<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): July 26, 1996
---------------------------
Security Dynamics Technologies, Inc.
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
Delaware
- --------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation)
0-25120 04-2916506
- -------------------------- -----------------------------------------
(Commission File Number) (I.R.S. Employer Identification No.)
One Alewife Center, Cambridge, Massachusetts 02140
- --------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(617) 547-7820
- --------------------------------------------------------------------------------
(Registrant's Telephone Number, Including Area Code)
Not Applicable
- --------------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
------------------------------------
On July 26, 1996 (the "Effective Date"), Security Dynamics Technologies,
Inc. (the "Company") completed its acquisition of RSA Data Security, Inc.
("RSA") pursuant to an Agreement and Plan of Merger, dated as of April 14, 1996
(the "Merger Agreement"), among the Company, RSA and Card-Key Inc., a
wholly-owned subsidiary of the Company (the "Merger Subsidiary").
Pursuant to the Merger Agreement, the Merger Subsidiary was merged with and
into RSA (the "Merger") on the Effective Date, whereupon RSA became a
wholly-owned subsidiary of the Company. At that time, each outstanding share of
capital stock (the "RSA Stock") of RSA (other than shares of RSA Stock owned
beneficially by the Company or the Merger Subsidiary, shares of RSA Stock for
which demands for appraisal under the Delaware General Corporation Law were duly
and timely delivered and shares of RSA Stock held in RSA's treasury) was
converted into the right to receive 0.83056 shares of Common Stock of the
Company (the "Conversion Ratio"). The Conversion Ratio was determined by
dividing 4,000,000 by the sum of (i) the number of shares of RSA Stock issued
and outstanding immediately prior to the Effective Date (other than shares of
RSA Stock held in RSA's treasury) and (ii) the number of shares of RSA Stock
issuable upon exercise of all options to purchase RSA Stock issued by RSA
pursuant to its 1987 Stock Option Plan (the "RSA Options"). Each outstanding RSA
Option was converted into an option to purchase a number of shares of Common
Stock of the Company determined by multiplying the number of shares subject to
the RSA Option by the Conversion Ratio (rounded down to the next lowest whole
number of shares) at an exercise price equal to the exercise price of such RSA
Option divided by the Conversion Ratio (rounded up to the next highest cent).
Based upon the capitalization of the Company as of the Effective Date, the
3,341,539 shares of Common Stock of the Company issued to the holders of RSA
Stock represent approximately 23.7% of the outstanding shares of Common Stock
of the Company. On July 26, 1996, the last reported sale price per share of the
Common Stock of the Company on the Nasdaq National Market was $64.625.
The Company, RSA and representatives of RSA stockholders and optionholders
have entered into an Escrow Agreement providing, among other things, that 12.5%
of the Common Stock of the Company received by RSA stockholders and
optionholders in the Merger will be held in escrow to reimburse the Company in
connection with breaches of representations, warranties or covenants made by RSA
in the Merger Agreement and in connection with certain identified litigation.
- 2 -
<PAGE> 3
Prior to the Merger, RSA developed, marketed and supported cryptographic
and electronic data security products and provided cryptographic consulting
services. The Company currently intends to continue RSA's business substantially
in the manner conducted by RSA immediately prior to the Merger.
The issuance of shares of Common Stock of the Company in connection with
the Merger was approved by the Board of Directors and the stockholders of the
Company, and the Merger Agreement and the Merger were approved by the Board of
Directors and the stockholders of RSA. The terms of the Merger Agreement and the
Merger were determined on the basis of arm's-length negotiations. Prior to the
execution of the Merger Agreement, neither the Company nor any of its
affiliates, nor any director or officer of the Company or any associate of any
such director or officer, had any material relationship with RSA.
The foregoing description of the Merger Agreement does not purport to be
complete and is qualified in its entirety by reference to the full text of the
Merger Agreement which is filed as Exhibit 2 to this Current Report on Form 8-K
and incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENT AND EXHIBITS.
--------------------------------
(a) Financial Statements of Businesses Acquired:
-------------------------------------------
The financial statements of RSA contained on pages F-17 through F-31 of the
Company's Registration Statement on Form S-4 (File No. 333-7265) are hereby
incorporated by reference and attached hereto as Exhibit 99.2 pursuant to Rule
12b-23(a)(3) of the Securities Exchange Act of 1934, as amended.
(b) Pro Forma Financial Information:
-------------------------------
The pro forma financial information contained on pages 65 through 71 of the
Company's Registration Statement on Form S-4 (File No. 333-7265) are hereby
incorporated by reference and attached hereto as Exhibit 99.3 pursuant to Rule
12b-23(a)(3) of the Securities Exchange Act of 1934, as amended.
(c) Exhibits:
--------
See Exhibit Index attached hereto.
- 3 -
<PAGE> 4
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
Date: July 30, 1996 SECURITY DYNAMICS TECHNOLOGIES, INC.
(Registrant)
/s/ Charles R. Stuckey, Jr.
----------------------------------
By: Charles R. Stuckey, Jr.
Chairman of the Board, President
and Chief Executive Officer
- 4 -
<PAGE> 5
INDEX TO EXHIBITS
Exhibit
Number Description
------ -----------
2* Agreement and Plan of Merger, dated
as of April 14, 1996, among the
Company, RSA and the Merger Subsidiary
23 Consent of Ernst & Young LLP
99.1 Press Release issued July 26, 1996
99.2 Consolidated Financial Statement of RSA.
99.3 Pro Forma Financial Information of SDI and RSA.
--------------------
* Incorporated by reference from the Registration Statement on
Form S-4 (File No. 333-7265) of the Company.
<PAGE> 1
Exhibit 23
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in this Form 8-K of
Security Dynamics Technologies, Inc. of our report dated April 8, 1996
with respect to the financial statements of RSA Data Security, Inc.
included in the Registration Statement (Form S-4 No. 333-7265)
of Security Dynamics Technologies, Inc.
/s/ ERNST & YOUNG LLP
Palo Alto, California
July 25, 1996
<PAGE> 1
Exhibit 99.1
------------
Contact: Charles R. Stuckey, Jr. Mike Farber, Owen Davis
Security Dynamics Schwartz Communications
(617) 547-7820 (617) 431-0770
SECURITY DYNAMICS ANNOUNCES COMPLETION OF ACQUISITION
OF RSA DATA SECURITY
SECURITY DYNAMICS STOCKHOLDERS AUTHORIZE ADDITIONAL SHARES
OF COMMON STOCK
Cambridge, MA -- July 29, 1996 -- Security Dynamics Technologies Inc.
(Nasdaq: SDTI), a leading provider of computer and network security
solutions, today announced the completion of its acquisition of RSA
Data Security Inc., a Redwood City, California vendor of encryption
software. The transaction was accomplished through the merger of RSA
and a wholly-owned subsidiary of Security Dynamics and will be recorded
as a pooling of interests for accounting purposes.
The merger, which was announced on April 15, 1996, was consummated by
the exchange of 0.83056 shares of Common Stock of Security Dynamics for
each outstanding share of RSA capital stock. Security Dynamics issued
approximately 3.3 million shares of Common Stock in exchange for all of
the outstanding shares of capital stock of RSA, and Security Dynamics
has reserved approximately 0.7 million additional shares of its Common
Stock for issuance to holders of RSA options. RSA will continue its
existing license business as a subsidiary of Security Dynamics.
