<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 28, 1996
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SECURITY DYNAMICS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 3577 04-2916506
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
------------------------
ONE ALEWIFE CENTER
CAMBRIDGE, MASSACHUSETTS 02140
(617) 547-7820
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
------------------------
CHARLES R. STUCKEY, JR.
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SECURITY DYNAMICS TECHNOLOGIES, INC.
ONE ALEWIFE CENTER
CAMBRIDGE, MASSACHUSETTS 02140
(617) 547-7820
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
------------------------
WITH COPIES TO:
<TABLE>
<S> <C>
HAL J. LEIBOWITZ, ESQ. DAVID W. HEALY, ESQ.
JAY E. BOTHWICK, ESQ. ROBERT B. DELLENBACH, ESQ.
HALE AND DORR TRAM T. PHI, ESQ.
60 STATE STREET JOHN F. PLATZ, ESQ.
BOSTON, MASSACHUSETTS 02109 FENWICK & WEST LLP
(617) 526-6000 TWO PALO ALTO SQUARE
PALO ALTO, CALIFORNIA 94306
(415) 494-0600
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF SECURITIES TO THE
PUBLIC: As soon as practicable after the effective date of this Registration
Statement and the satisfaction or waiver of certain other conditions under the
Agreement and Plan of Merger described herein.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
================================================================================================
</TABLE>
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE (3)
<S> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------
Common Stock, $.01 par value 4,000,000 shares $4.45 $17,816,778 $6,143.72
per share..................
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- -----------------------------------------------------------------------------------------------------
</TABLE>
(1) Based upon the maximum number of shares of Common Stock of Security Dynamics
Technologies, Inc. ("SDI") that may be issued in connection with the merger
of Card-Key Inc., a wholly-owned subsidiary of SDI, with and into RSA Data
Security, Inc. ("RSA"), as described herein.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(2) under the Securities Act of 1933, as amended (the
"Securities Act"). The Proposed Maximum Aggregate Offering Price is the sum
of (a) $11,210,008 (the book value of RSA Common Stock as of May 31, 1996),
(b) $1,108,307 (the book value of RSA Series A Convertible Preferred Stock
as of May 31, 1996), (c) $2,216,393 (the book value of RSA Series B
Convertible Preferred Stock as of May 31, 1996), (d) $1,595,962 (the book
value of RSA Series C Convertible Preferred Stock as of May 31, 1996), and
(e) $1,686,108 (the book value of RSA Series D Convertible Preferred Stock
as of May 31, 1996).
(3) A fee of $2,305.68 was paid on May 1, 1996 pursuant to Rules 14a-6(i)(4) and
0-11 under the Securities Exchange Act of 1934, as amended, in respect of
the merger upon the filing of preliminary proxy materials relating thereto.
Pursuant to Rule 457(b) under the Securities Act, the amount of such
previously paid fee has been credited against the registration fee payable
in connection with this filing. Accordingly, an additional fee of $3,838.04
is required to be paid with this Registration Statement.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
SECURITY DYNAMICS TECHNOLOGIES, INC.
CROSS-REFERENCE SHEET SHOWING LOCATIONS IN THE PROSPECTUS
OF THE RESPONSES TO THE ITEMS OF FORM S-4
(PURSUANT TO ITEM 501 OF REGULATION S-K)
FORM S-4
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
- ------------------------------------------------ ------------------------------------------
<C> <S> <C>
A. Information About the Transaction
1. Forepart of Registration Statement and
Outside Front Cover Page of Prospectus.... Outside Front Cover Page of Joint Proxy
Statement and Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus............................. Inside Front Cover Page of Joint Proxy
Statement and Prospectus; Available
Information; Table of Contents
3. Risk Factors, Ratio of Earnings to Fixed
Charges and Other Information............. Summary; Risk Factors; Selected Historical
and Unaudited Pro Forma Combined Financial
Data; Comparative Per Share Data
4. Terms of the Transaction.................. Summary; The Merger; The Merger Agreement;
Comparison of Stockholder Rights;
Description of SDI Capital Stock
5. Pro Forma Financial Information........... Selected Historical and Unaudited Pro
Forma Combined Financial Data; Pro Forma
Condensed Combining Financial Statements
6. Material Contacts with the Company Being
Acquired.................................. The Merger
7. Additional Information Required for
Reoffering by Persons and Parties Deemed
to be Underwriters........................ Not Applicable
8. Interests of Named Experts and Counsel.... Legal Matters
9. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities............................... Not Applicable
B. Information About the Registrant
10. Information with Respect to S-3
Registrants............................... Not Applicable
11. Incorporation of Certain Information by
Reference................................. Not Applicable
12. Information with Respect to S-2 or S-3
Registrants............................... Not Applicable
13. Incorporation of Certain Information by
Reference................................. Not Applicable
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION LOCATION IN PROSPECTUS
- ------------------------------------------------ ------------------------------------------
<C> <S> <C>
14. Information with Respect to Registrants
Other Than S-3 or S-2 Registrants......... Summary; Selected Historical and Unaudited
Pro Forma Combined Financial Data; Market
Price Information and Dividend Policies;
Business -- SDI; Management's Discussion
and Analysis of Financial Condition and
Results of Operations -- SDI; Consolidated
Financial Statements
C. Information About the Company Being Acquired
15. Information with Respect to S-3
Companies................................. Not Applicable
16. Information with Respect to S-2 or S-3
Companies................................. Not Applicable
17. Information with Respect to Companies
Other Than S-3 or S-2 Companies........... Summary; Selected Historical and Unaudited
Pro Forma Combined Financial Data; Market
Price Information and Dividend Policies;
Business -- RSA; Management's Discussion
and Analysis of Financial Condition and
Results of Operations -- RSA; Consolidated
Financial Statements
D. Voting and Management Information
18. Information if Proxies, Consents or
Authorizations Are to be Solicited........ Summary; Outside Front Cover Page of Joint
Proxy Statement and Prospectus; The SDI
Special Meeting; The RSA Special Meeting;
The Merger; Management -- SDI;
Management -- RSA; Certain Transactions --
RSA
19. Information if Proxies, Consents or
Authorizations Are Not to be Solicited in
an Exchange Offer......................... Not Applicable
</TABLE>
ii
<PAGE> 4
SECURITY DYNAMICS TECHNOLOGIES, INC.
ONE ALEWIFE CENTER
CAMBRIDGE, MASSACHUSETTS 02140
July 3, 1996
Dear Stockholder:
You are cordially invited to attend a Special Meeting of Stockholders (the
"SDI Special Meeting") of Security Dynamics Technologies, Inc., a Delaware
corporation ("SDI"), to be held on Friday, July 26, 1996 at 10:00 a.m., local
time, at the offices of Hale and Dorr, 60 State Street, Boston, Massachusetts
02109. The accompanying Notice of SDI Special Meeting of Stockholders, Joint
Proxy Statement and Prospectus and proxy card contain important information
about the matters to be acted upon at the SDI Special Meeting. Please give this
information your careful attention.
At the SDI Special Meeting, you will be asked to consider and vote upon a
proposal (the "Merger Proposal") to approve the issuance of up to an aggregate
of 4,000,000 shares of SDI Common Stock, $.01 par value per share (the "SDI
Common Stock"), in order to effect the proposed acquisition of RSA Data
Security, Inc., a Delaware corporation ("RSA"), by SDI (the "Merger") pursuant
to an Agreement and Plan of Merger, dated as of April 14, 1996, among SDI,
Card-Key Inc., a wholly-owned subsidiary of SDI (the "Merger Subsidiary"), and
RSA (the "Merger Agreement").
The Merger Agreement provides that, upon the satisfaction or waiver of
certain conditions to the closing set forth therein, the Merger Subsidiary will
be merged with and into RSA, whereupon RSA will become a wholly-owned subsidiary
of SDI. At that time, each outstanding share of capital stock of RSA (the "RSA
Stock") will be converted into that number of shares of SDI Common Stock equal
to a fraction, the numerator of which is 4,000,000 and the denominator of which
is the sum of (i) the shares of RSA Stock issued and outstanding immediately
prior to the effective time of the Merger (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. Based upon the capitalization of SDI and RSA on June 4, 1996,
it is currently anticipated that each share of RSA Stock will convert into
0.83056 shares of SDI Common Stock. If the requisite approvals of the
stockholders of SDI and RSA are received, the Merger is expected to be
consummated on or about July 26, 1996.
Based upon the capitalization of SDI and RSA as of June 3, 1996 (the record
date for the SDI Special Meeting), 4,000,000 shares of SDI Common Stock would
represent approximately 21.1% of the outstanding SDI Common Stock immediately
following the Effective Time on a fully diluted basis. On June 27, 1996, the
last reported sale price per share of the SDI Common Stock on the Nasdaq
National Market was $84.3125.
Holders of SDI Common Stock do not have rights of appraisal under Delaware
law in connection with the Merger.
THE SDI BOARD OF DIRECTORS HAS UNANIMOUSLY CONCLUDED THAT THE MERGER
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY ARE IN THE BEST INTERESTS OF
THE HOLDERS OF SDI COMMON STOCK AND RECOMMENDS THAT YOU VOTE FOR THE MERGER
PROPOSAL.
The affirmative vote of the holders of a majority of the shares of SDI
Common Stock voting in person or by proxy on the Merger Proposal is required to
approve the Merger Proposal. The Merger Agreement and the Merger will also
require the approval and adoption of the stockholders of RSA and the
satisfaction or waiver of other conditions as described in the attached Joint
Proxy Statement and Prospectus.
<PAGE> 5
At the SDI Special Meeting, you will also be asked to consider and vote
upon a proposal to approve an amendment (the "Charter Amendment") to SDI's Third
Restated Certificate of Incorporation increasing the authorized number of shares
of SDI Common Stock from 30,000,000 to 80,000,000 shares. The SDI Board of
Directors has unanimously approved the Charter Amendment and recommends that you
vote FOR the Charter Amendment.
Your vote is important regardless of the number of shares you own. We urge
you to read the enclosed materials carefully and then to complete, sign and date
the enclosed proxy card and return it promptly in the enclosed prepaid envelope,
whether or not you plan to attend the SDI Special Meeting. Your prompt
cooperation and continued support of SDI is greatly appreciated.
Sincerely,
Charles R. Stuckey, Jr.,
President and Chief
Executive Officer
<PAGE> 6
SECURITY DYNAMICS TECHNOLOGIES, INC.
ONE ALEWIFE CENTER
CAMBRIDGE, MASSACHUSETTS 02140
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 26, 1996
To the Stockholders of Security Dynamics Technologies, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "SDI
Special Meeting") of Security Dynamics Technologies, Inc., a Delaware
corporation ("SDI"), will be held on Friday, July 26, 1996 at 10:00 a.m., local
time, at the offices of Hale and Dorr, 60 State Street, Boston, Massachusetts
02109 for the following purposes:
1. To consider and vote upon a proposal to approve the issuance of up to an
aggregate of 4,000,000 shares of SDI Common Stock, $.01 par value per
share (the "SDI Common Stock"), in order to effect the proposed
acquisition of RSA Data Security, Inc., a Delaware corporation ("RSA"),
by SDI pursuant to an Agreement and Plan of Merger, dated as of April
14, 1996, among SDI, Card-Key Inc., a wholly-owned subsidiary of SDI,
and RSA, as described in the accompanying Joint Proxy Statement and
Prospectus;
2. To approve an amendment to the Third Restated Certificate of
Incorporation of SDI increasing the authorized number of shares of SDI
Common Stock from 30,000,000 to 80,000,000 shares; and
3. To transact such other business as may properly come before the SDI
Special Meeting or any adjournments or postponements thereof.
The SDI Board of Directors has fixed the close of business on June 3, 1996
as the record date for the determination of SDI stockholders entitled to notice
of and to vote at the SDI Special Meeting and any adjournments or postponements
thereof. The list of SDI stockholders entitled to vote at the SDI Special
Meeting will be available for examination for ten days prior to the SDI Special
Meeting at the principal executive offices of SDI, One Alewife Center,
Cambridge, Massachusetts 02140.
All SDI stockholders are cordially invited to attend the SDI Special
Meeting in person. However, to ensure your representation at the SDI Special
Meeting, you are urged to sign and return the enclosed proxy card as promptly as
possible in the enclosed postage prepaid envelope.
By order of the Board of Directors,
M. Lawrence Oliverio,
Secretary
July 3, 1996
Cambridge, Massachusetts
WHETHER OR NOT YOU PLAN TO ATTEND THE SDI SPECIAL MEETING, PLEASE PROMPTLY
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ACCOMPANYING
ENVELOPE. NO POSTAGE NEED BE AFFIXED IF THE PROXY CARD IS MAILED IN THE UNITED
STATES.
<PAGE> 7
RSA DATA SECURITY, INC.
100 MARINE PARKWAY, SUITE 500
REDWOOD CITY, CALIFORNIA 94065
July 3, 1996
Dear Stockholder:
You are cordially invited to attend the Special Meeting of Stockholders
(the "RSA Special Meeting") of RSA Data Security, Inc., a Delaware corporation
("RSA"), to be held on Friday, July 26, 1996 at 10:00 a.m., local time (which is
held in lieu of the meeting previously scheduled for June 26, 1996), at the
offices of Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California
94306. Enclosed are a document entitled Notice of RSA Special Meeting, a
document entitled Joint Proxy Statement and Prospectus and a proxy card
containing information about the matters to be acted upon.
At the RSA Special Meeting, you will be asked to consider and vote upon the
approval and adoption of (i) the Agreement and Plan of Merger, dated as of April
14, 1996 (the "Merger Agreement"), among RSA, Security Dynamics Technologies,
Inc., a Delaware corporation ("SDI"), and Card-Key Inc., a wholly-owned
subsidiary of SDI (the "Merger Subsidiary"), and (ii) the Merger (as defined
below). A copy of the Merger Agreement appears as Annex A to the accompanying
Joint Proxy Statement and Prospectus.
