety (90) day period, Landlord shall return to Tenant the Letter of Credit (unless presented for payment as provided herein) and any Letter of Credit Proceeds then held by Landlord (other than those held for application by Landlord as provided below, including application to cure any failure by Tenant to restore the Premises as required by this Lease upon the surrender thereof); provided, however, that in no event shall any such return be construed as an admission by Landlord that Tenant has performed all of its obligations hereunder. Landlord shall not be required to segregate the Letter of Credit Proceeds from its other funds and no interest shall accrue or be payable to Tenant with respect thereto. Landlord may (but shall not be required to) draw upon the Letter of Credit and use the Letter of Credit Proceeds or any portion thereof to cure any Event of Default by Tenant under this Lease or to compensate Landlord for any damage Landlord incurs as a result of Tenant's failure to perform any of its obligations hereunder, it being understood that any use of the Letter of Credit Proceeds shall not constitute a bar or defense to any of Landlord's other remedies under this Lease. In such event and upon written notice from Landlord to Tenant specifying the amount of the Letter of Credit Proceeds so utilized by Landlord and the particular purpose for which such amount was applied, Tenant shall immediately deliver to Landlord an amendment to the Letter of Credit or a replacement thereof in an amount equal to one hundred percent (100%) of the amount specified below for the applicable period. Tenant's failure to deliver such amendment or replacement to Landlord within five (5) days of Landlord's notice shall constitute an Event of Default hereunder. No lessor under any ground or underlying lease or holder of or beneficiary under a mortgage or deed of trust, nor any purchaser at any judicial or private foreclosure sale of the Property or any portion thereof, shall be responsible to Tenant for such Letter of Credit or any Letter of Credit Proceeds unless such lessor, holder or purchaser shall have actually received the same. c. As used herein, Letter of Credit shall mean an unconditional, irrevocable letter of credit (hereinafter referred to as the "Letter of Credit") issued at Tenant's sole expense by the San Francisco or New York office of a major national bank satisfactory to Landlord (the "Bank"), naming Landlord as beneficiary, and in form and substance satisfactory to Landlord, in the amount of One Million Dollars ($1,000,000.00) (subject to increase by the amount of the Improvement Advance as described below) for the during the period from the date of this Lease through the first annual anniversary of the Commencement Date, and reducing in amount on the first annual anniversary of the Commencement Date and on each subsequent annual anniversary of the Commencement Date by twenty percent (20%) of the original amount of the Letter of Credit; provided, however, that if on the date the Letter of Credit amount would otherwise reduce, an Event of Default, or default that with notice or the passage of time or both could mature into an Event of Default, shall have occurred and be continuing, the Letter of Credit amount shall not reduce on such date and shall not thereafter 17 reduce until the later of the next scheduled reduction date or the date such Event of Default or default shall have been cured. The Letter of Credit shall be for a one-year or, at Tenant's election, longer, term and shall provide: (i) that Landlord may make partial and multiple draws thereunder, up to the face amount thereof, (ii) that Landlord may draw upon the Letter of Credit up to the full amount thereof, as determined by Landlord, and the Bank will pay to Landlord the amount of such draw upon receipt by the Bank of a sight draft signed by Landlord and accompanied by a written certification from Landlord to the Bank stating either: (a) that an Event of Default has occurred and is continuing under this Lease, or (b) that Landlord has not received notice from the Bank that the Letter of Credit will be renewed by the Bank for at least one (1), year beyond the then relevant expiration date and Tenant has not furnished Landlord with a replacement Letter of Credit as hereinafter provided, or (c) that Bank no longer meets the requirements set forth above and Tenant has not furnished Landlord with a replacement Letter of Credit as required hereunder from a Bank meeting such requirements; and (iii) that, in the event of Landlord's assignment or other transfer of its interest in this Lease, the Letter of Credit shall be freely transferable by Landlord, without charge and without recourse, to the assignee or transferee of such interest and the Bank shall confirm the same to Landlord and such assignee or transferee. The Letter of Credit shall further provide that a draw thereon pursuant to clause (ii)(b) above may only be made during the thirty (30) day period preceding the then applicable expiration date of the Letter of Credit. In the event that the Bank shall fail to notify Landlord that the Letter of Credit will be renewed for at least one (1) year beyond the then applicable expiration date, and Tenant shall not have delivered to Landlord, at least thirty (30) days prior to the relevant annual expiration date, a replacement Letter of Credit in the amount required hereunder and otherwise meeting the requirements set forth above, then Landlord shall be entitled to draw on the Letter of Credit as provided above, and shall hold and apply the proceeds of such draw as Letter of Credit Proceeds pursuant to Paragraph 17.b above. Notwithstanding the foregoing, in the event that Landlord shall make an Improvement Advance as described in Exhibit B attached hereto, within thirty (30) days of the determination of the total amount of the Improvement Advance Tenant shall increase the initial amount of the Letter of Credit by the amount of the Improvement Advance. 18. Surrender of Premises. By taking possession of the Premises, Tenant shall be deemed to have accepted the Premises and the Property in good, clean and completed condition and repair, subiect to all applicable laws, codes and ordinances. On the Expiration Date or earlier termination of this Lease, Tenant shall surrender the Premises to Landlord in its condition as of the Commencement Date, normal wear and tear excepted. Tenant shall remove from the Premises all of Tenant's Personal Property and any Alterations required to be removed pursuant to Section 9 of this Lease. Tenant shall repair any damage or perform any restoration work required by the removal. If Tenant fails to timely remove any Personal Property or Alterations as aforesaid, Landlord may remove the property and store and/or dispose of the same at Tenant's expense, including interest at the Interest Rate. If the Premises are not so surrendered at the termination of this Lease, Tenant shall indemnify Landlord against all Claims resulting from delay by Tenant in so surrendering the Premises, including, without limitation, any claims made by any succeeding tenant, losses to Landlord due to lost opportunities to lease to succeeding tenants, and attorneys' fees and costs. Tenant shall give written notice to Landlord at least thirty (30) days prior to vacating the Premises and shall meet with Landlord for a joint inspection of the Premises at the time of vacating. In the event of Tenant's failure to give such notice or participate in such joint inspection, Landlord's inspection at or after Tenant's vacating the Premises shall conclusively be deemed correct for purposes of determining Tenant's responsibility for removal of Alterations and repairs and restoration of the Premises. 19. Holding Over. If Tenant remains in possession of all or any part of the Premises after the expiration of the Term or the 18 earlier termination of this Lease without Landlord's prior written consent, the tenancy shall be a tenancy at sufferance only and shall not constitute a renewal or extension for any further term, regardless of whether Landlord shall accept Rent for any such period. In such event, Base Rent shall be increased in an amount equal to two hundred percent (200%) of the Base Rent during the last month of the Term (including any extensions), and any other sums due under this Lease shall be payable in the amount, and at the times, specified in this Lease. The tenancy shall be subject to every other term, condition, covenant and agreement contained in this Lease, except that any renewal or extension option in favor of Tenant shall not be applicable. No such increase shall impair Landlord's other rights and remedies against Tenant by reason of such holding over by Tenant, and Tenant shall vacate the Premises immediately upon Landlord's request. 20. Access to Premises. Tenant shall permit Landlord and its agents to enter the Premises at all reasonable times upon reasonable notice, except in the case of an emergency (in which event entry may be made when necessary and without notice), to inspect the Premises, to post Notices of Nonresponsibility and similar notices, to show the Premises to interested parties such as prospective mortgagees, purchasers and tenants to provide any services required of Landlord hereunder, to make necessary alterations, additions, improvements or repairs either to the Premises, the Building, or other premises within the Building, and to discharge Tenant's obligations hereunder when Tenant has failed to do so within a reasonable time after written notice from Landlord. No such entry shall constitute a constructive eviction or give rise to an abatement of Rent hereunder, constitute a constructive eviction, or otherwise diminish Tenant's obligations under this Lease. In exercising its rights under this Section 20, Landlord shall at all times endeavor to minimize interference with Tenant's operations, to the extent practicable. During the last year of the Term, Landlord shall have the right to erect on the exterior of the Premises and/or on the exterior or in the Common Areas of the Building and the Property suitable signs indicating that the Premises are available for lease. 21. Signs a. The size, design, color, location and other physical aspects of any sign in or on the Premises shall be subject to the CC&R's, Rules, Landlord's approval prior to installation, and to all Legal Requirements. The costs df any permitted sign, and the costs of its installation, maintenance and removal, shall be at Tenant's sole expense and shall be paid within ten (10) days of Tenant's receipt of a bill from Landlord for the costs. In no event shall Tenant be permitted to place any sign, logo or other identification on the exterior of the Building, in the Building's Common Areas (other than on a Building directory maintained to identify the Building's tenants), or upon the Property, or which is inside the Premises but visible from outside of the Premises (other than upon the door(s) to the Premises). b. Exterior Building Signage. Notwithstanding Section 21.a., so long as the Tenant under this Lease (i) is the Tenant originally named under this Lease in the Basic Lease information, or any Affiliate or Successor of such original Tenant, (ii) is in occupancy pursuant to this Lease of at least seventy-five percent (75%) of the entire Premises originally demised under this Lease, and (iii) is not in default of any of its obligations hereunder beyond the expiration of any applicable grace or cure period, Tenant shall be permitted to maintain identification signage at the top of one exterior side of the Building in a location reasonably approved by Landlord. The installation, maintenance and removal of Tenant's signage pursuant to this Section 21.b. shall be performed by Tenant at Tenants expense, but in coordination with Landlord and its reasonable installation procedures and requirements, or at Landlord's option, by Landlord at Tenant's expense. Such signage of Tenant shall be subject to Landlord's prior approval and all Legal Requirements, and shall be limited to Tenant's name and/or logo. If Tenant shall fail to meet the signage conditions specified herein, Landlord may immediately remove Tenant's signage at Tenant's expense, and Tenant's signage rights pursuant to this Section 21.b. shall thereafter forever cease and terminate; provided, however, that if applicable Legal Requirements do not require removal of such signage prior to the expiration of the thirty (30) day period hereinafter provided, Landlord shall not remove such signage unless it shall have 19 given Tenant thirty (30) days' prior notice of the signage conditions Tenant has failed to meet, and such failure continues after the expiration of such thirty (30) day period. Upon the expiration or earlier termination of this Lease, Tenant shall, at Tenant's expense, or at Landlord's option Landlord shall, at Tenant's expense, remove Tenant's signage and repair any damage to the Building caused by such removal. 22. Subordination. a. Subordinate Nature. Except as provided in Subsections b. and c., this Lease is subject and subordinate to all ground and underlying leases, mortgages and deeds of trust which now or may hereafter affect the Real Property or any portion thereof, to the CC&R's, and to all renewals, modifications, consolidations, replacements and extensions of the foregoing, without the necessity of any further documentation evidencing such subordination. Notwithstanding such self-operative subordination, within ten (10) days after Landlord's written request therefor, Tenant shall execute any and all documents required by Landlord, the lessor under any ground or underlying lease ("Ground Lessor"), or the holder or holders of any mortgage or deed of trust ("Holder"), evidencing this Lease to be subordinate to the lien of any such lease, mortgage or deed of trust, as the case may be. Tenant hereby irrevocably appoints Landlord as Tenant's attorney-in-fact to execute and deliver any such instrument in the name of Tenant if Tenant fails to do so within such time. If the interest of Landlord in the Real Property or the Building is transferred to any Ground Lessor or Holder pursuant to or in lieu of proceedings for enforcement of any such lease, mortgage, or deed of trust, Tenant shall immediately and automatically attorn to the Ground Lessor or Holder, and this Lease shall continue in full force and effect as a direct lease between the Ground Lessor or Holder and Tenant on the terms and conditions set forth herein. b. Possible Priority of Lease. If a Ground Lessor or a Holder advises Landlord that it desires or requires this Lease to be prior and superior to a lease, mortgage or deed of trust, Landlord may notify Tenant. Within seven (7) days of Landlord's notice, Tenant shall execute, have acknowledged and deliver to Landlord any and all documents or instruments, in the reasonable form presented to Tenant, which Landlord, Ground Lessor or Holder deems necessary or desirable to make this Lease prior and superior to the lease, mortgage or deed of trust. c. Lease Modification. If, in connection with obtaining financing for the Real Property or any portion thereof, any Holder or Ground Lessor shall request reasonable modification to this Lease as a condition to such ground lease or financing, Tenant shall execute and deliver to Landlord, within ten (10) days of Landlord's request, any such modification agreement so requested, provided such modifications do not adversely affect Tenant's rights or increase Tenant's obligations hereunder (other than additional obligations requiring Tenant to send such Holder or Ground Lessor copies of notices given to Landlord). d. Nondisturbance Agreement. It shall be a condition to the subordination of this Lease to any Superior Interest created after the date of this Lease (as distinguished from any Superior Interest in effect as of the date of this Lease, or any amendment or modification thereto), that Tenant shall receive from the Ground Lessor or Holder, as applicable, of such Superior Interest a so-called non-disturbance agreement in the form reasonably required by such Ground Lessor or Holder. 23. Transfer of the Property. Upon transfer of the Real Property and assignment of this Lease, Landlord shall be entirely freed and relieved of all liability under any and all of its covenants and obligations contained in or derived from this Lease occurring after the consummation of the transfer and assignment, and if Landlord shall transfer the Security Deposit to the transferee of Landlord's interest in the Real Property, Landlord shall be released from all liability for the Security Deposit. Tenant shall attorn to any entity purchasing or otherwise acquiring the Premises at any sale or other proceeding. 20 24. Estoppel Certificates; Financial Statements. Within ten (10) days following written request by Landlord from time to time throughout the Term, Tenant shall execute and deliver to Landlord an estoppel certificate in the form attached hereto as Exhibit E, duly completed by Tenant. At the request of Landlord from time to time during the Term, Tenant shall provide to Landlord its current financial statements or other information setting forth Tenant's financial condition and net worth. Landlord shall use such documentation solely for purposes of this Lease and in connection with the ownership, financing, management and disposition of the Real Property. 25. Mortgagee Protection. In the event of any default on the part of Landlord, Tenant will give notice by registered or certified mail to each Ground Lessor and Holder whose identity has been disclosed to Tenant, and shall offer the Ground Lessor or Holder a reasonable opportunity after such notice (but in no event less than thirty (30) days) to cure the default, including time to obtain possession of the Property or the Premises by lease termination, power of sale or a judicial foreclosure (as applicable), if such should prove necessary to effect a cure. In no event shall any Ground Lessor or Holder in any way or to any extent be: (a) liable for any act or omission of any prior Landlord in contravention of any provision of this Lease; or (b) subject to any offsets, claims or defenses which Tenant might have against any prior Landlord; or (c) bound by any Rent which Tenant might have paid for more than thirty (30) days in advance to any prior Landlord; or (d) bound by any agreement or modification of this Lease made without such Ground Lessor's or Holder's written consent. Tenant agrees that if any Ground Lessor or Holder acquires possession of the Premises or title to the Real Property as a result of termination of its ground lease or foreclosure of such Holder's deed of trust or other security instrument, as applicable, the acceptance of a lease surrender or deed in lieu of such foreclosure, or otherwise, the provisions of Section 36 below shall be applicable to liability of such Ground Lessor or Holder as successor Landlord under this Lease. 26. Attorneys' Fees. If either party shall bring any action or legal proceeding for damages for an alleged breach of any provision of this Lease, to recover rent or other sums due, to terminate the tenancy of the Premises or to enforce, protect or establish any term, condition or covenant of this Lease or right of either party, the prevailing party shall be entitled to recover, as a part of the action or proceedings, or in a separate action brought for that purpose, reasonable attorneys' fees and court costs as may be fixed by the court or jury. The prevailing party shall be the party which secures a final judgment in its favor, provided that if the party bringing any action shall dismiss the same without the consent of the other party, the other party shall be deemed the prevailing party. 27. Brokers. Tenant warrants and represents that it has had no dealings with any real estate broker or agent in connection with the negotiation of this Lease, except for the brokers(s) specified in the Basic Lease Information (the "Brokers"), and that it knows of no other real estate broker or agent who is or might be entitled to a fee, commission or other compensation in connection with this Lease. Tenant shall indemnify and hold harmless Landlord from and against any and all liabilities or expenses (including reasonable attorneys' fees and costs) arising out of claims made by any broker or individual (other than the Brokers) for a fee, commission or other compensation resulting from this Lease. Pursuant to the terms of separate agreement(s) between Landlord and the Brokers, Landlord shall pay the Brokers any fee, commission or other compensation to which they are entitled from Landlord by reason of this Lease. Tenant shall have no liability to the Brokers for any fee, commission or other compensation. 21 28. Parking Tenant shall have the right to park in the Building's parking facilities, in common with other tenants of the Building, upon such terms and conditions as may from time to time be established by Landlord. There shall be no charge for any portion of the parking facilities which is not reserved. Tenant agrees not to use in excess of its proportionate share (i.e. the rentable square footage of the Premises in proportion to the rentable square footage of the Building or Buildings served by such parking facilities) of parking facilities and agrees to cooperate with Landlord and other tenants in the use of the parking facilities. Landlord reserves the right in its absolute discretion, to determine whether the parking facilities are becoming crowded and to allocate and assign parking spaces among Tenant and the other tenants. Landlord shall not be liable to Tenant, nor shall this Lease be affected, if any parking is impaired by moratorium, initiative, referendum, law, ordinance, regulation or order passed, issued or made by any governmental or quasi-governmental body or by fire or other casualty. 29. Utilities and Services. Tenant shall arrange for all telephone, water, gas, electricity and other power and utilities which it shall require in connection with its use or occupancy of the Premises and shall pay for the same, together with any taxes, penalties, surcharges or the like pertaining thereto. Landlord shall have no obligation to furnish any utilities or services to the Premises or any equipment providing for the same. Without limitation, Tenant shall be solely responsible for providing such heating, ventilation and air conditioning ("HVAC") to the Premises as Tenant shall require for the comfortable occupancy thereof. Any equipment or systems which Tenant shall require in order to supply HVAC shall be subject to the provisions of Section 9 above. Tenant shall obtain, at its expense all electric light bulbs, ballasts and tubes as it shall require for the Premises. If any of the foregoing utilities or services are not separately metered to Tenant, Tenant shall pay a reasonable proportion, as determined by Landlord, of all charges jointly serving the Premises and other premises. Landlord shall not be liable for any damages directly or indirectly resulting from nor shall the Base Rent, Operating Expenses or any other monies owed by Tenant to Landlord under this Lease be abated or reduced by reason of (a) the installation, use or interruption of use of any equipment used in connection with the furnishing of any of the foregoing utilities and services, (b) failure to furnish or delay in furnishing any such utilities or services for any reason whatsoever, or (c) the limitation, curtailment, rationing or restriction on use of water, electricity, gas or any other form of energy or any other service or utility whatsoever serving the Premises or the Real Property. Landlord shall be entitled to cooperate voluntarily and in a reasonable manner with the efforts of national, state or local government agencies or utility suppliers in reducing energy or other resource consumption. The obligation to make services available hereunder shall be subject to the limitations of any such voluntary, reasonable program. 30. Intentionally Deleted. 31. Acceptance. Delivery of this Lease, duly executed by Tenant, constitutes Tenant's offer to lease the Premises as set forth herein, and under no circumstances shall such delivery be deemed to create an option or reservation to lease the Premises for the benefit of Tenant. This Lease shall become effective and binding only upon execution hereof by Landlord and delivery of a signed copy to Tenant. If Landlord does not accept the Tenant's offer, any sums delivered by Tenant with its offer shall be returned to Tenant. 32. Use of Building Name. Tenant shall not employ the name of the Building in the name or title of its business or occupation, or for any other purpose, except to identify the address of the Building, without Landlord's prior written consent, which consent Landlord may withhold in its sole discretion. Landlord reserves the right to change the name 22 of the Building without Tenant's consent and without any liability to Tenant. 33. Recording. Neither Landlord nor Tenant shall record this Lease, nor a short form memorandum of this Lease, without the prior written consent of the other. 34. Quitclaim. Upon any termination or expiration of this Lease pursuant to its terms, Tenant, at Landlord's request, shall execute, have acknowledged and deliver to Landlord a quitclaim deed of all Tenant's interest in the Premises, Building and Property created by this Lease. 35. Notices. Any notice, demand or request required or desired to be given under this Lease shall be in writing sent to the address of the party specified in this Lease, and shall be given by hand delivery, electronic mail (e.g., telecopy), overnight courier service (e.g. Federal Express), or the United States mail, registered or certified, the postage prepaid. All notices shall be deemed to have been given when received at the address of the party to which it has been sent (or when such receipt is refused). As of the date of execution of this Lease, the addresses of Landlord and Tenant are as specified in the Basic Lease Information. Either party may change its address by giving notice of the change in accordance with this Section. 36. Landlord's Exculpation. The term "Landlord," as used in this Lease, shall mean only the owner or owners of the Real Property at the time in question. Notwithstanding any other provision of this Lease, the liability of Landlord for its obligations under this Lease is limited solely to Landlord's interest in the Real Property as the same may from time to time be encumbered, and no personal liability shall at any time be asserted or enforceable against any other assets of Landlord or against the constituent shareholders, partners or other owners of Landlord, or the directors, officers, employees and agents of Landlord or such constituent shareholder, partner or other owner, on account of any of Landlord's obligations or actions under this Lease. Notwithstanding any other provision of this Lease, Landlord shall not be liable for any consequential damages or interruption or loss of business, income or profits, nor shall Landlord be liable for loss of or damage to artwork, currency, jewelry, bullion, unique or valuable documents, securities or other valuables, or for other property not in the nature of ordinary fixtures, furnishings and equipment. Wherever in this Lease Tenant (a) releases Landlord from any claim or liability, (b) waives or limits any right of Tenant to assert any claim against Landlord or to seek recourse against any property of Landlord or (c) agrees to indemnify Landlord against any matters, the relevant release, waiver, limitation or indemnity shall run in favor of and apply to Landlord, the constituent shareholders, partners or other owners of Landlord, and the directors, officers, employees and agents of Landlord and each such constituent shareholder, partner or other owner. In no event shall any shareholder, partner, member, officer, director or other constituent of Landlord or its direct or indirect constituents ever be personally liable for Landlord's obligations or liability under this Lease. 37. Additional Structures. Any diminution or interference with light, air or view by any structure which may be erected on land adjacent to the Building shall in no way alter this Lease or impose any liability on Landlord. 23 38. Consents and Approvals. Wherever the consent, approval, judgment or determination of Landlord is required or permitted under this Lease, except as expressly provided herein Landlord may exercise its sole discretion in granting or withholding such consent or approval or in making such judgment or determination. Whenever Tenant requests Landlord to take any action or give any consent or approval, Tenant shall reimburse Landlord for all of Landlord's costs incurred in reviewing the proposed action or consent (whether or not Landlord consents to any such proposed action), including, without limitation, reasonable attorneys' or consultants' fees and expenses, within ten (10) days after Landlord's delivery to Tenant of a statement of such costs. If it is determined that Landlord failed to give its consent or approval where it was required to do so under this Lease, Tenant's sole remedy will be an order of specific performance or mandatory injunction of the Landlord's agreement to give its consent or approval. The review and/or approval by Landlord of any item shall not impose upon Landlord any liability for accuracy or sufficiency of any such item or the quality or suitability of such item for its intended use. Any such review or approval is for the sole purpose of protecting Landlord's interest in the Real Property, and neither Tenant nor any Tenant Party nor any person or entity claiming by, through or under Tenant, nor any other third party shall have any rights hereunder by virtue of such review and/or approval by Landlord. 39. General. a. Captions. The captions and headings used in this Lease are for the purpose of convenience only and shall not be construed to limit or extend the meaning of any part of this Lease. b. Time. Time is of the essence for the performance of each term, condition and covenant of this Lease. c. Severability. If any provision of this Lease is held to be invalid, illegal or unenforceable, the invalidity, illegality, or unenforceability shall not affect any other provision of this Lease, but this Lease shall be construed as if the invalid, illegal or unenforceable provision had not been contained herein. d. Choice of Law; Construction. This Lease shall be construed and enforced in accordance with the laws of the State of California. The language in all parts of this Lease shall in all cases be construed as a whole according to its fair meaning and not strictly for or against either Landlord or Tenant. e. Gender; Singular, Plural. When the context of this Lease requires, the neuter gender includes the masculine, the feminine, a partnership or corporation or joint venture, and the singular includes the plural. f. Binding Effect. The covenants and agreements contained in this Lease shall be binding on the parties hereto and, subject to Section 14 above, on their respective successors and assigns. g. Waiver. The waiver of Landlord of any breach of any term, condition or covenant of this Lease shall not be deemed to be a waiver of the provision or any subsequent breach of the same or any other term, condition or covenant of this Lease. The subsequent acceptance of Rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach at the time of acceptance of the payment. No covenant, term or condition of this Lease shall be deemed to have been waived by Landlord unless the waiver is in writing signed by Landlord. h. Entire Agreement. This Lease is the entire agreement between the parties, and supersedes all prior agreements, including letters of intent, between them, and there are no agreements or representations between the parties except as expressly set forth herein. Except as otherwise provided herein, no subsequent change or addition to this Lease shall be binding unless in writing and signed by the parties hereto. 24 i. Waiver of Jury. Tenant hereby waives any right it may have to a jury trial in the event of litigation between Tenant and Landlord pertaining to this Lease. Landlord and Tenant agree that this paragraph constitutes a written consent to waiver of trial by jury within the meaning of Califomia Code of Civil Procedure Section 631 (a)(2), and Tenant does hereby authorize and empower Landlord to file this paragraph and or this Lease, as required, with the clerk or judge of any court of competent jurisdiction as a written consent to waiver of jury trial. j. Counterparts. This Lease may be executed in counterparts, each of which shall be an original, and all of which together shall constitute but one instrument. k. Exhibits. The Basic Lease Information and all exhibits attached hereto are hereby incorporated herein and made an integral part hereof. l. Addendum. The Addendum, if any, attached hereto is hereby incorporated herein and made an integral part hereof. m. Other Leases. Tenant represents and warrants to Landlord that, with the exception of this Lease, neither Tenant nor any affiliate of Tenant is a tenant under a lease or any other tenancy agreement (1) with (a) Riggs & Company; a division of Riggs Bank N.A., as trustee of the Multi-Employer Property Trust, (b) Riggs Bank N.A., as trustee of the Multi-Employer Property Trust, (c) the Multi-Employer Property Trust, (d) the National Bank of Washington Multi-Employer Property Trust, the previous name of the Multi-Employer Property Trust, (e) The Riggs National Bank of Washington, D.C., as trustee of the Multi-Employer Property Trust, (f) North-ridge Business Center LLC, (g) the Corporate Drive Corporation, as trustee of the Corporate Drive Nominee Realty Trust, (h) Arboretum Lakes-I, L,L.C., a Delaware limited liability company, (i) Village Green at Seven Bridges, L.L.C., (j) Pine Street Development, L.L.C., (k) MEPT Realty LLC, a New York limited liability company, (1) MIEPT, L.L.C., a Delaware limited liability company, (m) Cabrillo Properties LLC, (n) Valencia LLC, (o) Mission Trails LLC, or (p) Centrepointe Distribution Center LLC, or (2) involving any property in which any one or more of the entities named in clauses (1)(a) through (e) are known by Tenant to have an ownership interest. 40. Renewal Option. a. Tenant shall have the option to renew this Lease for one (1) additional term of five (5) years, commencing upon expiration of the initial Term. Such renewal option must be exercised, if at all, by written notice given by Tenant to Landlord not later than nine (9) months prior to expiration of the initial Term. Notwithstanding the foregoing, this renewal option shall be null and void and Tenant shall have no right to renew this Lease if (i) as of the date immediately preceding the commencement of the renewal period the original Tenant named under this Lease in the Basic Lease Information is not in occupancy of the entire Premises then demised hereunder or such Tenant does not intend to continue to occupy the entire Premises then demised hereunder (but intends to assign this Lease or sublet the Premises in whole or in part), or (ii) on the date Tenant exercises such renewal option or on the date immediately preceding the commencement date of the renewal period Tenant is in default of any of its obligations under this Lease. If Tenant exercises such renewal option, then during the renewal period the Base Rent payable by Tenant shall be the then fair market rent for the Premises based upon the terms of this Lease, as renewed. For purposes of this Section 40, the term "fair market rent" shall mean the rental rate for comparable space under primary lease (and not sublease) to new tenants, taking into consideration such amenities as existing improvements, view, floor on which the Premises are situated and the like, situated in comparable first-class office buildings in comparable business parks in a fifteen (15) mile radius of the Property, taking into consideration the then-prevailing ordinary rental market practices with respect to tenant concessions (if any) (e.g. not offering extraordinary rental, promotional deals and other concessions to tenants which deviate from what is the then-prevailing ordinary practice in an effort to alleviate cash flow problems, difficulties 25 in meeting loan obligations or other financial distress, or in response to a greater than average vacancy rate). Fair market rent shall include the periodic rental increases, if any, that would be included for space leased for the renewal period. The fair market rent shall be mutually agreed upon by Landlord and Tenant in writing within the thirty (30) calendar day period commencing three (3) months prior to commencement of the renewal period. If Landlord and Tenant do not agree upon the fair market rent within said thirty (30) day period, then the fair market rent shall be established by appraisal in accordance with the procedures set forth in Exhibit F attached hereto. b. Notwithstanding anything in the foregoing or in Exhibit F to the contrary, in no event shall the Base Rent during the renewal period be less than the Base Rent payable by Tenant for the month immediately preceding the commencement of the renewal period (without regard to any temporary abatement of rental then in effect pursuant to the provisions of this Lease). IN WITNESS WHEREOF, the parties have executed this Lease on the dates set forth below, effective as of the date first above wntten. Landlord: Tenant: THE MULTI-EMPLOYER CERTICOM CORP., PROPERTY TRUST, A TRUST a Delaware corporation ORGANIZED UNDER 12 C.F.R. SECTION 9.18, by its trustee By: /s/ Philip C. Deck Riggs & Company, a division of -------------------------- Riggs Bank N.A. Its: Chairman + CEO -------------------------- By: /s/ Mary Anne Martins By: /s/ B. MacInnis --------------------------- --------------------------- Mary Anne Martins Its: Managing Director Its: Vice President + CFO -------------------------- -------------------------- 26 EXHIBIT A --------- Mt. Eden Business Park Hayward, CA Graphic Omitted EXHIBIT B --------- TENANT IMPROVEMENTS ------------------- 1. Tenant Improvements. a. Plans. Improvements shall be constructed in the Premises in accordance with this Paragraph 1. On or before October 27, 1998, Tenant shall furnish to Landlord for Landlord's review and approval (which approval shall not be unreasonably withheld) detailed layout plans and finish specifications (the "Space Plans") prepared by an architect approved by Landlord. The Space Plans shall show all of the improvements which Tenant desires to be constructed in the Premises, and all such improvements shall comply with all applicable building codes and other Legal Requirements. The Space Plans shall separately note any proposed structural work or extraordinary or supplemental electrical, plumbing or HVAC requirements, and shall contain such detail and specifications as would permit a general contractor to obtain preliminary estimates of the cost of performing all work shown thereon. Tenant shall respond promptly to any reasonable objections of Landlord to the Space Plans and shall resubmit appropriately revised Space Plans prepared by Tenant's architect within three (3) Business Days of Tenant's receipt of Landlord's objections. The Space Plans, as finally approved in writing by Landlord, shall be referred to herein as the "Final Space Plans." Landlord shall furnsh to Tenant for Tenant's written approval (which shall not be unreasonably withheld) working plans and specifications (the "Working Drawings") prepared by Landlord's architect for the improvements which Tenant desires to be constructed in the Premises. The Working Drawings shall show improvements that conform to the Final Space Plans (except to the extent specifically noted therein or in accompanying specifications). Tenant shall respond to the Working Drawings within three (3) Business Days of its receipt thereof. Landlord shall respond promptly to any reasonable objections of Tenant to the Working Drawings and shall resubmit to Tenant for Tenant's approval (which shall not be unreasonably withheld) appropriately revised Working Drawings prepared by Landlord's architect. Tenant shall respond to the revised Working Drawings within three (3) Business Days of its receipt thereof. If Tenant falls to respond to the Working Drawings or the revised Working Drawings within the periods described above, Tenant shall be deemed to have approved the Working Drawings or revised Working Drawings, as applicable. The Working Drawings, as approved in writing by Landlord and Tenant, as revised in accordance with the following provisions of this Paragraph 1, are hereinafter called the "Final Plans", and the improvements to be performed in accordance with the Final Plans are hereinafter called the "Tenant Improvements". Any delay in Substantial Completion of the Tenant Improvements or increased cost of the Tenant Improvements caused directly or indirectly by any revision to the Space Plans or the Working Drawings requested by Tenant shall constitute a Tenant Delay under Paragraph 1.e. below. b. Construction. Upon approval of the Final Plans, Landlord shall submit the same for pricing to a contractor selected by Landlord ("Landlord's Contractor"), and thereafter provide Tenant with an estimated budget for the Tenant Improvements, including Landlord's Construction Operations Fee (as defined in Paragraph 1.f.iii.B. below). Tenant shall have five (5) Business Days after the receipt of Landlord's estimated budget to approve or reasonably disapprove of the same. If Tenant disapproves of the budget within such five (5) Business Day period, Tenant shall so notify Landlord and the Final Plans shall promptly be modified by Landlord's architect in order to satisfactorily reduce the amount of the estimated budget, as requested by Tenant. Any and all revisions to the Final Plans shall be subject to Landlord's and Tenant's reasonable approval. Upon Landlord's revision of the Final Plans, Landlord shall cause Landlord's Contractor to promptly issue new pricing and upon receipt of such pricing Landlord shall prepare and submit to Tenant a revised estimated budget. Tenant shall respond to the revised estimated budget in the manner described above. Any delay in Substantial Completion of the Tenant Improvements or increased cost of the 1 Tenant Improvements caused directly or indirectly by any revision to the Final Plans or the estimated budget to address Tenant's disapproval of the estimated budget shall constitute a Tenant Delay under Paragraph 1.e. below. If Tenant fails to raise any objections to the budget within the five (5) Business Day period(s) described above, Tenant shall be deemed to have approved Landlord's proposed budget. Landlord shall commence construction of the Tenant Improvements promptly after approval of the Final Plans, and thereafter diligently pursue such construction to completion (but in no event shall Landlord be required to pursue a construction schedule which would cause Substantial Completion to occur prior to January 15, 1999). Landlord shall use reasonable care in preparing the budget, but it shall be a good faith estimate only and will not limit Tenant's obligation to pay for its share of the costs of the Tenant Improvements as set forth below in this Paragraph 1. c. Changes. In the event that Tenant shall request any change in or to the Final Plans (a "Change"), Landlord's architect shall prepare for Landlord's and Tenant's review and written approval a change order with respect to such Change (the "Change Order"), together with, if appropriate, revised Working Drawings incorporating the requested Change and clearly identifying the same as such on the revised Working Drawings. Landlord shall not unreasonably withhold or delay its approval of the Change Order or revised Working Drawings, provided, however, that Landlord shall have at least three (3) Business Days after receipt thereof to review any proposed Change. In the event that Landlord shall approve any proposed Change, together with such approval, if practicable, and if not practicable as soon thereafter as is practicable, Landlord shall give Tenant Landlord's estimated increase or decrease in the cost of the Tenant Improvements which would result from incorporating such Change and Landlord's estimate of the delay, if any, in the commencement or completion of the Tenant Improvements which would result from incorporating such Change. Landlord will use reasonable care in preparing the estimates, but they shall be good faith estimates only and will not limit Tenant's obligation to pay for the actual increase in the cost of the Tenant Improvements or Tenant's responsibility for the actual construction delay resulting from the Change. Within two (2) Business Days after receipt of such cost and delay estimates, Tenant shall notify Landlord in writing whether Tenant approves the Change. If Tenant fails to approve the change within such two (2) Business Day period, construction of the Tenant Improvements shall proceed as provided in accordance with the Final Plans as they existed prior