In connection with the completed merger, Security Dynamics announced
that its Board of Directors had elected Mr. Bidzos as a director and an
executive vice president of the Company.
"The merging of Security Dynamics and RSA Data Security positions the
new combined Company in the forefront of two of the industry's most
rapidly expanding areas of growth: the Internet and its future promise
of electronic commerce; and the intranet or corporate enterprise-wide
internetworking of data processing resources," said Charles R. Stuckey,
Jr., president and CEO of Security Dynamics.
"We feel the addition of Jim Bidzos and the RSA team to the Security
Dynamics organization fits extremely well with our expressed strategy
of expanding into other segments of the information security market.
RSA today supplies to a growing list of major systems and software
providers its industry-leading technology and toolkits for public key
encryption, assuring the privacy, integrity and confidentiality of
users' data resources. Through this acquisition, Security Dynamics will
combine its de
<PAGE> 2
facto standard user authentication technology with the industry's
de facto standard for cryptographic services and products."
Added Jim Bidzos, president of RSA Data Security, "I am very excited
about RSA's new role with Security Dynamics. In addition to the
strength created by the combined technologies and organizational
structures, I believe there is a significant opportunity to leverage
each other's broad network of customers and existing relationships to
generate new avenues of growth and development for the organization."
Security Dynamics also announced today that its stockholders had
approved an amendment to the Company's Certificate of Incorporation
increasing the authorized number of shares of Common Stock from
30,000,000 to 80,000,000 shares.
RSA Data Security Inc. is the world's brand name for cryptography, with
more than 75 million copies of RSA encryption and authentication
technologies installed and in use worldwide. RSA's encryption
technology is embedded in Microsoft Windows, Novell NetWare, Netscape
Navigator, Intuit's Quicken, Lotus Notes and hundreds of other
products. The company develops and markets platform-independent
developers' kits and end-user products and also provides comprehensive
cryptographic consulting services. RSA Data Security was founded in
1982 by the inventors of the RSA Public Key Cryptosystem.
Security Dynamics designs, develops, markets and supports a family of
security products used to protect and manage access to computer-based
information resources and is the de facto standard for secure user
identification and authentication. The Company's family of products
employs a patent-protected combination of super smart token technology
and software or hardware access control products to authenticate the
identity of users accessing networked or stand-alone computing
resources. The Company's customers include Fortune 500 companies and
financial institutions as well as academic institutions, research
laboratories, hospitals and federal, state and foreign government
organizations.
2
<PAGE> 1
Exhibit 99.2
------------
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
RSA Data Security, Inc.
We have audited the accompanying consolidated balance sheets of RSA Data
Security, Inc. as of December 31, 1995 and 1994, and the related consolidated
statements of operations, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1995. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of RSA Data
Security, Inc. at December 31, 1995 and 1994 and the consolidated results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
April 8, 1996
F-17
<PAGE> 2
RSA DATA SECURITY, INC.
<TABLE>
CONSOLIDATED BALANCE SHEETS
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------------------
1996 1995 1994
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 3,702,902 $ 4,701,278 $ 823,858
Marketable securities...................................... 15,060,000 16,680,000 --
Accounts receivable, net of allowance for doubtful accounts
of $267,220, $348,715 and $90,785 at March 31, 1996,
December 31, 1995 and 1994, respectively................ 828,462 1,206,169 1,308,737
Prepaid expenses and other current assets.................. 597,348 904,196 193,685
----------- ----------- -----------
Total current assets.................................... 20,188,712 23,491,643 2,326,280
Property and equipment, net.................................. 389,609 380,774 271,445
Capitalized software costs, net.............................. 244,261 217,974 121,054
Investment in partnership venture............................ 370,945 362,417 249,024
Deferred income taxes........................................ 184,947 184,947 --
Purchased license and other long-term assets................. 126,341 155,394 122,205
----------- ----------- -----------
$21,504,815 $24,793,149 $ 3,090,008
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................... $ 1,705,134 $ 1,385,888 $ 410,794
Accrued liabilities........................................ 408,075 778,456 215,929
Payable to partnership venture............................. 468,167 468,167 91,723
Accrued royalties.......................................... 140,853 256,901 14,975
Deferred revenue........................................... 1,641,475 2,605,170 1,401,853
Deferred income taxes...................................... 5,539,491 6,418,473 --
Current portion of capital lease obligations............... 12,112 11,869 30,616
----------- ----------- -----------
Total current liabilities............................... 9,915,307 11,924,924 2,165,890
Accrued rent................................................. 52,525 49,131 61,358
Noncurrent portion of capital lease obligations.............. 8,576 11,666 23,359
Commitments and contingencies
Stockholders' equity:
Convertible preferred stock, issuable in series, $0.10 par
value, 2,500,000 shares authorized at March 31, 1996 and
December 31, 1995; 1,490,284, 1,490,284 and 1,276,617
shares outstanding at March 31, 1996, December 31, 1995
and 1994, respectively (liquidation
preference -- $2,475,952 at March 31, 1996 and December
31, 1995)............................................... 2,501,647 2,501,647 1,862,896
Common stock, $0.01 par value, 7,000,000 shares authorized
at March 31, 1996 and December 31, 1995; 2,528,633,
2,523,133 and 2,169,683 shares issued and outstanding at
March 31, 1996 and December 31, 1995 and 1994,
respectively............................................ 1,142,008 1,073,115 500,750
Notes receivable from stockholders......................... (6,000) (6,000) (6,000)
Unrealized gain on marketable securities, net of tax
effect.................................................. 8,843,168 9,807,164 --
Cumulative translation adjustment.......................... (1,050) -- --
Accumulated deficit........................................ (951,366) (568,498) (1,518,245)
----------- ----------- -----------
Total stockholders' equity.............................. 11,528,407 12,807,428 839,401
----------- ----------- -----------
$21,504,815 $24,793,149 $ 3,090,008
=========== =========== ===========
</TABLE>
See accompanying notes.
F-18
<PAGE> 3
RSA DATA SECURITY, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31,
---------------------------- -------------------------------------------
1996 1995 1995 1994 1993
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue.......................... $2,691,848 $ 587,050 $11,599,912 $ 3,077,096 $3,002,165
Costs and expenses:
Cost of revenue................ 601,927 120,134 1,271,790 733,157 843,673
Research and
development................. 557,385 391,040 1,678,972 1,034,869 586,580
Marketing and selling.......... 869,617 569,410 2,112,012 1,751,642 1,023,635
General and
administrative.............. 1,317,689 858,799 6,160,516 1,431,012 758,642
---------- ----------- ----------- ----------- ----------
Total costs and
expenses............. 3,346,618 1,939,383 11,223,290 4,950,680 3,212,530
---------- ----------- ----------- ----------- ----------
Income (loss) from operations.... (654,770) (1,352,333) 376,622 (1,873,584) (210,365)
Equity in profits (losses) of
investees...................... 8,528 87,626 (20,111) 96,833 67,379
Interest income, net............. 32,921 2,085 56,430 9,663 16,908
---------- ----------- ----------- ----------- ----------
Income (loss) before income
taxes.......................... (613,321) (1,262,622) 412,941 (1,767,088) (126,078)
(Benefit) for income taxes....... (230,453) -- (536,806) (39,865) (11,000)
---------- ----------- ----------- ----------- ----------
Net income (loss)................ $ (382,868) $(1,262,622) $ 949,747 $(1,727,223) $ (115,078)
========== =========== =========== =========== ==========
Net income (loss) per
share.......................... $ (.15) $ (.58) $ .23 $ (.80) $ (.05)
========== =========== =========== =========== ==========
Shares used in computing net
income (loss) per share........ 2,525,913 2,193,039 4,069,899 2,164,539 2,147,183
========== =========== =========== =========== ==========
</TABLE>
See accompanying notes.