Pursuant to the Merger Agreement, the Merger Subsidiary will be merged with
and into RSA (the "Merger"), whereupon RSA will become a wholly-owned subsidiary
of SDI. At that time, each outstanding share of capital stock of RSA (the "RSA
Stock") will be converted into that number of shares of SDI Common Stock equal
to a fraction (the "Conversion Ratio"), the numerator of which is 4,000,000 and
the denominator of which is the sum of (i) the number of shares of RSA Stock
issued and outstanding immediately prior to the effective time of the Merger
(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. Based upon the
capitalization of SDI and RSA on June 28, 1996, it is currently anticipated that
each share of RSA Stock will convert into 0.83056 shares of SDI Common Stock.
Holders of RSA Stock will receive cash in lieu of any fractional shares of SDI
Common Stock to which such RSA stockholders would have been entitled. Each
outstanding option to purchase RSA Common Stock will be converted into an option
to purchase a number of shares of SDI Common Stock determined by multiplying the
number of shares subject to the 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 option at the time of the Merger divided by the
Conversion Ratio, rounded up to the next highest cent. If the requisite
approvals of the stockholders of SDI and RSA are received, the Merger is
expected to be consummated on or about July 26, 1996. We urge you to read the
enclosed Joint Proxy Statement and Prospectus for a description of the federal
income tax consequences of the Merger.
Based upon the capitalization of SDI as of June 3, 1996 (the record date
for the SDI Special Meeting), 4,000,000 shares of SDI Common Stock would
represent approximately 21.1% of the outstanding SDI Common Stock immediately
following the Effective Time on a fully diluted basis. On June 27, 1996, the
last reported sale price per share of the SDI Common Stock on the Nasdaq
National Market was $84.3125.
The Merger Agreement includes representations, warranties and covenants of
RSA. The Escrow Agreement to be entered into by SDI, RSA and representatives of
RSA stockholders and option holders provides, among other things, that 12.5% of
the SDI Common Stock received by RSA stockholders in the Merger will be held in
escrow to secure the indemnification obligations under the Merger Agreement in
connection with breaches of such representations, warranties and covenants and
in connection with certain litigation.
<PAGE> 8
After the Merger, I will continue in my current position as President and
Chief Executive Officer of RSA and expect to become a member of the Board of
Directors of SDI.
THE RSA BOARD HAS UNANIMOUSLY DETERMINED THAT THE MERGER IS IN THE BEST
INTERESTS OF RSA AND ITS STOCKHOLDERS AND HAS APPROVED AND ADOPTED THE MERGER
AGREEMENT AND THE MERGER. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS OF RSA VOTE FOR THE APPROVAL AND ADOPTION OF THE MERGER AGREEMENT
AND THE MERGER.
The affirmative vote of the holders of a majority of the outstanding shares
of RSA Stock, voting together as a single class, is necessary to approve and
adopt the Merger Agreement and the Merger. The issuance of shares of SDI Common
Stock in connection with the Merger will require the approval of the
stockholders of SDI, and the Merger will also require the satisfaction or waiver
of other conditions as described in the attached Joint Proxy Statement and
Prospectus.
We urge you to read the enclosed material carefully and to complete, sign
and date the enclosed proxy card and return it promptly in the enclosed prepaid
envelope, whether or not you plan to attend the RSA Special Meeting. If you
attend the RSA Special Meeting in person, you may, if you wish, vote your shares
personally on all matters whether or not you have previously submitted a proxy.
Your prompt cooperation will be greatly appreciated.
Please do not send your share certificates with your proxy card. If the
Merger Agreement is approved and adopted by the RSA stockholders and all other
conditions to the Merger are satisfied, you will receive a transmittal form and
instructions for the surrender and exchange of your shares.
Sincerely yours,
D. James Bidzos,
President and Chief
Executive Officer
<PAGE> 9
RSA DATA SECURITY, INC.
100 MARINE PARKWAY, SUITE 500
REDWOOD CITY, CALIFORNIA 94065
------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON JULY 26, 1996
To the Stockholders of
RSA Data Security, Inc.:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders (the "RSA
Special Meeting") of RSA Data Security, Inc., a Delaware corporation ("RSA"),
will be held on Friday, July 26, 1996 at 10:00 a.m., local time, at the offices
of Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California 94306 for the
following purposes:
1. To consider and vote upon a proposal to approve and adopt (i) the
Agreement and Plan of Merger, dated as of April 14, 1996 (the "Merger
Agreement"), among RSA, Security Dynamics Technologies, Inc., a Delaware
corporation ("SDI"), and Card-Key Inc., a wholly-owned subsidiary of SDI
(the "Merger Subsidiary"), and (ii) the merger of the Merger Subsidiary
with and into RSA (the "Merger"), whereupon RSA will become a
wholly-owned subsidiary of SDI, as described in the accompanying Joint
Proxy Statement and Prospectus; and
2. To transact such other business as may properly come before the RSA
Special Meeting or any adjournments or postponements thereof.
At the effective time of the Merger, each outstanding share of capital
stock of RSA (the "RSA Stock") will be converted into that number of shares of
SDI Common Stock equal to a fraction (the "Conversion Ratio"), the numerator of
which is 4,000,000 and the denominator of which is the sum of (i) the number of
shares of RSA Stock issued and outstanding immediately prior to the effective
time of the Merger (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. Based
upon the capitalization of RSA on June 28, 1996, it is currently anticipated
that each share of RSA Stock will convert into 0.83056 shares of SDI Common
Stock. Holders of RSA Stock will receive cash in lieu of any fractional shares
of SDI Common Stock to which such RSA stockholders would have been entitled.
Each outstanding option to purchase RSA Common Stock will be converted into an
option to purchase a number of shares of SDI Common Stock determined by
multiplying the number of shares subject to the 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 option at the time of the Merger divided by
the Conversion Ratio, rounded up to the next highest cent.
The Merger Agreement includes representations, warranties and covenants of
RSA. The Escrow Agreement to be entered into by SDI, RSA and representatives of
the RSA stockholders and option holders provides that, among other things, 12.5%
of the stock received by RSA stockholders in the Merger will be held in escrow
to secure the indemnification obligations under the Merger Agreement in
connection with breaches of such representations, warranties and covenants and
in connection with certain litigation.
The holders of record of RSA Common Stock, RSA Series A Convertible
Preferred Stock, RSA Series B Convertible Preferred Stock, RSA Series C
Convertible Preferred Stock and RSA Series D Convertible Preferred Stock at the
close of business on June 28, 1996 are entitled to notice of and to vote at the
RSA Special Meeting and any adjournments or postponements thereof. The list of
RSA stockholders entitled to vote at the RSA Special Meeting will be available
for examination for ten days prior to the RSA Special Meeting at the offices of
Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California 94306.
<PAGE> 10
In accordance with Section 262 of the Delaware General Corporation Law, a
copy of which is enclosed as Annex D to the accompanying Joint Proxy Statement
and Prospectus, holders of RSA Stock are entitled to appraisal rights with
respect to such stock in connection with the merger.
All stockholders are cordially invited to attend the RSA Special Meeting.
To ensure your representation at the RSA Special Meeting, however, you are urged
to mark, sign and return the enclosed proxy card in the accompanying envelope,
whether or not you expect to attend the RSA Special Meeting. No postage is
required if mailed in the United States. Any RSA stockholder attending the RSA
Special Meeting may vote in person even if that stockholder has returned a
proxy.
By order of the Board of Directors
Joel D. Kellman,
Secretary
July 3, 1996
Palo Alto, California
WHETHER OR NOT YOU PLAN TO ATTEND THE RSA SPECIAL MEETING, PLEASE PROMPTLY
COMPLETE, DATE, SIGN AND RETURN THE ENCLOSED PROXY CARD IN THE ACCOMPANYING
ENVELOPE. NO POSTAGE NEED BE AFFIXED IF THE PROXY CARD IS MAILED IN THE UNITED
STATES. DO NOT SEND ANY STOCK CERTIFICATES WITH THE ENCLOSED PROXY CARD.
<PAGE> 11
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED JUNE 28, 1996
------------------------
SECURITY DYNAMICS TECHNOLOGIES, INC.
ONE ALEWIFE CENTER
CAMBRIDGE, MASSACHUSETTS 02140
RSA DATA SECURITY, INC.
100 MARINE PARKWAY, SUITE 500
REDWOOD CITY, CALIFORNIA 94065
------------------------
JOINT PROXY STATEMENT
SECURITY DYNAMICS TECHNOLOGIES, INC. PROSPECTUS
This Joint Proxy Statement and Prospectus is being furnished to holders of
Common Stock, par value $.01 per share ("SDI Common Stock"), of Security
Dynamics Technologies, Inc., a Delaware corporation ("SDI"), in connection with
the solicitation of proxies by the SDI Board of Directors (the "SDI Board") for
use at the Special Meeting of SDI Stockholders (the "SDI Special Meeting") to be
held on Friday, July 26, 1996, at the offices of Hale and Dorr, 60 State Street,
Boston, Massachusetts, commencing at 10:00 a.m., local time, and at any
adjournments or postponements thereof.
This Joint Proxy Statement and Prospectus is also being furnished to
holders of Common Stock, par value $.01 per share ("RSA Common Stock"), and
Preferred Stock, par value $.10 per share ("RSA Preferred Stock" and, together
with the RSA Common Stock, the "RSA Stock"), of RSA Data Security, Inc., a
Delaware corporation ("RSA"), in connection with the solicitation of proxies by
the RSA Board of Directors (the "RSA Board") for use at the Special Meeting of
RSA Stockholders (the "RSA Special Meeting") to be held on Friday, July 26,
1996, at the offices of Fenwick and West LLP, Two Palo Alto Square, Palo Alto,
California, commencing at 10:00 a.m., local time, and at any adjournments or
postponements thereof.
This Joint Proxy Statement and Prospectus also constitutes a prospectus of
SDI with respect to the issuance of up to an aggregate of 4,000,000 shares of
SDI Common Stock in order to effect the proposed acquisition of RSA by SDI (the
"Merger") pursuant to an Agreement and Plan of Merger, dated as of April 14,
1996 (the "Merger Agreement"), among SDI, Card-Key Inc., a wholly-owned
subsidiary of SDI (the "Merger Subsidiary"), and RSA. All information contained
in this Joint Proxy Statement and Prospectus relating to SDI has been supplied
by SDI, and all information relating to RSA has been supplied by RSA. Based upon
the capitalization of SDI as of June 3, 1996 (the record date for the SDI
Special Meeting), 4,000,000 shares of SDI Common Stock would represent
approximately 21.1% of the outstanding SDI Common Stock immediately following
the Effective Time on a fully diluted basis. On June 27, 1996, the last reported
sale price per share of the SDI Common Stock on the Nasdaq National Market was
$84.3125.
An aggregate of 12.5% of the SDI Common Stock received by RSA stockholders
in the Merger will be held in escrow to secure certain indemnification
obligations under the Merger Agreement.
SEE "RISK FACTORS" BEGINNING ON PAGE 15 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY STOCKHOLDERS OF SDI AND RSA IN CONNECTION WITH THE
MERGER.
In accordance with the Delaware General Corporation Law, holders of RSA
Stock are entitled to appraisal rights in connection with the Merger. See "The
Merger -- Appraisal Rights."
------------------------
THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY STATEMENT AND
PROSPECTUS HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE
INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT AND
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
------------------------
This Joint Proxy Statement and Prospectus and the accompanying forms of
proxy cards are first being mailed to stockholders of SDI and RSA on or about
July 3, 1996.
The date of this Joint Proxy Statement and Prospectus is ,
1996.