to the requested Change. If, following Tenant's review of the estimated costs and delays, Tenant desires Landlord to incorporate the Change into the Tenant Improvements, then Tenant and Landlord shall execute a change order for such Change on Landlord's standard form therefor, and the term "Final Plans" shall thereafter be deemed to refer to the Working Drawings as so revised and approved. d. Landlord's Work. In addition to construction of the Tenant Improvements, Landlord shall construct the Building as a watertight shell, with all utilities brought to the Building, in accordance with plans prepared by Landlord's architect and previously delivered to Tenant (collectively, "Landlord's Work"). Landlord's Work shall be performed at Landlord's sole cost and expense (except for any costs resulting from Tenant Delays, including any Changes) by such general contractor as Landlord shall determine. e. Tenant Delays. Tenant shall be responsible for, and shall pay to Landlord, any and all costs and expenses (including lost rent) incurred by Landlord in connection with the following, or by reason of any delay in the commencement or completion of Landlord's Work or the Tenant Improvements or in Landlord's timely delivery of the Premises caused by the following: (i) the failure of Tenant to submit the Space Plans or Final Space Plans to Landlord by the dates or within the time periods set forth in Paragraph l.a. above, or the failure of the Space Plans or Final Space Plans to meet the applicable requirements of Paragraph l.a. above, (ii) Tenant's failure to respond to the Working Drawings within the time period(s) set forth in Paragraph l.a. above, (iii) any changes in the Space Plans requested by Tenant, or any changes in the Working Drawings requested by Tenant (including any costs or delays resulting from proposed changes that are not ultimately 2 made), (iv) any failure by Tenant to promptly respond to inquiries regarding the construction of the Tenant Improvements or Landlord's Work or to promptly grant Tenant's approval of materials or finishes for the Tenant Improvements or Landlord's Work, (v) any failure by Tenant to timely pay any amounts due from Tenant hereunder (it being acknowledged that if Tenant fails to make or otherwise delays making such payments, Landlord may stop Landlord's Work rather than incur costs which Tenant is obligated to fund but has not yet done so and any delay from such a work stoppage will be a Tenant Delay), (vi) any interference by Tenant with the construction of the Tenant Improvements or Landlord's Work, or (vii) any other delay requested or caused by Tenant, including, without limitation, any delay caused by Tenant's early entry into any portion of the Premises pursuant to Section 2.d. of the Lease. Each of the foregoing is referred to herein and in the Lease as a "Tenant Delay". Landlord shall notify Tenant in writing of any Tenant Delay (identifying the nature of the Tenant Delay) as soon as reasonably practicable after Landlord becomes actually aware of such Tenant Delay, together with Landlord's then good faith estimate of the probable duration of such Tenant Delay. Without limitation, Landlord will use its good faith efforts to notify Tenant of "long lead items" as soon as reasonably practicable after actually being advised of the delay by the suppliers involved, or otherwise actually becoming aware of the delay. Landlord will suggest alternative products to alleviate the delay, if possible, and may substitute reasonably equivalent products as deemed reasonably necessary by Landlord. f. Cost of Improvements. The cost of the construction and installation of the Tenant Improvements shall be borne as follows: 1. Landlord shall pay the entire cost of Landlord's Work (as described in Paragraph 1.d. above), including costs of obtaining permits for the same. ii. Landlord's architectural, engineering and other consultant fees in connection with the design and construction of the Tenant Improvements, including the costs of producing the Working Drawings and Final Plans, shall be paid by Tenant upon Landlord's demand, subject to Tenant's right to use a portion of Landlord's Contribution towards the amount of such costs as provided below. iii. Landlord shall contribute toward the cost of the construction and installation of the Tenant Improvements an amount not to exceed $857,100.00 (which is the product of $20.00 times the stipulated number of rentable square feet of the Premises as set forth in the Basic Lease Information) ("Landlord's Contribution"). The following provisions shall govern the payment of Landlord's Contribution: A. Excess Cost; Share of Costs. If the total cost of construction of the Tenant Improvements (including the Construction Operations Fee described below and the City of Hayward Interim Supplemental Building Construction and Improvement Tax) exceeds the funds available therefor from Landlord's Contribution, then Tenant shall pay all such excess (the "Excess Cost"). Based on the estimated cost (the "Estimated Costs") of the construction of the Tenant Improvements, the prorata share of the Estimated Costs payable by Landlord and Tenant shall be determined and an appropriate percentage share established for each (a "Share of Costs"). Tenant and Landlord shall fund the cost of such work as the same is performed, in accordance with their respective Share of Costs for such work. At such time as Landlord's Contribution has been entirely disbursed, Tenant shall pay the remaining Excess Cost, if any, which payments shall be made in installments as 3 construction progresses in the same manner as Tenant's payments of Tenant's Share of Costs were paid. B. Construction Operations Fee. Landlord shall retain from the amount of Landlord's Contribution, in the manner described below, an aggregate sum equal to four percent (4%) of the total cost of the construction and installation of the Tenant Improvements (which cost of the construction and installation shall include architectural and engineering fees but shall not include permit fees) (the "Construction Operations Fee") as compensation to Landlord for review of plans, specifications and budgets, coordinating the schedule for construction of the Tenant Improvements, and for other miscellaneous costs incurred by Landlord as a result of the construction work. At the time Landlord makes any disbursement of Landlord's Contribution, Landlord shall retain from Landlord's Contribution, as a partial payment of the Construction Operations Fee, a proportionate amount of the Construction Operations Fee based upon Landlord's reasonable estimate of the amount required to be withheld from such disbursement in order to ensure that the entire Construction Operations Fee is retained over the course of construction on a prorata basis. At such time as Landlord's Contribution has been entirely disbursed, if the entire Construction Operations Fee has not yet been paid to Landlord, Tenant shall pay to Landlord a prorata portion of each payment made by Tenant on account of the Tenant Improvements in order to ensure that the balance of the Construction Operations Fee is paid to Landlord over the course of construction on a prorata basis. C. Certain Costs. Portions of Landlord's Contribution may, at Tenant's election, be applied toward Tenant's architectural fees in connection with the production of the Space Plans and Final Space Plans, and Landlord's architectural, engineering and other consultant fees in connection with the design and construction of the Tenant Improvements, including the costs of producing the Working Drawings and Final Plans; provided, however, that the portion of Landlord's Contribution applied to such fees may not exceed One Dollar ($1.00) per rentable square foot of the Premises and any excess shall be paid directly by Tenant to Landlord from Tenant's own funds. In no event may any portions of Landlord's Contribution be applied towards the costs of Tenants engineering fees (if any), trade fixtures, personal property, equipment or furniture, or towards rent due under this Lease. D. Entire Premises to be Improved. Tenant acknowledges that Landlord's Contribution is to be applied to the Tenant Improvements (and the costs permitted under Paragraph 1 .f.iii.C. above) covering the entire Premises. If Tenant does not improve the entire Premises, then, without limitation of any other rights or remedies of Landlord hereunder, Landlord's Contribution shall be adjusted on a prorata per rentable square foot basis to reflect the number of rentable square feet actually being improved. E. Provisions Applicable to Phases. Landlord and Tenant acknowledge that the Premises may be improved by Tenant in two phases based on Tenant's anticipated occupancy schedule for the Premises. Accordingly, the foregoing provisions shall apply separately as to each phase of the Premises, and where the foregoing provisions refer to the "Premises", such reference shall be deemed a reference to the applicable phase of the Premises. iv. Improvement Advance. Notwithstanding the foregoing provisions, if the cost of the Tenant Improvements shall exceed Landlord's Contribution, upon Tenant's request Landlord shall advance to Tenant the Excess Cost, up to a total 4 advance of $299,985.00 (which is $7.00 per rentable square foot of the Premises). The amount of the total Excess Cost advanced by Landlord (the "Improvement Advance") shall be repaid by Tenant, together with interest on amounts thereof from time to time unpaid at the rate of eleven percent (11%) per annum, in equal monthly installments of principal and interest, as additional rent hereunder, payable with the monthly Basic Rent. Such installments shall be in such amount as will fully amortize the amount of the Improvement Advance, together with such interest, over the initial Term. Upon the determination of the amount of the Improvement Advance, Landlord and Tenant shall promptly execute a written memorandum of the amount of such installments. Notwithstanding anything in the foregoing to the contrary, in the event this Lease is terminated prior to the originally scheduled Expiration Date, for any reason whatsoever, the then-outstanding balance of Improvement Advance, together with accrued and unpaid interest thereon, but without any prepayment penalty, shall become immediately due and payable in full by Tenant. 5 EXHIBIT C --------- COMMENCEMENT DATE MEMORANDUM ---------------------------- LANDLORD: __________________________ __________________________ TENANT: __________________________ __________________________ LEASE DATE: __________________________ PREMISES: __________________________ __________________________ __________________________ Pursuant to Section 2.d. of the above-referenced Lease, the Commencement Date hereby is established as ___________________, and the Expiration Date hereby is established as ___________________. LANDLORD: __________________________ a ________________________ By _______________________ Its ___________________ TENANT: __________________________ a ________________________ By _______________________ Its ___________________ EXHIBIT D --------- RULES AND REGULATIONS --------------------- 1. No sign, placard, picture, advertisement, name or notice shall be installed or displayed on any part of the outside or inside of the Building without the prior written consent of Landlord. Landlord shall have the right to remove, at Tenant's expense and without notice, any sign installed or displayed in violation of this rule. All approved signs or lettering on doors, windows and walls shall be printed, painted, affixed or inscribed at the expense of Tenant by a person chosen by Landlord, using materials of Landlord's choice and in a style and format approved by Landlord. 2. The directory of the Building will be provided exclusively for the display of the name and location of tenants, and Landlord reserves the right to exclude any other names therefrom. Tenant shall pay Landlord's standard charge for Tenant's listing thereon and for any changes by Tenant. 3. Except as consented to in writing by Landlord or in accordance with Building standard improvements, no draperies, curtains, blinds, shades, screens or other devices shall be hung at or used in, connection with any window or exterior door or doors of the Premises. No awning shall be permitted on any part of the Premises. Tenant shall not place anything against or near glass partitions or doors or windows which may appear unsightly from outside the Premises. 4. Tenant shall not obstruct any sidewalks, halls, lobbies, passages, exits, entrances, elevators or stairways of the Building. No tenant and no employee or invitee of any tenant shall go upon the roof of the Building or make any roof or terrace penetrations. Tenant shall not allow anything to be placed on the outside terraces or balconies without the prior written consent of Landlord. 5. No Tenant shall invite to the Premises, or permit the visit of, persons in such numbers or under such conditions as to interfere with the use and enjoyment of the Common Areas of the Building by other tenants. 6. Intentionally Deleted. 7. Landlord will furnish Tenant, free of charge, two (2) keys to Tenant's suite entrance. Landlord may make a reasonable charge for any additional keys and for having any locks changed. Tenant shall not make or have made additional keys without Landlord's prior written consent, and Tenant shall not alter any lock or install a new additional lock or bolt on any door of its Premises without Landlord's prior written consent. Tenant shall deliver to Landlord, upon the termination of its tenancy, the keys to all locks for doors on the Premises. If Tenant loses any keys furnished by Landlord, Tenant shall pay Landlord the cost of rekeying the Premises. Landlord will furnish Tenant, free of charge, two (2) building access cards. A reasonable charge will be assessed for any additional cards and lost or stolen cards. Tenant shall deliver to Landlord, upon the termination of its tenancy, all access cards. 8. If Tenant requires telegraphic, telephonic, burglar alarm or similar services, it shall first obtain, and comply with, Landlord's instructions for their installation. 9. Intentionally Deleted. 10. Tenant shall not place a load upon any floor of the Premises which exceeds the maximum load per square foot which the floor was designed to carry and which is allowed by law. Tenant's business machines and mechanical equipment which cause noise or vibration which may be transmitted to the structure of the Building or to any space therein, and which is objectionable to Landlord or to any tenants in the Building, shall be placed and maintained by Tenant, at Tenant's expense, on vibration eliminators or other devices sufficient to eliminate noise or vibration. 11. Tenant shall not use or keep in the Premises any toxic or hazardous materials or any kerosene, gasoline or inflammable or combustible fluid or material other than those limited quantities necessary for the operation or maintenance of office equipment. Tenant shall not use or permit to be used in the Premises any foul or noxious gas or substance, or permit or allow the Premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors or vibrations. No animal, except seeing eye dogs when in the company of their masters, may be brought into or kept in the Building. 12. Tenant shall not use any method of heating or air-conditioning other than that supplied by Landlord, unless Tenant receives the prior written consent of Landlord. 13. Tenant shall cooperate fully with Landlord to assure the most effective operation of the Building's heating and air-conditioning and to comply with any governmental energy-saving rules, laws or regulations of which Tenant has actual notice. Tenant shall refrain from attempting to adjust controls other than room thermostats installed for Tenant's use. 14. All entrance doors to the Premises shall be left locked when the Premises are not in use, and all doors opening to public corridors shall be kept closed except for normal ingress and egress to and from the Premises. 15. Landlord reserves the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building. 16. Landlord reserves the right to prevent access to the Building by closing the doors or by other appropriate action in case of invasion, mob, riot, public excitement or other commotion. 17. Tenant shall close and lock the doors of its Premises, shut off all water faucets or other water apparatus and turn off all lights and other equipment which is not required to be continuously run. Tenant shall be responsible for any damage or injuries sustained by other tenants or occupants of the Building or Landlord for noncompliance with this Rule. 18. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed, and no foreign substance of any kind whatsoever shall be placed therein. The expense of any breakage, stoppage or damage resulting from any violation of this rule shall be borne by the tenant who, or whose employees or invitees, shall have caused it. 19. Tenant shall not install any radio or television antenna, loudspeaker or other device on the roof or exterior walls of the Building, except as part of Alterations approved by Landlord pursuant to Section 9 of the Lease. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building or elsewhere. 20. Intentionally Deleted. 21. Tenant shall not install, maintain or operate upon the Premises any vending machine (other than vending machines for use by Tenant's employees) without the prior written consent of Landlord. 22. Canvassing, soliciting and distributing handbills or any other written material and peddling in the Building are prohibited, and each tenant shall cooperate to prevent these activities. 23. Landlord reserves the right to exclude or expel from the Building any person who, in Landlord's judgment, is intoxicated or under the influence of liquor or drugs, or who is in violation of any of the Rules and Regulations of the Building. 24. Tenant shall store all its trash and garbage within its Premises. Tenant shall not place in any trash box or receptacle any material which cannot be disposed of in the ordinary and customary manner of trash and garbage disposal within the Building. All garbage and refuse disposal shall be made in accordance with directions issued from time to time by Landlord. 25. Use by Tenant of Underwriters' Laboratory approved equipment for brewing coffee, tea, hot chocolate and similar beverages and microwaving food shall be permitted, provided that the equipment and use is in accordance with all applicable federal, state, county and city laws, codes, ordinances, rules and regulations. 26. Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant, except as Tenant's address, without the written consent of Landlord. 27. Tenant shall comply with all safety, fire protection and evacuation procedures and regulations established by Landlord or any governmental agency. Tenant shall be responsible for any increased insurance premiums attributable to Tenant's use of the Premises, Building or Property. 28. Tenant assumes any and all responsibility for protecting its Premises from theft and robbery, which responsibility includes keeping doors locked and other means of entry to the Premises closed. 29. Tenant shall not use the Premises, or suffer or permit anything to be done on, in or about the Premises, which may result in an increase to Landlord in the cost of insurance maintained by Landlord on the Building and Common Areas. 30. Tenant's requests for assistance will be attended to only upon appropriate application to the office of the Building by an authorized individual. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord, and no employee of Landlord will admit any person (Tenant or otherwise) to any office without specific instructions from Landlord. 31. Tenant shall not park its vehicles in any parking areas designated by Landlord as areas for parking by visitors to the Building or other reserved parking spaces. Tenant shall not leave vehicles in the Building parking areas overnight, nor park any vehicles in the Building parking areas other than automobiles, motorcycles, motor driven or non-motor driven bicycles or four-wheeled trucks. Tenant, its agents, employees and invitees shall not park any one (1) vehicle in more than one (1) parking space. 32. The scheduling and manner of all Tenant move-ins and move-outs shall be subject to the discretion and approval of Landlord, and move-ins and move-outs shall take place only after 6:00 p.m. on weekdays, on weekends, or at other times as Landlord may designate. Landlord shall have the right to approve or disapprove the movers or moving company employed by Tenant, and Tenant shall cause the movers to use only the entry doors and elevators designated by Landlord. If Tenant's movers damage the elevator or any other part of the Property, Tenant shall pay to Landlord the amount required to repair the damage. 33. No cooking shall be permitted on the Premises, except with a microwave oven or using facilities constructed as Alterations approved by Landlord pursuant to Section 9 of the Lease, nor shall the Premises be used for washing clothes, for lodging or for any improper, objectionable or immoral purpose. 34. Tenant shall not use in any space or in the public halls of the Building, any hand trucks except those equipped with rubber tires and side guards or such other material-handling equipment as Landlord may approve. Tenant shall not bring any bicycles or other vehicles of any kind into the building. 35. Landlord shall have the right to control and operate the public portions of the Building, and the public facilities, heating and air conditioning, as well as facilities furnished for the common use of the tenants, in such manner as it deems best for the benefit of the tenants generally. 36. Landlord may waive any one or more of these Rules and Regulations for the benefit of Tenant or any other tenant, but no waiver by Landlord shall be construed as a waiver of the Rules and Regulations in favor of Tenant or any other tenant, nor prevent Landlord from thereafter enforcing the Rules and Regulations against any or all of the tenants of the Building. 37. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements and conditions of any lease of premises in the Building. 38. Landlord reserves the right to make other reasonable Rules and Regulations as, in its judgment, may from time to time be needed for safety and security, for care and cleanliness of the Building and for the preservation of good order therein. Tenant agrees to abide by all Rules and Regulations hereinabove stated and any additional rules and regulations which are adopted. 39. Tenant shall be responsible for the observance of all of the foregoing rules by Tenant's employees, agents, clients, customers, invitees and guests. EXHIBIT E TO DEVELOPMENT SERVICES AGREEMENT Tenant Estoppel Certificate --------------------------- TO: The Multi-Employer Property Trust, a trust organized under 12 C.F.R. Section 9.18 ("Landlord") c/o Kennedy Associates Real Estate Counsel, Inc. 2400 Financial Center Building 1215 Fourth Avenue Seattle, Washington 98161 THIS IS TO CERTIFY: 1. That the undersigned is the Tenant under that certain Lease dated _________________ and, if applicable, amended on ___________________, by and between The Multi-Employer Property Trust by its trustee Riggs & Company, a division of Riggs Bank N.A. ("Landlord"), and the undersigned ("Tenant") covering those certain premises located as shown on the drawing made part of the Lease (the "Premises"). 2. That said Lease is in full force and effect and, except as noted in paragraph 1 above, has not been modified, changed, altered or amended in any respect, and is the only lease or agreement between the Tenant and the Landlord affecting the Premises. 3. To the best of Tenant's knowledge, the information set forth below is true and correct: 3.1 Square footage of the Premises:________________________________ 3.2 Annual rent as of the commencement of Lease:$___________________ 3.3 Current annual rent (if different than at commencement): $______ 3.4 Commencement date of Lease:_____________________________________ 3.5 Lease termination date:_________________________________________ 3.6 Rent paid to and including:_____________________________________ 3.7 Security deposit: ___________________________________________ 3.8 Prepaid rent for and in amount of:$_____________________________ 3.9 Free Rent Period:_________________________ to __________________ 3.10 Amount of current monthly escrow payment obligations with respect to taxes, insurance, and Common Area Maintenance charges under the Lease: Taxes: $_____________ Insurance: $_____________ Common Area Maintenance Charges: $_____________ 3.11 Dates through which Tenant has paid monthly escrow payments and Common Area Maintenance charges: Escrow Payment for Taxes: $_____________ Escrow Payment for Insurance: $_____________ Common Area Maintenance charge: $_____________ 3.12 Base Amounts (stops) established in leases for monthly escrow payments: Base Amount Taxes: $_____________ Base Amount Insurance: $_____________ Base Amount Maintenance Charge: $_____________ 4. Tenant now occupies the Premises, accepts the Premises in their current condition subject only to those punch list items listed in Exhibit A, if any, and is not aware of any defect in the Premises except as described in Exhibit A, if any. 5. No rent has been paid in the current month other than as disclosed in paragraph 3. No free rent or other concessions, benefits, or inducements other than as specified in the Lease have been granted to Tenant or undertaken by the Landlord. 6. Tenant has not been granted any renewal, expansion or purchase options and has not been granted any rights of first refusal except as disclosed in writing in the Lease. 7. Neither Tenant nor to the best of Tenant's knowledge, Landlord is in breach of the Lease and there has not occurred any event, act, omission or condition which by notice or lapse of time or both or otherwise, will result in any breach by Tenant or to the best of Tenant's knowledge, by Landlord. As of the date hereof, and except as set forth in the Lease, the undersigned is entitled to no credit, offset or deduction in rent. Tenant knows of no liabilities or obligations of Landlord which have accrued but are unsatisfied under the Lease as of the date of this Certificate. 8. To the best of Tenant's knowledge, there are no actions, whether voluntary or otherwise, pending against the undersigned under the bankruptcy laws or other laws for the relief of debtors of the United States or any state thereof. 9. With the exception of this Lease, neither the Tenant nor any affiliate of the Tenant is a tenant under a lease or any other tenancy arrangement (1) with (a) Riggs & Company, a division of Riggs Bank N.A., as trustee of the Multi-Employer Property Trust; (b) Riggs Bank N.A., as trustee of the Multi-Employer Property Trust, (c) the Multi-Employer Property Trust; (d) the National Bank of Washington Multi-Employer Property Trust, the previous name of the Multi-Employer Property Trust; (e) The Riggs National Bank of Washington, D.C., as trustee of the Multi-Employer Property Trust; (f) the Corporate Drive Corporation as trustee of the Corporate Drive Nominee Realty Trust; (g) -2- Arboretum Lakes-I, L.L.C., a Delaware limited liability company; (h) Village Green at Seven Bridges, L.L.C.; (i) Pine Street Development, L.L.C.; (j) MEPT Realty L.L.C.; (k) MEPT, L.L.C.; (l) Cabrillo Properties LLC; (m) Valencia LLC; (n) Centrepointe Distribution Center LLC; (o) Mission Trails LLC; or (p) Northridge Business Center LLC; or (2) involving any property in which any one or more of the entities named in clauses (1) (a) through (e) are known by the Tenant to have an ownership interest. [This paragraph will be updated from time to time.] DATED this ___ day of ______________, 19__. TENANT: ___________________________________ a _________________________________ By:________________________________ Name: _______________________ Its: ________________________ -3- EXHIBIT A to Tenant Estoppel Certificate List of Defects --------------- -4- CONTINUING GUARANTY OF LEASE This Continuing Guaranty of Lease, dated as of October 30, 1998, is executed by Certicom Corp., an Ontario corporation ("Guarantor"), in favor of The Multi-Employer Property Trust, a trust organized under 12 C.F.R. Section 9.18 ("Landlord"). RECITAL As a condition to Landlord's entering into that certain lease dated on or about the date hereof (as the same may be amended or otherwise modified from time to time, the "Lease"), between Landlord and Certicom Corp., a Delaware corporation, as tenant ("Tenant," which term shall include its successors and assigns), for premises (the "Premises") in the building known as 25801 Industrial Blvd., Hayward, California, in the business park known as Mt. Eden Business Park, Landlord is requiring Guarantor to guarantee Tenant's obligations under the Lease. Guarantor will derive substantial benefit from the Lease by virtue of Tenant being a wholly owned subsidiary of Guarantors. NOW, THEREFORE, as a material inducement to Landlord's agreement to enter into the Lease, Guarantor agrees as follows: 1. Guaranty. Guarantor hereby irrevocably and unconditionally guarantees to Landlord the prompt, full and complete performance of all of the obligations of Tenant under the Lease as and when due. If Tenant at any time fails to make any payment under the Lease when due or fails to perform or comply with any covenant, condition or term of the Lease, Guarantor will, upon written notice from Landlord and without further demand, pay, perform or comply with the same in the same manner and to the same extent as is required of Tenant. 2. Covenants and Acknowledgments. (a) Guarantor agrees that, regardless of whether Landlord gives notice thereof or obtains the consent of Guarantor thereto, Guarantor's liability hereunder shall not be released, extinguished or otherwise reduced in any way by reason of: (i) Any amendment, modification, renewal, extension, substitution or replacement of the Lease or any of the guaranteed obligations, in whole or in part; (ii) Any acceptance, enforcement or release by Landlord of any security for the Lease or any of the guaranteed obligations, any addition, substitution or release of any guarantor, or any enforcement, waiver, surrender, impairment, release, compromise or settlement of any matter with respect to the Lease or any of the guaranteed obligations or any security therefor; (iii) Any assignment of this Guaranty in whole or in part by Landlord, or any assignment or transfer of the Lease by Landlord or Tenant, or any sublease by Tenant of the Premises; (iv) The invalidity or unenforceability of any provision of the Lease or any of the guaranteed obligations; or (v) Any failure, omission or delay of Landlord in enforcing the Lease, any of the guaranteed obligations, or this Guaranty, any refund of payments received by Landlord with respect to any of the guaranteed obligations, or any other action which 1 Landlord may take or omit to take in connection with the Lease, any of the guaranteed obligations, or this Guaranty. (b) Landlord has no duty to disclose to Guarantor any information it receives regarding the financial status of Tenant, whether or not such information indicates that the risk of Guarantor under this Guaranty has been or may be increased. Guarantor assumes full responsibility for being and keeping informed of Tenant's financial condition, Tenant's performance under the Lease, and Tenant's use and operation of the Premises. (c) Guarantor hereby subordinates all its claims for payment or liens securing indebtedness of Tenant to Guarantor, if any, to Landlord's right to receive payment from Tenant of all sums due under the Lease. (d) The obligations of Guarantor under this Guaranty are primary and are independent of the obligations of Tenant, and Landlord may directly enforce its rights under this Guaranty without proceeding against or joining Tenant or any other person or entity, or applying or enforcing any security for the Lease. (e) Guarantor's obligations hereunder shall not be affected by any bankruptcy, insolvency, or reorganization of Tenant, by any disaffirmance or abandonment by a trustee of Tenant, or any termination, rejection, modification of the Lease or any of the guaranteed obligations in connection with the bankruptcy, insolvency or reorganization of Tenant. If any payments made to Landlord by Tenant or any other guarantor of the Lease are deemed to be a fraudulent, preferential or voidable transfer, then Guarantor's liability hereunder shall automatically be revived, reinstated and restored as to the amount of any such transfer plus all costs and expenses (including court costs and attorneys' fees) of Landlord related thereto. 3. Waivers. Guarantor waives (a) any right to the benefit of, or to direct the application of, any security held by Landlord, (b) any right to require Landlord to proceed against Tenant or any other person or entity for enforcement of the Lease or the guaranteed obligations, (c) any defense arising out of any alteration of the Lease or the guaranteed obligations, (d) any right of subrogation to any rights of Landlord, and any right of reimbursement, indemnity or contribution against any person or entity with direct or contingent liability for any of the guaranteed obligations, (e) any defense to Landlord's recovery of any deficiency after Landlord has exercised any right or remedy, even if such exercise results in any impairment of Guarantor's rights of reimbursement or subrogation or any other rights of Guarantor against Tenant, (f) any defense arising out of the absence, impairment or loss of any right of reimbursement or subrogation or other right or remedy of Guarantor against Tenant or any security held by Landlord, (g) any defense arising by reason of any legal disability or other defense of Tenant to the enforcement of this Guaranty, or the cessation or reduction of the liability of Tenant from any cause whatsoever other than full payment, performance and discharge of the obligations under the Lease, (h) notice of acceptance of this Guaranty, (i) notice of Tenant's default in the payment or performance of any of the guaranteed obligations, and (j) presentment, demand, protest and notice of any other kind. 4. Miscellaneous. (a) This Guaranty shall inure to the benefit of any person or entity who at any time may be entitled to the benefits of, or obligated to perform the duties of, Landlord under the Lease, and shall be binding upon the heirs, administrators, successors and assigns of Guarantor. (b) Guarantor agrees to pay on demand all costs and expenses, including court costs and attorneys' fees, incurred or paid by Landlord in enforcing this Guaranty or collecting any sums due hereunder, together with interest on all such amounts at the maximum interest rate allowed by law. 2 (c) This Guaranty may not be changed orally, and no obligation of Guarantor can be released or waived except by a writing signed by Landlord. (d) If any term or provision of this Guaranty is ever determined to be illegal or unenforceable, all other terms and provisions of this Guaranty shall remain effective and enforceable to the fullest extent permitted by law. (e) This Guaranty and the rights and obligations of Guarantor and Landlord under this Guaranty shall be governed by and construed in accordance with the laws of the State of California, and the venue of any action or proceeding under this Guaranty shall be the City and County of San Francisco, California. Guarantor hereby submits to personal jurisdiction in the State of California for the enforcement of this Guaranty, waives any and all personal rights under the laws of the State of California to object to jurisdiction within that state for the purposes of any action or proceeding to enforce this Guaranty, and agrees that service of process may be made, and personal jurisdiction over Guarantor obtained, by service of process upon Guarantor at the address set forth below or by any other means of obtaining personal jurisdiction and perfecting service of process as now or hereafter provided by the laws of the State of California. (f) IF ANY ACTION OR PROCEEDING BETWEEN LANDLORD AND GUARANTOR TO ENFORCE THE PROVISIONS OF THIS GUARANTY PROCEEDS TO TRIAL, LANDLORD AND GUARANTOR HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY IN SUCH TRIAL. Landlord and Guarantor agree that this paragraph constitutes a written consent to waiver of trial by jury within the meaning of California Code of Civil Procedure Section 631(a)(2), and Guarantor does hereby authorize and empower Landlord to file this paragraph and or Guaranty, as required, with the clerk or judge of any court of competent jurisdiction as a written consent to waiver of jury trial. (g) Any notices to be sent by either party hereto to the other party shall be in writing and delivered personally, sent by reputable overnight or same-day courier, or sent by United States certified or registered mail, postage prepaid, and addressed, if the notice is from Guarantor to Landlord, to Landlord, c/o Simeon Commercial Properties, 655 Montgomery Street; Suite 1190, San Francisco, California 94111, and if the notice is from Landlord to Guarantor, to Guarantor at Certicom Corp., 200 Matheson Blvd. W, Mississauga, Ontario, Canada L5R 3L7. Either party may change the address to which notice to such party shall be sent hereunder by providing the other party with notice of such address in accordance with the provisions of this paragraph. (h) If this Guaranty is signed by more than one party, the term "Guarantor" shall mean each of the parties signing as Guarantor, and each obligation under this Guaranty shall be their joint and several obligation. IN WITNESS WHEREOF, this Guaranty has been executed by Guarantor, effective as of the date first set forth above. Guarantor CERTICOM CORP., an Ontario corporation By: /s/ B. MacInnis -------------------------- Name: /s/ Bruce MacInnis ---------------------- Title: Vice President + CFO --------------------- 3 SIMEON [GRAPHIC OMITTED] 655 Montgomery Street Suite 1190 San Francisco, CA 94111-2630 ph: 415/986-2002 fax: 415/986-2130 May 21, 1999 Mr. Bruce MacInnis Certicom Corp. 200 Matheson Blvd., West, Suite 103 Mississauga, Onatrio - CANADA RE: Mt. Eden Business Park-Operating Expenses Dear Bruce: In accordance with Paragraph 5 of your lease dated October 30, 1998 enclosed please find Invoice #05-09 which represents the 1999 Estimated Operating Expenses for your offices at the above referenced property, effective March 1, 1999. The total due June 1, 1999 is outlined below: Invoice #05-09 $21,536.00 Base Rent $53,568.75 Monthly Operating Expenses $ 7,718.67 ---------- Total Due June 1, 1999 $82,823.42 The revised monthly rent due July 1, 1999 and each month thereafter shall be: Base Rent $53,568.75 Monthly Operating Expenses $ 7,718.67 ---------- Total $61,287.42 Please remit all payments to the address below: Riggs Bank - MEPT Mt. Eden Business Park Dept. 05899-05 P.O. Box 39000 San Francisco CA 94139-5899 Please feel free to contact me if you have any questions. Thank you for your patience in receiving this document. Sincerely, SIMEON Commercial Properties /s/ Barbara Mondani Barbara Mondani Property Manager Enclosures cc: Starla Ackley A Family of Real Estate Companies FIRST AMENDMENT TO LEASE THIS FIRST AMENDMENT TO LEASE (this "Amendment"), is made as of the 17th day of November, 1998, by and between THE MULTI-EMPLOYER PROPERTY TRUST, A TRUST ORGANIZED UNDER 12 C.F.R. SECTION 9.18 ("Landlord"), and CERTICOM CORP., a Delaware corporation ("Tenant"). WHEREAS, Landlord and Tenant entered into that certain lease dated October 30, 1998 (the "Lease"), with respect to certain premises (the "Premises") located at 25801 Industrial Blvd. in the Mt. Eden Business Park in Hayward, California; WHEREAS, the lease incorrectly sets forth the agreement of Landlord and Tenant regarding Base Rent adjustments, and the parties desire to amend the Lease to correct such error. Unless otherwise defined herein, capitalized terms are used herein as defined in the Lease. NOW, THEREFORE, the parties hereto do hereby agree as follows: 1. Base Rent Adjustment. Section 4.b. of the Lease is hereby amended to read in its entirety as follows: "b. Base Rent Adjustment. Commencing on the first day of the 37th full calendar month of the Term, the Base Rent shall increase to $58,536.00 per month, and shall be payable in such amount through the end of the 72nd full calendar month of the Term. Commencing on the first day of the 73rd full calendar month of the Term, the Base Rent shall increase to $63,964.00 per month, and shall be payable in such amount through the Expiration Date." 2. Ratification. Except as amended hereby, the Lease remains unmodified and in full force and effect. 3. Entire Understanding. This Amendment represents the entire understanding between of the parties concerning the subject matter hereof, and there are no understandings or agreements between them relating to the Lease or the leased premises not set forth in writing and signed by the parties hereto. No party hereto has relied upon any representation, warranty or understanding not set forth herein, either oral or written, as an inducement to enter into this Amendment. 4. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. 1 IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written. Landlord: Tenant: THE MULTI-EMPLOYER CERTICOM CORP., PROPERTY TRUST, A TRUST a Delaware corporation ORGANIZED UNDER 12 C.F.R. SECTION 9.18, by its trustee Riggs & Company, a division of By: /s/ Philip C. Deck Riggs Bank N.A. ------------------------- Its: Chairman & CEO ------------------------- By: Illegible By: /s/ Bruce MacInnis ------------------------- ------------------------- Its: Illegible Its: VP Finance & CFO ------------------------- ------------------------- The undersigned, as Guarantor of the Lease pursuant to that certain Continuing Guaranty of Lease dated as of October 30, 1998 (the "Guaranty"), hereby consents to the foregoing Amendment and agrees that the Guaranty shall remain in full force and effect and shall apply to the foregoing Amendment and to the Lease as amended thereby. Guarantor CERTICOM CORP., an Ontario corporation By: /s/ Bruce MacInnis -------------------------- Name: Bruce MacInnis ------------------------ Title: VP Finance & CFO ----------------------- 2 SECOND AMENDMENT TO LEASE THIS SECOND AMENDMENT TO LEASE (this "Amendment"), is made as of the 15 day of March, 2000, by and between THE MULTI-EMPLOYER PROPERTY TRUST, A TRUST ORGANIZED UNDER 12 C.F.R. SECTION 9.18 ("Landlord"), and CERTICOM CORP., a Delaware corporation ("Tenant"). WHEREAS, Landlord and Tenant entered into that certain lease dated October 30, 1998, as amended by First Amendment to Lease dated as of November 17, 1998 (as so amended, the "Lease"), with respect to certain premises (the "Original Premises") located at 25801 Industrial Blvd. in the Mt. Eden Business Park in Hayward, California (the "Business Park"); WHEREAS, the parties desire to amend the Lease to add additional space in the Business Park to the premises demised thereunder and to make certain changes to the Lease in connection therewith. Unless otherwise defined herein, capitalized terms are used herein as defined in the Lease. NOW, THEREFORE, the parties hereto do hereby agree as follows: 1. Additional Premises. a. Effective as of April 1, 2000 (the "Additional Premises Commencement Date"), the Additional Premises shall be added to the premises demised to Tenant under the Lease. The term of the Lease, as applicable to the Additional Premises, shall expire on the date (the "Additional Premises Expiration Date") that is seven (7) years from the Additional Premises Rent Commencement Date (as defined in Paragraph 3 below). The "Additional Premises" shall mean that portion of the building known as 25821 Industrial Boulevard, located in the Business Park, as shown on Exhibit A attached hereto. The parties hereby stipulate that for all purposes of this Amendment and the Lease, the Additional Premises consist of 68,182 rentable square feet. From and after the Additional Premises Commencement Date, the term "Premises" used in the Lease shall be deemed to refer to the Original Premises and the Additional Premises, and all of the terms, covenants and conditions of the Lease applicable to the Original Premises shall be applicable to the Additional Premises, except as hereinafter set forth or to the extent in conflict with the provisions of this Amendment. b. The Additional Premises shall be delivered to Tenant in their then "as-is" condition, and Landlord shall not have any obligation to make or, except as provided in Paragraph 2 below, pay for any alterations, additions or improvements to prepare the Additional Premises for Tenant's occupancy. c. If, for any reason, Landlord cannot deliver possession of the Additional Premises to Tenant on the Additional Premises Commencement Date, (i) Tenant's obligations hereunder with respect to the Additional Premises shall not commence, and the Additional Premises Commencement Date shall not be deemed to have occurred, until possession of the Additional Premises is delivered to Tenant, (ii) the failure shall not affect the validity of this Amendment or the Lease, or, except as provided in clause (i), the obligations of Tenant 1 hereunder or under the Lease, (ii) such failure shall not serve to extend the Additional Premises Expiration Date, and (iii) Landlord shall not be subject to any liability. 