F-19
<PAGE> 4
RSA DATA SECURITY, INC.
<TABLE>
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<CAPTION>
NOTES UNREALIZED
CONVERTIBLE RECEIVABLE GAIN (LOSS) ON
PREFERRED COMMON FROM MARKETABLE
STOCK STOCK STOCKHOLDERS SECURITIES
----------- ---------- ------------ --------------
<S> <C> <C> <C> <C>
Balances at December 31, 1992..................................... $1,370,949 $ 426,100 $(18,856) $ --
Compensation relating to stock options.......................... -- 5,400 -- --
Repayments of stockholders' notes............................... -- -- 12,856 --
Net loss........................................................ -- -- -- --
---------- ---------- -------- ----------
Balances at December 31, 1993..................................... 1,370,949 431,500 (6,000) --
Issuance of 166,667 shares of convertible Series D preferred
stock, net of offering costs of $8,054........................ 491,947 -- -- --
Amortization of deferred compensation........................... -- 35,500 -- --
Issuance of 22,500 shares of common stock upon exercise of
options....................................................... -- 33,750 -- --
Net loss........................................................ -- -- -- --
---------- ---------- -------- ----------
Balances at December 31, 1994..................................... 1,862,896 500,750 (6,000) --
Issuance of 213,667 shares of convertible Series D preferred
stock, net of offering costs of $2,250........................ 638,751 -- -- --
Issuance of 305,950 shares of common stock upon exercise of
options....................................................... -- 400,125 -- --
Issuance of 47,500 shares of common stock....................... -- 101,250 -- --
Amortization of deferred compensation........................... -- 70,990 -- --
Unrealized gain on marketable securities........................ -- -- -- 9,807,164
Net income...................................................... -- -- -- --
---------- ---------- -------- ----------
Balances at December 31, 1995..................................... 2,501,647 1,073,115 (6,000) 9,807,164
Issuance of 5,500 shares of common stock upon stock grant and
exercise of options (unaudited)............................... -- 30,251 -- --
Amortization of deferred compensation (unaudited)............... -- 38,642 -- --
Unrealized loss on marketable securities (unaudited)............ -- -- -- (963,996)
Cumulative translation adjustment (unaudited)................... -- -- -- --
Net loss (unaudited)............................................ -- -- -- --
---------- ---------- -------- ----------
Balances at March 31, 1996 (unaudited)............................ $2,501,647 $1,142,008 $ (6,000) $8,843,168
========== ========== ======== ==========
<CAPTION>
CUMULATIVE TOTAL
TRANSLATION ACCUMULATED STOCKHOLDERS'
ADJUSTMENT DEFICIT EQUITY
---------- ----------- -------------
<S> <C> <C> <C>
Balances at December 31, 1992..................................... $ -- $ 324,056 $ 2,102,249
Compensation relating to stock options.......................... -- -- 5,400
Repayments of stockholders' notes............................... -- -- 12,856
Net loss........................................................ -- (115,078) (115,078)
------- ----------- -----------
Balances at December 31, 1993..................................... -- 208,978 2,005,427
Issuance of 166,667 shares of convertible Series D preferred
stock, net of offering costs of $8,054........................ -- -- 491,947
Amortization of deferred compensation........................... -- -- 35,500
Issuance of 22,500 shares of common stock upon exercise of
options....................................................... -- -- 33,750
Net loss........................................................ -- (1,727,223) (1,727,223)
------- ----------- -----------
Balances at December 31, 1994..................................... -- (1,518,245) 839,401
Issuance of 213,667 shares of convertible Series D preferred
stock, net of offering costs of $2,250........................ -- -- 638,751
Issuance of 305,950 shares of common stock upon exercise of
options....................................................... -- -- 400,125
Issuance of 47,500 shares of common stock....................... -- -- 101,250
Amortization of deferred compensation........................... -- -- 70,990
Unrealized gain on marketable securities........................ -- -- 9,807,164
Net income...................................................... -- 949,747 949,747
------- ----------- -----------
Balances at December 31, 1995..................................... -- (568,498) 12,807,428
Issuance of 5,500 shares of common stock upon stock grant and
exercise of options (unaudited)............................... -- -- 30,251
Amortization of deferred compensation (unaudited)............... -- -- 38,642
Unrealized loss on marketable securities (unaudited)............ -- -- (963,996)
Cumulative translation adjustment (unaudited)................... (1,050) -- (1,050)
Net loss (unaudited)............................................ -- (382,868) (382,868)
------- ----------- -----------
Balances at March 31, 1996 (unaudited)............................ $(1,050) $ (951,366) $11,528,407
======= =========== ===========
</TABLE>
See accompanying notes.
F-20
<PAGE> 5
RSA DATA SECURITY, INC.
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<CAPTION>
THREE MONTHS ENDED MARCH 31, YEARS ENDED DECEMBER 31,
--------------------------- ----------------------------------
1996 1995 1995 1994 1993
---------- ----------- -------- ----------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)..................................... $ (382,868) $(1,262,622) $ 949,747 $(1,727,223) $ (115,078)
Adjustments to reconcile net income (loss) to net cash
from operating activities:
Depreciation and amortization....................... 109,346 72,141 330,395 304,724 230,567
Equity investments received in exchange for
licenses.......................................... -- -- -- (60,000) --
Equity in (profits) losses of investees............. (8,528) (87,626) 20,111 (96,833) (67,379)
Issuance of common stock in exchange for services... 27,500 -- -- -- --
Issuance of common stock in exchange for grant of
license........................................... -- -- 41,250 -- --
Bonus paid through forgiveness of note receivable
from officer...................................... -- -- -- -- 75,000
Changes in other balance sheet accounts:
Accounts receivable............................... 377,707 759,521 102,568 404,091 (1,400,489)
Inventories....................................... -- -- -- -- 38,277
Prepaid expenses and other assets................. 318,516 (33,398) (1,073,190) (67,396) 47,258
Accounts payable, accrued liabilities and accrued
royalties....................................... (140,558) 286,833 1,767,320 328,565 100,097
Payable to partnership venture.................... -- 7,692 376,444 49,451 23,909
Deferred revenue.................................. (963,695) (169,257) 1,206,991 644,125 560,603
Deferred income taxes............................. (230,453) -- (409,363) -- (32,000)
---------- ----------- ----------- ----------- -----------
Net cash provided by (used in) operating activities... (893,033) (426,716) 3,312,273 (220,496) (539,235)
---------- ----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capitalized software costs............................ (48,385) (89,121) (216,474) (51,558) (9,658)
Capital expenditures for property and equipment....... (55,055) (63,785) (302,815) (137,537) (135,309)
Cash paid related to investment in joint venture...... -- -- -- -- (68,750)
Service income from partnership venture............... -- 6,000 16,000 24,000 24,000
---------- ----------- ----------- ----------- -----------
Net cash used in investing activities................. (103,440) (146,906) (503,289) (165,095) (189,717)
---------- ----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock, net of
issuance
costs............................................... -- (2,249) 638,751 491,947 --
Principal payments on capital lease obligations....... (2,847) (9,030) (30,440) (34,004) (33,632)
Proceeds from issuance of common stock................ 2,750 -- 460,125 33,750 12,856
---------- ----------- ----------- ----------- -----------
Net cash provided by (used in) financing activities... (97) (11,279) 1,068,436 491,693 (20,776)
---------- ----------- ----------- ----------- -----------
Effect of exchange rates on cash and cash
equivalents......................................... (1,806) -- -- -- --
---------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents......................................... (998,376) (584,901) 3,877,420 106,102 (749,728)
Cash and cash equivalents at beginning of the
period.............................................. 4,701,278 823,858 823,858 717,756 1,467,484
---------- ----------- ----------- ----------- -----------
Cash and cash equivalents at end of the period........ $3,702,902 $ 238,957 $ 4,701,278 $ 823,858 $ 717,756
========== =========== =========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid......................................... $ 506 $ 1,916 $ 4,704 $ 6,679 $ 9,308
========== =========== =========== =========== ===========
Income taxes (refund) paid, net....................... $ (62,359) $ -- $ 345,029 $ 19,399 $ (16,926)
========== =========== =========== =========== ===========
</TABLE>
See accompanying notes.