<PAGE> 12
TABLE OF CONTENTS
<TABLE>
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<S> <C>
AVAILABLE INFORMATION................................................................. 6
SUMMARY............................................................................... 7
The Companies....................................................................... 7
Date and Place of the Meetings...................................................... 7
Stockholders Entitled to Vote....................................................... 8
Purposes of the Meetings............................................................ 8
Votes Required...................................................................... 8
The Merger.......................................................................... 9
Recommendations..................................................................... 10
Opinion of SDI's Financial Advisor.................................................. 10
Interests of Certain Persons in the Merger.......................................... 10
Effective Time of the Merger........................................................ 11
Management of RSA After the Merger.................................................. 11
Regulatory Approvals................................................................ 11
Conditions to the Merger............................................................ 11
Termination; Amendment and Waiver................................................... 12
Surrender of Certificates........................................................... 12
Appraisal Rights.................................................................... 12
Certain Federal Income Tax Consequences of the Merger............................... 12
Accounting Treatment................................................................ 13
Accounting for Certain Option Grants by SDI......................................... 13
Restrictions on Resale of Securities Issued in the Merger........................... 13
Stockholdings After the Merger...................................................... 14
Comparison of Stockholder Rights.................................................... 14
Resignation of Chairman and Chief Technical Officer of SDI.......................... 14
Risk Factors........................................................................ 14
RISK FACTORS.......................................................................... 15
Risks Relating to the Merger........................................................ 15
Risks Relating to SDI............................................................... 17
Risks Relating to RSA............................................................... 22
SELECTED HISTORICAL AND UNAUDITED PRO FORMA COMBINED FINANCIAL DATA................... 27
COMPARATIVE PER SHARE DATA............................................................ 31
MARKET PRICE INFORMATION AND DIVIDEND POLICIES........................................ 32
STOCKHOLDINGS AFTER THE MERGER........................................................ 33
THE SDI SPECIAL MEETING............................................................... 34
General............................................................................. 34
Purpose of the SDI Special Meeting.................................................. 34
Board of Directors Recommendation................................................... 34
Date, Time and Place................................................................ 34
Record Date; Shares Outstanding..................................................... 34
Voting at the SDI Special Meeting................................................... 34
Solicitation of Proxies............................................................. 35
Effect of Abstentions and "Broker Non-Votes"........................................ 35
Appraisal Rights.................................................................... 35
THE RSA SPECIAL MEETING............................................................... 36
General............................................................................. 36
Purpose of the RSA Special Meeting.................................................. 36
</TABLE>
2
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<TABLE>
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<S> <C>
Board of Directors Recommendation................................................... 36
Date, Time and Place................................................................ 36
Record Date; Shares Outstanding..................................................... 36
Voting at the RSA Special Meeting................................................... 36
Solicitation of Proxies............................................................. 37
Appraisal Rights.................................................................... 37
THE MERGER............................................................................ 38
Background of the Merger............................................................ 38
Reasons for the Merger; Recommendations of the Boards of Directors.................. 40
Opinion of SDI's Financial Advisor.................................................. 43
Interests of Certain Persons in the Merger.......................................... 49
Accounting Treatment................................................................ 49
Certain Federal Income Tax Consequences............................................. 50
Regulatory Approvals................................................................ 52
Federal Securities Law Consequences................................................. 52
Nasdaq National Market Listing...................................................... 53
Appraisal Rights.................................................................... 53
THE MERGER AGREEMENT.................................................................. 55
The Merger.......................................................................... 55
Conversion of Securities............................................................ 56
Stock Option and Benefit Plans...................................................... 56
Representations and Warranties...................................................... 57
Certain Covenants and Agreements.................................................... 57
No Solicitation..................................................................... 58
Related Matters After the Merger.................................................... 58
Conditions.......................................................................... 59
Indemnification..................................................................... 60
Escrow.............................................................................. 60
Termination......................................................................... 61
Amendment and Waiver................................................................ 62
Related Agreements.................................................................. 62
PRO FORMA CONDENSED COMBINING FINANCIAL STATEMENTS.................................... 65
BUSINESS -- SDI....................................................................... 72
Industry Background................................................................. 72
SDI Solution........................................................................ 74
Strategy............................................................................ 75
Products............................................................................ 76
Sales and Marketing................................................................. 78
Customers........................................................................... 79
Customer Service and Support........................................................ 80
Product Development................................................................. 80
Manufacturing, Suppliers and Quality Control........................................ 81
Competition......................................................................... 82
Proprietary Rights.................................................................. 82
Employees........................................................................... 83
Properties.......................................................................... 83
Legal Proceedings................................................................... 83
</TABLE>
3
<PAGE> 14
<TABLE>
<CAPTION>
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<S> <C>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- SDI................................................................... 84
Overview............................................................................ 84
Results of Operations............................................................... 84
Accounting for Certain Stock Options................................................ 89
Liquidity and Capital Resources..................................................... 89
MANAGEMENT -- SDI..................................................................... 91
Directors and Executive Officers.................................................... 91
Board and Committee Meetings........................................................ 92
Director Compensation............................................................... 92
Compensation of Executive Officers.................................................. 93
Compensation Committee Interlocks and Insider Participation......................... 96
Security Ownership of Certain Beneficial Owners and Management...................... 97
BUSINESS -- RSA....................................................................... 99
RSA Strategy........................................................................ 99
RSA Technology...................................................................... 99
Products............................................................................ 100
Sales and Marketing................................................................. 102
Competition......................................................................... 102
Government Regulation and Export Controls........................................... 103
Proprietary Rights.................................................................. 103
Employees........................................................................... 104
Facilities.......................................................................... 104
Legal Proceedings................................................................... 104
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -- RSA................................................................... 107
Overview............................................................................ 107
Results of Operations............................................................... 108
Liquidity and Capital Resources..................................................... 110
MANAGEMENT -- RSA..................................................................... 112
Directors, Executive Officers and Other Key Personnel............................... 112
Compensation of Executive Officers.................................................. 113
Security Ownership of Certain Beneficial Owners and Management...................... 115
CERTAIN TRANSACTIONS -- RSA........................................................... 116
DESCRIPTION OF SDI CAPITAL STOCK...................................................... 117
SDI Common Stock.................................................................... 117
Registration Rights................................................................. 117
Delaware Law and Certain Charter and By-Law Provisions.............................. 117
Transfer Agent and Registrar........................................................ 118
COMPARISON OF STOCKHOLDER RIGHTS...................................................... 119
Authorized Capital Stock............................................................ 119
Preemptive Rights................................................................... 119
Action by Written Consent of Stockholders........................................... 119
Special Meetings of Stockholders.................................................... 119
Voting Requirements and Quorums for Stockholder Meetings............................ 120
Business Conducted at Stockholder Meetings.......................................... 120
Number and Qualification of Directors............................................... 121
Nomination and Election of Directors................................................ 121
Classification of Board............................................................. 121
Removal of Directors................................................................ 122
</TABLE>
4
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<TABLE>
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<S> <C>
Indemnification of Officers and Directors........................................... 122
Amendment of Certificate of Incorporation; Amendment of By-Laws..................... 123
Dividends and Other Distributions................................................... 124
AMENDMENT TO SDI'S CERTIFICATE OF INCORPORATION....................................... 124
LEGAL MATTERS......................................................................... 125
EXPERTS............................................................................... 125
OTHER MATTERS......................................................................... 125
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS............................................ F-1
ANNEX A -- AGREEMENT AND PLAN OF MERGER............................................... A-1
ANNEX B -- OPINION OF ROBERTSON, STEPHENS & COMPANY LLC............................... B-1
ANNEX C -- FORM OF STOCKHOLDER AGREEMENT.............................................. C-1
ANNEX D -- SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW........................ D-1
</TABLE>
5
<PAGE> 16
AVAILABLE INFORMATION
SDI is subject to the informational requirements of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), and, in accordance therewith,
files reports, proxy statements and other information with the Securities and
Exchange Commission (the "Commission"). The reports, proxy statements and other
information filed by SDI with the Commission can be inspected and copied at the
public reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the following Regional Offices of
the Commission: Seven World Trade Center, Suite 1300, New York, New York 10048
and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of such material also can be obtained at prescribed rates from the
Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington,
D.C. 20549. In addition, SDI is required to file electronic versions of these
documents with the Commission through the Commission's Electronic Data
Gathering, Analysis and Retrieval (EDGAR) system. The Commission maintains a
World Wide Web site at http://www.sec.gov that contains reports, proxy and
information statements and other information regarding registrants that file
electronically with the Commission. SDI Common Stock is traded on the Nasdaq
National Market. Reports and other information filed by SDI can also be
inspected at the offices of the National Association of Securities Dealers, Inc.
(the "NASD"), Reports Section, 1735 K Street, N.W., Washington, D.C. 20006.
SDI has filed with the Commission a Registration Statement on Form S-4
(together with any amendments or supplements thereto, the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
with respect to the shares of SDI Common Stock to be issued pursuant to this
Joint Proxy Statement and Prospectus. This Joint Proxy Statement and Prospectus
does not contain all of the information set forth in the Registration Statement,
certain portions of which have been omitted pursuant to the rules and
regulations of the Commission. Such additional information may be obtained from
the Commission's principal office in Washington, D.C. or from the offices of the
NASD in Washington, D.C. Although statements contained in this Joint Proxy
Statement and Prospectus as to the contents of any contract or other document
referred to herein set forth all material elements of such documents, such
statements are not necessarily complete. With respect to each such contract or
other document filed as an exhibit to the Registration Statement, reference is
made to the exhibit for a more complete description of the matters involved, and
each such statement, although setting forth all material elements of such
document, shall be deemed qualified in all respects by such reference.
COPIES OF SDI'S FILINGS WITH THE COMMISSION MAY BE OBTAINED UPON WRITTEN OR
ORAL REQUEST WITHOUT CHARGE FROM SDI, ONE ALEWIFE CENTER, CAMBRIDGE,
MASSACHUSETTS 02140, ATTENTION: INVESTOR RELATIONS, TELEPHONE (617) 547-7820. IN
ORDER TO ASSURE TIMELY DELIVERY OF THE REQUESTED MATERIAL BEFORE THE RSA SPECIAL
MEETING OR THE SDI SPECIAL MEETING, ANY REQUEST SHOULD BE MADE PRIOR TO JULY 19,
1996.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS JOINT PROXY STATEMENT AND
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY SDI, RSA OR ANY OTHER PERSON. THIS
JOINT PROXY STATEMENT AND PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO BUY, ANY SECURITIES, OR THE SOLICITATION OF A PROXY,
IN ANY JURISDICTION TO OR FROM ANY PERSON TO WHOM IT IS NOT LAWFUL TO MAKE ANY
SUCH OFFER OR SOLICITATION OF AN OFFER IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS JOINT PROXY STATEMENT AND PROSPECTUS NOR ANY DISTRIBUTION OF
SECURITIES MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF SDI OR RSA SINCE THE DATE HEREOF
OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
Security Dynamics, SecurID and Ace/Server are registered trademarks, and
the Security Dynamics logo, PASSCODE, PINPAD and SecurADM are trademarks, of
Security Dynamics Technologies, Inc. BCERT, BSAFE, RSA Secure, S/MIME, S/WAN and
TIPEM are trademarks of RSA Data Security, Inc. All other trademarks or
tradenames referred to in this Joint Proxy Statement and Prospectus are the
property of their respective owners.
6
<PAGE> 17
SUMMARY
The following is a summary of certain information contained elsewhere in
this Joint Proxy Statement and Prospectus. Reference is made to, and this
Summary is qualified in its entirety by, the more detailed information contained
in this Joint Proxy Statement and Prospectus and the Annexes hereto. Unless
otherwise defined herein, capitalized terms used in this Summary have the
respective meanings ascribed to them elsewhere in this Joint Proxy Statement and
Prospectus. Stockholders are urged to read this Joint Proxy Statement and
Prospectus and the Annexes hereto in their entirety.
All share and per share data in this Joint Proxy Statement and Prospectus
reflect the two-for-one split of the SDI Common Stock in the form of a stock
dividend, which became effective as of October 30, 1995.
THE COMPANIES
SDI. SDI designs, develops, markets and supports a family of security
products used to protect and manage access to computer-based information
resources. SDI's family of products employs a patent-protected combination of
super smart card technology and software or hardware access control products to
authenticate the identity of users accessing networked or stand-alone computing
resources. SDI's SecurID Cards and other "tokens" and its access control
products, including its ACE/Server software and Access Control Module software
and hardware products, are designed to interface with a wide variety of
operating systems and hardware platforms on client/server, mainframe and
mid-range systems to enable enterprise-wide security coverage. SDI's customers
include Fortune 500 companies and financial institutions as well as academic
institutions, research laboratories, hospitals and federal, state and foreign
government organizations.
SDI was organized as a Massachusetts corporation in 1984 and reincorporated
in Delaware in 1986. SDI's principal office is located at One Alewife Center,
Cambridge, Massachusetts 02140, and its telephone number is (617) 547-7820. As
used in this Joint Proxy Statement and Prospectus, the term "SDI" refers to
Security Dynamics Technologies, Inc. and its wholly-owned subsidiaries, SD
Securities Corp., Security Dynamics (France) S.A.R.L., Security Dynamics
Technologies GmbH and Security Dynamics International Pte. Ltd., unless the
context otherwise requires.
RSA. RSA develops, markets and supports cryptographic and electronic data
security products and provides cryptographic consulting services. RSA licenses
its products to original equipment manufacturers who incorporate RSA's
encryption technology into their products. RSA's developer tool kits and other
products are used to implement cryptographic electronic data security
applications such as encryption and digital signatures for products and services
targeted at secure electronic commerce, secure electronic mail, communications
privacy, client/server data security, smart cards and other key information
technologies. RSA's encryption technology is embedded in current versions of
Microsoft Windows, Netscape Navigator, Intuit's Quicken, Lotus Notes and
numerous other products. RSA technologies are part of existing and proposed
standards for the Internet and World Wide Web, ITU, ISO, ANSI and IEEE as well
as various business, financial and electronic commerce networks.
RSA was incorporated in Delaware in 1982. RSA's principal office is located
at 100 Marine Parkway, Suite 500, Redwood City, California 94065, and its
telephone number is (415) 595-8782. As used in this Joint Proxy Statement and
Prospectus, the term "RSA" refers to RSA Data Security, Inc. and its
wholly-owned subsidiaries, RSA Technology Holdings and RSA Japan K.K., unless
the context otherwise requires.
DATE AND PLACE OF THE MEETINGS
The SDI Special Meeting will be held on Friday, July 26, 1996 at 10:00
a.m., local time, at the offices of Hale and Dorr, 60 State Street, Boston,
Massachusetts 02109.
The RSA Special Meeting will be held on Friday, July 26, 1996 at 10:00
a.m., local time, at the offices of Fenwick & West LLP, Two Palo Alto Square,
Palo Alto, California 94306.
7
<PAGE> 18
STOCKHOLDERS ENTITLED TO VOTE
Holders of record of shares of SDI Common Stock at the close of business on
June 3, 1996 (the "SDI Record Date") are entitled to notice of and to vote at
the SDI Special Meeting and any adjournments or postponements thereof. On the
SDI Record Date, there were outstanding 13,656,760 shares of SDI Common Stock.
Holders of record of shares of RSA Stock at the close of business on June
28, 1996 (the "RSA Record Date") are entitled to notice of and to vote at the
RSA Special Meeting and any adjournments or postponements thereof. On the RSA
Record Date, there were outstanding 2,530,833 shares of RSA Common Stock;
250,000 shares of RSA Series A Convertible Preferred Stock, $.10 par value per
share (the "RSA Series A Preferred Stock"); 499,950 shares of RSA Series B
Convertible Preferred Stock, $.10 par value per share (the "RSA Series B
Preferred Stock"); 360,000 shares of RSA Series C Convertible Preferred Stock,
$.10 par value per share (the "RSA Series C Preferred Stock"); and 380,334
shares of RSA Series D Convertible Preferred Stock, $.10 par value per share
(the "RSA Series D Preferred Stock" and, together with the RSA Series A
Preferred Stock, the RSA Series B Preferred Stock and the RSA Series C Preferred
Stock, the "RSA Preferred Stock"). The RSA Common Stock and the RSA Preferred
Stock are referred to together in this Joint Proxy Statement and Prospectus as
the "RSA Stock."
PURPOSES OF THE MEETINGS
SDI Special Meeting. The purpose of the SDI Special Meeting is to consider
and vote upon: (i) the issuance of up to an aggregate of 4,000,000 shares of SDI
Common Stock in exchange for shares of RSA Stock pursuant to the Merger
Agreement (the "Merger Proposal"), (ii) an amendment to SDI's Third Restated
Certificate of Incorporation (the "SDI Certificate") to increase the number of
shares of SDI Common Stock that SDI is authorized to issue from 30,000,000 to
80,000,000 shares (the "Charter Amendment"), and (iii) such other matters as may
properly be brought before the SDI Special Meeting or any postponements or
adjournments thereof. See "The SDI Special Meeting."