2. Tenant Improvements. Any alterations, additions or improvements which Tenant desires to make to the Additional Premises to prepare the same for Tenant's initial occupancy (the "Tenant Improvements") shall be performed in accordance with, and be subject to all provisions of, Section 9 of the Lease. Landlord shall contribute toward the cost of the construction of the Tenant Improvements an amount not to exceed $681,820.00 (which is the product of $10.00 times the stipulated number of rentable square feet of the Additional Premises) ("Landlord's Contribution"). The following provisions shall govern the payment of Landlord's Contribution: A. Excess Cost: Share of Costs. If the total cost of construction of the Tenant Improvements (including the Alteration Fee described in Section 9 of the Lease and the City of Hayward Interim Supplemental Building Construction and Improvement Tax) exceeds the funds available therefor from Landlord's Contribution, then Tenant shall pay all such excess (the "Excess Cost"). Based on the estimated cost (the "Estimated Costs") of the construction of the Tenant Improvements, the prorata share of the Estimated Costs payable by Landlord and Tenant shall be determined and an appropriate percentage share established for each (a "Share of Costs"). Tenant and Landlord shall fund the cost of such work as the same is performed, in accordance with their respective Share of Costs for such work. At such time as Landlord's Contribution has been entirely disbursed, Tenant shall pay the remaming Excess Cost, if any, which payments shall be made in installments as construction progresses in the same manner as Tenant's payments of Tenant's Share of Costs were paid. At the time Landlord makes any disbursement of Landlord's Contribution, Landlord shall retain from Landlord's Contribution, as a partial payment of the Alteration Fee, a proportionate amount of the Alteration Fee based upon Landlord's reasonable estimate of the amount required to be withheld from such disbursement in order to ensure that the entire Alteration Fee is retained over the course of construction on a prorata basis. At such time as Landlord's Contribution has been entirely disbursed, if the entire Alteration Fee has not yet been paid to Landlord, Tenant shall pay to Landlord a prorata portion of each payment made by Tenant on account of the Tenant Improvements in order to ensure that the balance of the Alteration Fee is paid to Landlord over the course of construction on a prorata basis. Notwithstanding anything to the contrary in this Paragraph 2, Landlord's Contribution shall be available for disbursement pursuant to the terms hereof only during the calendar year 2000. Accordingly, if any portion of Landlord's Contribution is not utilized prior to December 31, 2000, such unused portion shall be forfeited by Tenant. B. Certain Costs. Portions of Landlord's Contribution may, at Tenant's election, be applied toward Tenant's architectural fees in connection with the design and construction of the Tenant Improvements; provided, however, that the portion of Landlord's Contribution applied to such fees may not exceed One Dollar ($1.00) per rentable square foot of the Additional Premises and any excess shall be paid directly by Tenant to Landlord from Tenant's own funds. In no event may any portions of Landlord's Contribution be applied towards the costs of Tenant's engineering fees (if any), trade fixtures, personal property, equipment or furniture, or towards rent due under this Lease. C. Entire Additional Premises to be Improved. Tenant acknowledges that Landlord's Contribution is to be applied to the Tenant Improvements (and the costs permitted under Paragraph 2.B. above) covering the entire Additional Premises. If Tenant does not 2 improve the entire Additional Premises, then, without limitation of any other rights or remedies of Landlord hereunder, Landlord's Contribution shall be adjusted on a prorata per rentable square foot basis to reflect the number of rentable square feet actually being improved. 3. Base Rent. Commencing as of the date (the "Additional Premises Rent Commencement Date") that is the earlier of (i) one-hundred twenty (120) days after the Additional Premises Commencement Date, or (ii) Tenant's occupancy of the Additional Premises or any portion thereof for the conduct of business, and thereafter on the first day of each calendar month of the Term, Tenant shall pay to Landlord (or other entity designated by Landlord) Base Rent for the Additional Premises, in advance, at Landlord's address for notices (as set forth in the Basic Lease Information in the Lease) or at such other address as Landlord may designate. The initial Base Rent for the Additional Premises shall be Sixty-One Thousand Three Hundred Sixty-Four Dollars ($61,364.00). Effective as of each annual anniversary of the Additional Premises Rent Commencement Date, the Base Rent payable by Tenant for the Additional Premises shall increase to one-hundred three percent (103%) of the Base Rent then in effect for the Additional Premises. From and after the Additional Premises Rent Commencement Date, the term "Base Rent" as used in the Lease shall mean the Base Rent payable for the Original Premises and the Base Rent payable for the Additional Premises, collectively. The Base Rent for the Additional Premises shall be payable by Tenant in addition to the Base Rent payable by Tenant for the Original Premises, as set for the in the Lease. 4. Operating Expenses. Commencing as of the Additional Premises Rent Commencement Date, and continuing thereafter during the balance of the Term, the provisions of Section 5 of the Lease shall be applicable to the Additional Premises. As so applied to the Additional Premises, the term "Tenant's Percentage Share" shall mean seventy-five percent (75%), and the term "Building" shall mean the building in which the Additional Premises are located. The Operating Expenses for the Additional Premises shall be payable by Tenant in addition to the Operating Expenses payable by Tenant for the Original Premises, as set forth in the Lease. 5. Security Deposit: Letter of Credit. a. Concurrently with Tenant's execution and delivery of this Amendment to Landlord, Tenant shall increase the Security Deposit delivered to Landlord pursuant to Section 17 of the Lease to the amount of One Hundred Fifty Thousand Dollars ($150,000.00), and the term "Security Deposit", as used in the Lease, shall thereafter refer to the Security Deposit in such amount. b. In addition to the increase in the Security Deposit required pursuant to Paragraph 5 .a. above, and in addition to the Letter of Credit previously delivered by Tenant pursuant to the Lease (the "Original Letter of Credit"), on or prior to the Additional Premises Commencement Date, Tenant shall deliver an additional Letter of Credit to Landlord as further security for Tenant's performance of all of Tenant's covenants and obligations under the Lease. Such additional Letter of Credit (the "Additional Letter of Credit"), and any proceeds therefrom, shall be subject to all of the terms, covenants and conditions applicable to the Original Letter of Credit, as set forth in Section 17 of the Lease, except that the Additional Letter of Credit shall be in the original amount of One Million Two Hundred Thousand Dollars ($1,200,000.00) during the period from the Additional Premises Commencement Date through the third annual anniversary of the Additional Premises Rent Commencement Date, and reducing in amount on 3 the third annual anniversary of the Additional Premises Rent Commencement Date and on each subsequent annual anniversary of the Additional Premises Rent Commencement Date by twenty percent (20%) of the original amount of the Additional Letter of Credit; provided, however, that if on the date the Additional Letter of Credit amount would otherwise reduce, an Event of Default, or default that with notice or the passage of time or both could mature into an Event of Default, shall have occurred and be continuing, the Additional Letter of Credit amount shall not reduce on such date and shall not thereafter reduce until the later of the next scheduled reduction date or the date such Event of Default or default shall have been cured. Where reference is made in Section 17 of the Lease to the Term of the Lease (for purposes of determining the period during which the Original Letter of Credit or the Additional Letter of Credit, as applicable, must be maintained in effect), as respects the Original Letter of Credit such reference shall mean the Term of the Lease as respects the Original Premises, and as respects the Additional Letter of Credit such reference shall mean the Term of the Lease as respects the Additional Premises. 6. Lease Term. Effective as of the Additional Premises Commencement Date, the expiration date of the term of the Lease, as applicable to the Original Premises, shall be deemed extended from February 28, 2006 (which the parties acknowledge to be the current expiration date of the term of the Lease as respects the Original Premises) to the Additional Premises Expiration Date. All of the terms, covenants and conditions of the Lease shall apply during such extension period (the "Extension Period"), except the Base Rent payable by Tenant for the Original Premises shall be the "fair market rent" for the Original Premises for the Extension Period. "Fair market rent" shall have the meaning given in Section 40 of the Lease, with all references to the "renewal period" being deemed references to the "Extension Period". The "rent floor" specified in Section 40.b. of the Lease shall be fully applicable as respects the Extension Period. 7. Renewal Option. Pursuant to Section 40 of the Lease, as of the date of this Amendment Tenant has the option to renew the Lease for one (1) additional term of five (5) years. In the event that Tenant validly exercises its option to renew the Lease for such additional five (5) year term, the parties hereby agree that such exercise shall apply to the entire premises then demised hereunder (i.e. both the Original Premises and the Additional Premises), and such option may not be exercised as to less than all of the premises then demised hereunder. The "rent floor" specified in Section 40.b. of the Lease shall be determined, for purposes of such renewal, by reference to the average Base Rent, per rentable square foot, payable by Tenant for all of the premises then demised hereunder. 8. Building Definition. The definition of the "Building" contained in the Lease is hereby modified to mean, collectively, the buildings in which the Original Premises and the Additional Premises are located, unless the context expressly requires otherwise. As used in Section 11 and Section 12 of the Lease, the term "Building" means only the building in which the Original Premises or Additional Premises are located which has been damaged or destroyed or the subject of the taking by eminent domain (or conveyance in lieu thereof), as applicable, and notwithstanding anything to the contrary contained in Section 11 or Section 12 of the Lease, where Landlord or Tenant is granted in any such Section a right or option to terminate this Lease by reason of damage or destruction to, or a taking by eminent domain (or conveyance in lieu thereof), of the Premises or the Building, such right or option shall only permit termination of the Lease as to the space demised thereunder in the building which has been damaged or destroyed or subject to the taking by eminent domain (or conveyance in lieu thereof). 4 9. Ratification. Except as amended hereby, the Lease remains unmodified and in full force and effect. 10. Brokers. Each party hereto represents and warrants to the other party hereto that it has dealt with no broker or finder who can properly claim a commission, fee or other compensation by reason of this Amendment or Tenant's lease of the Additional Premises, except that Landlord acknowledges that it has dealt with Colliers Parish International, Inc. ("Landlord's Broker") in connection with this Amendment. Each party hereto shall indemnify, protect and hold harmless the other party hereto from and against any and all loss, cost, damage, liability and expense (including attorneys' fees and costs) arising out of any breach or alleged breach of its foregoing representation and warranty. In addition, Landlord shall pay any commission due to Landlord's Broker by reason of this Amendment pursuant to the terms of a separate agreement. 11. Entire Understanding. This Amendment represents the entire understanding between of the parties concerning the subject matter hereof, and there are no understandings or agreements between them relating to the Lease or the leased premises not set forth in writing and signed by the parties hereto. No party hereto has relied upon any representation, warranty or understanding not set forth herein, either oral or written, as an inducement to enter into this Amendment. 12. Counterparts. This Amendment may be executed in any number of counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written. Landlord: Tenant: THE MULTI-EMPLOYER CERTICOM CORP., PROPERTY TRUST, A TRUST a Delaware corporation ORGANIZED UNDER 12 C.F.R. SECTION 9.18, by its trustee Riggs & Company, a division of By: /s/ Richard P. Dalmazzi Riggs Bank N.A. ---------------------------- Richard P. Dalmazzi President and CEO By: /s/ Name Illegible By: /s/ Richard D. Brounstein ---------------------------- ---------------------------- Richard D. Brounstein Its: Managing Director Chief Financial Officer ---------------------------- 5 The undersigned, as Guarantor of the Lease pursuant to that certain Continuing Guaranty of Lease dated as of October 30, 1998 (the "Guaranty"), hereby consents to the foregoing Amendment and agrees that the Guaranty shall remain in full force and effect and shall apply to the foregoing Amendment and to the Lease as amended thereby. The undersigned represents and warrants to Landlord that it is the successor entity to the entity which originally executed the Guaranty and the confirmation of the Guaranty contained at the end of the First Amendment to the Lease. Guarantor: CERTICOM CORP a Yukon corporation By: /s/ Richard P. Dalmazzi ---------------------------- Richard P. Dalmazzi President and CEO By: /s/ Richard D. Brounstein ---------------------------- Richard D. Brounstein Chief Financial Officer 6 EX-10.2 5 0005.txt AMENDING AGREEMENT DATED 04/25/1999 LEASE THIS LEASE made as of the 29th day of March, 1999 PURSUANT TO THE SHORT FORMS OF LEASES ACT BETWEEN: AIRPORT CORPORATE CENTRE OFFICE PARK INC. the "Landlord") OF THE FIRST PART AND: CERTICOM CORP. (the "Tenant") OF THE SECOND PART Articles. For convenience of reference this Lease has been divided into the following Articles: Article I - Definitions Article II - Lease Term and Payments Article III - Landlord and Tenant Covenants Article IV - Repair and Damage Article V - Taxes and Operating Costs Article VI - Utilities and Additional Services Article VII - Assigning and Subletting Article VIII - Fixtures and Improvements Article IX - Insurance and Liability Article X - Subordination, Attornment and Certificates Article XI - Events of Default and Remedies Article XII - Miscellaneous Article XIII - Other Provisions List of Schedules. The following schedules form an integral part of this Lease: Schedule "A" - Legal Description of Lands Schedule "B" - Leased Premises Schedule "C" - Rules and Regulations Schedule "D" - Building Specifications Schedule "E" - Development Schedule Schedule "F" - Site Plan Schedule "G" - Exclusions from Operating Costs ARTICLE 1.00 - Definitions 1.1 Definitions. In this Lease the following defined terms shall have the meanings set forth below. "Additional Rent" means Operating Costs under Section 5.5, Taxes under 5.3, Electricity under 6.2, and insurance under Article IX and all other charges, costs and expenses required to be paid by the Tenant under the terms of this Lease (other than Base Rental) whether payable to the Landlord or not. "Additional Services" means the services and supervision supplied by the Landlord to the Leased Premises and Common Area Facilities and referred to -2- herein or in any other provision hereof as Additional Services and any other services which from time to time the Landlord supplies to the Tenant at the Tenant's written request or as the Landlord deems necessary, acting reasonably, and which are additional to the janitor and cleaning and other services typically supplied in a first class office building, supervision in connection with the making of any repairs or alterations by the Tenant affecting the Base Building, building systems or Leasehold Improvements. "Attic Stock" means spare fan, pump and cooling tower motors, base Building light fixtures, fuses, etc. "Base Rental" means the Base Rental payable by the Tenant in accordance with Section 2.3. "Building" means the building municipally known as 5520 explorer Drive on plan attached hereto as Schedule "F", and fronting on Explorer Drive in the City of Mississauga, Regional Municipality of Peel. "Capital Tax" is an amount presently or hereafter imposed from time to time pursuant to Part III of the Corporations Tax Act (Ontario) (the "Act") upon the Landlord or the owner of the Building and Lands and payable by the Landlord on account of its interest in the Building and the Lands or any part thereof, or its interest in or capital employed in the Building and the Lands, as the case may be. "Commencement Date" means December 15th, 1999, subject to Section 2.3 hereof. "Common Area Facilities" means all facilities, improvements, installations, utilities and equipment located in the Building or the Lands immediately surrounding the Building. "Common Areas" means those areas, facilities, utilities, improvements, equipment and installations comprising the Lands and Building and which are not leased or designated for lease to tenants but are provided to be used in common by (or by the sublessees, agents, employees, customers or licensees of) the Landlord, the Tenant, and other tenants of the Building and other buildings on the Lands, whether or not the same are open to the general public or a specific tenant of the Building, and include, but are not limited to, parking areas and all vestibules for and entrances and exits thereto; driveways, truckways and related areas; corridors and underground or above ground tunnels or passageways; stairways, escalators, ramps, and elevators and other transportation equipment and systems; tenant, common and public washrooms; telephone, meter, valve, mechanical, mail, storage, service and janitor rooms; fire prevention, security and communication systems, any fixtures, chattels, systems, decor, signs, facilities, or landscaping and planted areas contained therein or maintained or used in connection therewith. "Cost of Additional Services" shall mean in the case of Additional Services provided by the Landlord a reasonable charge made therefor by the Landlord which shall not exceed the cost of obtaining such services from independent contractors and in the case of Additional Services provided by independent contractors the Landlord's total cost of providing Additional Services to the Tenant including the proportionate cost of all direct labour (including salaries, wages and fringe benefits) and materials and other direct expenses incurred, the cost of supervision without duplication or profit and other expenses reasonably allocated thereto. "Insured Damage" means that part of any damage occurring to the Leased Premises of which the entire cost of repair is actually recovered by the Landlord (less any deductibles payable in respect thereof) under a policy of insurance in respect of fire and other perils from time to time effected by the Landlord, or for -3- which the Landlord has self-insured under Section 9.1 herein, less any deductibles payable in respect thereof. "Land" means those lands described in Schedule "A" attached hereto. "Lease" means this Lease between the Landlord and the Tenant, and all amendments hereto. "Leasehold Improvements" means all fixtures, improvements, installations, alterations and additions from time to time made, erected or installed by or on behalf of the Tenant or by or on behalf of any other previous occupant in the Leased Premises (including the Landlord) with the exception of trade fixtures, furniture and equipment, (not of the nature of fixtures), modular office furniture systems, improvements of a cosmetic nature such as rugs (but not broadloom), decorations and other improvements moveable without the use of tools, but Leasehold Improvements include all office partitions however affixed and includes wall-to-wall and other carpeting with the exception of such carpeting where laid over vinyl tile or other finished floor and affixed so as to be readily removable without damage. "Leased Premises" means approximately 25,000 square feet of Rentable Area on the fourth floor of the Building as outlined in red on the plans attached as Schedule "B", in accordance with current BOMA standards. "Normal Business Hours" means the hours of 7:00 a.m. to 7:00 p.m. Monday to Friday, except public holidays. "Operating Costs" means the total, without duplication, of all reasonable expenses, reasonable costs, and reasonable outlays incurred in the complete maintenance, repair and operation of the Building and Common Area Facilities, whether incurred by or on behalf of the Landlord. (i) Operating Costs shall include without limiting the generality of the foregoing but without duplication (but subject to certain deductions as hereinafter provided), for the following expenses, costs and outlays, but only to the extent that same are reasonable having regard to the nature of the project: the cost of providing complete cleaning and janitorial services, the cost of building supplies used in the maintenance of the Building, Attic Stock, supervisory (if any) and maintenance services, exterior landscaping, snow removal, garbage and waste collection and disposal, rental of equipment and signs, janitorial services to the Common Areas of the Building, the cost of operating elevators, the cost of heating, cooling and ventilating all space including both rentable and non-rentable areas, the cost of providing hot and cold water, electricity (including lighting), and the replacement of electric light bulb tubes, starters and ballasts, telephone and other utilities and services to both rentable and non-rentable areas, the cost of all repairs including repairs to the Building or services in the Building or Common Area Facilities including elevators, depreciation on the central HVAC systems distribution plant and associated equipment, depreciation on all fixtures, equipment and facilities requiring periodic maintenance or substantial replacement, the cost of window cleaning, and providing security (if any), the cost of all insurance for liability or fire or other casualties referred to in Article 9.1, accounting costs incurred in connection with maintenance and operation including computations required for the imposition of charges to tenants and audit charges required to be incurred for the conclusive determination of any costs hereunder, legal fees, the amount of all salaries (only to the extent that such salaries or a proportion thereof, relate directly to the Building), wages and fringe benefits, unemployment and workers compensation insurance premiums, pension plan contributions and other similar premiums and -4- contributions paid or provided to employees directly or a reasonable proportion thereof engaged in the maintenance, repair or operation of the Building, amounts paid to independent contractors for any services in connection with such maintenance, repair or operation, the cost of management fees (but not exceeding fifteen percent (15%) of operating costs), and other indirect expenses to the extent allocable to the maintenance, repair and operation of the Building and Common Area Facilities and all other expense of every nature incurred in connection with the maintenance, repair and operation of the Building and Common Area Facilities; and (ii) the costs of any of the items cited in paragraph (i) above that vary with the level of occupancy of the Building (such as but not limited to cleaning and janitorial costs, garbage and waste collection and the cost of utilities) shall be adjusted and included in the Operating Costs as if the Building were 100% occupied (hereinafter referred to as "Gross Up"). This Gross Up is for the sole purpose of equitably dividing the cost of such items among the tenant(s) actually occupying the Building and is to ensure that: (a) this Lease is on an absolutely net net basis to the Landlord; and (b) the Landlord is not subsidizing any tenant in the Building for costs that would otherwise be paid in full by the tenant if the Building was in fact 100% occupied. For further clarity the Landlord shall not profit from the terms of this paragraph and any Gross Up shall be net revenue neutral with respect to cost recovery to the Landlord; and (iii) Operating Costs shall exclude debt service, and all management costs not allocable to the actual maintenance, repair and operation of the Building (such as that incurred in connection with leasing and rental advertising) and shall exclude those amounts noted on Schedule "G" hereto. "Property" means the Land and Building. "Proportionate Share" shall mean the fraction which has as its numerator the Rentable Area of the Leased Premises and has as its denominator the total Rentable Area of the Building, whether leased or not. The total Rentable Area of the Leased Premises shall be adjusted from time to time, as may be reasonably necessary, to give effect to any structural or functional changes affecting the calculation of total Rentable Areas. "Rent" means Base Rental and Additional Rent. "Rentable Area" in this Lease means: (i) in the case of a single tenancy on a whole floor of the Building, all areas within the inside finished surface of the dominant portion of the permanent outer Building walls and shall be computed by measuring the inside finished surface of the dominant portion of the permanent outer Building walls and shall include Service Areas and any special stairs and/or elevators for the specific sole use of that floor, but excluding stairs, elevator shafts, flues, pipe shafts and vertical ducts and the like and their enclosing walls (the "Vertical Openings"), with no deductions for columns or projections necessary to the Building plus a gross-up factor for ground floor services in common with other tenants, including, but not limited to vestibules, corridors, elevator lobbies, mechanical, electrical, telephone, mail, garbage and janitor's rooms, such factor to be based upon a ratio which the ground floor Service Areas of the Building bears to the gross floor area, less Vertical Openings of the Building; and (ii) in the case of a floor of the Building to be occupied by more than one tenant, -5- all areas from the inside finished surface of the dominant portion of the permanent outer Building walls to the Tenant's side of corridors and/or other permanent interior walls and to the centre of demising partitions which separate the area occupied from adjoining rentable premises, herein referred to as the "Usable Area", plus a gross-up factor for the Service Areas on the floor in common with other tenants on the same floor, including, but not limited to, corridors, elevator lobbies, mechanical, electrical, telephone and janitor's rooms exclusively serving the floor, such factor to be based upon a ratio which the Service Areas of the floor bear to the sum of the Usable Area of the floor, plus an additional gross-up factor for ground floor services in common with other tenants, including, but not limited to, vestibules, corridors, elevator lobbies, mechanical, electrical, telephone, mail, garbage and janitor's rooms, such factor to be based upon a ratio which the ground floor Service Areas of the Building bears to the gross floor area, less Vertical Openings of the Building. "Rules and Regulations" means the rules and regulations attached as Schedule "C". "Service Areas" shall mean the area of corridors, elevator, lobbies, service elevator lobbies, washrooms, air-cooling rooms, fan rooms, janitor's closets, telephone and electrical closets and other closets serving the Leased Premises in common with other premises on the same floor. "Taxes" means all taxes, rates, duties, levies and assessments whatsoever, whether municipal, parliamentary or otherwise, levied, imposed or assessed against the Building, Common Areas or Common Area Facilities or upon the Landlord in respect thereof including Capital Tax and commercial concentration tax, or from time to time levied, imposed or assessed in the future in lieu thereof, or in addition thereto, whether now contemplated or not, and those levied, imposed or assessed for education, schools and local improvements and including all costs and expenses (including legal and other professional fees and interest and penalties on deferred payments), incurred by the Landlord in good faith in contesting, resisting or appealing any taxes, rates, duties, levies or assessments, but excluding taxes and license fees in respect of any business carried on by tenants and occupants of the Building (including the Landlord) to the extent such taxes are not levied in lieu of taxes, rates, duties, levies and assessments against the Building or upon the Landlord in respect thereof, and shall also include any and all taxes which may in future be levied in lieu of taxes as hereinbefore defined, and also including Large Corporations Tax or any similar or successor tax in lieu thereof or in addition thereto assessed upon the Landlord. "Term" means the term of the Lease stipulated in paragraph 2.2. "Utilities" means electricity as described in Article 6.2, natural gas and any other utility required in the operation of the Building. ARTICLE 2.00 - LEASE TERM AND PAYMENTS 2.1 Demise. In consideration of the rents, covenants and agreements hereinafter reserved and contained, the Landlord hereby leases to the Tenant, for the exclusive use of the Tenant, the Leased Premises for the Term. 2.2 Term. The Lease shall have a term of ten (10) years commencing on the Commencement Date and ending on the date ten (10) years thereafter, unless such term shall be sooner terminated as hereinafter provided and subject to the Tenant's right to extend the Term as provided in Section 13.4 hereof. -6- 2.3 Base Rental. THE TENANT SHALL PAY yearly and every year during the first five (5) years of the within Term the sum of $350,000.00 of lawful money of Canada in twelve (12) equal monthly installments of $29,166.67, in advance, the first of such instalment to become due and payable on the Commencement Date (the "Base Rental"). THE TENANT SHALL PAY yearly and every year during the last five (5) years of the within Term the sum of $400,000.00 of lawful money of Canada in twelve (12) equal monthly installments of $33,333.33, in advance, the first of such instalment to become due and payable on the first day of the sixth (6th) year following the Commencement Date (the "Base Rental"). The aforesaid annual Base Rental is calculated on the basis of the Rentable Area of the Leased Premises being 25,000 square feet at a yearly rate of $14.00 for each square foot of Rentable Area during the first five (5) years of the within Term and at a yearly rate of $16.00 for each square foot of Rentable Area during the last five (5) years of the within Term. The Landlord shall deliver to the Tenant a certificate from an architect certifying the area of the Leased Premises in accordance with current BOMA Standards. IF THE TERM COMMENCES on any day other than the first day of a month or ends on any day other than the last day of the month, the Base Rental and additional rental for the fractions of a month at the commencement and at the end of the Term shall be adjusted pro rata. All Base Rental payments shall be payable on the first of each month. If the Leased Premises are completed by the Landlord prior to the Commencement Date, the Tenant shall be entitled to occupy the Leased Premises prior to the Commencement Date for purposes of readying the Leased Premises for the Tenant's use. During such pre-term occupancy, the Tenant will only be responsible for paying for utilities consumed in the Leased Premises. However, it is agreed and understood that the Landlord is not representing that it will complete the Leased Premises prior to the Commencement Date. If for any reason the Landlord is delayed in delivering or is unable to give possession of the Leased Premises to the Tenant in the condition required pursuant to the terms of this Lease on or before the Commencement Date then the Tenant shall, subject to its right to terminate as hereinafter set out, take possession on the date when the Landlord delivers possession to the Tenant in the condition required pursuant to the terms of this Lease and the Commencement Date shall be redefined as such date. Notwithstanding the foregoing, if the Landlord is unable to deliver possession of the Leased Premises in substantially completed condition to the Tenant in the condition required pursuant to the terms of this Lease by a date which is six (6) months subsequent to the 15th of December, 1999, then within 3 days of such date the Tenant shall have the option in its sole discretion to declare this Lease null and void and the parties shall have no further obligation to one another. If the Tenant does not deliver such notice in writing to the Landlord within 3 days of such date, then the Tenant shall have no further right to terminate this Lease and the Commencement Date shall mean that date when the Landlord actually delivers possession of the Leased Premises to the Tenant in the condition required pursuant to the terms of this Lease. 2.4 Prepaid Rent. Deleted intentionally. 2.5 Security Deposit. Deleted intentionally. 2.6 Post-Dated Cheques The Tenant shall deliver to the Landlord, prior to the Tenant taking possession of the Premises, twelve (12) post-dated cheques each in the amount equal to the monthly Base Rental plus the Additional Rent payments required under this Lease. -7- One month prior to the first and subsequent anniversaries of the Lease, the Tenant agrees to deliver twelve (12) post-dated cheques to the Landlord. Notwithstanding this provision, the Tenant shall not be obligated to provide postdated cheques unless it is habitually late in making payments pursuant to this Lease, which shall mean three (3) late payments in any twelve (12) month period. ARTICLE 3.00 - LANDLORD AND TENANT COVENANTS 3.1 Landlord Covenants. The Landlord covenants with the Tenant: (a) Quiet Enjoyment. To provide for quiet enjoyment. (b) Interior Climate Control and Utilities. To provide to the Leased Premises during Normal Business Hours, necessary utilities for the use of the Leased Premises by the Tenant and processed air by means of a system for heating and cooling, filtering and circulating, processed in such quantities, and at such temperatures as shall be reasonable in accordance with good standards of interior climate control generally pertaining to normal occupancy of premises for office purposes. The Landlord shall have no responsibility for inadequacy of the performance of the said system if the Leased Premises depart from the design criteria. (c) Elevators. Subject to the supervision of the Landlord and except when repairs are being made thereto, to furnish for use by the Tenant and its employees and invitees in common with other persons entitled thereto reasonable standards of passenger elevator service to the Leased Premises. The Tenant shall be responsible for any damages caused to the elevator as a result of taking possession or giving up possession of the Leased Premises and shall pay such costs forthwith upon demand as Additional Rent. (d) Entrances, Lobbies, Etc.. To permit the Tenant and its employees and invitees to have the use in common with others entitled thereto of the Common Areas, Common Area Facilities, common entrances, lobbies, stairways, elevators and corridors of the Building giving access to the Leased Premises (subject to the Rules and Regulations and such other reasonable limitations as the Landlord may from time to time impose). (e) Washrooms. To permit the Tenant and its employees and invitees, in common with others entitled thereto to use the washrooms available to the Leased Premises on each floor of the Building upon which any part of the Leased Premises is located. (f) Janitor Service. To cause when reasonably necessary from time to time the floors and windows of the Leased Premises to be swept and cleaned and the desks, tables and other furniture of the Tenant to be dusted, all in keeping with a first-class office building, such work shall be done at the Landlord's direction without interference by the Tenant, its servants or employees. (g) Maintenance of Common Areas. To cause the Common Areas, Common Area Facilities, elevators, common entrances, lobbies, stairways, corridors, washrooms and other parts of the Building from time to time provided for common use and enjoyment to be swept, cleaned or otherwise maintained substantially in keeping with a first-class office building. 3.2 Tenant Covenants. The Tenant covenants with the Landlord: (a) Rent. To pay Base Rental and Additional Rent. -8- (b) Permitted Use. To use the Leased Premises only for the purpose of general business offices and any other uses allowed pursuant to applicable by-laws if approved by the Landlord acting reasonably and not to use or permit to be used the Leased Premises or any part thereof for any other purpose or business. (c) Waste and Nuisance. Not to commit or permit any waste, damage or injury to the Leased Premises including the Leasehold Improvements and trade fixtures therein, reasonable wear and tear excluded, any overloading of the floors thereof, any nuisance therein or any use or manner of use causing unreasonable annoyance to other tenants and occupants of the Building. (d) Condition. Not to permit the Leased Premises to become hazardous or permit unreasonable quantities of waste or refuse to accumulate therein and at the end of each business day to leave the Leased Premises in a condition such as to reasonably facilitate the performance of the Landlord's janitor and cleaning services referred to herein. (a) By-Laws. To comply at its own expense with all municipal, federal, provincial, sanitary, fire, building and safety statutes, laws, by-laws, regulations, ordinances, orders or regulations pertaining to the operation and use of the Leased Premises, the condition of the Leasehold Improvements, trade fixtures, furniture and equipment installed by the Tenant therein and the making by the Tenant of any repairs, changes or improvements therein. (f) Fire Exit Doors. To permit the installation by the Landlord of all doors in the exterior wall of the Leased Premises necessary to comply with the requirements of any statute, law, by-law, regulation, ordinance, order or regulation. (g) Rules and Regulations. To observe and to cause its employees, invitees and others over whom the Tenant can reasonably be expected to exercise control, the Rules and Regulations and such further and other reasonable rules and regulations and amendments and changes therein as may hereafter be made by the Landlord and notified to the Tenant. (h) Overholding. That in the event that the Tenant remains in possession of the Leased Premises after the termination of the original Term hereby created, without other special agreement, it shall be at the monthly Base Rental equal to the Base Rental and Additional Rent payable during the last month of the Term hereof, times two, payable on the first day of each and every month and subject in other respects to the terms of this Lease, including those provisions requiring the payment of Base Rental and Additional Rent in monthly installments. 3.3 Signs and Directory. Subject to Section 13.8, the Tenant covenants not to permit, paint, display, inscribe, place or affix any sign, symbol, notice or lettering of any kind anywhere outside the Leased Premises (whether on the outside or inside of the Building) or within the Leased Premises so as to be visible from the outside of the Leased Premises, with the exception only of an identification sign at or near the entrance to the Leased Premises and a directory listing in the main lobby of the Building, in each case containing only the name of the Tenant and to be subject to the approval of the Landlord as to size, location, content and design criteria as established by the Landlord, acting reasonably. Such identification sign and directory listing shall be installed by the Landlord at the expense of the Tenant, which expense shall be the invoice cost plus 15% for an administration fee. The Landlord's acceptance of any name for listing upon the directory will not be deemed, nor will it substitute for the Landlord's consent if required by this Lease to any -9- sublease, assignment or other occupancy of the Leased Premises. 3.4 Inspection and Access. The Landlord shall be permitted to enter and to have its authorized agents, employees and contractors enter the Leased Premises, for the purpose of inspection, window cleaning, maintenance, providing janitor service, making repairs, alterations or improvements to the Leased Premises or the Building, or to have access to utilities and services and access panels which the Tenant agrees not to obstruct, or to determine the electric light and power consumption by the Tenant in the Leased Premises and the Tenant shall provide free and unhampered access for such purposes and shall not be entitled to compensation for any inconvenience, nuisance, discomfort or loss caused thereby, but the Landlord, in exercising its rights hereunder, shall proceed to the extent reasonably possible so as to minimize interference with the Tenant's use and enjoyment of the Leased Premises. 3.5 Exhibiting Premises. The Landlord and its authorized agents and employees shall be permitted entry to the Leased Premises during the last six (6) months of the term for the purpose of exhibiting them to prospective tenants or at any time for the purposes of arranging financing for the Building, in each case, however, the Landlord shall proceed to the extent reasonably possible so as to minimize interference with the Tenant's use and enjoyment of the Leased Premises. 3.6 Landlord's Control. The Tenant acknowledges that the Common Area Facilities are at all times subject to the exclusive control and operation of the Landlord, and the Landlord shall have the right to construct improvements, alterations and additions thereto and to relocate the various facilities thereon. 3.7 Financial Statements. The Tenant will, at the request of the Landlord, supply copies of his financial statements to the Landlord or to the mortgagees, if any, on the said lands or a prospective mortgagee. The Landlord acknowledges that the only financial statements to be delivered are those which are public. ARTICLE 4.00 - REPAIR AND DAMAGE 4.1 Tenant's Repairs. The Tenant covenants with the Landlord: (a) to keep the Leased Premises in good and reasonable state of repair and consistent with the general standards of first-class office buildings in Metropolitan Toronto, to perform all repairs and replacements as a prudent tenant would do (reasonable wear and tear excepted) to the Leased Premises including all Leasehold Improvements and all trade fixtures therein and all glass therein; (b) that the Landlord may enter and view the state of repair from time to time and that the Tenant will repair if required to do so pursuant to the terms of this Lease, according to notice in writing and that the Tenant will leave the Leased Premises in a good and reasonable state of repair; and (c) that if any part of the Building other than the Leased Premises becomes out of repair, damaged or destroyed through the negligence or misuse of the Tenant or its employees, invitees or others over whom the Tenant can reasonably be expected to exercise control, the expense of repairs or replacements thereto necessitated thereby shall be the responsibility of the Tenant. 