F-21
<PAGE> 6
RSA DATA SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION AT MARCH 31, 1996 AND FOR
THREE MONTHS ENDED MARCH 31, 1995 AND 1996 IS UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
RSA Data Security, Inc. (the "Company") develops and sells cryptographic
and electronic data security products and also provides cryptographic consulting
services. The Company's licenses its products to original equipment
manufacturers ("OEMs"), primarily in the United States, who incorporate the
Company's encryption technology into their products. The Company was
incorporated in Delaware on August 19, 1982 and operates in one industry
segment.
Interim Financial Information
In the opinion of management, the interim financial statements have been
prepared on the same basis as the annual financial statements and include all
accruals, consisting only of normal recurring adjustments, which the Company
considers necessary for a fair presentation of the financial position at such
date and the operating results and cash flows for those periods. Results of the
three months ended March 31, 1996 are not necessarily indicative of results to
be expected for the entire fiscal year.
Principles of Consolidation
The accompanying financial statements consolidate the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany accounts
and transactions 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 amounts reported in the financial statements. Actual
results could differ from these estimates.
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity from date of purchase of three months or less to be cash equivalents.
Marketable Securities
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115 ("SFAS 115"), "Accounting for Certain Investments
in Debt and Equity Securities." Pursuant to SFAS 115, the Company has classified
its marketable securities as "available-for-sale" and accordingly carries such
securities at aggregate fair value. Management determines the appropriate
classification of marketable debt and equity securities ("securities") at the
time of purchase and reevaluates such designation as of each balance sheet date.
Available-for-sale securities are held with the intention to sell as deemed
appropriate by the Company. Unrealized gains and losses on available-for-sale
securities are deferred and included as a component of stockholders' equity, net
of tax effect. The Company's available-for-sale securities consist entirely of
the common stock of two technology companies at March 31, 1996 and the common
stock of one technology company at December 31, 1995. Such stock is subject to
sale restrictions which expire in August 1996 and September 1996. The Company
held no marketable securities at December 31, 1994. There were no sales or
maturities of marketable securities through March 31, 1996.
F-22
<PAGE> 7
RSA DATA SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
<TABLE>
The following is a summary of available-for-sale securities:
<CAPTION>
AMORTIZED UNREALIZED UNREALIZED ESTIMATED
COST GAINS LOSSES FAIR VALUE
--------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
As of March 31, 1996:
Common stock..................... $45,000 $ 9,915,000 $-- $ 9,960,000
Common stock..................... 15,000 5,085,000 -- 5,100,000
------- ----------- --- -----------
$60,000 $15,000,000 $-- $15,060,000
======= =========== === ===========
As of December 31, 1995:
Common stock..................... $45,000 $16,635,000 $-- $16,680,000
======= =========== === ===========
</TABLE>
Concentration of Credit Risk
The Company's credit risk exposure arises primarily from its accounts
receivable and cash investments. Accounts receivable consist primarily of
amounts due from companies in the computer and software industries. The Company
performs ongoing credit evaluations of its customers and generally does not
require collateral. The Company maintains reserves for potential credit losses
and such losses have been within management's expectations.
The Company maintains deposits with banks and invests its excess cash in
short-term certificates of deposit and money market mutual funds. The Company
has not experienced any losses on its cash investments.
Property and Equipment
Property and equipment are recorded at cost and depreciated on a
straight-line basis over estimated useful lives of three to five years.
Equipment under capital leases and leasehold improvements are amortized on the
straight-line method over the shorter of their useful lives or the remaining
lease term.
Capitalized Software Costs
The Company capitalizes software production costs once technological
feasibility (as defined in "Statement of Financial Accounting Standards No. 86")
has been established. Capitalized amounts are reported at the lower of
unamortized cost or net realizable value. These costs are amortized to cost of
revenue on the greater of a straight-line basis over the estimated useful
economic lives of the software of three years or the ratio of current revenue to
total expected revenue for the product, starting when the software product
becomes available for general release to customers. Accumulated amortization was
$345,234, $324,218 and $443,499 at March 31, 1996, December 31, 1995 and 1994,
respectively.
Investments
Strategic equity investments, in which the Company has a 20% to 50%
interest or otherwise has the ability to exercise significant influence, are
accounted for under the equity method. Strategic equity investments for which
the Company does not have the ability to exercise significant influence are
carried at cost or estimated realizable value, if less. Investments in
partnerships are accounted for in accordance with the allocation of profits and
losses under the partnership agreements.
F-23
<PAGE> 8
RSA DATA SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition and Significant Customers
Revenues are generally recognized upon the delivery of the product and the
execution of a contract, provided that no significant obligations remain and
collection of the receivable is considered probable. On-going royalties are
recognized when earned. Revenue related to maintenance contracts is deferred and
recognized on a straight-line basis over the period of support provided to
customers, generally one year.
Two customers accounted for 22% and 13% of revenues during fiscal 1995. No
individual customer represented more than 10% of revenues in 1994. One customer
accounted for 47% of revenues in 1993.
Advertising
Advertising costs are expensed as incurred. Total advertising expense was
approximately $87,000 for the three months ended March 31, 1996 and $115,000,
$131,000 and $104,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
Per Share Amounts
Net (loss) income per share is computed using the weighted average number
of common and common equivalent shares (when dilutive) outstanding during the
period. Dilutive common equivalent shares consist of the incremental common
shares issuable upon conversion of the convertible preferred stock (using the
if-converted method) and shares issuable upon the exercise of stock options
(using the treasury stock or modified treasury stock method).
Employee Stock Awards
The Company accounts for stock awards to employees, and employee
equivalents, in accordance with the provisions of the Accounting Principles
Board's Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to Employees."
Long-Lived Assets
In 1995, the Financial Accounting Standards Board released Statement of
Financial Accounting Standards No. 121 ("SFAS 121"), "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of."
SFAS 121 requires recognition of impairment of long-lived assets in the event
the net book value of such assets exceeds the future undiscounted cash flows
attributable to such assets. SFAS 121 is effective for fiscal years beginning
after December 15, 1995. The adoption of SFAS 121 did not have a material impact
on the Company's financial position or results of operations in the first
quarter of 1996.