RSA Special Meeting. The purpose of the RSA Special Meeting is to consider
and vote upon: (i) a proposal to approve and adopt the Merger Agreement and the
Merger and (ii) such other matters as may properly be brought before the RSA
Special Meeting or any postponements or adjournments thereof. See "The RSA
Special Meeting."
VOTES REQUIRED
SDI. The approval of the Merger Proposal will require the affirmative vote
of the holders of a majority of the shares of SDI Common Stock present or
represented at the SDI Special Meeting. The approval of the Charter Amendment,
which is not a condition to the consummation of the Merger, will require the
affirmative vote of the holders of a majority of the outstanding shares of SDI
Common Stock. Each share of SDI Common Stock is entitled to one vote on all
matters presented at the SDI Special Meeting. All directors and executive
officers of SDI have indicated their intention to vote all shares over which
they exercise voting control (an aggregate of 781,943 shares of SDI Common Stock
or approximately 5.7% of the outstanding shares on June 3, 1996) FOR the
approval of the Merger Proposal. See "The SDI Special Meeting -- Voting at the
SDI Special Meeting."
Votes may be cast in person at the SDI Special Meeting or by proxy. Any SDI
stockholder who executes and returns a proxy card may revoke such proxy at any
time before it is voted by (i) notifying in writing the Secretary of SDI at One
Alewife Center, Cambridge, Massachusetts 02140, (ii) granting a subsequent
proxy, or (iii) appearing in person and voting at the SDI Special Meeting.
Attendance at the SDI Special Meeting will not in and of itself constitute
revocation of a proxy.
RSA. The approval and adoption of the Merger Agreement and the Merger will
require the affirmative vote of the holders of a majority of the outstanding
shares of RSA Stock, voting together as a single class. Each share of RSA Stock
is entitled to one vote on all matters presented at the RSA Special Meeting. D.
James Bidzos, Addison Fischer and Ronald Rivest, directors and principal
stockholders of RSA, have
8
<PAGE> 19
entered into Stockholder Agreements dated as of April 14, 1996 (the "Stockholder
Agreements") with SDI and RSA pursuant to which such stockholders have agreed to
vote an aggregate of 2,947,767 shares of RSA Stock in favor of the Merger
Agreement and the Merger. As of June 28, 1996, such shares represented
approximately 73% of the shares of RSA Stock entitled to vote at the RSA Special
Meeting. Accordingly, approval of the Merger Agreement and the Merger by the
stockholders of RSA is assured. See "The RSA Special Meeting -- Voting at the
RSA Special Meeting" and "The Merger Agreement -- Related
Agreements -- Stockholder Agreements."
Votes may be cast in person at the RSA Special Meeting or by proxy. Any RSA
stockholder who executes and returns a proxy card may revoke such proxy at any
time before it is voted by (i) notifying in writing the Secretary of RSA at 100
Marine Parkway, Suite 500, Redwood City, California 94065, (ii) granting a
subsequent proxy, or (iii) appearing in person and voting at the RSA Special
Meeting. Attendance at the RSA Special Meeting will not in and of itself
constitute revocation of a proxy.
THE MERGER
Effects of the Merger. Upon consummation of the Merger, pursuant to the
Merger Agreement, (i) the Merger Subsidiary will be merged with and into RSA,
whereby RSA will be the surviving corporation (sometimes referred to as the
"Surviving Corporation") and will become a wholly-owned subsidiary of SDI, and
(ii) each issued and outstanding share of RSA Stock (other than shares of RSA
Stock owned beneficially by SDI or the Merger Subsidiary, shares of RSA Stock
for which demands for appraisal under the Delaware General Corporation Law (the
"DGCL") have been duly and timely delivered and shares of RSA Stock held in
RSA's treasury) will be converted into the right to receive such number of
shares of SDI Common Stock as is equal to the Conversion Ratio (as defined
below). RSA stockholders will receive cash in lieu of any fractional shares of
SDI Common Stock to which such RSA stockholders would otherwise have been
entitled. See "The Merger Agreement -- The Merger."
Conversion Ratio. Pursuant to the Merger Agreement, the Conversion Ratio
is equal to a fraction, the numerator of which is 4,000,000 and the denominator
of which is the sum of (i) the number of shares of RSA Stock issued and
outstanding immediately prior to the Effective Time (as defined below) (other
than shares of RSA Stock held in RSA's treasury) and (ii) the number of shares
of RSA Stock issuable upon exercise of the RSA Options (as defined below),
whether vested, unvested or subject to repurchase by RSA following such
exercise. Based upon the capitalization of SDI and RSA on June 28, 1996, it is
currently anticipated that each share of RSA Stock will convert into 0.83056
shares of SDI Common Stock immediately following consummation of the Merger.
Assumption of Options. Upon consummation of the Merger, each
then-outstanding option to purchase RSA Common Stock issued under RSA's 1987
Stock Option Plan (an "RSA Option") will be assumed by SDI and automatically
converted into an option (an "SDI Option") to purchase the number of shares of
SDI Common Stock (rounded down to the next lowest whole number) equal to the
number of shares of RSA Common Stock issuable upon exercise of such RSA Option
multiplied by the Conversion Ratio. The exercise price per share (rounded up to
the next highest whole cent) under the SDI Option will be equal to the exercise
price of such RSA Option divided by the Conversion Ratio. See "The Merger
Agreement -- Stock Option and Benefit Plans."
Escrow Agreement. Pursuant to an Escrow Agreement to be entered into by
SDI, RSA, State Street Bank and Trust Company (the "Escrow Agent") and certain
representatives of the holders of RSA Stock and RSA Options (the "Escrow
Agreement"), stockholders of record of RSA will be entitled to receive 87.5% of
the shares of SDI Common Stock into which their shares of RSA Stock are
converted pursuant to the Merger, and the remaining 12.5% of the shares of SDI
Common Stock into which the shares of RSA Stock are converted will be deposited
in escrow and will be held and disposed of in accordance with the terms of the
Escrow Agreement. Such shares will be available to reimburse SDI in connection
with breaches of representations, warranties or covenants made by RSA in the
Merger Agreement and in connection with certain identified litigation.
9
<PAGE> 20
The indemnification obligations under the Escrow Agreement with respect to
breaches of representations, warranties or covenants made by RSA in the Merger
Agreement will continue until the earlier to occur of (i) the first anniversary
of the Effective Time (as defined below) or (ii) the issuance of SDI's audited
financial statements for the year ending December 31, 1996 (the "General
Indemnification Release Date"), and the indemnification obligations with respect
to certain identified litigation will continue until such litigation is finally
resolved (the "Litigation Indemnification Release Date"). On each of the General
Indemnification Release Date and the Litigation Indemnification Release Date,
any remaining shares of SDI Common Stock held in escrow for the purpose of
securing RSA's indemnity obligations under its representations, warranties or
covenants or in connection with the identified litigation, respectively, will be
released, except that, in the event there is a pending claim for indemnification
on such release date, the Escrow Agent will retain a sufficient number of shares
to satisfy the claim. As potentially significant future legal costs with respect
to such identified litigation are anticipated to be incurred irrespective of the
outcome of the litigation, it is expected that there will at least be some
recovery by SDI pursuant to these indemnity and escrow provisions, thereby
reducing the number of shares of SDI Common Stock ultimately received by holders
of RSA Stock as a result of the Merger. Approval of the Merger Agreement and the
Merger by the RSA stockholders at the RSA Special Meeting will constitute
approval of the appointment of Messrs. Bidzos, Fischer and Rivest as the
Indemnification Representatives (as defined below) and the terms of the Escrow
Agreement. See "The Merger Agreement -- Escrow."
RECOMMENDATIONS
The SDI Board has unanimously approved the Merger Agreement and the
issuance of shares of SDI Common Stock pursuant to the Merger Agreement and
recommends that holders of SDI Common Stock vote in favor of the Merger
Proposal. The SDI Board has also approved the Charter Amendment and unanimously
recommends that the holders of SDI Common Stock vote in favor of the Charter
Amendment.
The RSA Board has unanimously approved the Merger Agreement and the Merger
and recommends that holders of RSA Stock approve and adopt the Merger Agreement
and the Merger.
Both the SDI Board and the RSA Board considered many factors in reaching
their conclusion to approve the Merger Agreement and to recommend that
stockholders vote for approval of the Merger Proposal, the Merger Agreement and
the Merger, as the case may be. See "The Merger -- Reasons for the Merger;
Recommendations of the Boards of Directors" and "The Merger -- Interests of
Certain Persons in the Merger."
OPINION OF SDI'S FINANCIAL ADVISOR
Robertson, Stephens & Company LLC ("RS & Co.") delivered its oral opinion
to the SDI Board on April 12, 1996, confirmed in writing by a written opinion
dated April 14, 1996, to the effect that the consideration payable in the Merger
is fair, from a financial point of view, to SDI. The full text of the written
opinion of RS & Co., which sets forth the assumptions made, procedures followed,
matters considered and limits of its review, is attached hereto as Annex B and
is incorporated herein by reference. HOLDERS OF SDI COMMON STOCK ARE URGED TO,
AND SHOULD, READ SUCH OPINION IN ITS ENTIRETY. See "The Merger -- Opinion of
SDI's Financial Advisor."
INTERESTS OF CERTAIN PERSONS IN THE MERGER
In considering the recommendation of the RSA Board with respect to the
Merger Agreement and the Merger, stockholders should be aware that certain
directors and executive officers of RSA have certain interests in the
transactions contemplated by the Merger Agreement that are in addition to the
interests of stockholders of RSA generally. The RSA Board was aware of these
interests and considered them, among other matters, in approving the Merger
Agreement and the Merger. D. James Bidzos, President and Chief Executive Officer
and a director of RSA; Addison Fischer, a director of RSA; and Ronald Rivest, a
director and founder of RSA; who as of June 28, 1996 held in the aggregate
approximately 73% of the outstanding shares of RSA Stock, have entered into
Stockholder Agreements with SDI and RSA providing, among other things, for (i)
certain registration rights with respect to the SDI Common Stock issuable to
them in the
10
<PAGE> 21
Merger, and (ii) the appointment of each of the directors of SDI as proxies to
vote all shares of RSA Stock owned by such stockholders in favor of approval of
the Merger and the Merger Agreement. Simultaneously with the execution of the
Merger Agreement, Mr. Bidzos, SDI and RSA entered into an Employment Agreement
pursuant to which Mr. Bidzos will serve as the President of the Surviving
Corporation for a period of two years following the Effective Time, subject to
earlier termination in accordance with the terms of such Agreement. It is
currently anticipated that the SDI Board will elect Mr. Bidzos to the SDI Board
following the Effective Time. Kathryn Conrow, the Chief Financial Officer of
RSA, holds an option to acquire shares of RSA Common Stock subject to repurchase
rights in favor of RSA, which repurchase rights will terminate with respect to
10,000 shares upon the closing of the Merger pursuant to the terms of an
employment agreement between RSA and Ms. Conrow. In addition, a condition to
SDI's consummation of the Merger is the execution by RSA of employment
agreements with C. Victor Chang, Burton Kaliski and Paul Livesay, employees of
RSA. See "The Merger -- Interests of Certain Persons in the Merger" and "The
Merger Agreement -- Related Agreements."
EFFECTIVE TIME OF THE MERGER
The Merger will become effective upon the filing by the Surviving
Corporation of a duly executed Certificate of Merger with the Secretary of State
of the State of Delaware (the "Effective Time"). It is anticipated that the
Merger will become effective as promptly as practicable after the requisite
stockholder approvals have been obtained and all regulatory approvals and other
conditions to the Merger set forth in the Merger Agreement have been satisfied
or waived. It is anticipated that, assuming all conditions are met, the Merger
will occur on or about July 26, 1996. See "The Merger Agreement -- Conditions."
MANAGEMENT OF RSA AFTER THE MERGER
After the Effective Time, it is expected that the current officers of RSA
will continue as members of management of RSA, which will operate as a
wholly-owned subsidiary of SDI.
REGULATORY APPROVALS
The consummation of the Merger is subject to certain regulatory approvals,
including compliance with applicable federal and state securities laws and the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Act"). On May 16, 1996, SDI and certain stockholders of RSA each filed a
Notification and Report Form, together with a request for early termination of
the waiting period, under the HSR Act with the United States Federal Trade
Commission (the "FTC") and the Antitrust Division of the United States
Department of Justice (the "Antitrust Division"). On May 28, 1996, SDI and such
stockholders received notice of early termination of the waiting period. See
"The Merger -- Regulatory Approvals."
CONDITIONS TO THE MERGER
The respective obligations of SDI and RSA to consummate the Merger are
subject to the satisfaction of a number of conditions, including, among others,
(i) approval by the stockholders of SDI and RSA; (ii) approval for listing on
the Nasdaq National Market of the SDI Common Stock to be issued in the Merger;
(iii) expiration or termination of the relevant waiting period under the HSR
Act; (iv) effectiveness of the Registration Statement of which this Joint Proxy
Statement and Prospectus is a part; (v) filing, occurrence or acquisition of all
authorizations, consents, orders or approvals of, or declarations or filings
with, or expirations of waiting periods imposed by, any governmental entity;
(vi) absence of any action by or before any governmental authority that would
(a) prevent consummation of the Merger or (b) limit or restrict SDI's conduct or
operation of its business after the Merger; (vii) receipt by each party of
various legal opinions, accountants' pooling and comfort letters and other
certificates, consents and approvals from the other parties to the Merger and
from third parties; (viii) appraisal rights shall not have been properly
demanded in accordance with the DGCL as to more than 5% of the outstanding
shares of RSA Stock; and (ix) accuracy in all material respects of the
representations and warranties of each party and compliance in all material
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respects with all covenants and conditions by each party. See "The
Merger -- Accounting Treatment," "The Merger -- Certain Federal Income Tax
Consequences" and "The Merger Agreement -- Conditions."
TERMINATION; AMENDMENT AND WAIVER
The Merger Agreement may be terminated and the Merger abandoned at any time
prior to the Effective Time, in certain circumstances, including (i) by mutual
consent of SDI and RSA, (ii) by either party, if the Merger shall not have been
consummated on or before August 31, 1996, (iii) by either party if the other
breaches any material representation, warranty or covenant contained in the
Merger Agreement and fails to cure such breach within 10 days of notice thereof,
or (iv) by either party if the stockholders of SDI fail to approve the Merger
Proposal or the stockholders of RSA fail to approve and adopt the Merger
Agreement and the Merger. See "The Merger Agreement -- Termination."