4.2 Abatement and Termination. It is agreed between the Landlord and the Tenant that: -10- (a) In the event of damage to the Leased Premises or to the Building affecting access or services essential to the conduct of business in the Leased Premises and if the damage is such that the Leased Premises or any substantial part thereof is rendered not reasonably capable of use and occupancy by the Tenant for the purposes of its business for any period of time in excess of 10 days, then (i) unless the damage was caused by the misuse, fault, negligence of the Tenant or its employees, invitees or others under its control, from and after the date of occurrence of the damage and until the Leased Premises are again reasonably capable of use and occupancy as aforesaid, Base Rental and Additional Rent shall abate from time to time in proportion to the part or parts of the Leased Premises not reasonably capable of such use and occupancy, and (ii) unless this Lease is terminated as hereinafter provided, the Landlord or the Tenant as the case may be (according to the nature of the damage and their respective obligations to repair as provided herein, it being understood that the Tenant shall have the obligation to repair and replace all Leasehold Improvements and all Tenant's trade fixtures) shall repair such damage with all reasonable diligence, but to the extent that any part of the Leased Premises is not reasonably capable of such use and occupancy by reason of damage which the Tenant is obligated to repair hereunder, any abatement of Rent to which the Tenant is otherwise entitled hereunder shall not extend later than the time by which repairs by the Tenant ought to have been completed with reasonable diligence; and (b) if either the entire or substantially all of the Leased Premises, or premises whether of the Tenant or other tenants of the Building comprising in the aggregate 50% or more of the Rentable Area of the Building are substantially damaged or destroyed by any cause to such an extent in the reasonable opinion of the Landlord cannot be repaired or rebuilt within 160 days after the occurrence of the damage or destruction, the Landlord may at its option, exercisable by written notice to the Tenant given within 30 days after the occurrence of such damage or destruction terminate this Lease in which event neither the Landlord nor the Tenant shall be bound to repair as provided herein and the Tenant shall instead deliver up possession of the Leased Premises to the Landlord with reasonable expedition but in any event within 60 days after delivery of such notice of termination and rent shall be apportioned and paid to the date upon which possession is so delivered up (but, subject to any abatement to which the Tenant may be entitled under paragraph (a) of this clause 4.2 by reason of the Leased Premises having been rendered in whole or in part not reasonably capable of use and occupancy), but otherwise the Landlord or the Tenant as the case may be (according to the nature of the damage and their respective obligations to repair described in 4.2 (a) (ii)) shall repair such damage with reasonable diligence. ARTICLE 5.00 - TAXES AND OPERATING COSTS 5.1 Net Net Lease. The Tenant acknowledges and agrees that it is intended that this Lease is a completely carefree net net lease to the Landlord, except as expressly herein set out, that the Landlord is not responsible during the Term for any costs, charges, expenses and outlays of any nature whatsoever arising from or relating to the Leased Premises, or the use and occupancy thereof, or the contents thereof or the business carried on therein, except as expressly set out herein, and the Tenant shall pay all charges, impositions, costs and expenses of every nature and kind -11- relating to the Leased Premises, except as expressly set out herein. 5.2 Landlord's Tax Obligations. The Landlord covenants with the Tenant, subject to the provisions herein, to pay all Taxes promptly when due to the taxing authority or authorities having jurisdiction. 5.3 Tenant's Tax Obligations. The Tenant covenants with the Landlord: (i) to pay promptly when due to the taxing authority or authorities having jurisdiction all taxes, rates, duties, levies and assessments whatsoever, whether municipal, parliamentary or otherwise, levied, imposed or assessed in respect of any and every business carried on by the Tenant, subtenants, licensees, or other occupants of the Leased Premises or in respect of the use or occupancy thereof (including license fees); (ii) to pay promptly to the Landlord when demanded or otherwise due hereunder: (1) all Taxes charged in respect of all Leasehold Improvements and trade fixtures and all furniture and equipment made, owned or installed by or on behalf of the Tenant in the Leased Premises as Additional Rent; (2) if by reason of the act, election or religion of the Tenant or any subtenant, licensee or occupant of the Leased Premises, the Leased Premises or any part of them shall be assessed for the support of Separate Schools, the amount by which the Taxes so payable exceed those which would have been payable if the Leased Premises had been assessed for the support of Public Schools; and (3) the Tenant's Proportionate Share of Taxes as Additional Rent in the manner stipulated herein; and (iii) notwithstanding any other provisions of this Lease to the contrary, the Tenant shall pay to the Landlord, at such times and in such manner as the Landlord may direct, without duplication, an amount equal to all goods and service taxes, sales taxes, value-added taxes or any other taxes imposed with respect to Base Rental, Additional Rent or other amounts payable by the Tenant to the Landlord under this Lease, howsoever such taxes are characterized. The amount payable by the Tenant hereunder shall not be deemed to be Base Rental or Additional Rent but the Landlord shall have all of the same rights and remedies for recovery of same as it has for recovery of Base Rental and Additional Rent hereunder. Whenever requested by the Landlord the Tenant will deliver to it receipts for payment of all taxes, rates, duties, levies and assessments payable by the Tenant hereof and furnish such other information in connection therewith as the Landlord may reasonably require. 5.4 Method of Payment of Taxes. The Tax payments required to be made by the Tenant to the Landlord under the provisions of 5.3 (ii) herein shall be estimated by the Landlord, and the Tenant shall pay to the Landlord in addition to the monthly payments of Base Rental hereinbefore reserved, one-ninth of the estimated annual tax payments in the months of January to September, both inclusive, in each calendar year with an adjustment being made when the property tax bill respecting the Building is received by the Landlord for each year. The Tenant shall within sixty (60) days of being invoiced pay to the Landlord such additional sums as may be required in order that out of such monthly additional payments, the Landlord may pay the whole amount of the annual taxes payable by the Tenant as the installments thereof fall due; and if the monthly additional payments so paid by the -12- Tenant to the Landlord exceed in total the Tenant's Proportionate Share of the annual property tax bill with respect to the Building and Lands of which the Leased Premises form part, then the excess shall be adjusted by the Landlord in favour of the Tenant by applying such excess on account of the next ensuing rental payments due (following the issue of the yearly statement) and such next ensuing rental payments shall be reduced by such excess accordingly, unless it is the last year of the Term, in which case, such excess shall be paid by the Landlord to the Tenant which obligation to pay shall survive any termination of this Lease or expiration of the Term. The Landlord shall forward to the Tenant copies of all notices or tax bills relating to the imposition of property taxes or other charges required hereunder to be paid as to part or all thereof by the Tenant. In the event that the Landlord is unable to obtain or determine a separate allocation of taxes payable by the Tenant under this Lease, the Landlord shall have the right to make an allocation, but shall be obligated to act reasonably and not arbitrarily. 5.5 Operating Costs. During the Term of this Lease, the Tenant shall pay to the Landlord its Proportionate Share of Operating Costs. Prior to the commencement of the Term of this Lease and the commencement of each fiscal period selected by the Landlord thereafter which commences during the Term the Landlord shall estimate the amount of Operating Costs and the Tenant's Proportionate Share thereof for the ensuing fiscal period or (if applicable) broken portion thereof, as the case may be, and notify the Tenant in writing of such estimate. The amount so estimated shall be payable in equal monthly installments in advance over the fiscal period or broken portion thereof in question, each such installment being payable on each monthly rental payment date provided in clause 2.3. The Landlord may from time to time alter the fiscal period selected, in which case, and in the case where only a broken portion of a fiscal period is included with the Term, the appropriate adjustment in monthly payments shall be made. From time to time during a fiscal period the Landlord may re-estimate the amount of Operating Costs and the Tenant's Proportionate Share thereof, in which event the Landlord shall notify the Tenant in writing of such re-estimate and fixed monthly installments for the then remaining balance of such fiscal period or broken portion thereof such that, after giving credit for installments paid by the Tenant on the basis of the previous estimate or estimates, the Tenant's entire Proportionate Share of Operating Costs will have been paid during such fiscal period or broken period thereof. As soon as practicable after the expiration of each fiscal period the Landlord shall make a final determination of Operating Costs and the Tenant's Proportionate Share thereof for such fiscal period or (if applicable) broken portion thereof and shall provide a statement to the Tenant and the parties shall make the appropriate readjustment. Each 12 month period ending December 31st shall be deemed to be an accounting year for adjusting the said Operating Costs and within 120 days after the end of each such accounting year, the Landlord shall compute the said costs for such accounting year and the Proportionate Share of the Tenant therefor and shall submit to the Tenant a statement to reflect the Operating Costs specifically permitted under this Lease, and the said Proportionate Share thereof shall be borne by the Tenant. To the extent that the Tenant's Proportionate Share of such costs for such accounting year shall be greater than the total amount actually paid by the Tenant by said monthly payments in respect of such year the difference shall be paid by the Tenant to the Landlord within thirty (30) days after receipt by the Tenant of such statement. Any excess payments shall be applied by reducing the next ensuing rental payment(s) by the amount of such excess, unless it is the last year of the Term, in which case, such excess shall be paid by the Landlord to the Tenant which obligation to pay shall survive any termination of this Lease or expiration of the Term. The said accounting period may be modified by the Landlord if reasonably necessary. The Tenant may not claim a readjustment in respect to the Tenant's Proportionate Share of Operating Costs based upon any error of assessment, determination or calculation thereof unless claimed in writing prior to the expiration of one year after the fiscal period to which the Operating Costs relate. -13- 5.6 Payment of Additional Rent. Any Additional Rent provided for under this Lease unless otherwise provided herein, shall become due with each instalment of monthly Base Rental. ARTICLE 6.00 - UTILITIES AND ADDITIONAL SERVICES 6.1 Water and Telephone. The Landlord shall furnish appropriate openings for bringing telephone services to the Leased Premises and shall provide hot and cold water to washrooms in the Leased Premises and to washrooms available for the Tenant's use in common with others entitled thereto. 6.2 Electricity. The Tenant shall pay throughout the Term promptly to the Landlord (unless paid directly to Hydro authorities pursuant to separate billing) as Additional Rent when demanded: (i) the cost of electric light and power supplied to the Leased Premises monthly based on the electric light and power requirements of the Tenant on a pro rata basis as determined from time to time during the Term by the Landlord acting reasonably; and (ii) the cost of cleaning, maintaining and servicing in all respects all electric lighting fixtures in the Leased Premises including the cost of replacement of electric light bulbs, tubes, starters and ballasts used to replace those installed at the commencement of the Term. Such cleaning, maintaining, servicing and replacement shall be within the exclusive right of the Landlord. It is understood and agreed that the costs described in this sub-section (ii) shall be charged to the Tenant as an Additional Service payable upon receipt of invoice from the Landlord. 6.3 Additional Services. The Landlord, if it shall from time to time so elect, shall have the exclusive right, by way of Additional Services, to provide or have its designated agents or contractors provide any janitor or cleaning service to the Leased Premises and Common Area Facilities required by the Tenant which are additional to those required to be provided by the Landlord hereunder, including the Additional Services which the Landlord agrees to provide by arrangement, and to supervise the moving of furniture or equipment of the Tenant in and out of the Building where such moving of furniture or equipment would be disruptive to the normal business of the Building, and the making of repairs or alterations conducted within the Leased Premises affecting Base Building, building systems or Leasehold Improvements. The reasonable cost of Additional Services provided to the Tenant, whether the Landlord shall be obligated hereunder or shall elect to provide them as Additional Services, shall be paid to the Landlord by the Tenant from time to time within thirty (30) days following receipt of invoices therefor from the Landlord. Costs of Additional Services charged directly to the Tenant and other tenants shall be credited in computing Operating Costs. ARTICLE 7.00 - ASSIGNING AND SUBLETTING 7.1 Assignments and Sublettings. The Tenant covenants with the Landlord that it will not assign, sublet, license or part with the possession of the Leased Premises or any part thereof, or share the occupation of the Leased Premises, or any part thereof, without the consent of the Landlord in writing first had and obtained such consent not to be unreasonably or arbitrarily withheld or delayed. Provided that as a condition of the granting of its consent, the Landlord may require any assignee, subtenant, licensee or occupant of the Leased Premises to execute an agreement whereby he, it or they attorn to and become the tenants of the Landlord as if he, it or they had executed this Lease, or, except in the case of an absolute assignment -14- of this Lease, to execute an acknowledgement that all the sublessee's or undertenant's estate, right and interest in and to the Leased Premises absolutely terminates upon the surrender, release, disclaimer or merger of this Lease notwithstanding the provisions of the Landlord and Tenant Act of Ontario, R.S.O. 1980, Chapter 232 and amendments thereof with specific reference to Paragraphs 21 and 39 (2) thereof, or other similar statute. The Tenant shall furnish to the Landlord copies of any assignment, sublease, license or other agreement herein contemplated. Notwithstanding any other provision in this section, no assignment, subletting, licensing or parting with possession of the Leased Premises shall in any way release or be deemed to release the Tenant (or any guarantor hereof) from their obligations under the terms of this Lease. Provided further that the proposed assignee, subtenant, licensee or occupant of the Leased Premises shall be required to provide financial statements or other financial information as the Landlord may require. It is agreed that the Landlord may consider in determining whether to grant consent among other matters, the following: the personal and business history of the proposed assignee, occupant, sublessee and its key employees. The Tenant agrees to pay the reasonable legal fees of the Landlord's solicitor relating to the preparation of the Landlord's consent, and determination as to whether to give the consent. If by sale, transfer or other disposition of its shares, the control of the Tenant is altered so that 51% of the shares are transferred in any manner, then same shall be deemed as an assignment and the provisions of this paragraph shall apply. The Tenant covenants and agrees to advise the Landlord forthwith if such a transfer is contemplated. This provision shall not apply if the Tenant is a public company. Notwithstanding the foregoing, the Tenant shall not be required to obtain the consent of the Landlord in the event of a sublease or assignment to any of its parent, subsidiaries, or affiliated companies (within the meaning of the Ontario Business Corporations Act, as amended or replaced from time to time) provided the Tenant provides the Landlord at least fifteen (15) days prior written notice and provided further that the assignee or sublessee signs an acknowledgement In the Landlord's standard form that it will be bound by all the terms and conditions of this Lease. Furthermore, upon Landlord's acceptance of the sublessee or assignee as such, the Tenant shall not be released from any obligations under this Lease. In the event of any subletting by the Tenant by virtue of which the Tenant receives rent in the form of cash, goods, services or other considerations from the subtenant which is higher than the rent payable hereunder to the Landlord for the premises so sublet, the Tenant shall pay any such excess to the Landlord, in addition to all rent and other costs payable hereunder, for the period of time during which the said subtenant remains in possession of the premises sublet to it. If the Tenant herein shall receive from any assignee of this Lease, either directly or indirectly, any Consideration (as hereinafter defined) for the assignment of this Lease, either in the form of cash, goods or services, the Tenant shall forthwith pay an amount equivalent to such Consideration to the Landlord and same shall be deemed to be further Additional Rent hereunder. For greater certainty and notwithstanding the foregoing, "Consideration" shall only include actual consideration received by the Tenant (in the form of cash, goods or services) for the assignment of the Tenant's interest in the Lease only and shall not include any consideration received by the Tenant for any assignment, transfer or sale of the Tenant's business or the Tenant's other assets, whether related to, located at or associated with the Leased Premises or the business of the Tenant conducted therein. In calculating whether there is any additional consideration payable by an assignee or sublessee as hereinbefore provided, no deduction shall be made for any commission payable to any agent or other party. -15- If the Landlord has granted to the Tenant, named on page 1 of this Lease, any first rights of refusal, exclusive rights or options to lease additional space or to purchase, it is agreed and understood that upon the Tenant assigning, subletting, licensing or parting with possession of the Leased Premises or any part thereof, the aforesaid rights referred to shall automatically become null and void. Notwithstanding the above provisions, within ten (10) business days after the receipt by the Landlord of such request for consent and of all information which the Landlord shall have requested hereunder, the Landlord shall have the right upon written notice of termination submitted to the Tenant to, if the request is to assign this Lease or sublet the whole of the Leased Premises, cancel and terminate this Lease, or to, if the request is to sublet a part of the Leased Premises only, cancel and terminate this Lease with respect to such part, in each case as of a termination date to be stipulated in the notice of termination which shall be ninety (90) days following giving of such notice. However, if such notice of termination is given by the Landlord, the Tenant shall have five (5) days from receipt thereof to withdraw the request for consent, in which event, the notice of termination shall be nullified. If the request for consent is not withdrawn by the Tenant as aforesaid, then the Tenant shall surrender the whole or part, as the case may be, of the Leased Premises in accordance with such notice of termination and Base Rental and Additional Rent shall be apportioned and paid to the date of surrender and, if only a part of the Leased Premises is surrendered, Base Rental and Additional Rent shall, after the date of surrender, abate proportionately. If the Landlord does not elect to terminate as aforesaid and if consent to sublease or assign will be granted, the Tenant may assign or sublet, as the case may be, only upon the terms and to the party set out in the offer submitted to the Landlord as aforesaid. ARTICLE 8.00 - FIXTURES AND IMPROVEMENTS 8.1 Installation of Fixtures and Improvements. The Tenant shall not make, erect, install or alter any Leasehold Improvements in the Leased Premises without having requested and obtained the Landlord's prior written approval which the Landlord shall not unreasonably delay or withhold. In making, erecting, installing or altering any Leasehold Improvements the Tenant will not alter or interfere with any installations which have been made by the Landlord without the prior written approval of the Landlord and in no event shall it alter or interfere with window coverings (if any) installed by the Landlord on exterior windows. The Tenant's request for any approval hereunder shall be in writing and accompanied by an adequate description of the contemplated work and, where appropriate, working drawings and specifications thereof. All work to be performed in the Leased Premises shall be performed by reputable contractors approved by the Landlord. The Landlord reserves the right to require the Tenant to utilize the contractor(s) of the Landlord where Base Building, building systems and/or warranties may be affected provided the Landlord agrees that charges by such contractors shall be in keeping with that which an arms length contractor would charge. The cost of all such work shall be estimated by the Landlord in advance and such estimate approved by the Tenant prior to work commencing. All such work shall be performed at the Tenant's expense and the Tenant shall be responsible for application and payment of all fees in connection with any permits required. All such work shall be subject to inspection by and the reasonable supervision of the Landlord, as an Additional Service, and shall be performed in accordance with any reasonable conditions or regulations imposed by the Landlord and completed in a good and workmanlike manner in accordance with the description of the work approved by the Landlord. The Landlord shall be entitled to supervise the work and charge the Tenant a reasonable supervision fee. The Tenant shall be obligated to pay any reasonable consultant's fees incurred by the Landlord for review and approval of plans for construction of any nature after the Commencement Date as Additional Rent. The Landlord shall not charge any fees to review any plans and specifications save and except for reasonable out-of-pocket expenses including -16- third party consultants. 8.2 Liens and Encumbrances on Fixtures and Improvements. In connection with the making, erection, installation or alteration of Leasehold Improvements and all other work or installations made by or for the Tenant in the Leased Premises the Tenant shall comply with all the provisions of the Construction Lien Act (Ontario) and other statutes from time to time applicable thereto and shall promptly pay all accounts relating thereto. The Tenant will not create or cause to be created any mortgage, conditional sale agreement or other encumbrance in respect of its Leasehold Improvements or permit any such mortgage, conditional sale agreement or other encumbrance to attach to the Leased Premises or to the Building and Common Area Facilities. If and whenever any construction or other lien for work, labour, services or materials supplied to or for the Tenant for the cost of which the Tenant may be in any way liable or claims therefor shall arise or be filed or any such mortgage, conditional sales agreement or other encumbrance shall attach, the Tenant shall within ten (10) days after receipt of notice thereof procure the discharge thereof, including any certificate of action registered in respect of any lien, by payment or giving security or in such other manner as may be required or permitted by law failing which the Landlord may in addition to all other remedies hereunder avail itself of its remedy hereunder and may make any payments required to procure the discharge of any such liens or encumbrances and shall be entitled to be reimbursed by the Tenant as provided herein and its right to reimbursement shall not be affected or impaired if the Tenant shall then or subsequently establish or claim that any lien or encumbrance so discharged was without merit or excessive or subject to any abatement, set-off or defense. 8.3 Removal of Fixtures and Improvements. All Leasehold Improvements in or upon the Leased Premises shall immediately upon the expiry of the Term or earlier termination of this Lease, be and become the Landlord's property without compensation therefor to the Tenant. Except to the extent otherwise expressly agreed by the Landlord in writing no Leasehold Improvements, trade fixtures, furniture or equipment shall be removed by the Tenant from the Leased Premises either during or at the expiration or earlier termination of the Term except that (1) the Tenant shall at the end of the Term remove its trade fixtures, and (2) the Tenant shall remove its furniture and equipment at the end of the Term and may remove its furniture and equipment during the Term in the usual and normal course of its business where such furniture or equipment has become excess for the Tenant's purposes or the Tenant is substituting therefor new furniture and equipment. The Tenant shall, in the case of every removal either during or at the end of the Term, make good any damage caused to the Leased Premises by the installation and removal. Provided that upon the termination of this Lease, the Tenant, if requested by the Landlord, shall restore the interior of the Leased Premises to its former condition immediately prior to the installation of such alterations or changes, including the restoration of such standard fixtures as may have been installed by the Landlord, and if not so requested, any such changes or alterations shall become the property of the Landlord, or alternatively, the Tenant shall install such comparable fixtures and materials as may then be in use. Notwithstanding any of the foregoing provisions or any other provisions in this Lease, it is understood and agreed that the Tenant shall not be required to remove those Leasehold Improvements approved by the Landlord prior to their construction. 8.4 Occupational Health and Safety. The Tenant covenants and agrees that it will ensure that a comprehensive and rigorous health and safety program to protect workers in the Leased Premises is implemented to ensure that no accidents or injuries occur in connection with the performance of any Tenant's work. The Tenant will indemnify the Landlord in respect of all claims, infractions, prosecutions, alleged infractions, losses, costs and expenses and any fines or proceedings relating to fines or other offenses under all occupational health and safety and any similar legislation that might be brought, or imposed against or suffered by the Landlord or -17- any of its officers, directors and employees in connection with the performance of any Tenant's work. Without limiting the obligations set out above in this Section 8.4, the Tenant will do at least the following: (a) ensure that all obligations imposed by statute, law or regulation on "constructors" or other persons completing or co-ordinating any Tenant's work are diligently and properly completed; (b) co-operate with the Landlord in having any Tenant's work designated as a separate project so that the Landlord does not incur any obligations as a constructor or obligations similar to those of a constructor at law or by regulation imposed in connection with the performance of any Tenant's work; (c) comply with all directions that the Landlord may give to the Tenant in connection with the performance of any Tenant's work having regard to construction health and safety requirements; and (d) provide to the Landlord whatever rights of access, inspection, and whatever information, documents and other matters the Landlord requires in order to ensure that the Tenant's obligations under this Section are complied with. ARTICLE 9.00 - INSURANCE AND LIABILITY 9.1 Landlord's Insurance. The Tenant will during the whole of the Term hereby granted as part of Operating Costs, pay its Proportionate Share of all premiums with respect to insurance to be placed by the Landlord and described in this Section 9.1. The Landlord agrees to maintain during the Term, insurance coverages as follows: (i) Property of Every Description (Building and Equipment) against the perils of "All-Risks", under form providing coverage at least equivalent to Commercial Building Broad Form I.A.O. Form No. 700 including "Building By-Laws Endorsements", and to be insured for the Replacement Value, without allowance for depreciation and Stated Amount, and with no co-insurance requirement; (ii) "Rental Income" for the gross annual rental income on "All-Risks" basis, as provided under Commercial Building Broad Form I.A.O. Form 700 including "Building By-Laws Endorsements", providing coverage at least equivalent to I.A.O. Profits Form No. 551 with an eighteen (18) month indemnity period; (iii) Broad Form Boiler and Machinery Policy on a blanket and replacement basis with limits for each accident in an amount not less than the replacement cost of the Building containing the Leased Premises and which shall cover all boilers, pressure vessels, air conditioning equipment and miscellaneous electrical apparatus owned by the Landlord and which shall include PCB coverage. It shall also include "Rental income" for the full gross annual income equivalent to I.A.O. Profits Form No. 551 with an eighteen (18) month indemnity period. This policy should also provide "Building By-Laws Endorsements"; (iv) "General LiabIlity Insurance" on a Comprehensive Form and on an "occurrence" basis without deductible with retroactive coverage against claims for Personal and Bodily Injury and Death and/or Property Damage occurring upon or about the Leased Premises and for a limit no less than $5,000,000.00 inclusive for one occurrence; and (v) such other insurance coverage or coverages as a prudent owner of a first -18- class office building would obtain for protection respecting loss of, or damage to the Building, the Lands or the Leased Premises, or liability arising therefrom. All such insurance coverages shall be kept and maintained by the Landlord, and in no event shall the coverage be less than the amount required by any institution then holding a mortgage on the Building and Common Area Facilities. The Tenant shall pay to the Landlord, as part of Operating Costs, its Proportionate Share of the Landlord's insurance. The Tenant shall not do or permit to be done any act or thing whereby insurance coverage, premiums or any of them hereinbefore contemplated, may be increased or cancelled by the insurer, or the Leased Premises shall be rendered uninsurable, and if by reason of any act done or permitted or omission, as the case may be, by the Tenant, the said insurance coverage, premiums or any of them shall be increased, then the Tenant, if it shall fail to rectify the event giving rise to the increased premium after written notice thereof from the Landlord, shall be liable to pay all of such increase in premium, with respect to the entire coverages, and this notwithstanding that the Tenant occupies only a portion of the Building covered by such insurance coverages, and if the Leased Premises shall be rendered uninsurable, or if the said insurance coverages, or any of them, shall be cancelled by reason of any act or omission as the case may be by the Tenant and shall not be susceptible of being replaced, after the Landlord's reasonable efforts under the circumstances to do so, then the Landlord, after giving the Tenant at least fourteen (14) days written notice within which to replace insurance coverage or coverages shall, at its absolute discretion, have the right to determine that the term hereof has expired and in such event the Tenant shall deliver up possession of the Leased Premises as if the Term of this Lease had expired. PROVIDED that no act required to be done by the Tenant nor any payment required to be made by the Tenant, including reimbursements of insurance premiums paid by the Landlord, shall relieve the Tenant from any liability for damage incurred by the Landlord as result of any act or omission of the Tenant. If any other tenant of the Building has his own insurance premiums increased by his insurers as a result of the use or occupation by the Tenant herein of the within Leased Premises, the Tenant covenants and agrees with the Landlord after written notice thereof, to pay the additional cost forthwith upon demand as Additional Rent. The Landlord's insurance policy shall contain a waiver of subrogation in favour of the Tenant or those for whom the Tenant is in law responsible. 9.2 Agents. The Tenant acknowledges, covenants and agrees that every right, exemption from liability, defense and immunity of whatsoever nature applicable to the Landlord or to which the Landlord is entitled hereunder shall also be available and shall extend to protect every such agent of the Landlord acting (in the course of or in connection with his employment or otherwise) and for the purposes of all of the foregoing provisions of this clause, the Landlord is or shall be deemed to be acting as agent or trustee on behalf of and for the benefit of persons who are or might be his servants, employees or agents from time to time. 9.3 Tenant's Insurance. The Tenant covenants to insure and to keep insured during the whole of the Term, with an insurance company or companies in good standing and upon terms and conditions all satisfactory to the Landlord: (i) "All-Risks" insurance upon all property owned by the Tenant or for which it is legally liable or installed or affixed by or on behalf of the Tenant and which is located in the Building including, without limitation, furniture, fittings, installations, alterations, additions, partitions and fixtures or anything in the nature of a Leasehold Improvement made or installed by or on behalf of the Tenant in an amount equal to the full replacement cost thereof; if there is a -19- dispute as to the amount which comprises full replacement cost the decision of the Landlord's Architect shall be conclusive; (ii) all parties hereto on a Comprehensive Form for bodily injury and property damage, general liability coverage arising out of the use, maintenance or repair of the Leased Premises and/or the business of the Tenant or any subtenant, licensees or occupiers of the Leased Premises; such insurance shall be for a limit of not less than $2,000,000.00 inclusive for any one occurrence, or such higher limits as the Landlord, acting reasonably, or any mortgagee requires from time to time, and shall contain a severability of interest clause, and a cross liability clause; (iii) glass coverage for the replacement of all glass broken, cracked or damaged in, on and about the Leased Premises; and (iv) any other form of insurance that the Landlord or any mortgagee may reasonably require, from time to time in form, amounts and for insurance risks acceptable to the Landlord and any mortgagee. The Tenant covenants and agrees to provide the Landlord with evidence of insurance as required under this provision. Such evidence shall be by way of a certified copy of the policy if available in timely fashion or failing which a certificate of insurance at such time or times as the Landlord may require. The Tenant agrees to provide same to the Landlord forthwith after notice has been given by the Landlord to the Tenant of its request. The Tenant's policy shall contain a waiver of subrogation in favour of the Landlord and those for whom the Landlord is in law responsible. 9.4 Limitation of Landlord's Liability. The Tenant agrees that: (i) save and except for any injury, loss, damages, costs or expenses arising as a result of the negligence of the Landlord or those for whom the Landlord is in law responsible, the Landlord shall not be liable for any bodily injury or death of, or loss or damage to any property belonging to the Tenant or its employees, invitees, or licensees or any other person in, on or about the Building and Common Area Facilities howsoever occurring and save and except for any injury, loss, damages, costs or expenses arising as a result of the negligence of the Landlord or those for whom the Landlord is in law responsible, in no event shall the Landlord be liable for: (1) any damage which is caused by steam, water, rain or snow which may leak into, issue or flow from any part of the Building or Common Area Facilities or from the pipes or plumbing works thereof or from any other place or quarter or for any damage caused by or attributable to the condition or arrangement of any electric or other wiring or for any damage caused by anything done or omitted by any other tenant; (2) any act or omission (including theft or malfeasance) on the part of any agent, contractor or person from time to time employed by it to perform janitor services, security services, maintenance, supervision or any other work in or about the Leased Premises or the Building or Common Area Facilities; and (3) loss or damage, however caused, to money, securities, negotiable instruments, papers or other valuables of the Tenant; and (ii) save and except for any injury, loss, damages, costs or expenses arising as a result of the negligence of the Landlord or those for whom the Landlord is in law responsible, the Landlord shall have no responsibility or liability for the failure to supply interior climate control or elevator service when prevented from doing so by strikes, the necessity of repairs, any order or regulation of -20- any body have jurisdiction, the failure of the supply of any utility required for the operation thereof or any other cause beyond the Landlord's reasonable control, and shall not be held responsible for any bodily injury, death or damage to property arising from the use of, or any happening in or about, any elevator. Respecting any negligent act referred to in this Section 9.4, the Landlord's liability shall be limited to the amount of proceeds of insurance it has received in respect thereto or would have received if it had maintained insurance as required under this Lease. 9.5 Indemnity of Landlord. The Tenant agrees to indemnify and save harmless the Landlord in respect of all claims for bodily injury or death, property damage or other loss or damage arising from the conduct of any work by or any act or omission of the Tenant or any assignee, subtenant, agent, employee, contractor, invitee or licensee of the Tenant, and in respect of all costs, expenses and liabilities incurred by the Landlord in connection with or arising out of all such claims, including the expenses of any action or proceeding pertaining thereto, and in respect of any loss, cost, expense or damage suffered or incurred by the Landlord arising from any breach by the Tenant of any of its covenants and obligations under this Lease. ARTICLE 10.00 - SUBORDINATION, ATTORNMENT AND CERTIFICATES 10.1 Subordination and Attornment. The Tenant agrees that this Lease and all the rights of the Tenant hereunder are subject and subordinate to all mortgages now or hereafter existing (including deeds of trust and all instruments supplemental thereto) which may now or hereafter affect the Building or Common Area Facilities and to all renewals, modifications, consolidations, replacements and extensions thereof, provided that the Tenant whenever requested by any mortgagee (including any trustee under a deed of trust and mortgage) shall attorn to such mortgagee as the Tenant upon all the terms of this Lease. Subject to the foregoing, the Tenant agrees to execute promptly whenever requested by the Landlord or by such mortgagee such instrument of subordination or attornment, as the case may be, as may be required of it. At the Tenant's cost and request, the Landlord will use its reasonable commercial efforts to obtain a non-disturbance agreement from existing or future encumbrancers. 10.2 Certificates. The Tenant shall promptly whenever requested by the Landlord from time to time execute and deliver to the Landlord (and if required by the Landlord, to any mortgagee [including any trustee under a deed of trust and mortgage] designated by the Landlord) a certificate in writing as to the then status of this Lease, including as to whether it is in full force and effect, is modified or unmodified, confirming the rent payable hereunder and the state of the accounts between the Landlord and Tenant, the existence or non-existence of defaults, and any other matters pertaining to this Lease as to which the Landlord shall request a certificate. ARTICLE 11.00 - EVENTS OF DEFAULT AND REMEDIES 11.1 Events of Default and Remedies. In the event of the happening of any one of the following events (hereinafter referred to as a "Default"): (a) the Tenant shall have failed to pay an instalment of Base Rental or of Additional Rent or any other amount payable hereunder when due and such default shall be continuing for a period of more than two (2) days after written notice by the Landlord to the Tenant of the amount due; -21- (b) there shall be a default of or with any condition, covenant, agreement or other obligation on the part of the Tenant to be kept, observed or performed hereunder (other than the obligation to pay Base Rental, Additional Rent or any other amount of money) and such Default shall be continuing for a period of more than ten (10) days after written notice by the Landlord to the Tenant specifying the Default and requiring that it discontinue; (c) if any policy of insurance upon the Building or any part thereof from time to time affected by the Landlord shall be cancelled or about to be cancelled by the insurer by reason of the use or occupation of the Leased Premises by the Tenant or any assignee, sub-tenant or licensee of the Tenant or anyone permitted by the Tenant to be upon the Leased Premises and the Tenant, after receipt of notice in writing from the Landlord, shall have failed to take such immediate steps in respect of such use or occupation as shall enable the Landlord to reinstate or avoid cancellation (as the case may be) of such policy of insurance; (d) the Leased Premises shall, without the prior written consent of the Landlord, be used by any other persons than the Tenant or its permitted assigns or sub-tenants or for any purpose other than that for which they were leased or occupied or by any persons whose occupancy is prohibited by this Lease; (e) the Leased Premises shall be vacated or abandoned, or remain unoccupied, without the prior written consent of the Landlord for seven (7) consecutive days or more while capable of being occupied; (f) the balance of the Term of this Lease or any of the goods and chattels of the Tenant located in the Leased Premises, shall at any time be seized in execution or attachment; or (g) the Tenant shall make any assignment for the benefit of creditors or become bankrupt or insolvent or take the benefit of any statute for bankrupt or insolvent debtors or, if a corporation, shall take any steps or suffer any order to be made for its winding-up or other termination of its corporate existence; or a trustee, receiver or receiver-manager or agent or other like person shall be appointed of any of the assets of the Tenant; the Landlord shall have the following rights and remedies all of which are cumulative and not alternative and not to the exclusion of any other or additional rights and remedies in law or equity available to the Landlord by statute or otherwise: (i) to remedy or attempt to remedy any Default of the Tenant, and in so doing to make any payments due or alleged to be due by the Tenant to third parties and to enter upon the Leased Premises to do any work or other things therein, and in such event all reasonable expenses of the Landlord in remedying or attempting to remedy such Default shall be payable by the Tenant to the Landlord on demand; (ii) with respect to unpaid overdue Rent, to the payment by the Tenant of the Rent and of interest (which said interest shall be deemed included herein in the term "Rent") thereon at a rate per annum equal to three percent (3%) above the prime commercial loan rate charged to borrowers having the highest credit rating from time to time by the Landlord's principal bank from the date upon which the same was due until actual payment thereof and the maximum amount allowed under the laws of the jurisdiction in which the Building is located; (iii) to terminate this Lease forthwith by leaving upon the Leased Premises or by -22- affixing to an entrance door to the Leased Premises notice terminating the Lease and to immediately thereafter cease to furnish any services hereunder and enter into and upon the Leased Premises or any part thereof in the name of the whole and the same to have again, repossess and enjoy as of its former estate, anything in this Lease contained to the contrary notwithstanding; and (iv) to enter the Leased Premises as agent of the Tenant and as such agent to re-let them and to receive the rent therefor and as the agent of the Tenant to take possession of any furniture or other property thereon and upon giving ten (10) days' written notice to the Tenant to store the same at the expense and risk of the Tenant or to sell or otherwise dispose of the same at public or private sale without further notice and to apply the proceeds thereof and any rent derived from re-letting the Leased Premises upon the account of the Rent due and to become due under this Lease and the Tenant shall be liable to the Landlord for the deficiency if any. 11.2 Payment of Rent, etc. on Termination. (a) Upon the giving by the Landlord of a notice in writing terminating this Lease under sub-paragraph 11.1 (iii) of this paragraph, this Lease and the term shall terminate, Rent and any other payments for which the Tenant is liable under this Lease shall be computed, apportioned and paid in full to the date of such termination forthwith, and there shall immediately become due and payable forthwith in one lump sum, the next immediately ensuing three (3) months' Rent (calculated as if full Base Rental and Additional Rent are owing and not giving credit for any scheduled free Rent period). Upon termination of this Lease and the Term, the Tenant shall immediately deliver up possession of the Leased Premises to the Landlord, without compensation to the Tenant, and the Landlord may forthwith re-enter and take possession of them. (b) The Tenant shall pay to the Landlord on demand all reasonable costs and expenses, including reasonable lawyers' fees and disbursements incurred by the Landlord in enforcing any of the obligations of the Tenant under this Lease. (c) The Tenant shall pay to the Landlord, for any monetary Default, interest at a fixed rate per annum equal to the most favourable rate which the Landlord's principal bank will lend money on prime loans to commercial customers at the date when interest commences to run plus three percent (3%) per annum. Such interest shall run from the due date of such sum without the necessity of a demand until payment and shall be compounded semi-annually. 