F-24
<PAGE> 9
RSA DATA SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. PROPERTY AND EQUIPMENT
<TABLE>
Property and equipment consist of the following:
<CAPTION>
DECEMBER 31,
MARCH 31, ---------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Equipment.......................................... $757,225 $702,170 $486,093
Furniture and fixtures............................. 156,252 156,252 137,409
Leasehold improvements............................. 21,973 21,973 8,876
-------- -------- --------
935,450 880,395 632,378
Less accumulated depreciation and amortization..... 545,841 499,621 360,933
-------- -------- --------
Net property and equipment......................... $389,609 $380,774 $271,445
======== ======== ========
</TABLE>
Property and equipment includes $124,060 recorded under capital leases with
related accumulated amortization of $105,198, $102,512 and $80,309 at March 31,
1996, and December 31, 1995 and 1994, respectively.
3. INVESTMENTS
Partnership Venture
In April 1990, the Company entered into a partnership agreement for the
purpose of sublicensing to third parties rights held by each of the partners.
The partners each assigned certain sublicensing rights (see Note 4) to the
partnership. The Company retained the right to make, use, lease and sell
licensed products.
Profits and losses are allocated to the Company and the other partner in
accordance with the partnership agreement, 55% to the Company and 45% to the
other partner during the periods disclosed. A portion of the 55% allocated to
the Company is in turn allocated to Massachusetts Institute of Technology
("M.I.T.") pursuant to a license agreement (see Note 4).
<TABLE>
Summary information for the partnership as of December 31, 1995 and 1994
and for the years then ended is as follows:
<CAPTION>
1995 1994
---------- --------
<S> <C> <C>
Revenues..................................................... $ 752,000 $392,000
Net income................................................... 523,000 262,000
Total assets................................................. 1,403,000 825,000
</TABLE>
As part of an arbitration order on September 6, 1995, the partnership was
ordered to be dissolved immediately (see Note 11). Even though the partnership
was legally dissolved as of September 6, 1995, the partnership-in-dissolution is
continuing to receive certain royalties under previously existing contractual
arrangements between third parties and the partnership, as well as continuing to
incur certain expenses to maintain this activity. The activity related to the
partnership during the quarter ended March 31, 1996 was immaterial.
Affiliate
During 1995, the Company granted certain rights and privileges in certain
products to a company in connection with its incorporation. The rights and
privileges granted included digital certification hardware, software, certain
fixed assets and signed digital certification contracts. In return, the Company
received 4,000,000 shares of common stock which represented a 44% ownership
through December 31, 1995. Subsequently, the ownership has decreased to
approximately 36% as of March 31, 1996. In addition to the investment by the
Company, certain officers and members of the Board of Directors, who are also
shareholders have preferred and common stock investments in this affiliate which
represent an ownership of approximately 8% and 9% at March 31, 1996 and December
31, 1995, respectively.
F-25
<PAGE> 10
RSA DATA SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. INVESTMENTS (CONTINUED)
The Company's investment, which was valued at the carrying value of
contributed assets of $149,500, had been written down to zero as of December 31,
1995.
On an unaudited basis, this affiliate had revenues of $382,000, total
assets of $4.1 million, and a net loss of $2.0 million for the period from
inception to December 31, 1995.
4. PURCHASED LICENSE
The Company has a license for cryptographic communication technology and
devices from the Massachusetts Institute of Technology ("M.I.T.") which granted
to the Company, for a specified period, an exclusive right to use, lease or sell
technology, subject to payment of royalties. Accumulated amortization,
determined on a straight-line basis over the remaining term of the patent, was
$77,086, $74,702 and $65,165 at March 31, 1996, December 31, 1995 and 1994,
respectively. Royalty expense was $165,553 for the three months ended March 31,
1996 and $705,595, $117,859 and $161,142 for the years ended December 31, 1995,
1994 and 1993, respectively.
5. LEASES
The Company has capital lease agreements for equipment and furniture which
provide the Company the option to purchase the leased equipment at a price of
one dollar or fair market value, depending on the type of equipment, at the end
of the lease term.
The Company leases its office facilities under various operating lease
agreements. The leases require monthly rental payments in varying amounts
through October 1999. Rent expense for office facilities under operating leases
was approximately $95,000 for the three months ended March 31, 1996 and
$320,000, $212,000 and $211,000 in 1995, 1994 and 1993, respectively.
<TABLE>
Future minimum annual payments under noncancelable capital and operating
leases are as follows:
<CAPTION>
CAPITAL LEASE OPERATING
OBLIGATION LEASES
------------- ----------
<S> <C> <C>
Year ended December 31,
1996..................................................... $13,414 $ 369,550
1997..................................................... 12,296 385,637
1998..................................................... -- 415,837
1999..................................................... -- 355,088
------- ----------
Total minimum payments..................................... 25,710 $1,526,112
==========
Less amount representing interest.......................... (2,175)
-------
Present value of minimum lease payments.................... 23,535
Less current portion....................................... 11,869
-------
Noncurrent portion of capital lease obligation............. $11,666
=======
</TABLE>
F-26
<PAGE> 11
RSA DATA SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
<TABLE>
Preferred stock has been designated into series and issued as follows:
<CAPTION>
DECEMBER 31,
MARCH 31, -------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Series A, 250,000 shares authorized, issued and
outstanding.......................................... $ 225,000 $ 225,000 $ 225,000
Series B, 500,000 shares authorized, 499,950 shares
issued and outstanding............................... 450,949 450,949 450,949
Series C, 1,050,000 shares authorized, 360,000 shares
issued and outstanding............................... 695,000 695,000 695,000
Series D, 700,000 shares authorized, 380,334 shares
issued and outstanding at March 31, 1996 and December
31, 1995 and 166,667 shares issued and outstanding at
December 31, 1994.................................... 1,130,698 1,130,698 491,947
---------- ---------- ----------
$2,501,647 $2,501,647 $1,862,896
========== ========== ==========
</TABLE>
All series of preferred stock are convertible at the stockholder's option
at any time into common stock on a one-for-one basis and have voting rights
equal to the voting rights of the common shares they would have upon conversion.
Conversion is automatic upon the closing of an underwritten public offering of
the Company's common stock for aggregate offering proceeds exceeding $3,000,000
and an offering price of at least $5.00 per share.
The preferred stockholders are entitled to noncumulative dividends in such
amounts and at such times as the board of directors deems appropriate. No
dividend shall be paid on any other series of preferred or common stock unless
an equal or greater dividend has first been paid on the Series D stock. No
dividend shall be paid on Series A, Series C or common stock unless an equal or
greater dividend has first been paid on the Series B stock. No dividend shall be
paid on Series A stock unless an equal or greater dividend has first been paid
on the Series C stock. No dividends have been declared or are payable at March
31, 1996 or at December 31, 1995.
In the event of a liquidation or winding up of the Company, holders of
Series A, B, C and D preferred stock shall have a liquidation preference of
$0.46, $1.00, $2.00 and $3.00, respectively, per share plus accrued and unpaid
dividends, if any, before distributions to the common stockholders. Series D
stockholders rank in preference to all other stockholders. Series B stockholders
rank in preference with respect to liquidation to Series A and Series C
stockholders. Series C stockholders rank in preference to Series A stockholders.
The Company has the option to redeem the Series A, B, C and D preferred
stock at $0.46, $1.00, $2.00 and $3.00 per share, respectively, upon the
occurrence of certain events.