The Merger Agreement may be amended by the written agreement of SDI and RSA
at any time before or after the approval of SDI's and RSA's stockholders,
provided that subsequent to obtaining such stockholder approvals, any amendment
shall be subject to the restrictions contained in the DGCL. See "The Merger
Agreement -- Amendment and Waiver."
SURRENDER OF CERTIFICATES
If the Merger becomes effective, SDI will mail a letter of transmittal with
instructions to all holders of record of RSA Stock at the Effective Time for use
in surrendering their stock certificates in exchange for certificates
representing shares of SDI Common Stock and a cash payment in lieu of fractional
shares, if any. CERTIFICATES SHOULD NOT BE SURRENDERED UNTIL THE LETTER OF
TRANSMITTAL IS RECEIVED. See "The Merger Agreement -- Conversion of Securities."
APPRAISAL RIGHTS
Under the DGCL, holders of RSA Stock who, prior to the RSA Special Meeting,
properly demand appraisal and vote against or abstain from voting with respect
to the Merger Agreement and the Merger have the right under certain
circumstances, if the Merger is nonetheless consummated, to require the
Surviving Corporation to purchase their shares for "fair value." To exercise
such appraisal rights, such stockholders must, among other things, (i) deliver a
written demand for appraisal before the taking of the vote on the Merger and the
Merger Agreement at the RSA Special Meeting, (ii) not vote for approval of the
Merger and the Merger Agreement, (iii) continually hold shares of RSA Stock
subject to the demand for appraisal from the date of making the demand through
the Effective Time, and (iv) execute a demand for appraisal, by or for the RSA
stockholder of record, in a manner that reasonably informs RSA of the identity
of such stockholder, all in accordance with the requirements of the DGCL. Any
RSA stockholder who has properly demanded appraisal may, at any time within 60
days after the Effective Time, withdraw his or her demand for appraisal and
accept the consideration to be paid under the Merger Agreement without interest.
Stockholders of RSA considering whether to seek appraisal should bear in mind
that the fair value of their RSA Stock determined under the DGCL could be more
than, the same as or less than the value of the consideration to be paid
pursuant to the Merger Agreement. Stockholders of SDI are not entitled to
appraisal rights under the DGCL in connection with the Merger. See "The
Merger -- Appraisal Rights" and Annex D -- Section 262 of the Delaware General
Corporation Law.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES OF THE MERGER
The Merger is intended to qualify as a reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). If
the Merger so qualifies, no gain or loss would be recognized by SDI, RSA or the
Merger Subsidiary, and no gain or loss would be recognized by any stockholders
of RSA, except in respect of cash received for fractional shares or shares of
RSA Stock for which demands for appraisal under the DGCL have been duly and
timely delivered. Consummation of the Merger is conditioned upon there being
delivered prior to the closing to each of SDI and RSA an opinion of their
respective counsel to the effect that the Merger will constitute a
reorganization under Section 368(a) of the
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Code with the above-described tax consequences. See "The Merger -- Certain
Federal Income Tax Consequences."
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for accounting
and financial reporting purposes. It is a condition to the Merger that SDI shall
have received a letter from Ernst & Young LLP, independent auditors for RSA,
stating that RSA meets the accounting requirements for the Merger to be
accounted for as a "pooling of interests" and a letter from Deloitte & Touche
LLP, independent auditors for SDI, to the effect that SDI may treat the Merger
as a "pooling of interests" for accounting purposes. See "The Merger --
Accounting Treatment" and "The Merger Agreement -- Conditions."
ACCOUNTING FOR CERTAIN OPTION GRANTS BY SDI
On October 18, 1995, the SDI Board adopted, subject to stockholder
approval, an amendment to SDI's 1994 Stock Option Plan (the "1994 Plan")
increasing the number of shares available for issuance under the 1994 Plan to
1,410,000. On October 18, 1995, January 24, 1996, April 1, 1996 and April 24,
1996, options to purchase a total of 16,000, 302,800, 100,000 and 19,450 shares,
respectively, were granted under the 1994 Plan by the SDI Board or the
Compensation Committee of the SDI Board. Options may be granted under the 1994
Plan by the Compensation Committee and, subject to certain limitations imposed
under applicable federal securities laws, by the SDI Board.
On April 12, 1996, the SDI Board adopted, subject to stockholder approval,
an amendment to the 1994 Plan further increasing the number of shares available
for issuance under the 1994 Plan to a total of 2,410,000 shares. In accordance
with applicable Internal Revenue Service regulations regarding the grant of
incentive stock options prior to stockholder approval, the effectiveness of each
of the options granted since October 18, 1995 was expressly conditioned upon the
approval of the 1994 Plan amendments prior to October 17, 1996 by the
stockholders of SDI. On May 22, 1996, the stockholders of SDI approved the 1994
Plan amendments.
The per share exercise price for the options granted on October 18, 1995,
January 24, 1996, April 1, 1996 and April 24, 1996 was $28.50, $49.525, $48.60
and $76.40, respectively. In accordance with the terms of the 1994 Plan, these
exercise prices represent the fair market value of the SDI Common Stock on the
respective dates of grant. The fair market value of the SDI Common Stock on May
22, 1996 (the date of approval of the 1994 Plan amendments by the stockholders
of SDI) was $90.75.
For options granted prior to April 1, 1996, because approval of the
stockholders was required and considered perfunctory, SDI measured compensation
expense on the date of grant by the SDI Board or the Compensation Committee of
the SDI Board. As a result of discussions with the staff of the Securities and
Exchange Commission, SDI changed its accounting policy on options requiring
stockholder approval to measure compensation expense on the approval date. This
change is effective for options granted on or after April 1, 1996. This change
resulted in aggregate compensation expense of approximately $4.5 million
relating to the April 1, 1996 and April 24, 1996 option grants, which SDI will
recognize over the remainder of the four-year vesting period of the options from
May 22, 1996. SDI does not plan to grant options in the future that are subject
to approval by the stockholders. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- SDI -- Accounting for Certain
Option Grants" and Note 4 of Notes to SDI's Consolidated Financial Statements.
RESTRICTIONS ON RESALE OF SECURITIES ISSUED IN THE MERGER
Shares of SDI Common Stock issued in the Merger will be freely
transferable, except for shares issued to persons who may be deemed "affiliates"
of SDI or RSA, which will be subject to certain restrictions on resale under
Rule 145 promulgated under the Securities Act, in addition to the restrictions
on transfer agreed to by such affiliates in connection with the pooling of
interests requirements. See "The Merger -- Federal Securities Law Consequences."
SDI has agreed to provide Messrs. Fischer, Bidzos and Rivest certain
registration rights with respect to the shares of SDI Common Stock issuable to
them in the Merger. See "The Merger Agreement -- Related
Agreements -- Stockholder Agreements."
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STOCKHOLDINGS AFTER THE MERGER
Based upon the capitalization of SDI and RSA as of June 3, 1996, if the
proposed Merger is approved and becomes effective, SDI stockholders immediately
prior to the Effective Time will own approximately 80.4% of the outstanding SDI
Common Stock at the Effective Time (approximately 78.9% on a fully-diluted
basis), and RSA stockholders immediately prior to the Effective Time will own
approximately 19.6% of the outstanding SDI Common Stock at the Effective Time
(approximately 21.1% on a fully-diluted basis). See "Stockholdings After the
Merger."
COMPARISON OF STOCKHOLDER RIGHTS
See "Comparison of Stockholder Rights" for a summary of the material
differences between the rights of holders of SDI Common Stock and RSA Stock.
RESIGNATION OF CHAIRMAN AND CHIEF TECHNICAL OFFICER OF SDI
On May 21, 1996, Kenneth P. Weiss resigned as a director and as Chairman of
the Board and Chief Technical Officer of SDI, citing material disagreements with
the operations, policy and practices of SDI and certain directors of SDI. For a
summary of the reasons cited by Mr. Weiss for his resignation and SDI's response
thereto, see "Management -- SDI -- Directors and Executive Officers."
RISK FACTORS
In considering the proposed Merger, stockholders should consider, among
other risks, the risks set forth under the caption "Risk Factors."
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<PAGE> 25
RISK FACTORS
This Joint Proxy Statement and Prospectus contains certain forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Exchange Act. For this purpose, any statements contained herein that
are not statements of historical fact may be deemed to be forward-looking
statements. Without limiting the foregoing, the words "believes," "anticipates,"
"plans," "expects" and similar expressions are intended to identify
forward-looking statements. Actual results could differ materially from those
indicated by such forward-looking statements as a result of certain of the risk
factors set forth below and elsewhere in this Joint Proxy Statement and
Prospectus. IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS JOINT PROXY
STATEMENT AND PROSPECTUS, SDI AND RSA STOCKHOLDERS SHOULD CAREFULLY CONSIDER THE
FOLLOWING RISKS RELATING TO THE MERGER, SDI AND RSA IN EVALUATING THE PROPOSALS
TO BE VOTED ON AT THE SDI SPECIAL MEETING AND THE RSA SPECIAL MEETING AND IN
EVALUATING AN INVESTMENT IN SDI COMMON STOCK.
RISKS RELATING TO THE MERGER
Challenges of Integration. The managements of SDI and RSA have entered
into the Merger Agreement with the expectation that the Merger will result in
beneficial synergies. See "The Merger -- Reasons for the Merger; Recommendations
of the Boards of Directors." Achieving the anticipated benefits of the Merger
will depend in part upon whether the integration of the two companies'
businesses is accomplished in an efficient and effective manner, and there can
be no assurance that this will occur. The successful combination of companies in
a rapidly changing high technology industry may be more difficult to accomplish
than in other industries. The combination of the two companies will require,
among other things, integration of the companies' respective product offerings
and coordination of their sales and marketing and research and development
efforts. There can be no assurance that such integration will be accomplished
smoothly or successfully. The difficulties of such integration may be increased
by the necessity of coordinating geographically separated organizations. The
integration of certain operations following the Merger will require the
dedication of management resources which may temporarily distract attention from
the day-to-day business of the combined company. The inability of management to
successfully integrate the operations of the two companies could have a material
adverse effect on the business and results of operations of SDI.
Possible Adverse Effect on Customer Purchasing Decisions. There can be no
assurance that present and potential customers of SDI and RSA will continue
their current buying patterns without regard to the announced Merger. In
particular, SDI and RSA believe that certain customers' purchasing decisions may
be affected as they evaluate SDI's future product strategy and competitive
positioning. Any adverse decisions made as a result of such evaluations could
have a material adverse effect upon the results of operations of SDI and/or RSA
both in the near term and the long term.
Incurrence of Significant Transaction Charges. SDI expects to incur
charges to operations currently estimated to be approximately $6.1 million in
the three months ended June 30, 1996, the quarter in which the Merger is
expected to be consummated, to reflect direct transaction costs, primarily for
investment banking, legal and accounting fees, and costs associated with
combining the operations of the two companies. This amount is a preliminary
estimate and is therefore subject to change. Additional unanticipated expenses
may be incurred relating to the integration of the businesses of RSA and SDI,
including the integration of certain product lines and distribution and
administrative functions. Although SDI expects that the elimination of
duplicative expenses as well as other efficiencies related to the integration of
the business of RSA may offset additional expenses over time, there can be no
assurance that such net benefit will be achieved in the near term, or at all.
See "Selected Historical and Unaudited Pro Forma Financial Data."
Possible Dilution. As discussed above, SDI anticipates that the results of
operations for the combined company in the quarter in which the Merger occurs
will be adversely affected by significant transaction and other costs associated
with the Merger. In addition, SDI anticipates that it will continue to incur
significant fees and expenses in connection with the Litigation described below
in "Risk Factors -- Risks Relating to RSA -- Litigation." SDI anticipates that
if such fees and expenses continue at current rates, the Merger will have a
dilutive effect on the earnings of SDI. Over the longer term, however, neither
SDI nor RSA anticipates that the Merger will be dilutive for the stockholders of
either company, although there can be no assurance
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that, if the Merger fails to produce the anticipated benefits, it will not have
the dilutive effect of causing the per share earnings of the combined company to
be lower than they would have been for either company if operated independently.
Furthermore, if the anticipated benefits are not achieved, or if the Merger has
other adverse effects that are not currently anticipated, the Merger could
result in a reduction in per share earnings of the combined company (as compared
to the per share earnings that either or both of the companies would have
achieved if the Merger had not occurred). Even if the effects of the Merger
prove to be as anticipated, there can be no assurance that future earnings will
not be adversely affected by any number of economic, market or other factors
that are not related to the Merger.
Escrow of Shares and Indemnity Obligations. Under the Merger Agreement,
12.5% of the shares of SDI Common Stock to be delivered to each stockholder of
RSA at the Effective Time will be placed in escrow with the Escrow Agent and
will be available to satisfy the indemnity obligations of RSA and the RSA
stockholders. Such escrow shares will be deposited, pro rata, from the shares of
SDI Common Stock which would otherwise be delivered to the RSA stockholders
following the Effective Time. In the event such escrow shares are delivered to
SDI from the escrow pursuant to the indemnification provisions in the Merger
Agreement, the number of shares of SDI Common Stock ultimately received by each
RSA stockholder would be less than anticipated at the Effective Time. Holders of
RSA Options will also be obligated to participate in such escrow arrangements.
Except with respect to claims based upon actual (but not constructive)
fraud, the escrow shares will be the sole source available to SDI to satisfy any
indemnification claims it may make, including with respect to certain identified
litigation involving RSA. As potentially significant future legal costs with
respect to such identified litigation are anticipated to be incurred
irrespective of the outcome of the litigation, it is expected that there will at
least be some recovery by SDI pursuant to these indemnity and escrow provisions,
thereby reducing the number of shares of SDI Common Stock ultimately received by
holders of RSA Stock as a result of the Merger.
The value of the escrow shares surrendered to satisfy the indemnity
obligations shall be determined by the average of the last sale price per share
of the SDI Common Stock for the 15 consecutive trading days prior to the
Effective Time. The actual value of the escrow shares may increase or decrease
significantly following such date. See "The Merger Agreement -- Indemnification"
and "-- Escrow."