11.3 Renunciation. The Tenant waives and renounces the benefit of any present or future statute taking away or limiting the Landlord's right of distress. ARTICLE 12.00 - MISCELLANEOUS 12.1 Registration. The Tenant agrees with the Landlord not to register this Lease, but nevertheless if the Tenant desires to register a notice of this Lease, the Landlord agrees to execute a notice or acknowledgement, if required, sufficient for the purpose in such form as the Landlord and Tenant mutually approve provided in no event shall rental rates of this Lease be shown. 12.2 Notice. Any notice required or contemplated by any provision of this Lease shall be given in writing, and if to the Landlord, either delivered to an executive officer of -23- the Landlord or by facsimile transmission or mailed by prepaid registered mail addressed to the Landlord at 3650 Victoria Park Avenue, Suite #500, North York (Toronto), Ontario, M2H 3P7, and if to the Tenant, either delivered to the Tenant (or to an officer of the Tenant if the Tenant is a firm or corporation) or by facsimile transmission or mailed by prepaid registered mail addressed to the Tenant at the Leased Premises. Every such notice shall be deemed to have been given when delivered or, if mailed as aforesaid in Canada, upon the day when it was mailed. The Landlord may from time to time by notice in writing to the Tenant designate another address in Canada as the address to which notices are to be mailed to it. 12.3 Extraneous Agreements. The Tenant acknowledges that there are no covenants, representations, warranties, agreements or conditions expressed or implied relating to this Lease or the Leased Premises save as expressly set out in this Lease and in any agreement to Lease in writing between the Landlord and the Tenant pursuant to which this Lease has been executed. This Lease may not be modified except by an agreement in writing executed by the Landlord and the Tenant. 12.4 Construction. All of the provisions of this Lease are to be construed as covenants and agreements. If any provision of this Lease is illegal or unenforceable it shall be considered separate and severable from the remaining provisions of this Lease, which shall remain in force and be binding as though the said provision had never been included. The headings and marginal sub-headings of clauses and sub-clauses are for convenience of reference and are not intended to limit, enlarge or otherwise affect their meanings. 12.5 Non-Waiver. No condoning, excusing or overlooking by the Landlord or the Tenant of any default, breach or non-observance by the Tenant or the Landlord, as the case may be, at any time or times in respect of any covenant, agreement, proviso or condition herein contained shall operate as a waiver of the Landlord's or the Tenant's rights hereunder in respect of any continuing or subsequent default, breach or non-observance or so as to defeat or affect in any way the rights of the Landlord or the Tenant in respect of any such continuing or subsequent default or breach and no waiver shall be inferred or implied by anything done or omitted by the Landlord or the Tenant save only express waiver in writing. 12.6 Accord and Satisfaction. No payment by the Tenant or receipt by the Landlord of a lesser amount than the Base Rental and Additional Rent from time to time due shall be deemed to be other than on account of the earliest stipulated Base Rental and Additional Rent due, nor shall any endorsement or statement on any cheque or any letter accompanying any cheque or payment of Base Rental or Additional Rent be deemed an accord and satisfaction, and the Landlord may accept such cheque or payment without prejudice to the Landlord's right to recover the balance of such Base Rental or Additional Rent or pursue any other remedy provided in this Lease. 12.7 Governing Law. This Lease shall be governed by and construed in accordance with the laws of the Province of Ontario. 12.8 Time of the Essence. Time shall be of the essence of this Lease and every part hereof. 12.9 No Partnership. Nothing contained herein shall be deemed or construed by the parties hereto, nor any third party, as creating the relationship of principal and agent, or a partnership, or a joint venture between the parties hereto, it being understood and agreed that none of the provisions contained herein nor any acts of the parties hereto shall be deemed to create any relationship between the parties hereto other than the relationship of Landlord and Tenant. 12.10 Force Majeure. Except as herein otherwise expressly provided, if and whenever -24- and to the extent that the Landlord shall be prevented, delayed or restricted in the fulfilment of any obligations hereunder other than because of a lack of financial resources on the part of the Landlord, in respect of the supply or provision of any service or utility, the making of any repair, the doing of any work or any other thing by reason of strikes or work stoppages or being unable to obtain any material, service, utility or labour required to fulfill such obligation or by reason of any statute, law or regulation of or inability to obtain any permission from any governmental authority having lawful jurisdiction preventing, delaying or restricting such fulfilment, or by reason of other unavoidable occurrence, other than because of a lack of financial resources on the part of the Landlord, the time for fulfilment of such obligation shall be extended during the period in which such circumstance operates to prevent, delay or restrict the fulfilment thereof and the Tenant shall not be entitled to compensation for any inconvenience, nuisance or discomfort thereby occasioned. 12.11 Contra Proferentem. The Parties acknowledge and agree that both parties have participated in the drafting of this Lease, and any rule of law providing that ambiguities shall be construed against the drafting party, shall be of no force or effect. 12.12 Planning Act. This Lease is expressly conditional upon compliance with the land division provisions of the Planning Act R.S.O. 1990 (as it may be amended from time to time), if applicable. 12.13 Access. The Tenant, its employees, invitees and customers and persons connected with the Tenant (subject and except as in this Lease provided) shall have the right in common with others entitled thereto from time to time to use the parking areas, driveways, walkways, lawns, ramps (if any) and other Common Areas in and about the Building from time to time. The Tenant shall not unreasonably block or in any manner hinder the Landlord, other tenants or other persons claiming through or under them or any of them who may be authorized by the Landlord to utilize the Common Areas from so doing. The Landlord may, acting reasonably, from time to time permit the Tenant to have the exclusive use of portions of the parking area which forms part of the Common Areas and to permit other tenants or other persons to have exclusive use of portions thereof. 12.14 Transfers by the Landlord. The Landlord at any time and from time to time may sell, transfer, lease, assign or otherwise dispose of the whole or any part of its interest in the Leased Premises or in the Building and lands of which the Leased Premises form a part, at any time and from time to time, may enter into any mortgage of the whole or any of its interest in the Building and Lands or in the Leased Premises. If the party acquiring such interest shall have agreed to assume and so long as it holds such interest, to perform each of the covenants, obligations and agreements of the Landlord under this Lease in the same manner and to the same extent as if originally named as the Landlord in this Lease, the Landlord shall, thereupon be released from all of its covenants and obligations under this Lease. The Landlord may assign its rights under this Lease to a lending institution as collateral security for a loan. If such assignment is made and executed by the Landlord and notification thereof is given to the Tenant by or on behalf of the Landlord this Lease shall not be cancelled or modified for any reason whatsoever except as provided for by the terms hereof or by law without the consent in writing of such lending institution. 12.15 Occupancy Permit. Provided further that notwithstanding the Commencement Date of the Lease as hereinbefore set out, the Tenant shall not be permitted to enter into possession of the Leased Premises until the Tenant has obtained at its sole expense, an occupancy permit from the proper governmental authority. The Landlord, in its sole discretion, may waive this provision. Provided further, the Tenant agrees to use its best efforts to obtain same prior to occupancy. -25- 12.16 Leased Premises. Save and except for any work to be performed by the Landlord as specifically set out herein, the taking of possession of the Leased Premises by the Tenant shall be conclusive evidence that the Tenant accepts the Premises in an "as is" condition and that the said Leased Premises were in good and satisfactory condition at the time possession was so taken. 12.17 Successors and Assigns. This Lease and everything herein contained shall enure to the benefit of and be binding upon the successors and assigns of the Landlord and the permitted successors and assigns of the Tenant. References to the Tenant shall be read with such changes in gender as may be appropriate, depending upon whether the Tenant is a male or a female person or a firm or corporation, and if the Tenant is more than one person or entity, the covenants of the Tenants shall be deemed joint and several. All obligations of the Tenant or the Landlord under this Lease shall be deemed to be covenants whether or not expressed as same. No rights of the Tenant in this Lease shall be deemed to be personal, but shall accrue to the benefit of the Tenant's successors, permitted subtenants and assigns. 12.18 Area Determination. In the event that any calculation or determination by the Landlord of the Rentable Area of any premises (including the Leased Premises) or the Building is disputed or called into question by the Tenant, it shall be calculated or determined by the Landlord's architect from time to time appointed for the purpose, whose certificate shall be conclusive and the cost of such certificate shall be borne by the Tenant and the Landlord equally. ARTICLE 13.00 - OTHER PROVISIONS 13.1 Common Areas. The Tenant acknowledges that the Common Area Facilities are at all times subject to the exclusive control and operation of the Landlord, and the Landlord shall have the right to construct improvements, alterations and additions thereto and to relocate the various facilities thereon. 13.2 Parking. The Landlord shall provide the Tenant with surface parking at a ratio of four (4) stalls per 1,000 square feet of rentable space leased during the initial Term and any subsequent extension terms free of charge. The Tenant further acknowledges that the parking facilities in the Common Area Facilities are on a non-exclusive "first come", "first serve basis" and may be altered or diminished during the term or extension thereof and the manner in which access is permitted may be altered. 13.3 Window Coverings. The Tenant acknowledges that as at the date of this Lease the Landlord does not intend to require the Tenant to install and maintain window coverings. Provided however, that the Landlord shall have the right at any future time to prescribe a uniform pattern for window coverings to be utilized in the Leased Premises. In the event the Landlord so prescribes same, the Tenant shall permit the Landlord to install window coverings at the cost of the Tenant which cost or the current portion thereof shall form part of Operating Costs. Until such time, no window coverings may be installed or utilized by the Tenant without the written consent of the Landlord, which consent may be unreasonably or arbitrarily withheld. 13.4 Extension. Provided that the Tenant is not habitually in default under the terms of this Lease and the Tenant is not in material default at the time of the exercise of the option herein, then the Landlord shall, at the expiration of the Term hereof, upon written request of the Tenant, grant to the Tenant an extension of this Lease for a further period of five (5) years (the "Extension Term") upon the same terms and conditions as contained herein, save as to the Base Rental rate, save as to the Leasehold Improvement allowance, save as to any Landlord's Work and save as to any further right of extension and in an "as-is" condition. Provided always that the -26- Tenant shall have given to the Landlord 180 days' notice in writing before the expiration of the Term of its desire to have such extension. The Base Rental rate for the Extension Term shall be at the then current market rate for premises of comparable type, location and condition and as mutually agreed between the Landlord and the Tenant. In the event that the Landlord and the Tenant are unable to agree upon the Base Rental rate for the Extension Term by 120 days prior to the maturity date, the matter shall be submitted to arbitration by notice given by either party to the other. Upon such notice being given, the dispute shall be determined by the award of 3 arbitrators, or by a majority of them, one to be named by the Landlord and one by the Tenant within 30 days of the giving of such notice, and the 3rd to be selected by these 2 arbitrators within 7 days after both have been nominated. If either the Landlord or the Tenant shall neglect or refuse to name its arbitrator in the time specified or to proceed with the arbitration, the arbitrator named by the other party shall proceed with the arbitration, and the award of such arbitrator shall be final and binding upon the Landlord and the Tenant. The Arbitrators shall have all the power given by the Arbitrations Act of Ontario and may at any time proceed in such manner as they see fit on such notice as they deem reasonable in the absence of either party, if such party fails to attend. Each party shall pay its own costs and shall share equally the costs of arbitration. The award and determination of the arbitrators shall be final and binding upon both parties hereto and each party agrees not to appeal any such award or determination. In no event shall the Base Rental for the Extension Term be less than the highest Base Rental payable under the original Term thereof. If the award of the arbitrators is not given before the commencement date of the Extension Term, then the Tenant shall commence paying rent at the market rate as determined by the Landlord together with Additional Rent, which shall be adjusted forthwith after the award of the arbitrators has become final and binding, to be calculated from the commencement date of the Extension Term. Interest at the rate set out herein shall be calculated monthly on the difference between the Base Rental paid by the Tenant and the actual amount awarded by the arbitrators and shall be paid forthwith upon demand when the arbitrators' decision has been made. The extension of lease form shall be prepared by the Landlord at the Tenant's cost and the Tenant covenants and agrees to pay to the Landlord said costs forthwith upon demand. 13.5 Leasehold Improvement Allowance The Landlord shall provide and pay to the Tenant a leasehold improvement allowance on or before the Commencement Date in the amount of $6.25 per rentable square foot plus G.S.T. for the first 5,000 square feet and $26.25 per rentable square foot plus G.S.T. for the balance of the Premises (collectively the "Leasehold Improvement Allowance"). 13.6 Leasehold Improvements Any Leasehold Improvements shall be completed by the Tenant at its own cost, subject to approval by the Landlord of all plans and specifications, such approval not to be unreasonably withheld. The Landlord shall not charge any fees to review such plans and specifications save and except for reasonable out of pocket expenses. The Landlord shall act as General Contractor in completing the Leasehold -27- Improvements. The Landlord shall ensure that all work be completed in a good and efficient manner and in compliance with all applicable building and fire codes. The Landlord's fee for completing the Leasehold Improvements shall not exceed 8% of the cost of construction. The Landlord shall tender out all construction work to a minimum of three (3) subcontractors and shall make available in writing to the Tenant upon reasonable request all costs, fees, and permits etc. relating to such construction. Further, the Landlord shall deliver the completed Leased Premises to the Tenant no later than December 15, 1999, subject to Force Majeure and delay caused directly or indirectly by the Tenant. 13.7 Base Building Subject to Force Majeure and delay caused directly or indirectly by the Tenant, the Landlord at its sole cost and expense shall ensure that all Base Building items are completed prior to the Commencement Date, in accordance with the Development Schedule attached hereto as Schedule "E". Base Building shall include, but not necessarily be limited to the exterior walls including drywall complete with skim coat painted with primer, washroom, stairs, lobby, common ground floor service rooms, electrical distribution for lighting purposes, sprinkler drops to suit Tenant's final plan, fully operational HVAC up to an including main high pressure line, all life safety systems in the Leased Premises, and sealed concrete floor. The Landlord shall also provide skylights in the Leased Premises in areas designated by the Tenant on plans submitted to the Landlord, subject to final approval of the Landlord. Further, the Landlord will ensure that all of the above shall conform to all current building and fire codes, laws, rules and regulations. Attached hereto as Schedule "D", is a complete performance specification outlining the construction of the Base Building and what is to be included as part of the Base Building. 13.8 Signage The Landlord will allow the Tenant at the Tenant's sole cost to erect a ground level podium sign, subject to all requisite municipal approvals and design, size and placement of said signage to be mutually agreed upon between the Landlord and the Tenant, both parties acting reasonably. The Landlord further agrees to use its best commercial efforts, subject to any rights granted to other tenants, and subject to municipal approval and at the Tenant's sole cost, to allow the Tenant exterior fascia mounted corporate signage on the face of the Building, the design, size and placement of same to be mutually agreed upon between the Landlord and the Tenant, both acting reasonably. If any current northern exterior fascia mounted corporate signage (the "Additional Signage Lights") become available at any time from execution of this Lease and throughout the Term, the Landlord will notify the Tenant of such availability and the Tenant will have seven (7) business days from receipt of notification to accept or decline the Additional Signage Rights. In addition, the Tenant at its sole cost shall have the right to erect exclusive corporate signage on a Building podium with prominent exposure to Highway 401, in the Building directory, and/or near the main entrance doors to the Leased Premises. The design of such signage is to be agreed upon between the Landlord and the Tenant, both parties acting reasonably, and subject to compliance with municipal authorities. -28- 13.9 Year 2000 Compliance The Landlord will ensure that any services it is personally obligated to provide to the Tenant under the terms of this Lease which involve or are dependent upon any computer hardware or software or any other automated equipment or devices are, or will be by December 31, 1999, millennium compliant such that there will be no interruption of service to the Tenant. The Tenant acknowledges that the Landlord cannot be held responsible for provision of services or products beyond its control (eg. Hydro). 13.10 24-Hour Access It is understood and agreed that the Tenant, its employees and invitees shall have the right, subject to emergencies, and reasonable security regulations, twenty-four (24) hours per day, seven (7) days per week throughout the Term and any extension term(s), to have access to the Premises and parking facilities for the Building and to use the common areas of the Building and the property for its intended purposes in common with others entitled thereto. The foregoing access to the Premises shall include, but not be limited to, continuous supply to the Tenant of electric power, hot and cold running water, heating, air conditioning, lighting within the Premises and elevator services to the Premises as outlined in the Lease. The Tenant acknowledges that the Additional Rent estimates of Operating Costs and Utilities contained in this Lease are based on normal operating hours of 7:00 am to 6:00 p.m., Monday to Friday (Statutory Holidays excepted) and that any after hours access will affect said estimates. Tenant agrees to provide reasonable notice to the Landlord when it requires after hours HVAC. 13.11 Riders The Riders attached form part of the within Lease. IN WITNESS WHEREOF the Landlord and Tenant have executed this Lease. AIRPORT CORPORATE CENTRE OFFICE PARK INC. Per: Name Illegible -------------------------------------------- (I/We have authority to bind the Corporation) CERTICOM CORP. Per: /s/ B. MacInnis -------------------------------------------- (I/We have authority to bind the Corporation) SCHEDULE "A" Part of Block 5, Plan 43M-793, designated as Parts 3,4,5,8,9 and 10, on Plan 43R - -18324 City of Mississauga, in the Regional Municipality of Peel. The Parties acknowledge that the above parcel contains lands in excess of that required for the Property and that this schedule will be replaced with a new schedule when a new reference plan is registered on title delineating the lands that are intended to comprise the subject Property. SCHEDULE "B" [ FOURTH FLOOR PLAN MAP OMITTED ] SCHEDULE "C" RULES AND REGULATIONS The Rules and Regulations may differentiate between different types of businesses in the Building but the Rules and Regulations will be adopted and promulgated by the Landlord acting reasonably and in such manner as would a prudent Landlord of a reasonably similar office building. The Tenant's failure to keep and observe the Rules and Regulations now or from time to time in force constitutes a default under this Lease in such manner as if the same were contained herein as covenants. The Landlord reserves the right from time to time to amend or supplement the Rules and Regulations applicable to the Leased Premises or the Building as in the Landlord's absolute and unfettered discretion are from time to time needed for the safety, care, cleanliness and more efficient operation of the Building and for the preservation of good order therein. Notice of the Rules and Regulations and amendments and supplements, if any, shall be given to the Tenant and the Tenant shall thereupon comply with and observe all such Rules and Regulations provided that no Rules and Regulations shall contradict any terms, covenants and conditions of this Lease. The Rules and Regulations as at the Commencement Date are as follows: 1. The Tenant shall not place any debris, garbage, trash or refuse or permit same to be placed or left in or upon any part of the Building outside of the Leased Premises and the Tenant shall not allow any undue accumulation of any debris, garbage, trash or refuse in or outside of the Leased Premises. 2. The Landlord shall permit the Tenant and the Tenant's employees and all Persons lawfully requiring communication with them to have the use during such hours as the Landlord deems reasonable in common with others entitled thereto of the main entrance and stairways, corridors, elevators or other mechanical means of access leading to the Leased Premises. At times other than during such hours as the Landlord deems reasonable the Tenant and the employees of the Tenant shall have access to the Building and to the Leased Premises only in accordance with the Rules and Regulations and shall be required to satisfactorily identify themselves and to register in any book which may at the Landlord's option be kept by the Landlord for such purpose. If identification is not satisfactory, the Landlord is entitled to prevent the Tenant or the Tenant's employees or other Persons lawfully requiring communication with the Tenant from having access to the Building. In addition, the Landlord is not required to open the door to the Leased Premises for the purpose of permitting entry therein to any Person not having a key to the Leased Premises. 3. The Landlord shall permit the Tenant and the employees of the Tenant in common with others entitled thereto, to use the washrooms on the floor of the Building on which the Leased Premises are situated or, in lieu thereof, those washrooms designated by the Landlord, save and except when the general water supply may be turned off from the public main or at such other times when repair and maintenance undertaken by the Landlord shall necessitate the non-use of the facilities. 4. The Tenant shall permit window cleaners to clean the windows of the Leased Premises during such hours as the Landlord deems reasonable. 5. The sidewalks, entrances, passages, elevators and staircases shall not be obstructed or used by the Tenant, its agents, servants, contractors, invitees or employees for any purpose other than ingress to and egress from the offices. The Landlord reserves entire control of all parts of the Building employed for the -2- common benefit of the tenants and without restricting the generality of the foregoing, the sidewalks, entrances, corridors and passages not within the Leased Premises, washrooms, lavatories, air-conditioning closets, fan rooms, janitor's closets, electrical closets and other closets, stairs, elevator shafts, flues, stacks, pipe shafts and ducts and shall have the right to place such signs and appliances therein, as it deems advisable, provided that ingress to and egress from the Leased Premises is not unduly impaired thereby. 6. The Tenant, its agents, servants, contractors, invitees or employees, shall not bring in or take out, position, construct, install or move any safe, business machinery or other heavy machinery or equipment or anything liable to injure or destroy any part of the Building without first obtaining the consent in writing of the Landlord. In giving such consent, the Landlord shall have the right in its absolute and unfettered discretion, to prescribe the weight permitted and the position thereof, and the use and design of planks, skids or platforms, to distribute the weight thereof. All damage done to the Building by moving or using any such heavy equipment or other office equipment or furniture shall be repaired at the expense of the Tenant. The moving of all heavy equipment or other office equipment or furniture shall occur only by prior arrangement with the Landlord. No Tenant shall employ anyone to do its moving in the Building other than the staff of the Building, unless permission to employ anyone else is given by the Landlord and the reasonable cost of such moving shall be paid by the Tenant. Safes and other heavy office equipment and machinery shall be moved through the halls and corridors only upon steel bearing plates. No freight or bulky matter of any description will be received into the Building or carried in the elevators except during hours approved by the Landlord. 7. The Tenant shall not place or cause to be placed any additional locks upon any doors of the Leased Premises without the approval of the Landlord and subject to any conditions imposed by the Landlord. Two keys shall be supplied to the Tenant for each entrance door to the Leased Premises and all locks shall be standard to permit access to the Landlord's master key. If additional keys are requested, they must be paid for by the Tenant. No one, other than the Landlord's staff will have keys to the outside entrance doors of the Building. 8. The water closets and other water apparatus shall not be used for any purpose other than those for which they were constructed, and no sweepings, rubbish, rags, ashes or other substances shall be thrown therein. Any damage resulting from misuse shall be borne by the Tenant by whom or by whose agents, servants, or employees the same is caused. The Tenant shall not (a) let the water run unless it is in actual use, (b) deface or mark any part of the Building, (c) drive nails, spikes, hooks or screws into the walls or woodwork of the Building, or (d) bore, drill or cut into the walls or woodwork of the Building in any manner or for any reason. 9. No one shall use the Leased Premises for sleeping apartments or residential purposes, or for the storage of personal effects or articles other than those required for business purposes. 10. The Tenant shall not permit any cooking or any heating of any foods or liquids in the Leased Premises,* without the written consent of the Landlord. 11. Canvassing, soliciting and peddling in or about the Building and in the parking facilities of the Building are prohibited. 12. It shall be the duty of the Tenant to assist and co-operate with the Landlord in preventing injury to the Leased Premises. *other than the heating of foods or liquids by microwave or similar device as is normal and typical for office premises, -3- 13. No flammable oils or other flammable, dangerous or explosive material save those approved in writing by the Landlord's insurers shall be kept or permitted to be kept in the Leased Premises. 14. No bicycles or other vehicles shall be brought within the building without the consent of the Landlord. 15. No animals or birds shall be brought into the Building without the consent of the Landlord. 16. The Tenant shall not install or permit the installation or use of any machine dispensing goods for sale in the Leased Premises or the Building or permit the delivery of an food or beverage to the Leased Premises,* without the approval of the Landlord,** or in contravention of any regulations fixed or to be fixed by the Landlord. Only Persons authorized by the Landlord shall be permitted to deliver or to use the elevators in the Building for the purpose of delivering foods or beverages to the Leased Premises. * other than normal take-out food, ** which approval shall not be unreasonably withheld, 17. If the Tenant desires telegraphic or telephonic connections, the Landlord will direct the electricians as to where and how the wires are to be introduced. No gas pipe or electric wire will be permitted which has not been ordered or authorized by the Landlord. 18. The Tenant shall not cover or obstruct any of the skylights and windows that reflect or admit light into any part of the Building except for the proper use of approved window coverings. 19. Any hand trucks, carryalls, or similar appliances used in the Building with the consent of the Landlord, shall be equipped with rubber tires, slide guards and such other safeguards as the Landlord requires. 20. The Tenant shall not place or maintain any supplies, merchandise or other articles in any vestibule or entry of the Leased Premises, on the footwalks adjacent thereto or elsewhere on the exterior of the Leased Premises or the Building. 21. The Tenant shall not commit or suffer or permit to be committed any waste upon, or damage to, or disfiguration of the Leased Premises or any nuisance or other act or thing which disturbs the quiet enjoyment of any other tenant in the Building or which unreasonably disturbs or interferes with or annoys any Person, nor perform any acts or carry on any practices which may damage the building. 22. The Tenant shall not refer to the Building by any name other than that designated from time to time by the Landlord, nor use such name for any purpose other than that of the business address of the Tenant, provided that the Tenant may use the municipal number of the Building assigned to it by the Landlord instead of the name of the Building. 23. The Tenant shall not install or allow on the Leased Premises any transmitting device, nor erect any aerial on the roof of the Building or on any exterior walls of the Leased Premises. Any such installations shall be subject to removal by the Landlord without notice at any time and such removal shall be done and all damage as a result thereof shall be made good, in each case, at the cost of the Tenant, payable as Additional Rent forthwith on demand. 24. The Tenant shall not use any travelling or flashing lights or signs or any loudspeakers, television, phonographs, radio or other audio-visual or mechanical devices in a manner so that they can be heard or seen outside of the Leased -4- Premises. If the Tenant uses any such equipment without receiving the prior written consent of the Landlord, the Landlord shall be entitled to remove such equipment without notice at any time and such removal shall be done and all damage as a result thereof shall be made good, in each case, at the cost of the Tenant, payable as Additional Rent forthwith on demand. 25. The Landlord shall have the right to restrict access to the elevators for move-in and move-out purposes. The Tenant shall consult prior to taking or giving up occupation of the Leased Premises in order to obtain an elevator schedule from the Landlord. 26. If the Tenant requires the supply of water, electricity, heating, air conditioning or any other utility or service after the normal hours during which the Landlord supplies same or on a weekend or holiday, the Tenant shall purchase its requirements for those utilities or services from the Landlord and the Tenant shall pay to the Landlord as Additional Rent forthwith upon demand the cost of same at the rates current from time to time set by the Landlord.* 27. There shall be no smoking allowed in any part of the Building including the Leased Premises and all public areas which shall include, but not be limited to washrooms, elevators, elevator lobbies, common area hallways, stairwells, etc. * The Tenant acknowledges that in order for the Tenant to requisition the supply of utilities after the hours that the Landlord normally supplies same, notice will have to be given to the Landlord's representative at least one (1) hour prior to 5:00 p.m. Monday through Friday (excluding Statutory Holidays). The Tenant shall be obligated to give not less than one (1) hour's notice during such time periods and if notice is given outside of such time periods or during Statutory Holidays, the Tenant shall be obligated to pay any out-of-pocket expenses which the Landlord incurs in order to turn on the supply of utilities. SCHEDULE "D" 5520 & 5560 EXPLORER DRIVE MISSISSAUGA, ONTARIO - -------------------------------------------------------------------------------- SPECIFICATION BASE BUILDING - -------------------------------------------------------------------------------- INDEX ----- DESCRIPTION SECTION - ----------- ------- GENERAL DESCRIPTION & CLARIFICATIONS ................................... 1 SITE WORK .............................................................. 2 CONCRETE ............................................................... 3 MASONRY ................................................................ 4 METALS ................................................................. 5 WOOD & PLASTIC ......................................................... 6 THERMAL & MOISTURE PROTECTION .......................................... 7 DOORS& WINDOWS ......................................................... 8 FINISHES ............................................................... 9 SPECIALTIES ............................................................ 10 EQUIPMENT .............................................................. 11 FURNISHING AND FIXTURES ................................................ 12 SPECIAL CONSTRUCTION ................................................... 13 CONVEYING SYSTEMS ...................................................... 14 MECHANICAL ............................................................. 15 ELECTRICAL ............................................................. 16 TENANT IMPROVEMENTS .................................................... 17
BASE BUILDING SPECIFICATION MENKES - -------------------------------------------------------------------------------- PROJECT: 5520 & 5560 EXPLORER DRIVE, MISSISSAUGA, ONTARIO MARCH 30, 1999 - -------------------------------------------------------------------------------- 1.1 GENERAL DESCRIPTION i. OFFICE: o 25,000 sq. ft. (approx,) per floor times 4 floors o 9 ft. clear to ceiling, all floors o 10 ft. clear to ceiling, ground floor lobby o Smooth, white precast concrete and reflective glass facade o 30ft. x 30ft. bays ii. GFA: o 100,000 sq. ft. iii. SITE: o Fully landscaped including all service connections. o 4 car per 1,000 sq.ft. rentable iv. OCCUPANCY: o Group "D" o Based on the Ontario Building Code, current revision. v. SCOPE OF WORK: o All materials, labour, Building Permits, Fees & Deposits, Occupancy Permit, applicable taxes, design costs, inspection and testing costs. o GST is additional to any quoted; purchase prices, optional costs, unit rates, lease rates, etc. 1.2 GENERAL CLARIFICATIONS i. DESIGN: Shall comply with the requirements of the local Municipal Building Codes and By-Laws in effect at date of the execution of the contract, including ASHRAE 90.1
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BASE BUILDING SPECIFICATION MENKES - -------------------------------------------------------------------------------- PROJECT: 5520 & 5560 EXPLORER DRIVE, MISSISSAUGA, ONTARIO MARCH 30, 1999 - -------------------------------------------------------------------------------- ii. ENGINEERING: All of the architectural and professional engineering fees for the complete design and supervision of the facilities, including but not limited to: o Geotechnical o Quality control o Architectural o Structural o Mechanical o Electrical o Sprinkler Protection o Landscape iii. WORK EXCLUDED: (Tenant supplied items) o Communication systems o Data networks o Special floor loading (not specified) o Process services and/or equipment (not specified) o Security systems o Department of Labour Approval o Furniture and furnishings iv. WORKMANSHIP o Materials used shall be new and free from & GUARANTEES: defects. o All work shall meet industry standards for detail and quality. o All workmanship and material guaranteed for a period of one (1) year from the date of substantial completion. 2 SITE WORK Excavation and backfill for foundations. Complete underground storm drain system, sanitary sewer system, domestic water system and natural gas connection.
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BASE BUILDING SPECIFICATION MENKES - -------------------------------------------------------------------------------- PROJECT: 5520 & 5560 EXPLORER DRIVE, MISSISSAUGA, ONTARIO MARCH 30, 1999 - -------------------------------------------------------------------------------- Municipal water and sewer connection charges included. Firemain and yard hydrants to meet applicable fire code. Landscaping (trees, shrubs, pavers for patio, design, borders, etc.) included to Municipal standards. No.1 grade sod for front yard. Three (3) inch of topsoil throughout. Irrigation system for landscaped areas. Heavy duty asphalt throughout trucking areas. Concrete curbs, sidewalks and curb cuts. 3 CONCRETE Foundation to suit site conditions. 48 inch (Forty-Eight) high formed and poured-in place, reinforced concrete dockwall. Office Floors: o 4 inch slab on grade with one coat of cure and seal on ground floor o reinforced concrete, poured in place for all floors above grade to accommodate a live load of 100 psf. (including 20 lb. partition load) Minimum under slab granular fill materials to be 8" Poured in place elevator shaft and core walls. Precast concrete stairs. Uninsulated concrete panels for office fascia.
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BASE BUILDING SPECIFICATION MENKES - -------------------------------------------------------------------------------- PROJECT: 5520 & 5560 EXPLORER DRIVE, MISSISSAUGA, ONTARIO MARCH 30, 1999 - -------------------------------------------------------------------------------- 4 MASONRY o block wall for service areas 5 METALS i. STRUCTURAL STEEL: Framing to roof screen(s). Fabrication and erection to comply with C.S.A. Specifications S-16 and inspected by an independent company. Structural steel to received one shop coat of red oxide primer. ii. MISCELLANEOUS: o stair handrails iii. METAL SIDING: o 26 gauge flat metal siding to roof screen painted to match windows. o 26 GA coloured roof flashings. 6 WOOD & PLASTIC Washroom vanities. 7 THERMAL AND MOISTURE PROTECTION i. ROOFING: Built-up with vapour barrier, 4 ply asphalt and gravel. FM Class 1 materials, I60 rating. Installation inspected by independent company. ii. INSULATION To meet ASHRAE 90.1 energy standards. Insulation Value ---------------- Walls R12 Roof R20
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BASE BUILDING SPECIFICATION MENKES - -------------------------------------------------------------------------------- PROJECT: 5520 & 5560 EXPLORER DRIVE, MISSISSAUGA, ONTARIO MARCH 30, 1999 - -------------------------------------------------------------------------------- 8 DOORS AND WINDOWS i. METAL DOORS Insulated hollow metal doors in hollow metal frames AND FRAMES (HMPS) on exterior to code (in numbers and location). Uninsulated HMPS for interior of Service Rooms, washrooms and stairs. ii. OVERHEAD DOORS: 1 total 8' x 10' steel, insulated, manually operated, truck-level doors. iii. GLAZING: Office glazing to be thermally broken clear anodized frames with double sealed units (clear glass inside, reflective outside). Full height mirrors over vanities. 9 FINISHES i. OFFICE: Painted insulated drywall on 3 5/8" studs, full height for perimeter walls, lobby. 1/2 inch painted drywall on 3 5/8" metal studs with sound insulation, full height for washrooms. 20" x 60" acoustic ceiling at 9 ft height. ii. PAINTING: 3 coats latex on: all misc, steel, stairs, washrooms, overhead doors, epoxy drywall. iii. FLOORING: Ceramic washrooms, granite/quarry lobby.