Stock Options
The Company has a 1987 Stock Option Plan (the "Plan") which authorizes the
Board of Directors to grant incentive stock options or nonqualified stock
options to employees, officers, directors, consultants and independent
contractors of the Company. The Plan is administered by a committee appointed by
the Board of Directors with the terms and conditions being generally left to the
discretion of this committee. Options granted are generally immediately
exercisable and remain exercisable for a term of five years. In the event of
termination of employment or consulting services, the Company has the option to
repurchase at the original exercise price any unvested shares.
F-27
<PAGE> 12
RSA DATA SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
<TABLE>
Plan transactions were as follows:
<CAPTION>
OUTSTANDING STOCK OPTIONS
-------------------------
SHARES NUMBER OF PRICE PER
AVAILABLE SHARES SHARE
--------- --------- -----------
<S> <C> <C> <C>
Balance at December 31, 1993............................. 273,000 296,500 $0.90-$1.90
Options granted........................................ (249,000) 249,000 $1.90
Options exercised...................................... -- (22,500) $1.50
-------- -------- -----------
Balance at December 31, 1994............................. 24,000 523,000 $0.90-$1.90
Additional shares authorized for issuance.............. 530,000 -- $ --
Options granted........................................ (477,700) 477,700 $1.50
Options exercised...................................... -- (278,950) $0.90-$1.50
Options canceled....................................... 43,500 (43,500) $1.50
-------- -------- -----------
Balance at December 31, 1995............................. 119,800 678,250 $0.90-$1.50
Options granted........................................ (105,600) 105,600 $5.50
Options exercised...................................... -- (500) $1.50
Options canceled....................................... 250 (250) $1.50
-------- -------- -----------
Balance at March 31, 1996................................ 14,450 783,100 $0.90-$5.50
======== ======== ===========
</TABLE>
At March 31, 1996 and December 31, 1995, options as to 289,435 and 203,375
shares, respectively, were subject to repurchase rights, and a total of 10,500
and 10,750 shares, respectively, were subject to repurchase which were
previously issued upon the exercise of stock options.
On April 3, 1995, all grants of stock options under the Plan with an
exercise price in excess of $1.50 were repriced to $1.50, the fair market value
on the date of repricing as determined by the Board of Directors.
Deferred compensation arising in 1994 resulted from the extension of
approximately 71,000 stock options. Deferred compensation of $71,000 was
amortized over a two year period, beginning January 1, 1994.
The Company records for financial statement purposes compensation expense
for the difference between the grant price and the deemed accounting value of
certain of the Company's common stock options granted in 1995. This amount is
being amortized over the vesting period of the individual options, which is
generally four years. Compensation expense recorded in 1995 totaled $35,490 and
at December 31, 1995 compensation remaining to be amortized totaled $121,684.
During the three months ended March 31, 1996, the Company granted additional
options for which the deemed accounting value exceeded the exercise price.
Compensation expense relating to such grants will also be amortized over the
vesting period.
The Company issued options outside the Plan to purchase 36,000 shares of
common stock at an exercise price of $0.90 per share and recorded deferred
compensation expense of $21,600 for the difference between the grant price and
the fair value of the Company's common stock for such options at the time of
grant. The amount was amortized to expense over the four-year vesting period of
the options. Options as to 9,000 shares were exercised in 1992 and the remaining
27,000 shares were exercised in 1995, leaving no options outstanding at December
31, 1995.
7. NONMONETARY EXCHANGE TRANSACTIONS
During 1994 the Company entered into several agreements in which the
Company transferred license agreements to customers in return for shares of the
customers' stock. The Company valued these exchange transactions, and recorded
license revenue, based upon the fair value of the license issued or the stock
F-28
<PAGE> 13
RSA DATA SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. NONMONETARY EXCHANGE TRANSACTIONS (CONTINUED)
received, whichever was more readily determinable. Revenue recognized under
nonmonetary exchange transactions was $60,000 in 1994. A director of the Company
is a shareholder of one of these customers. The value of the license agreement
with such customer was $15,000. No revenue under nonmonetary transactions was
recognized in 1995.
8. EMPLOYEE BENEFIT PLANS
The Company has a 401(k) Plan under which all employees aged 18 and over
are eligible to participate in the plan after completing one year of employment.
The Company provides matching contributions of approximately 50% of participant
contributions up to $1,800 per participant each year, which totaled
approximately $41,000 for the year ended December 31, 1995. The Company's
matching contributions vest over four years.
9. INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109.
<TABLE>
The benefit for income taxes consists of the following:
<CAPTION>
DECEMBER 31,
-----------------------------------
1995 1994 1993
--------- -------- --------
<S> <C> <C> <C>
Current
Federal......................................... $ 22,475 $(69,865) $ 14,000
State........................................... -- -- 3,000
Foreign......................................... 35,029 17,000 15,000
--------- -------- --------
57,504 (52,865) 32,000
Deferred
Federal......................................... (497,863) 10,000 (31,000)
State........................................... (96,447) 3,000 (12,000)
--------- -------- --------
(594,310) 13,000 (43,000)
--------- -------- --------
(Benefit) for income taxes........................ $(536,806) $(39,865) $(11,000)
========= ======== ========
</TABLE>
<TABLE>
The Company's income tax benefit differs from the amount computed by
applying the statutory federal income tax rate of 35% to income before taxes as
follows:
<CAPTION>
DECEMBER 31,
----------------------------------
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
Expected tax (benefit) at federal statutory
rate........................................... $ 144,529 $(600,810) $(41,506)
State taxes (net of federal benefit)............. 24,962 3,000 (9,000)
Research Credits................................. -- (67,248) --
Foreign Tax Credits.............................. (38,881) -- 9,900
Other............................................ 33,101 36,141 (14,054)
Change in valuation allowance.................... (700,517) 589,052 43,660
--------- --------- --------
(Benefit) for income taxes....................... $(536,806) $ (39,865) $(11,000)
========= ========= ========
</TABLE>
F-29
<PAGE> 14
RSA DATA SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES (CONTINUED)
<TABLE>
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<CAPTION>
DECEMBER 31,
-----------------------------------------
1995 1994 1993
----------- --------- -----------
<S> <C> <C> <C>
Deferred tax assets
Net operating loss carryforwards................ $ -- $ 458,159 $ --
Bad debt reserve................................ 142,973 37,222 --
Accrued expenses................................ 106,396 35,407 41,919
Deferred revenue................................ 98,103 51,250 44,331
PKP partnership................................. 87,213 16,953 --
Research credit carryforwards (expire
2003-2007).................................... 79,875 79,875 --
Foreign tax credits (expire 1998-2000).......... 51,088 39,296 --
Other........................................... 28,662 (17,645) (6,427)
----------- --------- --------
Total deferred tax assets.......................... 594,310 700,517 79,823
Valuation allowance.................................. -- (700,517) (79,823)
Deferred tax liabilities
Unrealized gain on available for sale
securities.................................... (6,827,836) -- --
----------- --------- --------
Net deferred tax assets (liabilities)................ $(6,233,526) $ 0 $ 0
=========== ========= ========
</TABLE>
Utilization of credit carry forwards may be subject to a substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code of 1986 and similar state provisions. The annual limitation may
result in the expiration of credits before utilization.
Taxes for the interim periods are provided by applying the estimated annual
effective tax rate to the interim pre-tax results.
10. RELATED PARTY TRANSACTIONS
During the three months ended March 31, 1996 and the years ended December
31, 1995, 1994 and 1993, the Company expensed approximately $24,000, $91,000,
$81,000 and $79,000, respectively, in consulting services performed by a
director/stockholder of the Company.