Fixed Conversion Ratio Does Not Reflect Changes in Stock Prices. The
number of shares of SDI Common Stock into which each share of RSA Stock is to be
converted is fixed. The price of SDI Common Stock at the Effective Time of the
Merger may vary significantly from the price at the date of execution of the
Merger Agreement, the date hereof or the date on which stockholders vote on the
Merger Agreement and the Merger or on the Merger Proposal, as the case may be,
due to, among other factors, market perception of the synergies expected to be
achieved by the Merger, changes in the business, operations or prospects of SDI
or RSA, market assessments of the likelihood that the Merger will be consummated
and the timing thereof, and general market and economic conditions. Because the
Conversion Ratio will not be adjusted to reflect changes in the value of the SDI
Common Stock issuable in the Merger, RSA stockholders may receive shares of SDI
Common Stock with a market value different from the value of such shares at the
time the Merger was negotiated.
Federal Income Tax Consequences and Continuity of Interest. One of the
requirements for the Merger being treated as a "reorganization" that is
generally tax free under the Code is that the "continuity of interest"
requirement be met. Under this requirement, holders of RSA Stock must intend, at
the time of the Merger, to retain a portion of their SDI Common Stock, such that
RSA stockholders, as a group, have a significant equity interest in SDI after
the Merger. If former RSA stockholders should collectively sell in excess of 50%
of the SDI Common Stock to be delivered at the Effective Time within a
relatively short period after the Effective Time, for example one to two years,
the Internal Revenue Service (the "IRS") may contend that this requirement is
not met. In such event, the Merger would be a taxable transaction and former RSA
stockholders would recognize taxable income as of the date of the Merger based
on the difference between the tax basis in their shares of RSA Stock and the
fair market value of SDI Common Stock received by them on that date (even if
such fair market value declines after the Merger). See "The Merger -- Certain
Federal Income Tax Consequences."
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Change in Nature of Investment. Stockholders of RSA currently hold a
capital interest in RSA, a privately-held company engaged in a single business.
The value of a capital interest in RSA is primarily related to the success or
decline of that single business. If the Merger is completed, at the Effective
Time the stockholders of RSA will have their shares of RSA Stock automatically
converted into shares of SDI Common Stock. Following the Merger, SDI would be
engaged in multiple lines of business and the relative success or decline of any
of those lines of business could impact the operating results of SDI and the
value of the SDI Common Stock received in the Merger. In addition, holders of
RSA Preferred Stock currently have liquidation and other preferences over RSA
Common Stock. Such preferences will terminate as a result of the conversion of
shares of RSA Preferred Stock into shares of SDI Common Stock.
Lock-up of Affiliates' Shares. In order to qualify the Merger as a pooling
of interests for accounting and financial reporting purposes, affiliates of RSA
and SDI may not sell any shares of stock of either RSA or SDI during the period
beginning 30 days preceding the Effective Time and ending on the date that SDI
publishes financial statements which reflect 30 days of combined operations of
SDI and RSA. Assuming that the Merger is completed and the Effective Time occurs
on or about July 26, 1996, it is not expected that such combined financial
results would be published until the latter part of October 1996. The affiliates
of RSA and SDI will, therefore, bear the risk of a decline in the price of SDI
Common Stock until such publication without being able to sell or otherwise
reduce their economic interest in their SDI Common Stock. As a condition to
consummation of the Merger, affiliates of RSA must enter into agreements setting
forth the restrictions described above. See "The Merger -- Accounting
Treatment."
RISKS RELATING TO SDI
Dependence on Principal Product. SDI currently derives substantially all
of its revenue from sales of its computer and network security products and
related services, all of which are currently used with SDI's SecurID token
technology. As a result, any factor adversely affecting sales of these products
and services would have a material adverse effect on SDI. See
"Business -- SDI -- Products."
Risks Associated with Computer and Network Security Market. The market for
SDI's security products is only recently emerging. The rapid development of
enterprise-wide and remote computing as well as increased use of the Internet
has enhanced the ability of users to access proprietary information and
resources and has, in recent years, increased demand for computer and network
security products. Declines in demand for SDI's products, whether as a result of
competition, technological change, the public's perception of the need for
security products, developments in the hardware and software environments in
which these products operate, general economic conditions or other factors,
could have a material adverse effect on SDI's financial condition or results of
operations. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- SDI."
A well-publicized actual or perceived breach of network or computer
security could trigger a heightened awareness of computer abuse, resulting in an
increased demand for security products such as those offered by SDI. Similarly,
an actual or perceived breach of network or computer security at one of SDI's
customers, regardless of whether such breach is attributable to SDI's products,
could adversely affect the market's perception of SDI and SDI's financial
condition or results of operations. In addition, although the effectiveness of
SDI's products is not dependent upon the secrecy of its proprietary algorithm,
the public disclosure of this algorithm could result in a perception of breached
security which could have an adverse effect on SDI's financial condition or
results of operations.
Technological Change and New Products. The market for SDI's security
products is characterized by rapidly changing technology, evolving industry
standards and new product introductions. SDI's future success will depend in
part upon its ability to enhance its existing products and to develop and
introduce new products and technologies to meet changing customer requirements.
SDI is currently devoting significant resources toward the development of
enhancements to its existing ACE/Server and other security products. There can
be no assurance that SDI will successfully complete the development of these
products in a timely fashion or that SDI's current or future products will
satisfy the needs of the computer and network security market. There can also be
no assurance that security-related products or technologies developed by others
will not
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adversely affect SDI's competitive position or render its products or
technologies noncompetitive or obsolete. See "Business -- SDI -- Product
Development" and "-- Competition." Although SDI has to date experienced
increasing annual unit sales without significant erosion of gross margins, as
product families mature gross margins may decline as a result of several
factors, including volume discounts and price competition.
Software products may contain undetected errors or bugs when first
introduced or as new versions are released, and software products or media may
contain undetected viruses. Errors or bugs may also be present in software
licensed by SDI from third parties and incorporated into SDI's products. Errors,
bugs or viruses may result in loss of or delay in market acceptance, recalls of
hardware products incorporating the software or loss of data. Delays or
difficulties associated with new product introductions or product enhancements
could have a material adverse effect on SDI's financial condition or results of
operations.
Management of Growth. SDI is currently experiencing a period of rapid
growth that could place a significant strain on its management and other
resources. A component of SDI's business strategy is to seek acquisitions of
businesses, products and technologies that are complementary to those of SDI.
There can be no assurance that SDI will be able to operate acquired businesses
profitably or otherwise implement its growth strategy successfully. SDI's
ability to manage its growth and integrate any newly-acquired businesses will
require it to continue to improve its operational, financial and management
information systems, and to motivate and effectively manage its employees. If
SDI's management is unable to manage growth effectively, the quality of SDI's
products, its ability to identify, hire and retain key personnel and its results
of operations could be materially and adversely affected.
Potential Fluctuations in Quarterly Performance; Seasonality. SDI's
quarterly operating results may vary significantly depending on a number of
factors, including the timing of the introduction or enhancement of products by
SDI or its competitors, the size, timing and shipment of individual orders,
market acceptance of new products, seasonality of revenue, customer order
deferrals in anticipation of new products, changes in SDI's operating expenses,
personnel changes, foreign currency exchange rates, mix of products sold,
changes in product pricing, development of SDI's direct and indirect
distribution channels and general economic conditions. There can be no assurance
that SDI will be able to grow or sustain its profitability on a quarterly basis.
Because SDI's operating expenses are based on anticipated revenue levels and a
high percentage of SDI's expenses are fixed, a small variation in the timing of
recognition of revenue can cause significant variations in operating results
from quarter to quarter. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- SDI."
SDI has experienced, and may experience in the future, significant
seasonality in its business, and SDI's financial condition or results of
operations may be affected by such trends in the future. Such trends have
included higher revenue in the last quarter of the year and lower revenue in the
next succeeding quarter. SDI believes that revenue has tended to be higher in
the last quarter due to SDI's quota-based compensation plans, year-end budgetary
pressures on SDI's customers and the tendency of certain of SDI's customers to
implement changes in computer or network security prior to the end of the
calendar year. In addition, revenue has tended to be lower in the summer months,
particularly in Europe, when businesses tend to defer purchase decisions.
Dependence on Proprietary Technology. SDI's success and ability to compete
is dependent in part upon its proprietary technology. SDI relies on a
combination of patent, trade secret, copyright and trademark law, nondisclosure
agreements and technical measures to protect its proprietary technology. SDI
enters into confidentiality and/or license agreements with all of its employees
and distributors, as well as with its customers and potential customers seeking
proprietary information, and limits access to and distribution of its software,
documentation and other proprietary information. There can be no assurance that
the steps taken by SDI in this regard will be adequate to deter misappropriation
or independent third-party development of its technology.
SDI's 13 issued United States patents expire at various dates ranging from
2005 to 2014, and, upon expiration of such patents, competitors may develop and
sell products based on technologies similar or equivalent to those currently
covered by SDI's patents. There can be no assurance that patents will be issued
with respect to pending or future patent applications or that SDI's patents will
be upheld as valid or will
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prevent the development of competitive products. Certain of SDI's patents are
currently the subject of on-going litigation. See "Business -- SDI -- Legal
Proceedings." SDI has applied for patent protection in only certain foreign
jurisdictions. In addition, the laws of many foreign jurisdictions, as well as
the scope of certain foreign counterparts to SDI's patents, do not protect SDI's
proprietary rights to the same extent as do the laws of the United States. SDI
has from time to time received correspondence alleging that its products may
infringe patents held by third parties. To date, none of these allegations have
been pursued, and SDI believes that its products and other proprietary rights do
not infringe the proprietary rights of third parties. There can be no assurance,
however, that third parties will not assert infringement claims against SDI in
the future, or that any such claims will not require SDI to enter into license
arrangements or result in protracted and costly litigation, regardless of the
merits of such claims.
Dependence on Suppliers and Third-Party Manufacturers. The microprocessor
chips contained in SDI's SecurID tokens are currently purchased from Sanyo
Electric Co., Ltd. ("Sanyo"), a Japanese computer chip manufacturer. Sanyo has
introduced commercially an alternative chip and is working with SDI on the
development and testing of this chip as a replacement chip for SDI's SecurID
tokens. Sanyo has agreed to give SDI at least 12 months' notice prior to any
cessation of production of the existing chip. There can be no assurance that
Sanyo will be able to furnish SDI with a sufficient number of chips to meet
customer demand, that SDI will be able to purchase chips from Sanyo at
commercially acceptable prices or, if Sanyo discontinues the manufacture of
certain chips, that SDI will be able to procure chips from another supplier on a
timely basis and at commercially acceptable prices. SDI believes that it would
take approximately six months to identify and commence production of a suitable
replacement chip from a new supplier. SDI attempts to maintain a three-month
supply of SecurID tokens in inventory.
The relational database management software contained in version 2.0 of
SDI's ACE/Server software ("ACE/Server v2.0") is licensed by SDI from Progress
Software Corporation ("Progress Software"). SDI relies on Progress Software for
ongoing maintenance and support for such licensed software. In addition, the
lithium batteries contained in SDI's SecurID tokens are purchased from Gould
Electronics ("Gould"), an American battery manufacturer. Gould has agreed to
give SDI at least 24 months' notice prior to any cessation of production.
SDI contracts for the manufacture of its Access Control Module ("ACM")
hardware products with one assembly operation located in New England and for the
manufacture of a substantial portion of its SecurID tokens with RJP
International, Ltd. ("RJP"), a sub-assembly subcontractor located in China. SDI
recently qualified a second source supplier in the United States for the
manufacture of one model of its SecurID token. Although SDI is currently working
with this supplier to develop a cost structure that is comparable with that of
RJP, SDI anticipates that RJP may continue to provide a substantial portion of
SDI's SecurID tokens.
SDI purchases all of these sole or limited source components pursuant to
purchase orders placed from time to time and, except as described above, has no
guaranteed supply arrangements. The inability to obtain sufficient manufactured
goods or sole or limited source components as required, or to obtain or develop
alternative sources at competitive prices and comparable quality if and as
required in the future, could result in delays in product shipments or increase
SDI's material costs, either of which would adversely affect SDI's financial
condition or results of operations. See "Business -- SDI -- Manufacturing,
Suppliers and Quality Control."
Risks Associated with Doing Business in China. SDI contracts for the
manufacture of a substantial portion of its SecurID tokens from RJP, a
subcontractor located in a "special economic zone" in Guangdong Province, China.
The importation of these products from China exposes SDI to the possibility of
product supply disruption and increased costs in the event of changes in the
policies of the Chinese government, political unrest or unstable economic
conditions in China or developments in the United States that are adverse to
trade, including enactment of protectionist legislation. In addition, the
preferential tax treatment granted to enterprises located in "special economic
zones" could also be withdrawn which could adversely affect the costs of
manufacturing in China. In the United States, the so-called "Special 301" law
(19 U.S.C. sec. 2242) provides that the United States Trade Representative
("USTR") is to designate certain priority foreign countries for special scrutiny
or investigation in connection with the failure to adequately
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protect intellectual property rights. On different occasions, China has been so
designated under Special 301 provisions. To date, this designation has not had
an adverse impact on products imported by SDI. However, SDI is unable to predict
whether current actions being taken by the USTR with regard to China or any
future actions taken under Special 301 will result in the imposition of
sanctions by the United States against China, or whether any such sanctions will
result in increases in cost or reductions in the supply of SecurID tokens. The
United States also provides China with most-favored-nation ("MFN") status,
allowing China to receive the same tariff treatment that the United States
extends to its "most favored" trading partners. Notwithstanding this current
policy, the President or Congress could seek to revoke MFN status for China, or
condition its renewal on factors such as China's human rights record. Any
revocation of China's MFN status could result in higher tariffs on SDI's SecurID
tokens manufactured in China, which higher tariffs could have a material adverse
effect on SDI's financial condition or results of operations.
Need to Establish and Maintain Collaborative Marketing Relationships. A
significant business strategy of SDI is to continue to establish and maintain
strategic marketing alliances or other similar collaborative relationships.