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BASE BUILDING SPECIFICATION MENKES - -------------------------------------------------------------------------------- PROJECT: 5520 & 5560 EXPLORER DRIVE, MISSISSAUGA, ONTARIO MARCH 30, 1999 - -------------------------------------------------------------------------------- 10 SPECIALTIES i. WASHROOM Plastic laminate ceiling mounted partitions for each PARTITIONS: stall. ii. WASHROOM Double toilet paper dispensers in each stall. ACCESSORIES: Recessed combination paper towel dispenser / disposal in each washroom. Surface mount soap dispenser for each basin. Sanitary napkin disposal in each female washroom stall. 11 EQUIPMENT i. DOCK PACKAGE: Dock bumpers, dock levelers (27,000 lb., 6 ft. x 6 ft. platform, mechanically operated). ii. PROCESS: Excluded are Client supplied process items such as: kitchen, cafeteria, water treatment, refrigeration, air filters, dust collection, waste collection, compaction equipment, cranes, make up air and exhaust, etc. 12 FURNISHINGS AND FIXTURES Excluded 13 SPECIAL CONSTRUCTION Excluded
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BASE BUILDING SPECIFICATION MENKES - -------------------------------------------------------------------------------- PROJECT: 5520 & 5560 EXPLORER DRIVE, MISSISSAUGA, ONTARIO MARCH 30, 1999 - -------------------------------------------------------------------------------- 14 CONVEYING SYSTEMS 3 total, 150 fpm. hydraulic elevators, 3000 lb. one 10 ft. cab for freight. Granite/quarry flooring to match lobby. 15 MECHANICAL i. PLUMBING: Complete plumbing system with wall hung fixtures for eight washrooms as follows: Gr. Floor 2nd Floor --------- --------- M F M F Water 2 4 3 5 closets Urinal 2 -- 3 -- Basin 6 4 4 5 (vanity) (Vanity) ii. FIRE PROTECTION: Light hazard including fire hose cabinet. Excluded are: loop main, smoke vents, foam, chemical or CO(2) systems. iii. HEATING AND All finished office areas are to be heated by gas fired, AIR-CONDITIONING: electric cooling, packaged rooftop units. Unit selections shall conform to the following design criteria: o Summer Design: indoor 24(degrees)C at 30(degrees)C outside ambient temperature. o Winter Design: Indoor 24(degrees)C at -20(degrees)C outside ambient temperature. o Minimum Fresh Air Rate: 20 cfm. Per person, based on 150 square foot per person
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BASE BUILDING SPECIFICATION MENKES - -------------------------------------------------------------------------------- PROJECT: 5520 & 5560 EXPLORER DRIVE, MISSISSAUGA, ONTARIO MARCH 30, 1999 - -------------------------------------------------------------------------------- o Internal Lighting Load: 1.5 watts per square foot* o Office Equipment Load: 3.0 watts per square foot Control system to be Variable Volume and Temperature (V.V.T.). All internal rooftop unit control components required for the V.V.T. control system interface and the main trunk ductwork greater than 36" x 16" and the Master controllers, supplemental electric baseboard heaters shall be provided under the base building. 16 ELECTRICAL Main service to be 1600 amp., 3 phase, 600 volt service, taken from Public Utilities pad mounted transformer. Hydro utility charges included. Subtransformation and branch wiring is included to service: o 600v equipment (RTU, door openers) o 347v lighting o 120v distribution part of Section 17.0 (capacity to provide 3 watts/s.f. "clean" power and 2 watts/s.f. "regular" power available at each floor) Telephone outlets (part of Section 17.0). The following illumination is provided: Office: o 50 fc. In ceiling by fluorescent* o 35 fc. In washrooms by fluorescent Fire alarm included.
* or as modified as per agreement between Landlord and Tenant -8-
BASE BUILDING SPECIFICATION MENKES - -------------------------------------------------------------------------------- PROJECT: 5520 & 5560 EXPLORER DRIVE, MISSISSAUGA, ONTARIO MARCH 30, 1999 - -------------------------------------------------------------------------------- Exterior building and parking lot lighting to Municipal standards. Emergency lighting by battery packs to code requirements to suit open floor. 17 TENANT IMPROVEMENTS 17.1 OFFICE FINISHES: The Unfinished Office Premises (excludes exit stairs, main lobby, washrooms) shall be improved via a Tenant Improvement Allowance as set out in the Lease which shall provide for: o Partitioning o Special ceilings o Special lighting o Floor coverings o Wall coverings o Power distribution o HVAC Distribution and controls o Power and Raceways for Communication o Security o Doors and frames o Hardware o Millwork o Miscellaneous plumbing fixtures o Interior design o Permits and Municipal Fees o Management Fees
-9- SCHEDULE "E" DEVELOPMENT SCHEDULE JULY 15, 1999 Final Space Plan approved by Certicom AUGUST 6, 1999 Equipment Lists, Power and Data requirements provided by Certicom SEPTEMBER 3,1999 Final Interior Working Drawings approved by Certicom, ready for tender - Details and finish materials - Complete mechanical and electrical SEPTEMBER 28, 1999 Submit Construction Cost Summary to Certicom for approval OCTOBER 1, 1999 Final Approval of Construction Costs by Certicom and Direction to proceed OCTOBER 18, 1999 Start Construction of Interior Finishes DECEMBER 15, 1999 Substantial Completion (Ready to start furniture and equipment installation) SCHEDULE "F" ------------ [ SITE PLAN - PHASES 1 AND 2 MAP OMITTED ] SCHEDULE "G" EXCLUSIONS FROM OPERATING COSTS There shall also be deducted or excluded, as the case may be, from the costs, taxes, premiums, fees, outlays and expenses referred to in the definition of Operating Costs, the following: (i) all income tax or similar taxes, corporation taxes, profits taxes, excess profits taxes, place of business taxes, gift taxes, estate taxes, succession taxes, inheritance taxes, franchise taxes, land transfer taxes and non-resident sales taxes, business taxes (other than those business taxes specifically payable by the Tenant pursuant to this lease) and any other taxes personal to the Landlord other than capital taxes; (ii) ground rent (if any), amortization and interest on and capital retirement of debt, affecting all or any of the lands and building; (iii) all recoveries which reduce the expenses incurred by the Landlord in operating, repairing and maintaining the lands and building (including the common areas and facilities) received by the Landlord from tenants as a result of any act, omission, default or negligence of such tenants or by reason of a breach of such tenants of provisions in their respective leases; (iv) any amounts directly chargeable to other tenants in the building for services, costs and expenses solely attributable to the accounts of such tenants; (v) any loss or damage to all or any part of the building or any personal injury for which the Landlord is or ought to have been insured under the terms of this lease; (vi) any cost or expense which is normally treated in accordance with generally accepted accounting principles as being of a capital nature which shall be amortized over useful life of the item and charged to the Tenant in accordance with G.A.A.P. as part of the Operating Costs; (vii) costs recovered by the Landlord in exercising the Landlord's construction warranties; (viii) commissions, advertising costs, the costs of any market research, traffic consumer attitude study or legal expenses in connection with leasing the building or any part thereof; (ix) all penalties or carrying charges relating to late payment of taxes and any capital, interest or other carrying charges on any mortgages or equipment head or land lease or equipment lease payments or other financing with respect to the building or any part thereof; (x) all fines, suits, claims, demands, actions, costs, charges and expenses of any kind or nature for which the Landlord is or may become liable by reason of any negligent or wilful acts or omissions to act on the part of the Landlord or those for whom it is in law responsible or by reason of any breach or violation or non-performance by the Landlord of any covenant, term or provision contained in the leases and other agreements entered into by the Landlord in respect of the building or the lands; (xii) the expenses incurred by the Landlord in respect of installation or removal of any tenant's improvements or any sum paid by the Landlord to any tenant in the building for any tenant allowance; (xiii) all work to the leased premises or the building or any part thereof made necessary by the Landlord's non-compliance with governing codes, by-laws, regulations and ordinances relating to the construction by the Landlord of the building or the Leased Premises; and -31- (xiv) the cost of construction and reconstruction of the building. RIDER 1 Notwithstanding the foregoing provisions or any other provision of this Lease, the Landlord shall provide the Tenant a gross Rent free period for the first 12 months of the Term on five thousand (5,000) square feet of Rentable Area, such that the Tenant shall not be obligated to pay Base Rental or Additional Rent for the first 12 months of the Term on five thousand (5,000) square feet of Rentable Area. AMENDING AGREEMENT THIS AMENDING AGREEMENT made this 25th day of April, 2000, BETWEEN: AIRPORT CORPORATE CENTRE OFFICE PARK INC. (the "Landlord") OF THE FIRST PART AND: CERTICOM CORP. (the "Tenant") OF THE SECOND PART WHEREAS the Landlord and the Tenant entered into a Lease dated March 29th, 1999 (the "Lease") when the Tenant leased certain premises located at 5520 Explorer Drive, in the City of Mississauga (the "Premises") as more particularly set out in the Lease; AND WHEREAS the Landlord has agreed to lease to the Tenant certain additional premises known as Suite 202 containing 5,344 square feet at 5520 Explorer Drive, in the City of Mississauga (the "Additional Premises"); AND WHEREAS the Landlord and the Tenant have agreed to enter into this Amending Agreement to amend the terms of the Lease in accordance with the terms herein; NOW THEREFORE WITNESSETH that in consideration of the mutual covenants hereinafter exchanged, the parties agree as follows; 1. The Landlord does hereby lease to the Tenant the Additional Premises for a term of five (5) years commencing June 1st, 2000 and expiring May 31st, 2005. 2. The Tenant covenants and agrees to pay to the Landlord as Base Rental, yearly and every year during the Term for the Additional Premises, the sum of $96,192.00 of lawful money of Canada in twelve equal monthly installments of $8,016.00 in advance, the first of such installments to become due and payable on the 1st of June, 2000. The Base Rental has been calculated on the basis of $18.00 per square foot of Rentable Area. 3. The Tenant shall be entitled to enter the Additional Premises immediately for completion of its Tenant improvements and shall not be obligated to pay any Base Rental or Additional Rent until June 1st, 2000. 4. The Landlord agrees to pay a one time cash payment of $20.00 per square foot of Rentable Area plus G.S.T. for the purpose of permitting the Tenant to perform its leasehold improvements. The payment shall be made upon completion of the Tenant improvements and receipt by the Landlord of: (a) satisfactory evidence of completion; (b) a Workmen's Compensation clearance; (c) evidence that there are no liens attached to the Additional Premises or the lands thereunder; and (d) subject to final inspection of the Additional Premises by the Landlord. 2 The Landlord's payment shall be subject to any required holdback under the applicable legislation. 5. It is agreed that the Landlord and Tenant's Work will include those items in accordance with the attached Memorandum from Guy Belanger dated March 7th, 2000 and be in compliance with same and the tenant shall be bound to comply with the terms thereof. It is agreed that the Landlord will not charge supervision cost should the Tenant utilize the Landlord's base building engineers. 6. The Landlord and Tenant agree and acknowledge that the following provisions of the Lease are not applicable to the Additional Premises: 13.5 (leasehold improvement allowance), 13.6 (leasehold improvements), 13.7 (base building) and Rider 1. 7. The capitalized terms herein shall have the same meanings ascribed to them in the Lease unless specified otherwise herein. 8. The Landlord and the Tenant hereby agree that the definitions of "Leased Premises" and "Commencement Date" in Article 1.1 of the Lease are hereby deleted and replaced with the following: "Leased Promises" means approximately 25,248 square feet of Rentable Area on the fourth floor of the Building as outlined in red on the plans attached as Schedule "B". "Commencement Date" means December 25th, 1999. 9. The Landlord and the Tenant hereby agree that the first two paragraphs and the fourth paragraph of Article 2.3 of the Lease are hereby deleted and replaced with the following: THE TENANT SHALL PAY yearly and every year during the first five (5) years of the within Term the sum of $353,472.00 of lawful money of Canada in twelve (12) equal monthly installments of $29,456.00, in advance, the first of such installment to become due and payable on the Commencement Date (the "Base Rental"). THE TENANT SHALL PAY yearly and every year during the last five (5) years of the within Term the sum of $403,968.00 of lawful money of Canada in twelve (12) equal monthly installments of $33,664.00, in advance, the first of such installment to become due and payable on the Commencement Date (the "Base Rental"). The aforesaid annual Base Rental is calculated on the basis of the Rentable Area of the Leased Premises being 25,248 square feet at a rate of $14.00 for each square foot of Rentable Area per annum during the first five (5) years of the within Term and at the rate of $16.00 for each square foot of Rentable Area per annum during the last five (5) years of the within Term. 10. The Landlord and the Tenant agree that the terms of the Lease are amended as required to give full force and effect to the terms of this Amending Agreement. 11. The Landlord and the Tenant agree to execute such further and other documentation as may be necessary to give this Amending Agreement full force and effect. 12. This Amending Agreement shall enure to and be binding upon the respective successors and assigns of the parties hereto. 3 IN WITNESS WHEREOF the parties hereto have executed this Amending Agreement as of the day, month and year noted above. AIRPORT CORPORATE CENTRE OFFICE PARK INC. Per: ____________________________________ [Authorized Signing Officer] CERTICOM CORP. Per: ____________________________________ [Authorized Signing Officer] SCHEDULE "A" Memorandum from Guy Belanger dated March 7th, 2000. March 7, 2000 Certicom Corporation 5520 Explorer Dr. -- 2nd Floor Re: Tenant Improvements The following base building work is in place: Ceiling grid installed Baseboard heaters installed Sprinkler System installed Supply only of light fixtures on floor within space All mechanical and electrical rough-in The only base building work not complete is the supply of ceiling tile Specifications for Tenant Work: All mechanical and electrical work must be designed by the base building engineers. It is the Tenant's responsibility to ensure that all OBC requirements are co-ordinated with the base building architect where applicable. A complete set of drawings including mechanical, electrical, architectural, and sprinkler must be approved by Menkes prior to the start of Construction. It will be the Tenants responsibility to obtain and pay for all required permits. A copy of the permit must be forwarded to Menkes prior to the start of any construction. It is our preference to use base building mechanical, electrical and sprinkler contractors. All contractors must be approved by Menkes before any work commences. The base building distribution system including VVT zone dampers and controls supplied by Lennox must be used (same as 4th floor). Base building air troffers and perimeter air boots must also be used. VVT controls including base board heaters and tie-in to base building system must be implemented in accordance with base building control system. A portion of the controls related to this tenant space have already been installed. The value of this work is $5,500 + gst. Menkes reserves the right to review the completed construction and direct the tenants to correct deficiencies to the landlords' satisfaction. Upon completion the tenant is to provide as built drawings approved by the base building engineers. Provide 2 prints and CAD files of each. The tenant is also to provide written confirmation from the City of Mississauga building department and fire department that all permit requirements are satisfied. EX-10.3 6 0006.txt LEASE BETWEEN ALLIANCE RESTON AND CERTICOM CORP. [VANTAS LOGO] OFFICING SOLUTIONS WORLDWIDE LEASE AND SERVICE AGREEMENT EXTENSION RIDER RE: Lease and Service Agreement between VANTAS Reston L.P. and Certicom ("Agreement"). DATE: May 18, 2000 CENTER: VANTAS Reston Office 307 Paragraph "3a" of the Agreement is hereby modified so that the term of the Agreement shall expire on 9/29/2000. In accordance with the Lease and Service Agreement Rebate Rider, attached to the original Lease and Service Agreement, and in consideration of this modification and extension of the term, the Lessee shall pay the Lessor as rent for the Premises a total rent of $16,427, payable in 3 equal monthly installments of $5475. All other terms and conditions of the Agreement shall remain in full force and effect. ACCEPTED BY LESSOR: ACCEPTED BY LESSEE: By: /s/ J. Morris By: /s/ Richard M. Depew --------------------------- ------------------------- Date: 6/12/00 Title: EVP of Field Operations ------------------------- ----------------------- Date: 6/8/00 ----------------------- [ALLIANCE LOGO] Business Centers LEASE AND SERVICE AGREEMENT EXTENSION RIDER RE: Lease and Service Agreement between ALLIANCE Reston L.P. and Certicom ("Agreement"). DATE: June 2, 1999 CENTER: ALLIANCE Reston Paragraph "3a" of the Agreement is hereby modified so that the term of the Agreement shall expire on December 31, 1999. In accordance with the Lease and Service Agreement Rebate Rider, attached to the original Lease and the revised Service Agreement, and in consideration of this modification and extension of the term, the Lessee shall pay the Lessor as rent for the Premises a total rent of $20,190, payable in 6 equal monthly installments of $3,365. All other terms and conditions of the Agreement shall remain in full force and effect. ACCEPTED BY LESSOR: ACCEPTED BY LESSEE: By: /s/ J. Mulson By: /s/ B. MacInnis --------------------------- ------------------------- Date: 6/3/99 Title: CFO ------------------------- ----------------------- Date: 6/3/99 -----------------------
Exhibit B-Continued E. CONCIERGE SERVICES 1) Arrangement for Business Supplies, Catering, Meal order taking, etc. $25.00 Per hour .20 hr minimum F. WORD PROCESSING GRAPHICS 1) Standard Word Processing Rate From $30.00 Per hour Standard Desktop Publishing/Graphics Rate From $40.00 .3 hr minimum Word Processing and Desktop Publishing Services billed in 6 minute increments. Normal turnaround = 24 hours 2) Word Processing - Rush Turnaround Time = 1-8 hours From $45.00 Per hour Desktop Publishing - Rush Turnaround Time = 1-8 hours From $50.00 .3 hr Minimum The Word Processing and Desktop Publishing services below will be billed at 150% of the normal Word Processing rate if requested as a rush. 3) Overtime Charges for Word Processing From $60.00 Per hour Overtime charges for Desktop Publishing/Graphics From $80.00 .3 hour minimum The Word Processing and Desktop Publishing services below will be billed at 200% of the normal rate if performed before or after scheduled working hours, or if overtime required or requested. Word Processing/Graphics Services Available * Ads * Logo design/Business Cards/Stationery * Bank Deposits * Photo minipulation * Bill Paying * Preparation of Expenses * Check Reconcilliation * Proposals * Invoicing (Bookkeeping) * Scanning (either text or photos) * Light Accounting * Straight keyboarding without any additional attributes * Multi-media Presentations * Tables/Forms * Charts & Graphs * Tape Transcription * Color Laser Printing & B&W * Web Page design * Database Development * Database Entry/Mailmerge List Entry * Excel Spreadsheets/Statistical typing * Flyers & Brochures Industry Production Standards: "Landlord shall bill in accordance with Industry Production Standards (IPS), published by the National Association of Secretarial Services and the Executive Suite Association. IPS are used for computing the time charged for document production and non-keyboarding services. IPS are based on the average time required to perform specific duties by a professional word processing operator. This allows the Tenant to know how much a project will cost regardless of how long it takes to complete it. 4) Resumes: Typing Only - Does not include edits or additional print outs * 1st Page $40.00 1st Page Only * Each Additional Page $20.00 Per Page * Cover Letter $10.00 Per Page Resume Writing Consultation Services $45.00 Per Hour 5) Technical Support $75.00-$125.00 Per Hour All Service pricing is subject to change with 30 days written notice to clients on contract. Revised 05/21/99 Initials BM Initials ________ Exhibit B-Continued G. CONFERENCE ROOMS 1) Rental * Full-Time Tenants Included Up to 4 Hours/contract * Hourly (Full-time and Part-time) $25.00 Per Hour * Daily (1 to 12 people) (Full-time and Part-time) $150.00 Per Day * Walk-in (Hourly) $35.00 Per Hour 2) Seminar Room (allowance at twice the time): Seminar rooms not available at all facilities. * Full-Time Tenants Included Accumulated with Conference Room rental * Hourly $50.00 Per Hour * Daily (up to 40 people) $300.00 Per Day * Walk-in (Hourly) $70.00 Per Hour 3) Cancellation, if not within 24 hours for conference room. Billable at 50% Or time reserved 4) Set-up/clean-up after Tenant in conference room $25.00 Per Hour H. DIRECTORY LISTING - BUILDING LOBBY 1) Full-time (one-line) Included First time 2) ImagePlus and Additional Listings-one time charge (Center Specific) $30-$150 Per line I. FURNITURE 1) Moves/adds/changes including administrative coordination and moving of $25.00 Per piece furniture places 2) Standard Furniture Set (desk, executive chair, 2 side chairs and Included Month/set credenza) 3) Additional Furniture Rental - Various Pieces Varies based on Piece Requested J. KITCHEN FACILITIES (Coffee, tea, etc.) 1) Tenants/Clients per cup service (self-serve) Included 2) Pots for Conference Room - Set-up $25.00 Per hour Actual time-Clerical rate K. MAIL SERVICES * Deliver parcel to tenants office. All parcels are called to tenant. If $25.00 Per hour not picked up by 5:00 p.m. we will deliver to office. .20 hr minimum * Prepare Certified, Express, or Courier * Check mailbox/hold (24-hours for packages later than mailbox)/review mail by phone * Prepare packages, such as label/wrap * Trace Shipments (Fed Ex, UPS, etc.) * Mass mailings (folding, stuffing, posting, etc.) L. OFFICE SUPPLIES 1) Minimum supplies are available on site through ALLIANCE or may be Cost + 20% ordered (See a clerical assistant for requests) 2) Weekly orders may be placed directly for tenant $25.00 Per hour .20 hr minimum M. PARKING 1) Surface Center Specific 2) Covered Parking Garage Center Specific All Service pricing is subject to change with 30 days written notice to clients on contract. Revised 05/21/99 Initials BM Initials ________ Exhibit B-Continued N. POSTAGE FEES (Landlord shall serve as postal agent to all tenants and clients) 1) U.S. Mail/UPS Cost + 20% * Posting of mail - 25 pieces Complimentary Per day * Posting of mail - Additional (after 25 pieces) $2.50 Per 25 pieces + (cost + 20%) 2) Courier Service Cost + 20% 3) Federal Express Published Standard Rates O. PRODUCTION & COPYING (a medium volume copy machine is available for Tenants) 1) Binding, copying & transparencies (clerical time only) $25.00 Per hour .20 hr minimum + supplies 2) Photocopies * up to 350 $0.15 Each * 351-700 $0.12 Each * 701-1000 $0.10 Each * 1001-2000 $0.08 * 2001+ $0.06 3) Binding (includes spine, cover & backing) $4.50 Each + time P. TELECOMMUNICATIONS 1) Standard Phone Equipment $125.00 Per Set, Per Month (Installation fee and set up not included) * Phone with built-in Speaker phone * DID Phone Number with 2 roll over lines * 1 line Directory Listing * Other basic features of telephone system. 2) Phone/Fax or Date Line installation $150.00 Per line/Per set 3) Fax or Data Line (Additional recurring charge each month plus a per $80.00 Per line, Per month minute charge where applicable) 4) Voice mail; adding another personal box $25.00 Per line, Per month $25.00 Per box, installation 5) Programming voice mail to pager - Center Specific $25.00 Programming fee, per pager 6) Paging (not intercom services) * Voice Mail Paging $25.00 Per pager Per Month - call transfer fee * Paging on Demand to a pager $2.50 Per Page 7) Call Patching set up fee- if available $25.00 Per number (one time charge) * Up to 100 patches $50.00 Per Month + call transfer fee * Additional Patches (after 40) $0.50 (based on distance of call) Per Patch and call transfer fee * On Demand $25.0 Per Patch 8) Reconnect fee (after termination of service) $150.00 Per Phone or Data Line 9) T-1 Access (Not available at all locations) (Requires LAN Connectivity) $100.00 Per user/month LAN Connectivity $25.00 Per user/month Installation and set up $150 + $125/hr Per user-one time Note: All changes are not listed for this service. Additional services also available. 10) Video Conferencing (not available at all centers) $150.00 $350.00/hr $50.00 set up fee 11) Call Screening $50.00 per person/month All Service pricing is subject to change with 30 days written notice to clients on contract. Revised: 05/21/99 Initials BM Initials ________ Exhibit B-Continued Q. TELECOPY/FAX - PLAIN PAPER FAX AVAILABLE (clerical charges may be incurred for faxes sent after normal business hours) 1) Outgoing $1.00 Per Page + Cost of Call 2) Incoming $1.00 Per Page R. IMAGEPLUS PROGRAM 1) Telephone Answering Only (8:30a.m. thru 5:30 p.m.; Mon-Fri) $100.00 Per Month 2) Mail Service Only - One Company Name $50.00 Per Month 3) ImagePlus Flex Program - Basic - No Conference Room $150.00 Per Month 4) Extra People $25.00 Per Month/per person ------------------------ All Service pricing is subject to change with 30 days written notice to clients on contract. Revised: 05/21/99 Initials BM Initials ________
[ALLIANCE LOGO] Business Centers LEASE AND SERVICE AGREEMENT This Agreement is made this 7th day of December 1998, by and between ALLIANCE Reston, L.P. . d/b/a ALLIANCE Business Centers ("Lessor") having offices known and numbered as Suites 100/300 (the "Facility") in the building located at 12020/12030 Sunrise Valley Drive, Reston, Virginia 20191 (the "Building") and Certicom ("Lessee") a(n) Deleware (corporation, partnership, individual) with an address of 200 Matheson Blvd. West, Suite 103 Mississauga, Ontario L5R 3L7. The parties for themselves, their heirs, legal representatives, successors and assigns, agree as follows: 1. Demise and Description of Property. a. Lessor leases to Lessee and Lessee leases from Lessor, the "Premises" (defined below), being a subpart of Lessor's total leased Facility space, for the term and subject to the conditions and covenants hereinafter set forth and to all encumbrances, restrictions, zoning laws, regulations or statutes affecting the Building, Facility or Premises. b. The Premises consists of Facility office space number(s) 307 as shown in the floor plan annexed hereto. Lessor hereby grants Lessee the privilege to use in common with other lessees and parties that Lessor may designate certain office amenities located in the Facility; the use of all of which are subject to such reasonable rules and regulations as Lessor currently has in place and may adopt from time to time. The amenities are more particularly described in attached Exhibit "A." "The Operating Standards" as presently in place and governing the use of the Premises and the Facility are attached in Exhibit "B". 2. Use. a. The Premises shall be used by Lessee solely for selling of data encryption technology and such other normally incident uses and for no other purpose, in strict accordance with the Operating Standards. Additionally, Lessee shall not offer at the Premises any services which Lessor provides to its lessees, including, but not limited to those amenities or services described in attached Exhibit "A". In the event Lessee breaches any provision of this paragraph, Lessor shall be entitled to exercise any rights or remedies available to the Lessor pursuant to this Agreement together with such other rights and remedies as the Lessor may otherwise have and choose to exercise. b. Lessee shall not make nor permit to be made any use of the Premises which would violate any of the terms of this Agreement or which, directly or indirectly, is forbidden by statute, ordinance or government regulations, which may be dangerous to life, limb or property, which may invalidate or increase the premium of any policy of insurance carried on the Building or on the Facility, which will suffer or permit the Premises to be used in any manner or anything to be brought into or kept there which, in the sole judgment of Lessor, shall in any way impair or tend to impair the high quality character, reputation or appearance of the Building or the Facility, or which may or tend to impair or interfere with any services performed by Lessor for Lessee or for others. 3. Term. a. The term of this Agreement shall be for a period of 6 months, commencing 9:00 a.m. on the 1st day of January 1999, and ending 5:00 p.m. on 30th day of June 1999, unless renewed as provided in paragraph "3(b)" herein. b. Upon the ending term date set forth herein or any extension thereof, the Agreement shall be extended for the same period of time as the initial term and upon the same terms and conditions as herein contained except for the amount of base rental charges and additional service charges, which shall each be increased by at least ten percent (10%), unless either party notifies the other in writing by certified or registered mail, return receipt requested, or delivered by hand that the Agreement shall not be extended within the period hereinafter specified or automatically renewed, If Lessee has less than three offices, such notice shall be given at least 60 days prior to the expiration date of this Agreement. If Lessee has three or more offices, such notice shall be given at least 90 days prior to the expiration date of this Agreement. c. In the event the entire Premises or the Facility are damaged, destroyed or taken by eminent domain or acquired by private purchase in lieu of eminent domain so as to render the Premises fully untenantable and unrestorable in Lessor's sole Judgment, then within 90 days thereafter by written notice to the other party, either party shall be able to terminate this Agreement, which will terminate as of the date thereof. 4. Rent. a. For and during the term of this Agreement, Lessee shall pay Lessor as rent for the Premises a total rental of $21,600, payable in 6 equal monthly installments of $3600 (unless otherwise indicated on attached Rebate Rider) each payable in advance of the first day of each calendar month after the commencement of the term, or a daily prorated amount for any partial calendar month during the term. If any payment of rent or other charges due under this Agreement is not received within five (5) calendar days after its due date, the Lessee will also pay, as additional rent, a late payment charge which shall be an amount equal to 10% of any amount owed to Lessor or $50 whichever is greater. b. It is additionally specifically covenanted and agreed that the financial terms of this Agreement are strictly confidential and Lessee agrees not to knowingly or willfully divulge this information to or any other Lessee or potential Lessee of Lessor. Any such disclosure by the Lessee of the financial terms of this Agreement as set forth herein above, shall constitute a material breach of this Lease. c. The first such payment of rental as well as the payment of the Deposit as set forth in below shall be paid by Lessee simultaneously with execution of this Agreement. Should the Lessee fail to make such payment prior to the commencement of the term of this Agreement, then, at Lessor's sole option, the Agreement shall be null and void and of no further effect. d. The rental payable during the term of this Agreement shall be increased on the first day of the month following notification of any rental increase (however designated) which the Lessor might receive from the Lessor's over-landlord ("Building"). The term "direct expenses" as used herein shall refer to the same items and costs as are used by the Building in its determination of expenses and costs passed on to Lessor. Lessor shall immediately notify Lessee in writing of any such increase, and shall bill Lessee for its pro rata share thereof, which bill Lessee shall pay promptly upon such notification for each and every month thereafter for the balance of the term. e. Rent charges are based on the value of the rental Premises and services to be used by three (3) person(s) only. If more than said number of person(s) habitually use the Premises or services, the Fixed Monthly Rental Charges will be increased by a factor of $100 for each additional person who habitually uses the Premises. f. If a Lessee check is returned for any reason, Lessee will pay an additional charge of $100.00 per returned check and, for the purpose of considering default and/or late charges, it will be as if the payment represented by the returned check had never been made. [ALLIANCE LOGO] 1 Business Centers BM Initials EV Initials 5. Security Deposit. a. Lessee shall deposit with Lessor an additional $3055.00, as a non- interest bearing security deposit (Lessee currently has $1070.00 on file as a non-interest bearing security deposit). Lessor may use the security deposit to cure any default of Lessee under this Agreement, restore the Premises including any and all furniture, fixtures and equipment provided by Lessor and vendors at the Premises to their original condition and configuration, reasonable wear and tear excepted, to pay for repairs to any damage to the Premises, Executive Suite or Building, caused by Lessee or Lessee's guests, to pay any rent or other charges which Lessee owes Lessor at or prior to the expiration of this Agreement, and to reimburse Lessor for costs or expenses arising from any other obligation of Lessee which Lessee has failed to perform. If Lessor transfers control or ownership of the Premises and Lessor transfers the security deposit to such purchaser, Lessee will look solely to the new Lessor for the return of the security deposit, and the Lessor named in this Agreement shall be released from all liability for the return of the security deposit. b. The security deposit (less any sums used by Lessor in accordance with the terms and conditions of this Agreement) will be returned within sixty (60) days after the termination of any services rendered or expiration of the term hereof. The security deposit shall not under any circumstance be applied in lieu of be the final payment(s) of Fixed Monthly Rental charges or service charges under this Agreement. c. In the event that, by reason of the Lessee's default in its obligations pursuant to this Agreement or otherwise, including but not limited to the payment of the Fixed Monthly Rental Charge, any amounts due by reason of the Lessee's use of additional services hereto and/or by reason of the Lessee's use of telephone services as supplied pursuant to this Agreement, Lessor shall be entitled to apply any of the security deposited pursuant to this Agreement to any outstanding sums due or owing to the Lessor, and Lessor shall have the right to charge the Lessee, as additional rent, such sums as are necessary to replenish any and all amounts applied so as to cause the security to be returned to its entire amount. The failure to pay such amounts as are necessary to replenish the security shall be considered a breach of this Agreement and shall entitle the Lessor to exercise any of its rights pursuant to this Agreement or otherwise. 6. Delivery of Possession. If, for any reason whatsoever, Lessor cannot deliver possession of the Premises to Lessee at the commencement of the term, this Agreement shall not be void nor voidable nor shall Lessor be liable to Lessee for any loss or damage resulting therefrom; but there shall be an abatement of rent for the period between the stated term commencement and the time when Lessor does deliver possession of the Premises. 7. Services. a. So long as Lessee is not in default hereunder, Lessor shall make available certain amenities to Lessee as more particularly described in Exhibit "A." Such services shall be offered to Lessee, in conjunction with such services being offered by Lessor to its other lessees, without charge for the reasonable use of the same. b. In addition, provided Lessee is not in default hereunder and provided the cost thereof does not exceed the Security Deposit, Lessor shall make available to Lessee certain other services the cost of which shall be billed to the Lessee as additional rent and the payment of which shall be subject to the same terms and conditions as those governing the payment of the Fixed Monthly Rental Charge herein regardless of when such charges are billed to the Lessee. 8. Telephone Services. a. Provided Lessee is not in default of any of the terms, covenants, conditions or provisions of this Agreement, Lessor will make available to Lessee, a telecommunications package which will consist of some combination of telephone equipment, numbers, lines, conference calling, voice mail, local, long distance and international service, and directory listing. All components of the telecommunications package including any telephone numbers used by Lessee will remain at all times the property of Lessor and Lessee will acquire no rights in the components beyond the term specified by Lessor. b. Upon Lessee's written request, Lessee shall be entitled to appoint Lessor as its exclusive agent for the sole purpose of procuring and arranging Lessee's local "white pages" listings. Lessor shall have no involvement nor responsibility for any "yellow pages" listings desired by Lessee. c. Lessor shall not be liable for any interruption or error in the performance of its services to Lessee under this Section. Lessee waives any recourse as against the Lessor for any claimed liability arising from the provision of telecommunication services including, but not limited to; injuries to persons or property arising out of mistakes, omissions, interruptions, delays, errors or defects in transmissions occurring in the course of furnishing telecommunications services provided same are not caused by the willful acts of the Lessor, as well an claim for business interruption and for consequential damages. d. Lessor shall use reasonable efforts to provide Telephone Services to Lessee in a first-class, professional manner. Telephone service charges shall be as per Lessor's then scheduled rates for the same, or as the same may be amended by Lessor from time to time. e. In the event that any toll fraud is traceable to telecommunications services employed by Lessee, such toll fraud shall be deemed to be a material default in the Lessee's obligations hereunder. Lessee further hereby agrees to indemnify, hold harmless and to reimburse Lessor for all charges associated with any such toll fraud including, but not limited to, unauthorized use of calling cards or telephone lines. f. It is expressly acknowledged and agreed that Lessor shall be the sole and exclusive provider of telecommunication services to Lessee. Lessee hereby agrees and covenants that it will not use any other telephone service or telephone carrier to provide it service in the Premises. In the event that Lessee uses or acquires any other telephone service at the Premises, such use and/or installation shall constitute a material default in the Lessee's obligations hereunder. 9. Furniture and Fixtures. At its own cost and expense, Lessor shall furnish and install furniture, fixtures and equipment as are in Lessor's sole opinion necessary to provide suitable office accommodations for Lessee, upon such terms and conditions routinely applicable to the Facility. All such furniture, fixtures and equipment shall remain Lessor's property. 10. Insurance; Waiver of Claims. a. Lessor has no obligation to and will not carry insurance for Lessee's benefit. Lessor will not be liable to Lessee or to any other person for damages on account of loss, damage or theft, to any business or personal property of Lessee. Lessee hereby waives any claims against Lessor from any loss, cost, liability or expense (including reasonable attorneys' fees) arising from Lessee's use of the Premises or any common areas made available to Lessee by Lessor or from the conduct of Lessee's business, or from any activity, work, or thing done in the Premises or common areas by Lessee or Lessee's agents, contractors, visitors or employees. To the extent that Lessor has any liability for any of the forgoing pursuant to any law, ordinance or statute, Lessee shall seek recovery for such loss(es)/or damage(s) from its own insurance company as provided for in subparagraph (c) herein prior to making any claims against Lessor. b. The Lessor shall not be liable or responsible to the Lessee for any injury or damage resulting from the acts or omissions of Lessor, its employees, persons leasing office space or obtaining services from the Lessor, or other persons occupying any part of the Premises or Building, or for any failure of services provided such as water, gas or electricity, HVAC or for any injury or damage to person or property caused by any person except for such loss or damage arising from the willful or grossly negligent misconduct of the Lessor, its agents, servants, or employees or from the Lessor's failure to make repairs which it is obligated to make hereunder. Neither Lessor or any of its agents, employees, officers or directors shall be responsible for damages resulting from any error, omission or defect in any work performed or provided as part of the services rendered, whether uncompensated services or compensated services. [ALLIANCE LOGO] 2 Business Centers BM Initials EV Initials c. Lessee shall provide Lessor with a certificate of insurance evidencing General/Public Liability coverage with liability limits of not less than One Million Dollars ($1,000,000) per occurrence for Bodily Injury and/or Property Damage Liability and One Hundred Thousand Dollars ($100,000) per occurrence for Fire/Legal Liability. Said insurance coverage shall remain in force during the term of this Agreement and renewals thereof. The Lessor, Alliance National, Inc, and Alliance Business Centers, Inc. shall be named as an additional named insured on each of these policies. Lessee's failure to provide or maintain such insurance shall not reduce or otherwise alter Lessee's liability or responsibility to pay any judgment rendered against Lessee for such Liability and Damages Failure to maintain such insurance and/or to name the Lessor and its designees, as set forth above, shall constitute a material breach of this Agreement. d. Both parties hereby agree to defend, indemnify and hold the other harmless from and against any and all claims, damages, injury, loss and expenses to or of any person or property resulting from the acts or negligence of their agents, employees, invitees and/or licensees while in the Building, Executive Suite and/or Premises. e. Any fire and extended risk casualty insurance that Lessee maintains shall include a waiver of subrogation in favor of Lessor and Building Landlord, and any fire and extended risk insurance carried on the Facility by Lessor shall likewise contain a waiver of subrogation in favor of Lessee. 