11. CONTINGENCIES
In April 1994, a Demand for Arbitration (the "Demand") was filed by
Caro-Kann Corporation ("CKC") and Cylink Corporation ("Cylink") against the
Company seeking a license of a patent of the Massachusetts Institute of
Technology (the "RSA Patent"), which had been exclusively licensed to the
Company, and reformation of certain agreements relating to the partnership
between the Company and CKC, Public Key Partnership ("PKP"). The Demand was
subsequently amended to include a claim of breach of fiduciary duty on the part
of the Company and a request to dissolve PKP. On September 6, 1995, the
Arbitration Panel issued a ruling, which ordered the immediate the dissolution
of PKP. The interpretation of the order is disputed by both parties. A
subsequent order was issued, on February 1, 1996 clarifying some matters; but
other matters continue to be litigated as both parties seek additional relief.
In June 1994, Cylink filed a claim against the Company claiming that the
RSA patent is invalid. The Company has filed a motion for summary judgment which
is set for hearing on April 29, 1996. The trial has been set for July 8, 1996.
F-30
<PAGE> 15
RSA DATA SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. CONTINGENCIES (CONTINUED)
In July 1994, a private party filed a claim against the Company alleging
patent invalidity and unfair business practices allegedly arising out of PKP and
RSA's patent licensing practices. CKC has intervened as an additional defendant.
Discovery is not yet closed on this matter, and this case has not been set for
trial.
In September 1995, the Company filed a complaint against CKC, Cylink and
the Board of Trustees of the Leland Stanford Junior University seeking
declaratory relief that certain patents licensed by the University to Cylink and
CKC are invalid, unenforceable and not infringed by the Company. Discovery is
not yet closed on this matter, and no trial date has been set.
Management of the Company intends to defend the litigation vigorously. The
outcome of any litigation, including the above matters, is uncertain. An
unfavorable outcome could materially adversely affect the financial position,
results of operations and/or cash flows of the Company.
F-31
<PAGE> 1
Exhibit 99.3
------------
PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS
The following unaudited Pro Forma Condensed Combining Balance Sheet at
March 31, 1996 and Pro Forma Condensed Combining Statements of Operations for
the three months ended March 31, 1996 and the years ended December 31, 1995,
1994 and 1993 (the "Pro Forma Condensed Combining Financial Statements")
illustrate the effect of the Merger as if the Merger had occurred as of the
beginning of the earliest period presented. Pursuant to the terms of the Merger
and based upon the capitalization of SDI and RSA as of June 28, 1996, it is
currently anticipated that each holder of RSA Stock will be entitled to receive
shares of SDI Common Stock based on a Conversion Ratio of 0.83056 shares of SDI
Common Stock for each share of RSA Stock. The Pro Forma Condensed Combining
Balance Sheet combines SDI's March 31, 1996 consolidated balance sheet with
RSA's March 31, 1996 consolidated balance sheet appearing elsewhere herein. The
Pro Forma Condensed Combining Statements of Operations combine SDI's historical
results for each of the three months ended March 31, 1996 and each of the three
years ended December 31, 1995, 1994 and 1993 with the corresponding RSA results
for the three months ended March 31, 1996 and the three years ended December 31,
1995, 1994 and 1993, respectively. The Pro Forma Condensed Combining Statements
of Operations do not give effect to any transaction charges associated with the
consummation of the Merger. All such costs are estimated to approximate $6.1
million ($5.4 million, net of related tax effects). The Pro Forma Condensed
Combining Financial Statements have been prepared on the basis that the Merger
will be accounted for as a pooling of interests.
The Pro Forma Condensed Combining Financial Statements should be read in
conjunction with the consolidated financial statements of SDI and RSA appearing
elsewhere in this Joint Proxy Statement and Prospectus. The Pro Forma Condensed
Combining Financial Statements are presented for comparative purposes only and
are not intended to be indicative of actual results had the transactions
occurred as of the dates indicated above or of results which may be attained in
the future.
65
<PAGE> 2
PRO FORMA CONDENSED COMBINING BALANCE SHEET
<TABLE>
AS OF MARCH 31, 1996
(IN THOUSANDS)
<CAPTION>
PRO FORMA
--------------------------
SDI RSA ADJUSTMENTS COMBINED
-------- ------- ----------- --------
<S> <C> <C> <C> <C>
Current Assets:
Cash and equivalents........................ $ 17,655 $ 3,703 $ 21,358
Marketable securities....................... 73,532 15,060 88,592
Accounts receivable -- net.................. 7,241 829 8,070
Inventory................................... 1,322 -- 1,322
Prepaid expenses and other.................. 1,626 597 2,223
Deferred taxes.............................. 501 -- 501
-------- ------- ------- --------
Total current assets................ 101,877 20,189 122,066
-------- ------- ------- --------
Property and Equipment -- net................. 2,723 390 3,113
Other Assets:
Investments................................. 686 371 1,057
Purchased technology and capitalized
software................................. 174 244 418
Deferred taxes.............................. 239 185 424
Other assets................................ 150 126 276
-------- ------- ------- --------
Total other assets.................. 1,249 926 2,175
-------- ------- ------- --------
Total............................... $105,849 $21,505 $ -- $127,354
======== ======= ======= ========
Current Liabilities:
Accounts payable............................ $ 2,194 $ 1,815 $ 4,009
Accrued payroll and related benefits........ 1,615 358 1,973
Accrued expenses and other.................. 801 561 $ 6,075 (1) 7,437
Income taxes payable and deferred........... 1,665 5,540 (700)(1) 6,505
Deferred revenue............................ 1,691 1,641 3,332
-------- ------- ------- --------
Total current liabilities........... 7,966 9,915 5,375 23,256
Other....................................... -- 62 62
-------- ------- ------- --------
Total liabilities................... 7,966 9,977 5,375 23,318
-------- ------- ------- --------
Stockholders' Equity:
Convertible preferred stock; 2,500,000
shares authorized and 1,490,284 shares
issued and outstanding for RSA........... -- 2,502 (2,502)(2) --
Common stock; 30,000,000 shares authorized,
13,558,018 shares issued and 13,557,870
shares outstanding for SDI; 7,000,000
shares authorized and 2,528,633 shares
issued and outstanding for RSA;
30,000,000 shares authorized, 16,895,969
shares issued and 16,895,821 shares
outstanding on a pro forma basis......... 136 1,141 (1,108)(2) 169
Additional paid-in capital.................. 91,321 -- 3,610 (2) 94,931
Notes receivable from stockholders.......... -- (6) (6)
Retained earnings (deficit)................. 6,494 (951) (5,375)(1) 168
Deferred compensation....................... (150) -- (150)
Cumulative translation adjustment........... (8) (1) (9)
Unrealized gain on marketable
securities -- net........................ 90 8,843 8,933
-------- ------- ------- --------
Total stockholders' equity............... 97,883 11,528 (5,375) 104,036
-------- ------- ------- --------
$105,849 $21,505 $ -- $127,354
======== ======= ======= ========
</TABLE>
See Notes to Pro Forma Condensed Combining Financial Statements.