There can be no assurance that SDI's existing collaborative relationships will
be commercially successful, that SDI will be able to negotiate additional
collaborative relationships, that such additional collaborations will be
available to SDI on acceptable terms or that any such relationships, if
established, will be commercially successful. In addition, there can be no
assurance that parties with whom SDI has established collaborative relationships
will not pursue alternative technologies or develop alternative products in
addition to or in lieu of SDI's products either on their own or in collaboration
with others, including SDI's competitors. SDI's financial condition or results
of operations may also be affected by the success of its collaborators in
marketing any successfully developed products. See
"Business -- SDI -- Strategy," "-- Products" and "-- Sales and Marketing."
Competition. The market for computer and network security products is
highly competitive and subject to rapid change. SDI believes that the principal
competitive factors affecting the market for computer and network security
products include technical features, ease of use, quality/reliability, level of
security, customer service and support, distribution channels and price. SDI's
competitors include organizations that provide computer and network security
products based upon approaches similar to and different from those employed by
SDI. There can be no assurance that the market for computer and network security
products will not ultimately be dominated by approaches other than the approach
marketed by SDI. See "Business -- SDI -- Industry Background -- Components of
Computer and Network Security" and "-- Competition."
Many of SDI's potential competitors have significantly greater financial,
marketing, technical and other competitive resources than SDI. As a result, they
may be able to adapt more quickly to new or emerging technologies and changes in
customer requirements, or to devote greater resources to the promotion and sale
of their products than can SDI. Competition could increase if new companies
enter the market or if existing competitors expand their product lines. Any
reduction in gross margins resulting from competitive factors could have a
material adverse effect on SDI's financial condition or results of operations.
Although SDI believes it has certain technological and other advantages over its
competitors, maintaining such advantages will require continued investment by
SDI in research and development and sales and marketing. There can be no
assurance that SDI will have sufficient resources to make such investments or
that SDI will be able to make the technological advances necessary to maintain
such competitive advantages. In addition, current and potential competitors have
established, or may in the future establish, collaborative relationships among
themselves or with third parties, including third parties with whom SDI has
strategic relationships, to increase the ability of their products to address
the security needs of SDI's prospective customers. Accordingly, it is possible
that new competitors or alliances may emerge and rapidly acquire significant
market share. If this were to occur, the financial condition and results of
operations of SDI would be materially adversely affected. See
"Business -- SDI -- Competition."
Dependence on Key Personnel. SDI's success depends to a significant extent
upon a number of key employees, including members of senior management. The loss
of the services of one or more of these key employees could have a material
adverse effect on SDI. SDI believes that its future success will depend in part
on its ability to attract, motivate and retain highly-skilled technical,
managerial and marketing personnel.
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<PAGE> 31
Competition for such personnel is intense and there can be no assurance that SDI
will be successful in attracting, motivating and retaining key personnel. See
"Management -- SDI."
Risks Associated with International Sales. Sales outside North America
accounted for approximately 8.9%, 12.4%, 16.3% and 18.0% of SDI's revenue in the
years ended December 31, 1993, 1994 and 1995 and the three months ended March
31, 1996, respectively. While SDI believes its current products are designed to
meet the regulatory standards of foreign markets, any inability to obtain
foreign regulatory approvals on a timely basis could have an adverse effect on
SDI's financial condition or results of operations. In addition, SDI's
international business may be subject to a variety of risks, including delays in
establishing international distribution channels, difficulties in collecting
international accounts receivable and increased costs associated with
maintaining international marketing efforts. SDI's direct sales in Canada, the
United Kingdom, France, Norway and Germany are denominated in the local
currency, and SDI is subject to the risks associated with fluctuations in
currency exchange rates. A decrease in the value of any of these foreign
currencies relative to the U.S. dollar could affect the profitability in U.S.
dollars of products sold in these markets. In addition, SDI is subject to the
usual risks of doing business abroad, including increases in duty rates, the
introduction of non-tariff barriers and difficulties in enforcement of
intellectual property rights.
Although SDI's products are subject to export controls under United States
law, SDI believes it has obtained all necessary export approvals. There can be
no assurance, however, that the list of products and countries for which export
approval is required, and the regulatory policies with respect thereto, will not
be revised from time to time. The inability of SDI to obtain required approvals
under these regulations could adversely affect the ability of SDI to make
international sales.
Possible Volatility of Share Price. The market price of the SDI Common
Stock, which is traded on the Nasdaq National Market, may be subject to
significant fluctuations in response to operating results, announcements of
technological innovations or new products by SDI or its competitors, patent or
proprietary rights developments and market conditions for computer industry
stocks in general. In addition, the stock market in recent years has experienced
extreme price and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of individual companies. These
market fluctuations, as well as general economic conditions, may adversely
affect the market price of the SDI Common Stock. The trading prices of many high
technology companies' stocks, including the Common Stock of SDI, are at or near
their historical highs and reflect price/earnings ratios substantially above
historical norms. There can be no assurance that the trading price of the SDI
Common Stock will remain at or near its current level. See "Market Price
Information and Dividend Policies."
Dividends. No dividends have been paid on the SDI Common Stock to date and
SDI does not anticipate paying dividends in the foreseeable future. See "Market
Price Information and Dividend Policies."
Antitakeover Provisions. The SDI Certificate requires that any action
required or permitted to be taken by stockholders of SDI must be effected at a
duly called annual or special meeting of stockholders and may not be effected by
any consent in writing, and requires reasonable advance notice by a stockholder
of a proposal or director nomination which such stockholder desires to present
at any annual or special meeting of stockholders. Special meetings of
stockholders may be called only by the Chairman of the Board, the Chief
Executive Officer or, if none, the President of SDI or by the Board of
Directors. The SDI Certificate provides for a classified Board of Directors, and
members of the Board of Directors may be removed only for cause upon the
affirmative vote of holders of at least two-thirds of the shares of capital
stock of SDI entitled to vote. These provisions, and other provisions of the SDI
Certificate, may have the effect of deterring hostile takeovers or delaying or
preventing changes in control or management of SDI, including transactions in
which stockholders might otherwise receive a premium for their shares over then
current market prices. In addition, these provisions may limit the ability of
stockholders to approve transactions that they may deem to be in their best
interests. See "Description of SDI Capital Stock -- Delaware Law and Certain
Charter and By-Law Provisions."
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RISKS RELATING TO RSA
Risks Associated with Rapidly Evolving Markets; New Products and Risks of
Technological Changes. The market for RSA's cryptographic and electronic data
security products is only recently emerging. The rapid development of
enterprise-wide and remote computing and internetworking as well as increased
use of the Internet have enhanced the ability of users to access proprietary
information and resources and have, in recent years, increased demand for
cryptographic and electronic data security products. Declines in demand for
RSA's products, whether as a result of competition, technological change, the
perceived need for and effectiveness of security products, developments in the
hardware and software environments in which these products operate, general
economic conditions or other factors, could have a material adverse effect on
RSA's financial condition or results of operations. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- RSA." An actual
or perceived breach of network or computer security at one of RSA's customers,
regardless of whether such breach is attributable to RSA's products, could
adversely affect the market's perception of and demand for RSA's products and
technology.
In addition, a portion of the sales of RSA's products will depend upon a
robust industry and infrastructure for providing access to public switched
networks, such as the Internet. There can be no assurance that the
infrastructure or complementary products necessary to make these networks into
viable commercial marketplaces will be developed, or, if developed, that these
networks will become viable marketplaces for electronic commerce.
The market for cryptographic and electronic data security products,
especially in the Internet and intranet markets, is characterized by rapidly
changing technology, emerging and evolving industry standards, new product
introductions, relatively short product life cycles and rapid and constant
changes in customer requirements and preferences. To the extent that a specific
method other than the method employed by RSA is adopted as the standard for
implementing security in any segment of the cryptographic and electronic data
security market, sales of RSA's existing and planned products in that market
segment may be adversely impacted, which could have a material adverse effect on
RSA's financial condition and results of operations. There can be no assurance
that competing products or technologies developed by others or the emergence of
new industry standards will not adversely affect RSA's competitive position or
render its products or technologies noncompetitive or obsolete. Thus, RSA's
future success will depend in part upon its customers' and end users' demand for
electronic security products and upon RSA's ability, on a timely and
cost-effective basis, to enhance its existing products and to introduce new
products with features that meet changing customer requirements and with
competitive prices. There can be no assurance that RSA will be successful in
doing so. Delays in product enhancement and development or the failure of RSA's
new products or enhancements to gain market acceptance would have a material
adverse effect on RSA's business and results of operations. Despite testing, new
products may be affected by quality, reliability or security failure problems,
including software errors, bugs or viruses, which could result in returns,
delays in collecting accounts receivable, unexpected service or warranty
expenses, reduced orders and a decline in RSA's competitive position.
Any significant advance in techniques for attacking crytographic systems
could render some or all of RSA's existing products obsolete or unmarketable.
RSA's cryptographic systems depend in part on the application of certain
mathematical principles. The security afforded by RSA's encryption products is
predicated on the assumption that the "factoring" of the composite of large
prime numbers is difficult. Should an "easy factoring method" be developed, then
the security afforded by RSA's encryption products would be reduced or
eliminated. There can be no assurance that such a development will not occur.
Moreover, even if no breakthroughs in factoring are discovered, factoring
problems can theoretically be solved by a computer system significantly faster
and more powerful than those presently available. If such improved techniques
for attacking cryptographic systems are ever developed, it would have a material
adverse impact on the business and results of operations of RSA. See
"Business -- RSA -- RSA Technology" and "-- Products."
Dependence on Principal Products; Expiration of RSA/MIT Patent. RSA has
derived a substantial majority of its revenue to date from sales of its BSAFE
and S/MIME (formerly marketed as TIPEM) products, which collectively accounted
for 92% of RSA's total revenues in 1995. Existing and new versions of such
products are expected to continue to represent a high percentage of RSA's
revenues for the foreseeable future. As a result, any factor adversely affecting
sales of these products, or any factor impeding or delaying RSA's ability to
diversify its product offering to lessen its dependency on the BSAFE and S/MIME
products,
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would have a material adverse effect on the business and financial results of
RSA. A patent developed at the Massachusetts Institute of Technology ("MIT")
(U.S. Patent No. 4,405,892) and licensed to RSA (the "RSA/MIT Patent"), claims
of which cover significant elements of these products, will expire on September
20, 2000, which may enable competitors to thereafter market competing products
which previously would have infringed the RSA/MIT Patent. In addition, one of
the "Stanford Patents" described below, the practice of which can be used to
substitute for methods covered by the RSA/MIT Patent, will expire in 1997, and
its applications may become more widespread as a result. In each case, the
growth of such competitive products may adversely impact sales of RSA's
products. See "Risk Factors -- Risks Relating to RSA -- Litigation,"
"Business -- RSA -- Competition" and "-- Legal Proceedings."
Potential Fluctuations in Quarterly Performance; Losses and Accumulated
Deficit. RSA's quarterly operating results may vary significantly depending on
a number of factors, including the size, timing and execution of individual
contracts, variations in expenses associated with pending litigation involving
RSA, the timing of the introduction or enhancement of products by RSA or its
competitors, market acceptance of new products, changes in RSA's operating
expenses, personnel changes, mix of products sold, changes in product pricing,
development of RSA's direct and indirect distribution channels and general
economic conditions. There can be no assurance that RSA will be able to achieve
and sustain profitability on a quarterly basis. Because RSA's operating expenses
are based on anticipated revenue levels, and a high percentage of RSA's expenses
are fixed, a small variation in the timing of recognition of revenue can cause
significant variations in operating results from quarter to quarter. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- RSA."
RSA reported net losses of $.15, $.80 and $.05 per share for the quarter
ended March 31, 1996 and the years ended December 31, 1994 and 1993,
respectively, reported net earnings of $.23 per share for 1995, and had an
accumulated deficit of $951,000 as of March 31, 1996. See "Selected Historical
and Pro Forma Financial Data -- Selected Historical Consolidated Financial Data
of RSA." As indicated above, the combined company will incur substantial costs
as a result of the Merger and will incur ongoing expenses associated with
pending litigation involving RSA, and there can be no assurance as to the
combined company's results of operations following the Merger. See "Risk
Factors -- Risks Relating to the Merger -- Incurrence of Significant Transaction
Charges" and "-- Risks Relating to RSA-- Litigation."
Litigation. RSA has been and continues to be involved in arbitration and
litigation proceedings (collectively, the "Litigation") relating, among other
things, to (i) the validity of the RSA/MIT Patent, which covers certain elements
of RSA's cryptographic technology; (ii) the rights of Cylink Corporation
("Cylink") and its subsidiary Caro-Kann Corporation ("CKC"), competitors of RSA,
to use and sublicense the RSA/MIT Patent; (iii) the validity and scope of U.S.
Patent Nos. 4,200,770, 4,218,582 and 4,424,414 (the "Stanford Patents"), which
cover Cylink's fundamental encryption technology and have been licensed to
Cylink by The Board of Trustees of the Leland Stanford Junior University
("Stanford"); and (iv) the liability, if any, of RSA for infringing or
contributing to the infringement of the Stanford Patents. The Litigation is
discussed in greater detail below under the caption entitled
"Business -- RSA -- Legal Proceedings."
Potential unfavorable outcomes of the Litigation could include a
declaration that the RSA/MIT Patent is invalid, the issuance of an injunction
against RSA's business activities based on a finding that the development or
distribution of RSA products infringe one or more of the Stanford Patents or a
finding that RSA is liable for monetary or other damages. If RSA is unsuccessful
in defending against the claims asserted in the Litigation, it may be enjoined
from distributing certain of its products, at least until the expiration of one
of the Stanford Patents in 1997, without a license from Cylink/CKC. No assurance
can be given that RSA will be able to obtain such a license, if required, on
commercially reasonable terms, if at all. Any derogation of RSA's rights in the
RSA/MIT Patent or a finding that such patent is invalid or unenforceable would
enable other companies to use technology claimed in such patent to enter, or
strengthen their respective positions in, the markets in which RSA does
business, resulting in increased competition for RSA. In addition, no assurance
can be given as to whether RSA will be subject to damages or, if so, the amount
of damages which RSA may be required to pay. Although Cylink has not claimed any
specific damages in the Litigation, in a letter to SDI following the
announcement of the proposed Merger, Cylink's general counsel asserted that
Cylink's compensatory damages, conservatively estimated, would exceed
$75,000,000 but provided no basis for such estimate. The outcome of litigation
is inherently uncertain and any such unfavorable outcome of the Litigation would
have a material adverse effect on the financial condition and results of
operations of RSA or the
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combined company. RSA has expended substantial amounts on legal fees and costs
associated with the Litigation in the past and anticipates spending substantial
amounts in the future, pending the outcome of the Litigation. See
"Business -- RSA -- Legal Proceedings."