11. Waiver of Breach. Should Lessor not insist upon the strict performance of any term or condition of this Agreement or to exercise any right or remedy available for a breach thereof, and no acceptance of full or partial payment during the continuance of any such breach shall constitute a waiver of any such breach or any such term or condition. No term or condition of this Agreement required to be performed by Lessee and no breach thereof, shall be waived, altered or modified, except by a written instrument executed by Lessor. No waiver of any breach shall affect or alter any term or condition in this Agreement, and each term or condition shall continue in full force and effect with respect to any other then existing or subsequent breach thereof. 12. Operating Standards. The Operating Standards attached to this Agreement as Exhibit "B" are hereby made an integral part of this Agreement. Lessee, its employees, agents, guests, invitees, visitors and/or any other persons caused to be present in and around the Premises by the Lessee shall perform and abide by the rules and regulations and any amendments or additions to said rules and regulations as Lessor may make. In addition, Lessee, its employees and agents shall abide by all applicable governmental rules, regulations, statutes and ordinances relating in any way to the Premises or the Facility or Lessee's use or occupancy of the Premises or the Facility; failing which Lessee shall be in default hereunder and shall pay any fines or penalties imposed for such violation(s) directly to the appropriate governmental authority or to Lessor, if Lessor has paid such amount on behalf of Lessee. Such remedy shall not be exclusive. It is hereby further explicitly agreed and understood that full compliance with the Operating Standards as set forth constitutes a material obligation of this Agreement, and that the failure to so comply shall constitute a violation of this Agreement entitling the Lessor to exercise any of its remedies pursuant to this Agreement or otherwise. 13. Employment of Lessor's Employees. a. Lessee agrees that it will not, during the term of this Agreement and any renewals thereof, or for a period of one year after the expiration or sooner termination of this Agreement, hire or issue an offer to employ any person who is or has been an employee of Lessor or Lessor's agent without prior consent from Lessor. If Lessee either hires an employee of Lessor or Lessor's agent; or hires any person who has been an employee of Lessor or its agent within six months prior to the time they are hired by Lessee, Lessee will, at Lessors sole option, be liable to Lessor for liquidated damages equal to six months wages of the employee, at the rate last paid that employee by Lessor. b. If Lessor assists in hiring an employee for Lessee, Lessee shall pay the Lessor a commission equal to 20% of that employee's annual salary. The provisions hereof shall survive the expiration or sooner termination of the term thereof. 14. Alteration. If Lessee requires any special wiring or office alterations for extraordinary business machines or other purposes not consistent with the current wiring extraordinary telephone equipment or computer equipment. Such alteration shall be done (i) only with the express written permission of the Lessor, and if said permission is granted, then (ii) by an agent designated by Lessor at Lessee's cost. The electrical current shall be used for ordinary lighting purposes only, unless written permission to do otherwise shall first have been obtained from Lessor at an agreed cost to Lessee. Lessor further reserves the sole and exclusive right to limit the number and type of lines and telephone equipment Lessee can install in the leased Premises. Lessee understands that all provisions must be made my Lessee to return altered property to its previous state upon termination of the lease. 15. Re-Entry. Lessor and its agents shall have the right to enter the Premises at any time for the purpose of making any repairs, alterations, inspections which it shall deem necessary for the preservation, safety or improvements of said Premises, without in any way being deemed or held to have committed an eviction (constructive or otherwise) of or trespass against Lessee. 16. Relocation. a. Lessee agrees that the Lessor may, in its sole discretion, relocate the lessee from its present Premises to a like or similar office space within the same facility upon ten (10) days notice to the Lessee. In the event that the Lessor requires the Lessee to relocate, the Lessor hereby agrees to bear the reasonable cost of any such relocation, which cost shall be limited to the cost associated with the physical transfer of the Lessee's property to any different office, which the Lessor may designate. b. In the event that any such relocation is effected, the Lessee hereby acknowledges that, unless otherwise agreed in writing, that all of the terms and conditions of this Agreement shall remain in full force and effect. 17. Assignment and Subletting. No assignment or subletting of the Premises, this Agreement or any part thereof shall be made by Lessee without Lessor's prior written consent, which consent may be withheld for any or no reason in Lessor's sole discretion. Neither all nor any part of Lessee's interest in the Premises or this Agreement shall be encumbered, assigned or transferred, in whole or in part, either by act of the Lessee or by operation of law. 18. Surrender. a. On expiration of the term, any extended term, or sooner termination of this Agreement , Lessee shall promptly surrender and deliver the Premises to Lessor, without demand, and in as good condition as when let, ordinary wear and tear excepted. b. Upon Lessee serving a notice of cancellation as provided in 3b herein Lessor shall have the right to show Lessee's Premises during the 60 day period (for one or two offices) or 90 day period (for three or more offices) as the case may be. c. Without prior written approval of Lessor, Lessee shall not remove any of its property from the Premises upon termination of this Agreement or at any other time, except during Lessor's normal business hours. In the event Lessor consents to Lessee's removing property before or after normal business hours, any expenses incurred by Lessor as a result, including but not limited to expenses for personnel, security, elevator, utilities and the like shall be paid by Lessee in advance, to the extent determinable by Lessor, by certified and/or bank check. [ALLIANCE LOGO] 3 Business Centers BM Initials EV Initials d. If Lessee vacates the Premises and leaves behind any property, whatsoever, same will be deemed abandoned by Lessee and may be disposed of by Lessor at Lessee's expense. If Lessee defaults in the payment of sums due to Lessor, and Lessor changes the locks, removes Lessee's property, or otherwise denies access to Lessee, Lessor shall not be liable for conversion or partial, actual and/or constructive eviction. 19. Holding Over. a. In the event that Lessee, should not renew this Agreement in accordance with the terms and conditions hereof, and/or fail to surrender the Premises upon the expiration of the term of the Agreement as provided herein, Lessee agrees to pay Lessor, as liquidated damages, a sum equal to twice the monthly rent and all additional charges for services provided by Lessor to Lessee, for each month that Lessee retains possession of the Premises or any part thereof; provided, however, that the acceptance of such sums, representing liquidated damages shall not be deemed to be permission to Lessee to continue in possession of the Premises. 20. Default and Remedies. a. If the Lessee shall default in fulfilling any of its terms, conditions, covenants or provisions of this Agreement, including but not limited to: 1. Payment of fixed Monthly Rental Charges and/or any other charges hereunder within ten days of the date such charges become due; 2. Becomes comes insolvent, makes an assignment for benefit of creditors, or files a voluntary petition under any bankruptcy or insolvency law, or has filed against it an involuntary petition under any such law; 3. Defaults in fulfilling any of the terms, conditions, covenants or provisions of this Agreement including but not limited to the breach of any of the terms and conditions set forth in the exhibits attached hereto; 4. The abandonment and/or vacatur of the Premises by the Lessee; then, after five days notice of any such default(s), the Lessor may, at its sole discretion, terminate this Agreement upon five days notice to the Lessee, and upon the expiration of such notice period, the Lessee shall quit and surrender the Premises to the Lessor. In the event that the Lessee fails to quit and surrender the Premises, the Lessor may re-enter and take possession of the Premises and remove all persons and property therefrom, as well as disconnect any telephone lines installed for the benefit of Lessee, without any liability whatsoever to Lessee. In addition, Lessor may elect concurrently or alternately to accelerate all of Lessee's obligations hereunder including without limitation the rental, direct expenses, Schedule B Costs, and Telephone Services costs, and/or the re-letting of the Premises or any part thereof, for all or any part of the remainder of said term, to a party satisfactory to Lessor, at any monthly rental rate. Lessor, in its sole discretion, may accept notwithstanding the foregoing, Lessor shall have no obligation, implied or otherwise, to mitigate its damage(s) under such circumstances. b. Should Lessor be unable to re-let the Premises, or should each monthly re-rental be less than the rental, Lessee is obligated to pay under this Agreement or any renewal thereof, at Lessor's option Lessee shall pay the amount of such deficiency, plus the expenses of reletting, immediately in one lump sum (if allowable under law) to Lessor upon demand and/or as such obligations accrue. c. If Lessee shall default in the observance or performance of any term or covenant on Lessee's part to be observed or performed under or by virtue of any of the terms or provisions in any article of this lease, then, unless otherwise provided elsewhere in this lease, Lessor may immediately or at any time thereafter and with notice perform the obligation of Lessee thereunder, and if Lessor, in connection therewith or in connection with any default by Lessee in the covenant to pay rent hereunder, makes any expenditures or incurs any obligations for the payment of money, including but not limited to attorney's fees, in instituting, prosecuting or defending any actions or proceeding, such sums so paid or obligations incurred with interest and costs shall be deemed to be additional rent hereunder and shall be paid by Lessee to Lessor rendition of any bill or statement to Lessee therefor, and if Lessee's lease term shall have expired at the time of making of such expenditures or incurring of such obligations, such sums shall be recoverable by Lessor as damages. 21. Mail & Telephone Forwarding. a. After termination or expiration of the term of this Agreement, Lessee hereby agrees that it will take all reasonable steps to notify all parties of Lessee's new address and phone numbers. Lessor shall have no obligation, to notify any person or entity of Lessee's new address and/or phone numbers, except as expressly provided herein. b. Lessor will, unless otherwise instructed by Lessee in writing, forward mail to Lessee at its new address and give out new telephone number via a voice mail message for a period of three (3) months at the rate of $150.00 per month, which sums shall be deducted from any amounts deposited with the Lessor as security hereunder and paid to the Lessor in advance. In the event that there is not sufficient security remaining on deposit to pay for the charges set forth herein, unless the Lessee shall pay the charges set forth herein to the Lessor in advance, Lessor shall have no obligation to provide the services set forth herein. 22. Notices. Any notice under this Agreement shall be in writing and shall be either delivered by hand or by first class mail to the party at the address set forth below. Lessor hereby designates its address as: ALLIANCE Business Centers 12030 Sunrise Valley Drive Suite 300 Reston, Virginia 20191 Attn: Sales Management with a copy by regular first class mail to: ALLIANCE National, Inc. 122 East 42nd Street, Suite 2707 New York, NY 10168 Attn: Legal Department Lessee hereby designates its address (which address must be an address within the United States), as Mr. Bruce MacInnis 300 Matheson Blvd West Suite 103 Mississauga, Ontario L5R 3L7 Phone; 905-507-4220 Fax: 905-507-4230 If such mail is properly addressed and mailed, as above, it shall be deemed notice for all purposes, given when sent or delivered, even if returned as undelivered. 23. Landlord's Election Under This Agreement. Upon early termination of the main Building lease, this Agreement shall terminate unless the Building Landlord under the main lease elects to have this Agreement assigned to the Building Landlord or another entity as provided in the main lease. Upon notice to Lessor of the termination of the main lease and such election, (i) the Agreement shall be deemed to have been assigned by Lessor to the Building Landlord or to such other entity as is designated in such notice by the Building Landlord, (ii) the Building Landlord shall be deemed to be the Lessor under this Agreement and shall assume all rights and responsibilities of Lessor under this Agreement, and (iii) Lessee shall be deemed to have attorned to the Building Landlord as Lessor under this Agreement. [ALLIANCE LOGO] 4 Business Centers BM Initials EV Initials 24. Time of Essence. Time is of the essence as to the performance by Lessee of all covenants, terms and provisions of this Agreement. 25. Severability. The invalidity of any one or more of the sections, subsections, sentences, clauses or words contained in this Agreement or the application thereof to any particular set of circumstances, shall not affect the validity of the remaining portions of this Agreement or of their valid application to any other set of circumstances. All of said sections, subsections, sentences, clauses and words are inserted conditionally on being valid in law; and in the event that one or more of the sections, subsections, sentences, clauses or words contained herein shall be deemed invalid, this Agreement shall be construed as if such invalid sections, subsections, sentences, clauses or words had not been inserted. In the event that any part of this Agreement shall be held to be unenforceable or invalid, the remaining parts of this Agreement shall nevertheless continue to be valid and enforceable as though the invalid portions had not been a part hereof. In addition, the parties acknowledge (i) that this Agreement has been fully negotiated by and between the parties in good faith and is the result of the joint efforts of both parties, (ii) that both parties have been provided with the opportunity to consult with legal counsel regarding its terms, conditions and provisions and (iii) that regardless of whether or not either party has elected to consult with legal counsel, it is the intent of the parties that in no event shall the terms, conditions or provisions of this Agreement be construed against either party as the drafter of this Agreement. 26. Execution by Lessee. The party or parties executing this Agreement on behalf of the Lessee warrant(s) and represent(s): (i) that such executing party (or parties) has (or have) complete and full authority to execute this Agreement on behalf of Lessee; (ii) that Lessee shall fully perform its obligations hereunder. 27. Assumption Agreements and Covenants. This Agreement is subject and subordinate to the main Building lease governing the Facility, under which Lessor is bound as tenant; and the provisions of the main lease, other than as to the payment of rent or other monies, are incorporated into this Agreement as if completely herein rewritten. Lessee shall comply with and be bound by all provisions of the main lease except that the payment of rent shall be governed by the provisions of this Agreement, and Lessee shall indemnify and hold Lessor harmless from and against any claim or liability under the main lease of Lessor arising from Lessee's breach of the Main Lease or this Agreement. Lessor covenants and warrants that the use of the Premises as a business office is consistent with and does not violate the terms of the main lease. 28. Covenant and Conditions. Each term, provision and obligation of this Agreement to be performed by Lessee shall be construed as both a covenant and condition. 29. Entire Agreement. This Agreement embodies the entire understandings between the parties relative to its subject matter, and shall not be modified, changed or altered in any respect except in writing signed by all parties. 30. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, Lessor and Lessee have executed this Agreement as of the date first above written. ALLIANCE Business Centers ALLIANCE RESTON, L.P. By: /s/ Elizabeth Vrooman ----------------------------------- Elizabeth Vrooman - General Manager Date: 12/18/98 --------------------------------- LESSEE: Certicom (if a corporation) By: /s/ Bruce MacInnis ----------------------------------- Name Printed: Bruce MacInnis ------------------------ Title: VP/CFO -------------------------------- [Corporate Seal] Date: 12/18/98 ------------------------------- LESSEE: (if an individual or partnership) By: ---------------------------------- By: ---------------------------------- EXHIBIT "A" o Furnished Private Office o Furnished, Decorated Reception Room with Professional Receptionist o Personalized Telephone Answering During Office Hours o 24 hour Voicemail o 12 hours of Conference Room or private furnished offices, subject to prior scheduling and use by other lessees o Corporate Identity on Lobby Directory where Available o Complete Mail Room Facility o Receipt of Mail and Packages o Complete Kitchen Facilities with Coffee Machine o Utilities and Maintenance o HVAC During Normal Business Hours o Janitorial Services o 8 hours per month courtesy use of other ALLIANCE BUSINESS Centers affiliated facilities. Locations subject to current affiliation and availabilty. o 24 hour access to Suite 307 and to Building 12030 [ALLIANCE LOGO] 5 Business Centers BM Initials EV Initials EXHIBIT "B" OPERATING STANDARDS 1. Lessees and their guests will conduct themselves in a businesslike manner; proper attire will be worn at all times; and the noise level will be kept to a level so as not to interfere with or annoy other Lessees. 2. Lessee shall not provide or offer to provide any services to Lessor's customers if such services are available from Lessor. 3. Lessee will not affix anything to the walls of the Premises without the prior written consent of the Lessor. 4. Lessee will not prop open any corridor doors, exit doors or doors connecting corridors during or after business hours. 5. Lessees using public areas may only do so with the consent of the Lessor, and those areas must be kept neat and attractive at all times. 6. Lessee will not conduct any activity within the Premises, Executive Suite or Building, which in the sole judgment of the Landlord will create excessive traffic or is inappropriate to the executive office suite environment. 7. Lessee may not conduct business in the corridors or any other areas except in its designated offices or conference rooms without the written consent of Lessor. 8. All corridors, halls, elevators and stairways shall not be obstructed by Lessee or used for any purpose other than normal egress and ingress. 9. No advertisement, identifying signs or other notices shall be inscribed, painted or affixed on any part of the corridors, doors, or public areas. 10. Without Lessor's specific prior written permission, Lessee is not permitted to place "mass market", direct mail or advertising (i.e. newspaper, classified advertisements, yellow pages, billboards) using Lessor's assigned telephone number or take any such action that would generate a excessive of incoming calls. 11. Lessee shall not solicit clients of Lessor or and their employees in the Building without first obtaining Lessor's prior written approval. 12. Immediately following Lessee's use of conference room space and/or audio/visual equipment, Lessee shall clean up and return the space and equipment to the state and condition it was in prior to Lessee's use. If not, Lessor may charge Lessee for any other expenses required to restore the conference space and/or equipment to its original condition. 13. Lessor must be notified in writing if Lessee desires to utilize the conference room or other common areas of the Executive Suite during evening or weekend hours. Lessor may deny the Lessee access if the desired usage is inappropriate and may disrupt normal operations. 14. Lessee shall not, without Lessor's written consent, store or operate any computer (except a desktop/laptop computer or fax machine) or any other large business machines, reproduction equipment, heating equipment, stove, speaker phones, radios, stereo equipment or other mechanical amplification equipment, refrigerator or coffee equipment, or conduct a mechanical business, do any cooking, or use or allow to be used on the Premises oil, burning fluids, gasoline, kerosene for heating, warming or lighting. No article deemed extra hazardous on account of fire or any explosives shall be brought into said Premises or Facility. No offensive gases, odors on liquids shall be permitted. 15. Lessee will bring no animals into the Premises or Facility except for those assisting disabled individuals. 16. Lessee shall not remove furniture fixtures or decorative material from offices or common areas without the written consent of Lessor. 17. Lessee shall not make any additional copies of any Lessor issued keys. All keys and security cards are the property of Lessor and must be returned upon request or by the close of the business on the expiration or sooner termination of the Agreement term. Any lost or unreturned keys or cards shall incur a $25.00 per item charge and the cost to re-key the office. 18. Lessee shall not smoke nor allow smoking in any area of the Facility, including the Premises, and shall comply with all governmental regulations and ordinances concerning smoking. 19. Lessee shall not allow more than three visitors in the reception lobby of the Premises at any one time. 20. Lessee's parking rights (if any) are defined by Lessor's Agreement with the owner of the Building. Landlord reserves the right to modify parking arrangements if required to do so by Building management. 21. Lessee shall cooperate and be courteous with all other occupants of the Facility and Lessor's staff and personnel. 22. Lessor reserves the right to make such other reasonable rules and regulations as in its judgment may from time to time be needed for the safety, care, appropriate operation and cleanliness of the Facility. [ALLIANCE LOGO] Business Centers BM Tenant: Certicom Landlord: ALLIANCE Reston Term: 6 months Move in date January 1, 1999 Move out date: June 30, 1999 Office/Suite No.(s): 307
- -------------------------------------------------------------------------------------------------- Terms Quantity Amount Total ================================================================================================== Fixed Monthly Fees: Conference Room Usage Allowance: 12 hours per month Included Fixed Monthly Office Rental: Suite 307 $ $3300 $ $ Fixed Monthly Furniture Rental: 3 sets $50 Included Additional Furniture pieces varies $ Fixed Monthly Phone Charge: per set $95 3 $95 $285 $40 per data/fax/modem 1 $40 $40 $125/month/T1 access 2 $125 $250 Fixed Monthly Add'l People Charge: $100 Fixed Monthly Parking: $25 per month/ per person $25 $50 Other Fixed Monthly Charges: Business Support Services offices $100/office $200 =================================================================================================== TOTAL FIXED MONTHLY CHARGES $4125.00 - --------------------------------------------------------------------------------------------------- Payment Due at Signing: Pro Rated Rent Pro-Rated Suite $ 1st Months Rent Suites $ 1st Months Furniture Set $75 Included 1st Months Parking $25 per month/per person $ $ 1st Months Telephone Charges: $95 per set with speakerphone $95 $ 1st Months $40 per data/fax/modem $40 $ Data/Modem/Fax Charges: $125 T1 access/month $125 $ Line Installation Charges) $150 per T1 line 2 $150 $300 $50 per line transferred from 318 3 $50 $150 1st Months Add'l Person $100 $ Start-up Fee $100 per office $100 $ Refundable Service Deposit One months fixed costs $1070 on file $ $3055 Other Fixed Monthly Charges: $ =================================================================================================== TOTAL 1st MONTH'S RENT CHARGES & DEPOSIT $3505.00 - --------------------------------------------------------------------------------------------------- State Tax will be calculated for the following services as provided: Production, Furniture, Copies, Catering, Additional Furniture, Equipment Rental, Incoming Facsimile, Line Charges, Moves, Adds & Changes, Office Supplies and Telephone Equipment Rental.
[ALLIANCE LOGO] Business Centers BM EV
Exhibit C SCHEDULE OF SERVICES A. ACCOUNTING 1) Establishing a second account for Tenant's convenience $25.00 each time 2) Clerical fee for processing payment using MC/VISA/American Express $10.00 each time 3) Fax or send duplicate statement or records (plus postage and faxing costs) $5.00 each copy 4) Research, collection calls or processing (plus postage, faxing and telephone incurred charges) Actual time billed as Clerical service $24.00 Actual time-Clerical Rate B. ADMINISTRATIVE 1) Credit authorization and set up fee o New Full-Time Tenants $150.00 Per Office o Flextime $100.00 Per Contract 2) Moving a Tenant from one suite to another, keys, and cards $50.00 per person 3) Additional employee initial set up $100.00 One-time charge Recurring Monthly Charge - Extra People Fee $100.00 Monthly 4) Painting and cleaning fee for a lease of less than six (6) months including administrative coordination $200.00 Per office 5) Lost security card, lost key $25.00 Per item 6) Tenant Storage: boxes, other items (if available) $40.00 Month/closest D. CLERICAL SERVICE 1) Standard Clerical Rate $24.00 Per Hour Clerical Service billed in 6 minute increments (i.e. .10 = 6 minutes) Normal Turnaround time = 24 hours .10 hr. minimum Clerical Services Available o Bank Deposits o Ordering Office Supplies o Bill Paying o Photocopying for Tenants or o Check Reconciliation Visitors o Computer Maintenance o Outgoing Calls for Tenants o Arrange Conference Calls and Meetings o Payroll o Extensive Fax Transmission o Preparation of Expense o Travel Arrangements Reports o Filing o Project Coordination o Invoicing (Bookkeeping) o Proofreading/editing o Light Accounting o Research o Hand written messages o Typing Forms o Message taking for visitors o Recording messages o Read messages over phone 2) Rush Turnaround Time = 1-8 hours or Overtime Hours $48.00 Per hour Clerical services will be billed at 200% of .10 hr minimum the normal Clerical rate if performed before or after scheduled working hours, or requested as a rush job or if overtime must be worked 3) Notary $2.00 Per seal .10 hr minimum 4) Patching a call through to a seven-digit number not $2.40 Per call + call set up with a patch service E. CONCIERGE SERVICES 1) Arrangement for Business Supplies, Catering, Meal $24.00 Per hour order taking, etc. .10 hr minimum
All Service pricing is subject to Change with 30 days advance written notice to clients on contract. Revised: 09/24/98 Initials BM Initials EV
Exhibit C- Continued F. CONFERENCE ROOMS 1) Rental o Full-Time Tenants Included up to 12 Hours o Hourly $25.00 Per Hour o Daily (1 to 12 people) $150.00 Per Day 2) Seminar Room (allowance at twice the time): Seminar rooms not available at all facilties. o Full-Time Tenants Included Accumulated with Conference Room rent o Hourly $50.00 Per Hour o Daily (up to 40 people) $300.00 Per Day 3) Cancellation, if not within 24 hours for conference room. Billable at 50% of time reserve 4) Set-up/clean-up after Tenant in conference room $24.00 Per hour .10 hr minimum G. DIRECTORY LISTING - BUILDING LOBBY 1) Full-time Included 2) Flex time and Additional Listings-one time charge Center Specific Per line H. FURNITURE 1) Moves/adds/changes including administrative coordination and moving of furniture places $25.00 Per piece 2) Standard Furniture Set Included Month/set 3) Additional Furniture Rental - Various Pieces Varies based on Piece Requested I. KITCHEN FACILITIES (Coffee, tea, etc) 1) Tenants/Clients per cup service Center Specific 2) Pots for Conference Room - Set-up $24.00 Per hour Actual time-Clerical rate J. MAIL SERVICES > Deliver parcel to Tenants office. All parcels are called to $24.00 Per hour tenant. If not picked up by 5:00pm, we will deliver to office. .10 hr minimum > Prepare Certified, Express, or Courier > Check mailbox/review mail by phone > Prepare packages, such as label/wrap > Trace Shipments (Fed Ex, UPS, etc.) > Mass mailings (folding, stuffing, posting, etc.) K. OFFICE SUPPLIES 1) Minimum supplies are available on site through ALLIANCE or may Cost + 20% be ordered (See a clerical assistant for requests) 2) Weekly orders may be placed directly for tenant $24.00 Per hour .10 hr minimum L. PARKING 1) Surface Center Specific 2) Covered Parking Garage Center Specific All Service pricing is subject to change with 30 days advance written notice to clients on contract. Revised: 09/24/98 Initials BM Initials EV Exhibit C - Continued M. POSTAGE FEES (Landlord shall serve as postal agent to all tenants and clients.) 1) U.S. Mail/UPS Cost + 20% o Posting of mail - 25 pieces Complimentary Per day o Posting of mail - Additional (after 25 pieces) $2.40 Per 25 pieces + (cost + 20%) 2) Courier Service Cost + 20% 3) Federal Express Standard Rate N. PRODUCTION & COPYING (a medium volume copy machine is avallable for Tenants) 1) Binding, copying & transparencies (clerical time only) $24.00 Per hour 2) Photocopies o up to 200 $0.15 Each o 200-750 $0.13 Each o 750+ $0.10 Each 3) Binding (includes spine, cover & backing) $3.50 Each 0. TELECOMMUNICATIONS 1) Standard Phone Equipment $95.00 Per Set, Per Month (Installation fee and set up not included) o Phone with built in Speaker phone, o DID Phone Number with 2 roll over lines o 1 line Directory Listing o Other basic features of telephone system. 2) Phone/ Fax or Data Line installation $150.00 Per line/per set 3) Fax or Data Line (Additional recurring charge each month plus a $40.00 Per line, Per Month per minute charge where applicable) 4) Voice mail; adding another personal box $10.00 Per box, Per month $25.00 Per box, installation 5) Programming voice mail to pager $25.00 Programming fee, per pager 6) Paging (not intercom services) o Voice Mail Paging $10.00 Per pager Per Month + call transfer fee o Paging on Demand to a pager $2.40 Per pager 7) Call Patching set up fee- if available $25.00 Per number (one time charge) o Up to 40 Patches $25.00 Per Month + call transfer fee o Additional Patches (after 40) $0.50 Per Patch and call transfer fee o On Demand $2.40 Per Patch 8) Reconnect fee (after termination of service) $150.00 Per Phone or Data Line 9) T-1 Access (Not available at all locations) $100.00 Per user/month LAN Connectivity $25.00 Per user/month Security for T-1 Access $90.00 Per user Installation and set up $150.00 + $75/hr Per user-one time Note: All charges are not listed for this service. Additional services also available. Q. TELECOPY/FAX - PLAIN PAPER FAX AVAILABLE (clerical charges may be incurred for faxes sent after normal business hours) 1) Outgoing $2.00 Per Page + Call 2) Incoming $1.00 Per Page All Service pricing is subject to change with 30 days advance written notice to clients on contract. Revised: 09/24/98 Initials BM Initials EV Exhibit C - Continued R. WORD PROCESSING / GRAPHICS* 1) Standard Word Processing Rate From $30.00 Per Hour Standard Desk top Publishing/Graphics Rate From $40.00 .1 hr minimum Word Processing and Desktop Publishing Services billed in 6 minute increments. Normal turnaround = 24 hours 2) Word Processing - Rush Tumaround Time = 1-8 hours From $45.00 Per Hour Desktop Publishing - Rush Turnaround Time = 1-8 hours From $60.00 .1 hr minimum The Word Processing and Desktop Publishing services below will be billed at 150% of the normal Word Processing rate if requested as a rush. 3) Overtime charges for Word Processing From $60.00 Per Hour Overtime charges for Desktop Publishing/Graphics From $80.00 .1 hr minimum The Word Processing and Desktop Publishing services below will be billed at 200% of the normal rate if performed before or after scheduled working hours, or if overtime required or requested. Word Processing/Graphics Services Available > Ads > Logo design/Business Cards/Stationery > Multi-media Presentations > Photo manipulation > Charts & Graphs > Proposals > Color Laser Printing & B&W > Scanning [either text or photos] > Database Development > Straight keyboarding without any additional attributes > Database Entry/Mailmerge List Entry > Tables/Forms > Excel Spreadsheets/Statistical typing > Tape Transcription > Flyers & Brochures > Web Page design Industry Production Standards- *Landlord shall bill in accordance with Industry Production Standards (IPS), published by the National Association of Secretarial Services and the Executive Suite Association. IPS are used for computing the time charged for document production and non-keyboarding services. IPS are based on the average time required to perform specific duties by a professional word processing operator. This allows the Tenant to know how much a project will cost regardless of how long it takes to complete it. 4) Resumes: Typing Only - Does not include edits or additional print outs o 1st Page $40.00 1st Page Only o Each Additional Page $20.00 Per Page o Cover Letter $10.00 Per Page Resume Writing Consultation Services $45.00 Per Hour 5) Technical Support $75.00 Per Hour S. FLEX TIME PROGRAM 1) Telephone Answering Only(8:3Oam thru 5:30 pm; Mon. -Fri) $100.00 Per Month 2) Mail Service Only $75.00 Per Month 3) Flex Program - Basic - No Conference Room $150.00 Per Month 4) Flex Program - Plus - 6 Hrs. Conf. Room $195.00 Per Month 5) Flex Program - Premier - 12 Hrs. Conf. Room $250.00 Per Month 6) Flex Program - Executive - 20 Hrs. Conf. Room $375.00 Per Month - -----------------------------