66
<PAGE> 3
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
<TABLE>
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
PRO FORMA
SDI RSA COMBINED
------- ------ ---------
<S> <C> <C> <C>
Revenue....................................................... $12,170 $2,692 $14,862
Cost of revenue............................................... 2,912 602 3,514
------- ------ -------
Gross profit.................................................. 9,258 2,090 11,348
------- ------ -------
Costs and expenses:
Research and development.................................... 1,488 557 2,045
Marketing and selling....................................... 3,570 870 4,440
General and administrative.................................. 1,410 1,318 2,728
------- ------ -------
Total............................................... 6,468 2,745 9,213
------- ------ -------
Income (loss) from operations................................. 2,790 (655) 2,135
Interest income, net.......................................... 1,227 33 1,260
Other income (loss)........................................... 9 9
------- ------ -------
Income (loss) before provision for income taxes............... 4,017 (613) 3,404
Provision (benefit) for income taxes.......................... 1,466 (230) 1,236
------- ------ -------
Net income (loss)............................................. $ 2,551 $ (383) $ 2,168
======= ====== =======
Net income (loss) per share................................... $ .18 $ (.15) $ .12
======= ====== =======
Weighted average number of common stock and common stock
equivalent shares outstanding............................... 14,302 2,526 18,137
======= ====== =======
</TABLE>
See Notes to Pro Forma Condensed Combining Financial Statements.
67
<PAGE> 4
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
<TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
PRO FORMA
SDI RSA COMBINED
------- ------- ---------
<S> <C> <C> <C>
Revenue...................................................... $33,804 $11,600 $45,404
Cost of revenue.............................................. 7,235 1,272 8,507
------- ------- -------
Gross profit................................................. 26,569 10,328 36,897
------- ------- -------
Costs and expenses:
Research and development................................... 4,048 1,679 5,727
Marketing and selling...................................... 11,059 2,112 13,171
General and administrative................................. 3,710 6,160 9,870
------- ------- -------
Total.............................................. 18,817 9,951 28,768
------- ------- -------
Income from operations....................................... 7,752 377 8,129
Interest income, net......................................... 1,699 56 1,755
Other income (loss).......................................... (20) (20)
------- ------- -------
Income before provision for income taxes..................... 9,451 413 9,864
Provision (benefit) for income taxes......................... 3,639 (537) 3,102
------- ------- -------
Net income................................................... $ 5,812 $ 950 $ 6,762
======= ======= =======
Net income per share......................................... $ .46 $ .23 $ .42
======= ======= =======
Weighted average number of common stock and common stock
equivalent shares outstanding.............................. 12,682 4,070 16,062
======= ======= =======
</TABLE>
See Notes to Pro Forma Condensed Combining Financial Statements.
68
<PAGE> 5
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
<TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
PRO FORMA
SDI RSA COMBINED
------- ------- ---------
<S> <C> <C> <C>
Revenue...................................................... $17,572 $ 3,077 $20,649
Cost of revenue.............................................. 3,873 733 4,606
------- ------- -------
Gross profit................................................. 13,699 2,344 16,043
------- ------- -------
Costs and expenses:
Research and development................................... 2,226 1,035 3,261
Marketing and selling...................................... 6,382 1,752 8,134
General and administrative................................. 1,636 1,431 3,067
------- ------- -------
Total.............................................. 10,244 4,218 14,462
------- ------- -------
Income (loss) from operations................................ 3,455 (1,874) 1,581
Interest income, net......................................... 105 10 115
Other income (loss).......................................... 97 97
------- ------- -------
Income (loss) before provision for income taxes.............. 3,560 (1,767) 1,793
Provision (benefit) for income taxes......................... 1,245 (40) 1,205
------- ------- -------
Net income (loss)............................................ $ 2,315 $(1,727) $ 588
======= ======= =======
Net income (loss) per share.................................. $ .25 $ (.80) $ .05
======= ======= =======
Weighted average number of common stock and common stock
equivalent shares outstanding.............................. 9,080 2,165 11,833
======= ======= =======
</TABLE>
See Notes to Pro Forma Condensed Combining Financial Statements.
69
<PAGE> 6
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
<TABLE>
FOR THE YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
PRO FORMA
SDI RSA COMBINED
------- ------ ---------
<S> <C> <C> <C>
Revenue....................................................... $12,110 $3,002 $15,112
Cost of revenue............................................... 2,738 844 3,582
------- ------ -------
Gross profit.................................................. 9,372 2,158 11,530
------- ------ -------
Costs and expenses:
Research and development.................................... 1,619 587 2,206
Marketing and selling....................................... 4,000 1,023 5,023
General and administrative.................................. 1,217 758 1,975
------- ------ -------
Total............................................... 6,836 2,368 9,204
------- ------ -------
Income (loss) from operations................................. 2,536 (210) 2,326
Interest income, net.......................................... 37 17 54
Other income (loss)........................................... 67 67
------- ------ -------
Income (loss) before provision for income taxes and cumulative
effect of change in accounting.............................. 2,573 (126) 2,447
Provision (benefit) for income taxes.......................... 900 (11) 889
------- ------ -------
Income (loss) before cumulative effect of change in
accounting.................................................. $ 1,673 $ (115) $ 1,558
======= ====== =======
Net income (loss) per share before cumulative effect of
accounting change........................................... $ .19 $ (.05) $ .13
======= ====== =======
Weighted average number of common stock and common stock
equivalent shares outstanding............................... 9,010 2,147 11,725
======= ====== =======
</TABLE>
See Notes to Pro Forma Condensed Combining Financial Statements.
70
<PAGE> 7
SECURITY DYNAMICS TECHNOLOGIES, INC. AND
RSA DATA SECURITY, INC.
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINING FINANCIAL STATEMENTS
1. The Pro Forma Condensed Combining Financial Statements are presented for
illustrative purposes only and do not give effect to any synergies which are
expected to occur due to the integration of SDI's and RSA's operations.
Additionally, the Pro Forma Condensed Combining Statements of Operations exclude
the nonrecurring costs of the Merger, which are estimated at $6.1 million ($5.4
million, net of related tax effects) for investment banking, legal and
accounting fees and costs associated with combining the operations of the two
companies. The nonrecurring cost estimate is a preliminary estimate only,
although it is not likely that material additional costs will be incurred. The
nonrecurring expenses will be charged to operations upon consummation of the
Merger. The Pro Forma Condensed Combining Balance Sheet includes the effect of
recording these costs. The Pro Forma Condensed Combining Financial Statements
assume the Merger qualifies as a reorganization within the meaning of Section
368(a) of the Code.
2. Stockholders' equity as of March 31, 1996 has been adjusted to reflect
the issuance of 3,337,952 shares of SDI Common Stock in exchange for all of the
issued and outstanding shares of RSA Stock. The Pro Forma Condensed Combining
Financial Statements do not reflect the exercise of outstanding stock options.
3. The pro forma combined net income per share is based on the combined
weighted average number of common and common equivalent shares, after adjusting
RSA's weighted average number of common shares outstanding and dilutive common
share equivalents for the conversion into SDI Common Stock at a conversion ratio
of 0.83056. Common share equivalents consist of convertible preferred stock and
common stock issuable upon the exercise of outstanding options.
4. There are no intercompany transactions or balances included in the Pro
Forma Condensed Combining Financial Statements and no adjustments required to
conform the accounting policies of SDI and RSA. Certain RSA amounts have been
reclassified to conform to the SDI presentation.
5. Both SDI and RSA adopted Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes ("SFAS No. 109"), effective in the first
quarter of 1993. Pursuant to rules and regulations of the Commission, the Pro
Forma Condensed Combining Statements of Operations for the year ended December
31, 1993 do not reflect the cumulative effect of the adoption of SFAS No. 109.
71