All Service pricing is subject to change with 30 days advance written notice to clients on contract. Revised: 09/24/98 Initials BM Initials EV [ALLIANCE LOGO] Business Centers LEASE AND SERVICE AGREEMENT REBATE RIDER RE: Lease and Service Agreement between ALLIANCE Reston, L.P. and Certicom ("Agreement") DATE: December 4, 1998 CENTER: ALLIANCE Reston WHEREAS The agreement in Paragraph "4a" provides that the lessor shall pay, as rent for the premises, a total rent of $21,600 payable in 6 equal monthly installments of $3600, and WHEREAS the parties agree and understand that the said sum reflects the market rent for the Premises, and WHEREAS the parties have agreed, that in consideration of entering into the Agreement, that the Lessor shall accept instead and in place of the rent described in paragraph "4a" the total sum of $19,800 payable in 6 monthly installments of $3300 which reflects a monthly abatement in the amount of $300, for a total abatement in the amount of $1800 for the term. It is hereby agreed as follows: 1. Paragraph "4a" is hereby modified so that, upon expiration of the term of the Agreement and upon the first lease renewal thereof, whether by operation of the Agreement or otherwise, the Lessee agrees to pay and shall pay rent as set forth in Paragraph "4a" of the Agreement. 2. Upon further expiration of any such renewal term, Lessee hereby agrees and understands that Paragraph "3b" of the Agreement shall apply to any such renewals. All other terms and conditions of the Agreement shall remain in full force and effect. ACCEPTED BY LESSOR: ACCEPTED BY LESSEE: By: /s/ Elizabeth Vroomen By: /s/ B. MacInnis --------------------------- ---------------------------- Date: 12/18/98 Title: VP/CFO --------------------------- -------------------------- Date: 12/8/98 -------------------------- RESTON, VA 12030 SUNRISE VALLEY DRIVE o SUITE 300 o RESTON, VA 20191 o PHONE: 703.476.2200 [FLOOR PLAN OMITTED] notes [ALLIANCE LOGO] Business Center EX-10.8 7 0007.txt EMPLOYMENT AGREEMENT - RICHARD P. DALMAZZI EMPLOYMENT AGREEMENT THIS AGREEMENT made as of November 30, 1999; BETWEEN: RICHARD P. DALMAZZI, of the City of Lafayette in the State of California (hereinafter referred to as the "Employee"), OF THE FIRST PART, -and- CERTICOM CORP., a corporation organized under the laws of the Yukon Territory (hereinafter referred to as the "Employer") OF THE SECOND PART. THIS AGREEMENT WITNESSES that in consideration of the covenants and agreements herein contained the parties hereto agree as follows: ARTICLE ONE - EMPLOYMENT 1.1 Employment Subject to the terms and conditions hereof, the Employee shall be employed by the Employer in the office of President and Chief Executive Officer and shall perform such duties and exercise such powers related to such office as set forth in the by-laws of the Employer and as prescribed or specified by the board of directors of the Employer, subject always to the control and direction of such board of directors. 1.2 Term of Employment The employment of the Employee hereunder shall commence on the date hereof and shall terminate on April 30, 2001, subject to any renewal of this Agreement pursuant to Section 5.1 and subject to earlier termination of this Agreement pursuant to Sections 4.1 and 4.2. ARTICLE TWO - REMUNERATION 2.1 Salary The Employer or a United States subsidiary of the Employee shall pay the Employee during the term of this Agreement a gross annual salary of US $250,000 payable on the 15th and the last day of each calendar month. If this Agreement is renewed beyond April 30, 2001, such salary shall be reviewed by the parties prior to any additional renewals of this -2- Agreement and any changes in such salary shall be as agreed upon in writing between the parties. 2.2 Bonus In its absolute discretion the Employer may pay the Employee an additional bonus in respect of each fiscal year of the Employer. The Employee acknowledges that the payment of any such bonus shall be in the absolute discretion of the Employer. 2.3 Options (a) The Employee shall be entitled to participate in the Employer's 1997 Stock Option Plan ("SOP") and any additional stock option plans or stock purchase plans established by the Employer. As of the date hereof, the Employee shall be granted options to purchase an additional 110,000 common shares under the SOP at an exercise price equivalent to the closing price of the shares on November 29, 1999. The grant of any future options or other benefits under such plans shall be in the discretion of the Employer. (b) In the event any person acquires more than 50% of the outstanding voting securities of the Employer, (a "Change of Control") and the Employee is subsequently terminated by the Employer without Cause (as defined below) or voluntarily terminates his employment hereunder with Good Reason (as defined below) then any options or other rights to acquire securities of the Employer, whether granted prior to or subsequent to the date hereof, including, without limitation, all such options or rights granted pursuant to the SOP, shall immediately vest and become fully exercisable. For the purposes of this Agreement: (i) "Cause" shall mean: (i) fraud, misappropriation, embezzlement or other act of material misconduct against the Employer or any of its subsidiaries; (ii) conviction of any criminal act involving a crime of moral turpitude including without limitation, misappropriation of funds or property; (iii) wilful and knowing violation of any rules or regulations of any governmental or regulatory body which are material to the business of the Employer; (iv) a material breach, material repudiation or other material failure to comply with or perform any of the material terms of this Agreement; (v) adjudication as incompetent; or (vi) a good faith determination by the board of directors of the Employer based on objective evidence that persistent use of drugs or alcohol is significantly interfering with the Employee's performance of his duties hereunder. (ii) "Good Reason" shall be deemed to exist where (A) the Employer materially alters or reduces the Employee's duties, responsibilities, authority or base compensation from those in effect immediately prior to the occurrence of a Change of Control (including an alteration or reduction indirectly in the form of resource allocation or other assignment); (B) the Employer materially breaches the terms of this Agreement or any other agreement between the Employer and the Employee with respect to the payment or vesting of compensation or benefits or in any other material respect and such breach is not cured within thirty (30) days after the Employer receives notice thereof; (C) the Employer requires the Employee, as a condition of the Employee's continued employment with the Employer to be based in any location more than fifty miles from the City of Hayward, California or to spend more than 25% of each calendar quarter travelling outside the San Francisco Bay Area; or (D) the Employer requires the Employee as a condition of the Employee's continued employment with the Employer, to perform illegal or fraudulent acts or omissions. 2.4 Benefits The Employee will be entitled to participate in all of the Employer's benefit plans generally available to its senior executive employees based in the United States from time to time in accordance with the terms thereof. 2.5 Vacation The Employee shall be entitled to four weeks of vacation per annum, which will be pro-rated for the first year of this Agreement. 2.6 Expenses The Employee shall be reimbursed at the Employee's cost for all authorized travelling and other out-of-pocket expenses actually and properly incurred by him in connection with his duties hereunder. For all such expenses the Employee shall furnish to the Employer statements and vouchers as and when required by the Employer. ARTICLE THREE - EMPLOYEE'S COVENANTS 3.1 Service The Employee shall devote such of his time, attention and ability to the business of the Employer as is necessary to fulfill his responsibilities, and shall well and faithfully serve the Employer and shall use his best efforts to promote the interests of the Employer. 3.2 Duties and Responsibilities The Employee shall duly and diligently perform all the duties assigned to him while in the employ of the Employer, and shall truly and faithfully account for and deliver to the -4- Employer all money, securities and things of value belonging to the Employer which the Employee may from time to time receive for, from or on account of the Employer. 3.3 Rules and Regulations The Employee shall be bound by and shall faithfully observe and abide by all the rules and regulations of the Employer from time to time in force which are brought to his notice or of which he should reasonably be aware. 3.4 Proprietary Rights Agreement The Employee has previously executed and delivered a Proprietary Rights Agreement in the form attached. The Employee's obligations under such Proprietary Rights Agreement shall continue both before and after he has used any Confidential Information for the purposes of such Proprietary Rights Agreement and both before and after the employment of the Employee with the Employer ceases and shall continue until such time as the Employee is expressly released therefrom by the Employer in writing and the obligations of the Employee under this Agreement shall be binding on the assigns, executors, administrators or other legal representatives of the Employee. Any breach by the Employee of this Agreement or the above Proprietary Rights Agreement shall cause irreparable damage to the Employer and any such breach shall entitle the Employer to immediate injunctive relief from a court of competent jurisdiction. ARTICLE FOUR - TERMINATION OF EMPLOYMENT 4.1 Termination by Employer for Cause The Employer may terminate this Agreement at any time for Cause without payment of any compensation either by way of anticipated earnings or damages of any kind. 4.2 Termination by Employer or Employee on Notice (a) The Employee may terminate this Agreement upon the giving of six months written notice to the Employer. (b) The Employer may terminate this Agreement immediately upon paying to the Employee salary equal to that which would have been paid to the Employee pursuant to Section 2.1 for the unexpired term of this Agreement, in lieu of such notice and upon making the benefit plan contributions necessary to maintain the Employee's participation for the minimum period prescribed by law in all benefit plans provided to the Employee by the Employer immediately prior to the termination of this Agreement. The Employee agrees that the Employer may deduct from any payment of salary in lieu of notice hereunder the Employee's benefit plan contributions which were regularly made during the term of this Agreement in accordance with the terms of all benefit plans to be maintained hereunder for the minimum period prescribed by law. (c) Notwithstanding Section 4.2(a) following a Change of Control, the Employee may terminate this Agreement on 15 days written notice to the Employer if Good Reason exists. 4.3 Fair and Reasonable The parties confirm that the notice and pay in lieu of notice provisions contained in Section 4.2 are fair and reasonable and the parties agree that upon any termination of this Agreement by the Employer in compliance with Sections 4.1 or 4.2 or upon any termination of this Agreement by the Employee, the Employee shall have no action, cause of action, claim or demand against the Employer or any other person as a consequence of such termination. 4.4 Return of Property Upon any termination of this Agreement the Employee shall at once deliver or cause to be delivered to the Employer all books, documents, effects, money, securities or other property belonging to the Employer or for which the Employer is liable to others, which are in the possession, charge, control or custody of the Employee. 4.5 Provisions Which Operate Following Termination Notwithstanding any termination of this Agreement for any reason whatsoever and with or without Cause, the provisions of Sections 3.4 and 4.4 of this Agreement and any other provisions of this Agreement necessary to give efficacy thereto shall continue in full force and effect following such termination. ARTICLE FIVE - RENEWAL OF AGREEMENT 5.1 Automatic Renewal This Agreement shall continue for successive periods of one year's duration on the same terms and conditions of employment or on such terms and conditions of employment as are agreed upon in writing between the parties unless either party has given at least 180 days written notice to the other that this Agreement is to terminate at the end of the initial period or at the end of any successive period of one year. 5.2 Non-Renewal In the event one of the parties gives written notice that this Agreement is to terminate at the end of the initial period of one year or any successive period of one year as set forth in Section 5.1 hereof, this Agreement shall expire and the employment hereunder shall terminate without any notice or payment of salary or benefit plan contributions in lieu of notice at the end of the initial period of one year or that successive period of one year for which it was last renewed pursuant to Section 5.1 hereof, as the case may be. -6- ARTICLE SIX - GENERAL 6.1 Sections and Headings The division of this Agreement into Articles and Sections and the insertion of headings are for the convenience of reference only and shall not affect the construction or interpretation of this Agreement. The terms "this Agreement", "hereof", "hereunder" and similar expressions refer to this Agreement and not to any particular Article, Section or other portion hereof and include any agreement or instrument supplemental or ancillary hereto. Unless something in the subject matter or context is inconsistent therewith, references herein to Articles and Sections are to Articles and Sections of this Agreement. 6.2 Number In this Agreement words importing the singular number only shall include the plural and vice versa and words importing the masculine gender shall include the feminine and neuter genders and vice versa and words importing persons shall include individuals, partnerships, associations, trusts, unincorporated organizations and corporations and vice versa. 6.3 Benefit of Agreement This Agreement shall inure to the benefit of and be binding upon the heirs, executors, administrators and legal personal representatives of the Employee and the successors and permitted assigns of the Employer respectively. 6.4 Entire Agreement This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and cancels and supersedes any prior understandings and agreements between the parties hereto with respect thereto, including without limitation, the employment agreement dated June 18, 1997. 6.5 Amendments and Waivers No amendment to this Agreement shall be valid or binding unless set forth in writing and duly executed by both of the parties hereto. No waiver of any breach of any provision of this Agreement shall be effective or binding unless made in writing and signed by the party purporting to give the same and, unless otherwise provided in the written waiver, shall be limited to the specific breach waived. 6.6 Severability If any provision of this Agreement is determined to be invalid or unenforceable in whole or in part, such invalidity or unenforceability shall attach only to such provision or part thereof and the remaining part of such provision and all other provisions hereof shall continue in full force and effect. 6.7 Notices Any demand, notice or other communication (hereinafter in this Section 6.7 referred to as a "Communication") to be given in connection with this Agreement shall be given in writing and may be given by personal delivery, by fax or by registered mail addressed to the recipient as follows: To the Employee: Richard P. Dalmazzi 629 Burton Drive Lafayette, CA 94549 To the Employer: Certicom Corp. 200 Matheson Boulevard West Mississauga, Ontario L5R 3L7 Attention: Secretary Fax: (905)507-1239 or such other address or individual as may be designated by notice by either party to the other. Any Communication given by personal delivery shall be conclusively deemed to have been given on the day of actual delivery thereof, if made or given by facsimile on the business day following receipt thereof, and, if made or given by registered mail, on the 7th day, other than a Saturday, Sunday or statutory holiday in Ontario, following the deposit thereof in the mail. If the party giving any Communication knows or ought reasonably to know of any difficulties with the postal system which might affect the delivery of mail, any such Communication shall not be mailed but shall be given by facsimile or personal delivery. 6.8 Governing Law This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein. 6.9 Attornment For the purpose of all legal proceedings this Agreement shall be deemed to have been performed in the Province of Ontario and the courts of the Province of Ontario shall have exclusive jurisdiction to entertain any action arising under this Agreement or in respect of the employment relationship between the Employer and Employee. The Employer and the Employee each hereby attorns to the jurisdiction of the courts of the Province of Ontario. 6.10 Copy of Agreement The Employee hereby acknowledges receipt of a copy of this Agreement duly signed by the Employer. -8- IN WITNESS WHEREOF the parties have executed this Agreement. ) ) /s/ Richard R. Dalmazzi ) ---------------------------------- Witness: Name Illegible ) Richard R. Dalmazzi ) Name: ) ) ) Address: ) CERTICOM CORP. By: /s/ Philip C. Deck --------------------------------------- Philip C. Deck Chairman of the Board By: /s/ Bruce A. MacInnis --------------------------------------- Bruce A. MacInnis Vice President Administration, Chief Financial Officer and Secretary 10317189_1.DOC EX-10.9 8 0008.txt EMPLOYMENT AGREEMENT - SCOTT A. VANSTONE . SERVICE AGREEMENT THIS AGREEMENT made and entered into as of May 1, 1999; BETWEEN: DR. SCOTT A. VANSTONE 10140 Pineview Trail P.O. Box 490 Campbellville, Ontario LOP 1B0 (the "Chief Cryptographer") OF THE FIRST PART -and- CERTICOM CORP. 200 Matheson Boulevard West, Suite 200 Mississauga, Ontario L5R 3L7 (the "Corporation") OF THE SECOND PART THIS AGREEMENT WITNESSES that in consideration of the covenants and agreements herein contained the parties hereto agree as follows: 1. Services 1.1 Description (a) The Chief Cryptographer will provide the following services: (i) provision of and responsibility for research and development, in the leadership role of Chief Cryptographer, of cryptographic and information security systems on an exclusive basis to the Corporation; (ii) provision of technical support for marketing and strategy development; (iii) provision of product development support; (iv) the overseeing and training of the Corporation's cryptographers; (v) the identification of strategic intellectual property initiatives; -1- (vi) provision of support for patent activity; (vii) responsibility for providing research and development of the Corporation's products relating to cryptographic and security information systems; and (viii) such other services as are mutually agreed upon between the Chief Cryptographer and the Corporation from time to time. (b) The Chief Cryptographer shall commit himself on a full-time basis and provide active service in person at the offices of the Corporation or such other appropriate site as the Corporation may agree to for an average three (3) days per week. At all times, the Chief Cryptographer will use his best efforts to respond in a reasonably timely fashion to all e-mail and voicemail messages relating to the services to be provided by him under this Agreement. (c) The parties agree that they will discuss and mutually agree upon the extent of the Chief Cryptographer's involvement in such other activities and his time commitments relating thereto. (d) Subject to shareholder approval, the Chief Cryptographer may be appointed as a member of the Corporation's board of directors during the term of this Agreement or, in the alternative, may attend meetings of such board of directors as an observer. 1.2 Term and termination Unless otherwise terminated as provided for in this Agreement, this Agreement shall be for a term of five (5) years, and may be renewed upon mutual written consent of the parties for successive additional periods of one (1) year each. This Agreement may be terminated by either party upon receipt of written notice at least ninety (90) days in advance of the annual anniversary date of this Agreement. Further, if either party is in breach of any of its obligations under this Agreement, the other party may give notice in writing of the breach to the defaulting party and request the latter to remedy such breach. If the party in breach fails to remedy the breach within thirty (30) days after the date of written notice, then the Agreement may be terminated immediately by written notice of termination given by the complaining party. 1.3 Non-Competition The Chief Cryptographer agrees that during the term of this Agreement, and for twelve (12) months following the termination of this Agreement, without the prior written approval of the Chief Financial Officer of the Corporation, he will not become engaged, directly or indirectly as an employee, consultant, partner, principal, agent, proprietor, shareholder (other than a holding of shares listed on a stock exchange that does not exceed 2% of the outstanding shares so listed) or advisor, in a business in -2- (a) Canada; (b) the United States; or (c) anywhere else in the world where the Corporation markets its products or services during the term of this Agreement; that (i) develops or markets software competitive with the software owned or marketed by the Corporation, or (ii) provides consulting, maintenance, support or training services that are competitive with the consulting, maintenance, support or training services provided by the Corporation, provided if, with respect to the period after the termination of this Agreement, such business has two or more divisions located at different addresses, then this Section 1.3 will not prohibit the Chief Cryptographer from becoming engaged in a division that neither develops nor markets software competitive with the software owned or marketed by the Corporation nor provides services that are competitive with the services provided by the Corporation (provided further that in such case all the other obligations of this Agreement shall continue to apply). The Corporation recognizes that the Chief Cryptographer is the owner and principal of SVI Consulting Inc. and that the corporation excludes SVI Consulting Inc. from the terms of this non-compete clause. SAV. 2. Remuneration 2.1 Fees The Corporation shall pay to the Chief Cryptographer an amount that will provide him with total annual compensation including all amounts paid to the Chief Cryptographer by the University of Waterloo, other than publishing royalties, as follows: May 1, 1999 - April 30, 2000 $275,000.00; May 1, 2000 - April 30, 2001 $300,000.00; May 1, 2001 - April 30, 2002 $325,000.00; May 1, 2002 - April 30, 2003 $350,000.00; May 1, 2003 - April 30, 2004 $375,000.00. Such amounts will be paid monthly in advance. 2.2 Compensation Disclosure The Chief Cryptographer will provide the Corporation with full and timely disclosure of his compensation from the University of Waterloo in order that the fees to be paid as outlined in Section 2.1 above may be calculated. -3- 2.3 Stock Options During the term of this Agreement, the Chief Cryptographer shall be entitled to participate in the Corporation's 1997 Stock Option Plan ("1997 SOP") and any additional stock option plans or stock purchase plans established by the Corporation. The grant of any options or other benefits under such plans shall be in the discretion of the Corporation, however, the Corporation acknowledges that the contribution of each of the Chief Cryptographer and Philip C. Deck is fundamental to the success of the Corporation and declares that subject to satisfactory performance, it is the intention of the Corporation to treat the Chief Cryptographer and Philip C. Deck similarly under the foregoing plans. 2.4 Auto Allowance In addition to the amounts outlined in section 2.1, the Chief Cryptographer will receive a monthly auto allowance in the amount of $800. 2.5 Expenses The Chief Cryptographer shall be reimbursed at the Corporation's cost for all authorized travelling and other out-of-pocket expenses actually and properly incurred by him in connection with his duties hereunder. For all such expenses the Chief Cryptographer shall furnish to the Corporation statements and vouchers as and when required by the Corporation. 2.6 Issuance of Shares In the event of a take-over bid, an amalgamation, a plan of arrangement or other form of business transaction pursuant to which holders of Common Shares cease to own at least 33% of the voting securities of the Corporation or surviving entity resulting from such transaction (an "Acquisition"), the Corporation will issue to the Chief Cryptographer 50,000 Common Shares. Such shares, if issued to the Chief Cryptographer, will vest as to 16,667 of such shares on the first anniversary following the completion of the Acquisition and a further 16,666 of such shares on each of the second and third anniversary of the completion of the Acquisition. Notwithstanding the foregoing, in the event that this Agreement is terminated by the Corporation subsequent to the completion of the Acquisition, then all of the foregoing shares that have not yet vested will vest immediately upon the termination of this Agreement. 3. Proprietary Rights Agreement The Chief Cryptographer confirms he has executed and is bound by the Proprietary Rights Agreement attached hereto. The Chief Cryptographer's obligations under such Proprietary Rights Agreement shall continue both before and after he has used any Confidential Information for the purposes of such Proprietary Rights Agreement and both before and after the services of the Chief Cryptographer with the Corporation cease, and shall continue until such time as the Chief Cryptographer is expressly released therefrom by the Corporation in writing. The obligations of the Chief Cryptographer under this Agreement shall be binding on the executors, administrators or other legal representatives -4- of the Chief Cryptographer. Any breach by the Chief Cryptographer of this Agreement or the above Proprietary Rights Agreement shall cause irreparable damage to the Corporation and any such breach shall entitle the Corporation to immediate injunctive relief from a court of competent jurisdiction. 4. Confidentiality All confidential data and information concerning the Corporation and obtained by the Chief Cryptographer during the performance of his services under this Agreement shall be maintained confidential by the Chief Cryptographer. 5. Exclusive Contract Subject to what is hereinafter stated, the Chief Cryptographer agrees that it is a condition of the Corporation utilizing the services of the Chief Cryptographer, that the Chief Cryptographer shall not provide similar services to any other person, other than the performance of his duties as a Professor at the University of Waterloo. For the purposes of clarity, it is agreed that the Chief Cryptographer shall not provide services directly or indirectly during the term of this Agreement to a competitor of the Corporation in the cryptographic or information security systems fields or in any closely related field of study. The Corporation shall be entitled to retain the services of any persons without restriction during the term of this Agreement. 6. Assignment Neither this Agreement nor any interest may be assigned in any manner by either party. 7. Entire Agreement This Agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and cancels and supersedes any prior understandings and agreements between the parties hereto with respect thereto. There are no representations, warranties, forms, conditions, undertakings or collateral agreements, express, implied or statutory between the parties other than as expressly set forth in this Agreement. 8. Governing Law This Agreement shall be governed by and construed in accordance with the laws of the Province of Ontario and the laws of Canada applicable therein. -5- IN WITNESS WHEREOF the parties have executed this Agreement. ) /s/ Bruce MacInnis ) /s/ Scott A. Vanstone - ---------------------------------) ------------------------------------- Witness ) Dr. Scott A. Vanstone Name: Bruce MacInnis ) Address: 1513 Sturgeon Court ) Pickering, ON ) L1V 5P6 ) CERTICOM CORP. By: /s/ Philip C. Deck ---------------------------------- Philip C. Deck Chief Executive Officer -6- EX-10.10 9 0009.txt EMPLOYMENT AGREEMENT - RICHARD D. BROUNSTEIN EMPLOYMENT AGREEMENT This employment Agreement is effective as of February 7, 2000 (the "Effective Date") between Certicom Corp., a Delaware corporation ("Certicom"), Certicom Corp., a Yukon Territory, Canada corporation ("Parent") and Richard D. Brounstein ("Employee"). In consideration of the mutual promises and conditions in this Employment Agreement, and all benefits associated with the employment of Employee, it is agreed as follows: ARTICLE 0NE -- EMPLOYMENT 1.1 Employment Commencing February 7, 2000, Certicom shall employ Employee as its Finance Director and commencing February 23, 2000, Certicom shall employ Employee as its Senior Vice President Finance, Chief Financial Officer and Secretary. Employee shall perform such duties and exercise such powers related to such offices as set forth in the bylaws of Certicom and as prescribed or specified by the Board of Directors of Certicom, subject always to the control and direction of such board of Directors. From February 23, 2000, Employee shall also serve as the Senior Vice President Finance, Chief Financial Officer and Secretary of Parent and each direct or indirect wholly owned subsidiary of Parent (such subsidiaries, Parent and Certicom collectively the "Certicom Group"). ARTICLE TWO -- REMUNERATION 2.1 Salary As compensation for the services by Employee hereunder, Certicom shall pay Employee during the term of this Agreement a gross annual salary of one-hundred seventy-five thousand dollars ($175,000.00), payable on the fifteenth and the last day of each calendar month. 2.2 Certicom Bonus Each quarter, Employee shall be eligible to receive a bonus payment equivalent to up to 2.5% ($4,375.00) of his annual salary from Certicom based on Parent achieving its quarterly financial targets, as determined by the CEO of Parent. 2.3 Annual Bonus In its sole and absolute discretion, Certicom may pay Employee an additional cash bonus at the end of each fiscal year of Parent. Employee acknowledges that the payment of any such bonus shall be in the sole and absolute discretion of the Board of Directors of Parent. -1- 2.4 Options (a) Employee shall be entitled to participate in Parent's 1997 Stock Option Plan ("SOP"), and any additional stock option plans or stock purchase plans as may be established by Parent. As of the date of this Agreement, Employee shall be granted options to purchase one-hundred fifteen thousand (115,000) Parent common shares under the SOP at an exercise price equivalent to the closing price of the shares on the trading day prior to the Effective Date of this Agreement. The grant of any future options or any benefits under such plans shall be in the discretion of Certicom. (b) In the event there is a Change of Control (as defined below) of Parent and Employee is subsequently terminated by Certicom or Parent without Cause (as defined below), or Employee resigns his employment with Good Reason (as defined below), then 50% of any unvested options or other rights to acquire securities of Parent, whether granted prior to or subsequent to the date hereof, including, without limitation, 50% of any such unvested options or rights granted pursuant to the SOP, shall immediately vest and become fully exercisable. For the purposes of this Agreement, "Change of Control" shall be deemed to have occurred if: (1) any person (including a "person" as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")), other than persons controlling (as defined in Rule 405 under the Securities Act of 1933 ("Rule 405")), Parent as of the Effective Date of this Agreement (except that no person shall be deemed to control Parent under Rule 405 merely due to his or her position as an officer or director of Parent), (A) becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the voting securities of Parent, or (B) succeeds to the control of all or substantially all of the business or assets of Parent through merger, transfer of assets, reorganization, or other event; or (2) individuals who as of the Effective Date constitute the Board of Directors cease for any reason to constitute at least a majority thereof, unless the election, or the nomination for election, by the Parent stockholders, of each new Board member was approved by a majority of the Board members then still in office who were Board members as of the Effective Date. For the purposes of this Agreement, "Cause" shall mean written notice to Employee that he has engaged in any one or more of the following; (1) Gross dishonesty, fraud, misappropriation, embezzlement, or other act of material misconduct against any entity in the Certicom Group; -2- (2) Conviction of any criminal act involving a crime of moral turpitude or a felony including, without limitation, misappropriation of funds, property, or trade secrets; (3) Willful and knowing violation of any rules or regulations of any governmental or regulatory body which are material to the business of any entity in the Certicom Group; (4) Violation of policies, rules or regulations of any entity in the Certicom Group which violation is materially detrimental to such entity; (5) A material breach, a material repudiation or other material failure to comply with or perform any of the material terms of this Agreement, including the attached Confidentiality and Rights Agreement; or (6) A good faith determination by the Board of Directors of Parent based on objective evidence that persistent use of drugs or alcohol is significantly interfering with Employee's performance of his duties hereunder. For the purposes of this Agreement, "Good Reason" shall be deemed to exist where following a Change of Control; (1) Parent materially alters or reduces employee's duties, responsibilities, authority or base compensation from those in effect immediately prior to the occurrence of a Change of Control (including an alteration or reduction indirectly in the form of resource allocation or other assignment); (2) parent materially breaches the terms of this Agreement or any other agreement between Parent and Employee with respect to the payment or vesting of compensation or benefits or in any other material respect and such breach is not cured within thirty (30) days after Parent receives written notice thereof; (3) Parent requires Employee, as a condition of employee's continued employment, to be based in any location more than fifty miles from the City of Hayward, California, or to spend more than twenty-five percent of each calendar quarter traveling outside the San Francisco Bay Area; or (4) Parent requires Employee, as a condition of Employee's continued employment, to perform illegal or fraudulent acts or omissions. -3- 2.5 Benefits Employee will be entitled to participate in all of Certicom's benefit plans generally available to its senior executive employees, as determined by Certicom in its discretion, in accordance with the terms thereof. 2.6 Vacation Employee shall be entitled to accrue fifteen (15) days of vacation per year during the first through fifth years of employment which will be prorated for the first year of this Agreement. After five years of employment, Employee shall be entitled to accrue twenty (20) days of vacation per year. 2.7 Expenses Employee shall be reimbursed at the Employee's cost for all authorized travel and other out of pocket expenses actually and properly incurred by him in connection with his duties hereunder. For all such expenses, Employee shall furnish to Certicom statements and vouchers as and when required by Certicom. Also, Certicom shall reimburse Employee reasonable and actual out-of-pocket expenses for Employee's legal counsel to review this Agreement in an amount not to exceed three thousand five hundred dollars ($3,500.00). ARTICLE THREE -- EMPLOYEE'S COVENANTS 3.1 Service During his employment, Employee shall devote such time, attention, energies, interests, and abilities for the business of the Certicom Group as is necessary to fulfill his responsibilities, shall well and faithfully serve the Certicom Group, and shall use his best efforts to promote the interests of the Certicom Group. Employee shall not engage in any business activity that would be adverse to the Certicom Group or its business prospects, financial or otherwise. 3.2 Duties and Responsibilities Employee shall duly and diligently perform all the duties assigned to him while in the employ of Certicom, and shall truly and faithfully account for and deliver to Certicom all money, securities and things of value belonging to any entity in the Certicom Group which Employee may, from time to time, receive for, from or on account of any entity in the Certicom Group. 3.3 Rules and Regulations Employees shall be bound by and shall faithfully observe and abide by all the rules, regulations, or policies that Certicom may institute at its discretion from time to time which are -4- brought to Employee's notice or of which he should reasonably be aware. 3.4 Confidentiality and Rights Agreement Employee will execute and deliver the Confidentiality and Rights Agreement in the form attached hereto as Exhibit A. The terms of the Confidentiality and Rights Agreement are incorporated herein as if fully set forth. Employee's obligations under such Confidentiality and Rights Agreement shall continue both before and after he has used any confidential information for the purposes of such Confidentiality and Rights Agreement, and both before and after the employment of Employee with Certicom ceases, and shall continue until such time as Employee is expressly released therefrom by Certicom in writing. The obligations of Employee under this Agreement shall be binding on the assigns, executors, administrators or legal representatives of Employee. Any breach by the employee of this Agreement or the Confidentiality and Rights Agreement shall cause irreparable damage to Certicom, and any such breach shall entitled Certicom to seek immediate injunctive relief from a court of competent jurisdiction. 3.5 Agreement to Arbitrate Employee will execute and deliver the Mutual Agreement to Arbitrate Claims in the form attached hereto as Exhibit B. The terms of the Mutual Agreement to Arbitrate Claims are incorporated herein as if fully set forth. ARTICLE FOUR -- TERMINATION OF EMPLOYMENT 4.1 At-Will Employment Employee's employment may be terminated by either mutual agreement of the parties, Employee's election, or Certicom's election. Either party may terminate Employee's employment for any reason, or for no reason, with or without Cause, and at any time, in their sole and absolute discretion; provided only that if Certicom terminates Employee's employment without Cause (as defined in section 2.4) whether or not following a Change of Control or if Employee resigns with Good Reason (as defined in section 2.4) following a Change of Control (as defined in section 2.4), it shall pay Employee severance as follows: (a) a lump sum payment equivalent to Employee's base salary for a total period of nine (9) months; and (b) continuation of Employee's health insurance benefits for a total period of nine (9) months; and -5- (c) Nine (9) months acceleration of vesting of all unvested stock options and other rights to acquire securities held by Employee as of the termination date; and (d) Up to ten thousand dollars ($10,000.00) in outplacement services. 4.2 Termination by Certicom for Cause Certicom may terminate this Agreement at any time for Cause (as defined in paragraph 2.4(b)) without payment of any compensation of any kind or nature, including but not limited to severance, anticipated earnings, or stock options or other securities of any kind. 4.3 Return of Property Upon any termination of this Agreement, Employee shall at once deliver or cause to be delivered to Certicom, all books, documents, effects, money, securities or other property belonging to any entity in the Certicom Group, or for which Certicom is liable to others, which are in the possession, charge, control or custody of Employee. 4.4 Provisions Which Will Operate Following Termination Notwithstanding any termination of this Agreement for any reason whatsoever, the provisions of sections 3.4 and 4.3 of this Agreement and any other provisions of this Agreement necessary to give effect thereto, shall continue in full force and effect following such termination. 4.5 Indemnity Certicom shall indemnify Employee to the fullest extent permitted by applicable law at California Labor Code section 2802. ARTICLE FIVE -- GENERAL 5.1 Sections and Headings The division of this Agreement into Articles and Sections and the insertion of headings are for the convenience of reference only and shall not effect the construction or interpretation of this Agreement. The term "this Agreement", "hereof", "hereunder" and similar expressions refer to this Agreement and not to any particular article, section or other portion of this Agreement. -6- 5.5 Benefit of Agreement This Agreement shall bind the Employee's heirs, personal representatives, legal representatives, successors, spouses and assigns, and shall bind Certicom and Parent, and their successors, purchasers, assignees or any entities who acquire the assets of Certicom and/or Parent. 5.3 Entire Agreement This Agreement, including the Confidentiality and Rights Agreement at Exhibit A, the Mutual Agreement to Arbitrate Claims at Exhibit B, and any stock option agreement entered into between the parties in relation to the grant of stock options referred to in Section 2.4(a), constitutes the entire Agreement between the parties with respect to the subject matter hereof, and replaces and supercedes any prior understanding and agreements between the parties. 5.4 Amendments and Waivers No amendment to this Agreement shall be valid or binding unless set forth in writing and duly executed by Employee and the Chief Executive Officer of Certicom. No waiver of any breach of any provision of this Agreement shall be effective or binding unless made in writing and signed by the party purporting to give the same and, unless otherwise provided in the written waiver, shall be limited to the specific breach waived. 5.5 Severability If any provision of this Agreement is determined to be invalid or unenforceable in whole or in part, such invalidity or unenforceability shall attach only to such provision or part thereof, and the remaining part of such provision and all other provisions hereof shall continue in full force and effect. 5.6 Notices Any demand, notice or other communication to be given in connection with this Agreement shall be given in writing and may be given by personal delivery, by fax or by registered mail addressed to the recipient as follows: To the Employee: Richard D. Brounstein 606 Bella Vista Court Fremont, CA 94539 -7- To the Employer: Certicom Corp. Attention: Mr. Richard P. Dalmazzi 25801 Industrial Boulevard Hayward, CA 94545 or such other address or individual as may be designated by notice by either party to the other. Any communication given by personal delivery shall be conclusively deemed to have been given on the day of actual delivery thereof; or if made or given by facsimile, on the business day following receipt thereof; or if made or given by registered mail, on the 7th day, other than a Saturday, Sunday or statutory holiday in California, following the deposit thereof in the mail. If the party giving any communication knows or ought reasonably to know of any difficulties with the postal system which might affect the delivery of mail, any such communication shall not be mailed but shall be given by facsimile or personal delivery. 5.7 Governing Law This Agreement shall be deemed to have been entered into and shall be construed and enforced in accordance with the laws of the State of California as applied to contracts made and to be performed within California. 5.8 Reasonableness Employee declares that he has read the foregoing and agrees to the conditions and obligations set forth. Employee also acknowledges that he has been given a reasonable amount of time in which to consult with, and has consulted with, an attorney with respect to this Agreement. 5.9 Copy of Agreement Employee acknowledges receipt of a copy of this Agreement duly signed by Employee and Certicom. Dated: February 7, 2000 /s/ Richard D. Brounstein ------------------------ --------------------------------- Richard D. Brounstein (Employee) Dated: February 7, 2000 /s/ Richard M. Depew ------------------------ --------------------------------- Witness to Employee Signature Richard M. Depew --------------------------------- Printed Witness' Name and Address -8- Certicom Corp. Dated: February 7, 2000 by: /s/ Richard P. Dalmazzi ------------------------ ----------------------------- Richard P. Dalmazzi Chief Executive Officer -9- EX-21.1 10 0010.txt LIST OF SUBSIDIARIES Exhibit 21.1 List of Subsidiaries Certicom Corp. (Delaware), a Delaware corporation and a wholly owned subsidiary of Certicom Corp., a corporation organized under the laws of the Yukon Territory. Consensus Development Corporation, a corporation organized under the laws of California, and a direct wholly owned subsidiary of Certicom Corp. (Delaware). Uptronics, Inc. a corporation organized under the laws of Delaware, and a direct wholly owned subsidiary of Certicom Corp. (Delaware). Trustpoint, a corporation organized under the laws of California, and a direct wholly owned subsidiary of Certicom Corp. (Delaware). EX-22.1 11 0011.txt MATTERS SUBMITTED TO VOTE OF SECURITYHOLDERS Item 22. Published Report Regarding Matters Submitted to Vote of Security Holders At Certicom Corporation's 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 FOR VOTES NOT VOTES AGAINST VOTED EXCLUDED 1. The special resolution approving the amendment to the Articles of 4,868,779 144 130 0 Continuance subdividing each of the issued and outstanding Common Shares of the Corporation on a two-for-one basis. 2. The resolution approving the removal of the requirement contained 2,756,710 1,436,793 589,086 86,464 in the Corporation'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 resolution approving the removal of the requirement contained 2,782,462 1,411,491 589,086 86,014 in the 1997 Stock Option Plan that, the total number of Common Shares reserved for issuance pursuant to options granted to insiders of the Corporation in any one-year period, not exceed 10% of the Common Shares outstanding. 4. The resolution approving the increase in the total number of 3,147,350 1,046,603 589,086 86,014 Common Shares reserved for issuance under the 1997 Stock Option Plan from 2,750,000 to 3,000,000. 5. The resolution approving the adoption of a 2000 U.S. Stock Plan 2,842,589 1,351,364 589,086 86,014 pursuant to which eligible U.S. directors, officers and employees of the Corporation, and 6. The resolution approving the adoption of an Employee Stock 4,011,234 182,719 589,086 86,014 Purchase Plan pursuant to which eligible employees of the Corporation, and its subsidiaries, will be entitled to purchase a total of 500,000 Common Shares.
EX-23.1 12 0012.txt INDEPENDENT AUDITORS' CONSENT INDEPENDENT AUDITORS' CONSENT Independent Auditors' Consent We consent to the incorporation by reference in Registration Statement No. 33-37204 of Certicom Corp. on Form S-8 of our report dated June 13, 2000, appearing in this Annual Report on Form 10-K of Certicom Corp. for the year ended April 30, 2000. /s/ DELOITTE & TOUCHE LLP --------------------- Chartered Accountants Toronto, Ontario July 28, 2000 EX-27.1 13 0013.txt FINANCIAL DATA SCHEDULE
5 1,000 12-MOS APR-30-2000 MAY-01-1999 APR-30-2000 10,508 2,550 6,138 161 218 20,993 8,646 3,433 51,516 14,420 0 0 0 80,859 (44,868) 51,516 12,040 12,040 0 29,069 0 147 359 (17,535) 334 (17,869) 0 0 0 (17,869) (0.80) (0.80)
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