Third Party Claims. Customers rely on RSA's information security products
for critical electronic security applications. Failure of RSA's products to work
as designed could result in tort or warranty claims. RSA attempts to reduce the
risk of losses resulting from such claims through warranty disclaimers and
liability limitation clauses in its sales agreements, however, there can be no
assurance that such measures will be effective in limiting RSA's liability. Any
liability for damages resulting from any such failure could be substantial and
could have a material adverse effect on RSA's business and results of
operations.
Management of Growth. RSA has recently experienced substantial growth in
demand for its products, which may require significant increases in the number
of its employees and the scope of its operations, resulting in additional
responsibilities for its management. To manage growth effectively, RSA will need
to continue to improve its operational, financial and management information
systems and to hire, train, motivate and manage a growing number of employees.
There can be no assurance that RSA will be able to effectively achieve or manage
any future growth, and its failure to do so could delay product development
cycles or otherwise have a material adverse effect on RSA's financial condition
and results of operations.
Competition. The market for cryptographic and electronic data security
products is competitive and expected to become increasingly more competitive as
remote computing, enterprise networks and internetworking become more prevalent
and as the Internet becomes a viable medium for electronic commerce. RSA
believes that the principal competitive factors affecting the market for
cryptographic software products include technical features, ease of use,
quality/reliability, level of security, customer service and support,
distribution channels and price. RSA's competitors include organizations that
provide cryptographic software products based upon approaches similar to and
different from those employed by RSA. There can be no assurance that the market
for computer and network security products will not ultimately be dominated by
approaches other than the approach marketed by RSA.
There have been recent attempts by organizations with limited rights to
RSA's technology to enter into direct competition with RSA. These include
Cylink, Northern Telecom and Terisa. Other companies are trying to compete with
alternate technologies that perform substantially the same operations as RSA's
products.
Many of RSA's current or potential competitors, including Certicom, Cylink,
Microsoft and Northern Telecom, may have significantly greater financial,
marketing, technical or other competitive resources than RSA. Such companies may
be able to establish alternative security standards or adapt more quickly to new
or emerging technologies and changes in customer requirements or to devote
greater resources to the promotion and sale of their products than can RSA.
Competition could increase if new companies enter the market, or if existing
competitors expand their product lines. Although RSA believes it has certain
technological and other advantages over its competitors, maintaining such
advantages will require continued investment by RSA in research and development
and sales and marketing. There can be no assurance that RSA will have sufficient
resources to make such investments or that RSA will be able to make the
technological advances necessary to maintain such competitive advantages. In
addition, current and potential competitors have established, or may in the
future establish, collaborative relationships among themselves or with third
parties, including third parties with whom RSA has strategic relationships, to
increase the ability of their products to address the security needs of RSA's
prospective customers. Accordingly, it is possible that new competitors or
alliances may emerge and rapidly acquire significant market share. If this were
to occur, the financial condition and results of operations of RSA would be
materially adversely affected. See "Business -- RSA -- Competition."
Government Regulation and Export Controls. Exports of RSA's encryption
products, or third-party products bundled with the encryption technology of RSA,
are expected to continue to be restricted by the United States government. All
cryptographic products need export licenses from the U.S. State Department,
acting under the authority of the International Traffic in Arms Regulation
("ITAR"), which defines cryptographic devices, including software, as munitions.
The United States government generally limits the export of software with
encryption capabilities to mass marketed software with limited key sizes, which
significantly constrains the security effectiveness of RSA products available
for export. As a result, RSA may
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be at a disadvantage in competing for international sales compared to companies
located outside the United States that are not subject to such restrictions.
Dependence on Key Personnel. RSA's success depends to a significant degree
upon the continued contributions of key personnel and consultants, including
members of senior management, many of whom would be difficult to replace and are
not subject to employment or noncompetition agreements. If any of these
individuals were to leave or cease to provide services to RSA, its business
could be adversely affected. RSA's future success will also depend, in large
part, upon its ability to attract and retain highly skilled engineering,
managerial, sales and marketing personnel. Competition for such personnel is
intense, and there can be no assurance that RSA will be successful in attracting
and retaining such personnel.
Proprietary Technology Protection and Claims. RSA holds a license to the
RSA/MIT Patent, which pertains to elements of RSA's current products and expires
on September 20, 2000, and is the exclusive agent for licensing a cryptography
patent held by Dr. Claus P. Schnorr. RSA relies on a combination of patent,
trade secret, copyright and trademark laws and employee and third-party license
and nondisclosure agreements to protect its intellectual property rights. There
can be no assurance that any patent, trademark, copyright or license owned or
held by RSA will not be invalidated, circumvented, challenged or terminated,
that any of RSA's pending or future patent applications will be within the scope
of claims sought by RSA, if at all, or that the steps taken by RSA to protect
its rights will be adequate to prevent misappropriation of RSA's technology or
to preclude competitors from developing products with features similar to RSA's
products. See "Risk Factors -- Risks Relating to RSA -- Litigation" and
"Business -- RSA -- Legal Proceedings." Further, there can be no assurance that
others will not develop technologies that are similar or superior to RSA's
technology, duplicate RSA's technology or design around the RSA/MIT Patent. RSA
may be subject to or may initiate interference proceedings in the United States
Patent and Trademark Office, which can require significant financial and
management resources. In addition, the laws of certain countries in which RSA's
products are or may be developed or sold may not protect RSA's products and
intellectual property rights to the same extent as the laws of the United
States. The inability of RSA to protect its intellectual property adequately
could have a material adverse effect on its financial condition and results of
operations.
The electronic security markets in which RSA sells its products are
characterized by substantial litigation regarding patent and other intellectual
property rights. From time to time, RSA has received communications from third
parties (including relating to the Litigation) asserting that patents licensed
to RSA are invalid or unenforceable or that features or content of certain of
RSA's products infringe upon the intellectual property rights held by third
parties, and RSA may receive such communications in the future. There can be no
assurance that third parties will not assert such claims against RSA that result
in litigation. RSA is currently engaged in several litigation matters related to
the patents that cover certain aspects of public key cryptography. See "Risk
Factors -- Risks Relating to RSA -- Litigation" and "Business -- RSA -- Legal
Proceedings." Any litigation, whether or not resolved in favor of RSA, could
result in significant expense to RSA and could divert management and other
resources. In the event of an adverse ruling in any litigation involving
intellectual property, RSA might be required to discontinue the use of certain
processes, cease the manufacture, use and sale of infringing products, expend
significant resources to develop non-infringing technology or obtain licenses to
the infringing technology and may suffer significant monetary damages, which
could include treble damages. There can be no assurance that under such
circumstances a license would be available to RSA on reasonable terms or at all.
In the event of a successful claim against RSA and RSA's failure to develop or
license a substitute technology on commercially reasonable terms, RSA's
financial condition and results of operations would be adversely affected. There
can be no assurance that any such claims (or claims for indemnity from customers
resulting from infringement claims) will not materially and adversely affect
RSA's financial condition and results of operations. See
"Business -- RSA -- Proprietary Rights" and "-- Legal Proceedings."
Need to Establish and Maintain Relationships with OEMs. A significant
business strategy of RSA is to market its products primarily through OEMs or
other similar collaborative relationships. There can be no assurance that RSA's
existing relationships with OEMs will be commercially successful, that RSA will
be able to negotiate additional OEM relationships, that such additional
relationships will be available to RSA on acceptable terms or that any such
relationships, if established, will be commercially successful. In addition,
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there can be no assurance that parties with whom RSA has established business
relationships will not pursue alternative technologies or develop alternative
products in addition to or in lieu of RSA's products either on their own or in
collaboration with others, including RSA's competitors. RSA's financial
condition or results of operations may also be affected by the success of its
OEMs in marketing any successfully developed products. See
"Business -- RSA -- Strategy," "-- Products" and "-- Sales and Marketing."
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SELECTED HISTORICAL AND UNAUDITED
PRO FORMA COMBINED FINANCIAL DATA
The following Selected Historical Consolidated Financial Data of SDI and
RSA should be read in conjunction with their respective consolidated financial
statements and the notes thereto included herein. The consolidated statement of
operations data for each of the three years in the period ended December 31,
1995 and the consolidated balance sheet data at December 31, 1995 and 1994 are
derived from, and are qualified by reference to, the respective audited
consolidated financial statements and the notes thereto included elsewhere
herein. The consolidated statement of operations data for the years ended
December 31, 1992 and 1991 and the consolidated balance sheet data at December
31, 1993, 1992 and 1991 are derived from the respective audited financial
statements not included herein. The consolidated statement of operations data
for the three months ended March 31, 1996 and 1995 and the consolidated balance
sheet data at March 31, 1996 are derived from unaudited consolidated financial
statements of SDI and RSA. The management of each of SDI (with respect to the
unaudited financial statements of SDI) and RSA (with respect to the unaudited
financial statements of RSA) believes that all adjustments necessary for a fair
presentation thereof have been made to the unaudited financial data for SDI and
RSA, as applicable, and that such data have been prepared on the same basis as
their respective audited consolidated financial statements included elsewhere
herein.
The Selected Unaudited Pro Forma Combined Financial Data are derived from
the Unaudited Pro Forma Condensed Combining Financial Statements, appearing
elsewhere herein, which give effect to the Merger as a pooling of interests, and
should be read in conjunction with such pro forma combined financial statements
and the notes thereto. For the purpose of the pro forma combined statement of
operations data, SDI's financial data for the three months ended March 31, 1996
and 1995 and the fiscal years ended December 31, 1995, 1994 and 1993 have been
combined with RSA's financial data for the same periods. No cash dividends have
been declared or paid on SDI Common Stock or RSA Stock.
The pro forma information is presented for illustrative purposes only and
is not necessarily indicative of the operating results or financial position
that would have occurred if the Merger had been consummated or of the future
operating results or financial position of the combined companies.
27
<PAGE> 38
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF SDI
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------- -------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------- ------ ------- ------- ------- ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................................ $12,170 $6,243 $33,804 $17,572 $12,110 $8,900 $6,122
Cost of revenue.................................... 2,912 1,217 7,235 3,873 2,738 2,251 1,403
-------- ------- ------- ------ ------ ------ ------
Gross profit..................................... 9,258 5,026 26,569 13,699 9,372 6,649 4,719
-------- ------- ------- ------ ------ ------ ------
Costs and expenses:
Research and development......................... 1,488 645 4,048 2,226 1,619 1,397 1,109
Marketing and selling............................ 3,570 2,266 11,059 6,382 4,000 2,981 2,154
General and administrative....................... 1,410 682 3,710 1,636 1,217 994 1,027
-------- ------- ------- ------ ------ ------ ------
Total..................................... 6,468 3,593 18,817 10,244 6,836 5,372 4,290
-------- ------- ------- ------ ------ ------ ------
Income from operations............................. 2,790 1,433 7,752 3,455 2,536 1,277 429
Interest income.................................... 1,227 384 1,699 105 37 48 58
-------- ------- ------- ------ ------ ------ ------
Income before provision for income taxes,
extraordinary item and cumulative effect of
change in accounting............................. 4,017 1,817 9,451 3,560 2,573 1,325 487
Provision for income taxes(1)...................... 1,466 700 3,639 1,245 900 520 165
-------- ------- ------- ------ ------ ------ ------
Income before extraordinary item and cumulative
effect of change in accounting................... 2,551 1,117 5,812 2,315 1,673 805 322
Extraordinary item................................. -- -- -- -- -- 407 146
Cumulative effect of change in accounting(1)....... -- -- -- -- 564 -- --
-------- ------- ------- ------ ------ ------ ------
Net income......................................... $ 2,551 $1,117 $ 5,812 $ 2,315 $ 2,237 $1,212 $ 468
======== ======= ======= ====== ====== ====== ======
Per share data(2):
Income before cumulative effect of change in
accounting..................................... $ .18 $ .09 $ .46 $ .25 $ .19
Cumulative effect of change in accounting........ -- -- -- -- .06
-------- ------- ------- ------ ------
Net income....................................... $ .18 $ .09 $ .46 $ .25 $ .25
======== ======= ======= ====== ======
Weighted average number of common shares
outstanding(2)................................... 14,302 12,514 12,682 9,080 9,010
======== ======= ======= ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, --------------------------------------------------
1996 1995 1994 1993 1992 1991
--------- -------- ------- ------- ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents..................................... $ 17,655 $ 44,583 $17,517 $ 2,827 $1,391 $1,198
Marketable securities.................................... 73,532 44,957 7,966 -- 496 --
Working capital.......................................... 93,911 91,901 27,724 4,189 3,009 2,077
Total assets............................................. 105,849 101,557 32,589 7,259 5,472 3,736
Redeemable convertible preferred stock................... -- -- -- 8,527 9,016 8,528
Stockholders' equity (deficiency)........................ 97,883 95,020 28,857 (3,677) (5,437) (6,160)
</TABLE>
- ---------------
(1) Effective January 1, 1993, SDI adopted prospectively the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." See Notes 1 and 5 of Notes to SDI's Consolidated Financial
Statements.
(2) Per share and share data for periods prior to 1995 are presented on a pro
forma basis. See Note 1 of Notes to SDI's Consolidated Financial Statements.
28
<PAGE> 39
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA OF RSA
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
----------------- ------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
------ ------- ------- ------- ------ ------ ------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue............................................ $2,692 $ 587 $11,600 $ 3,077 $3,002 $2,080 $2,321
Cost of revenue.................................... 602 120 1,272 733 844 596 452
------ ------- ------- ------- ------ ------ ------
Gross profit..................................... 2,090 467 10,328 2,344 2,158 1,484 1,869
------ ------- ------- ------- ------ ------ ------
Costs and expenses:
Research and development......................... 557 391 1,679 1,035 587 448 270
Marketing and selling............................ 870 569 2,112 1,752 1,023 757 428
General and administrative....................... 1,318 859 6,160 1,431 758 405 373
------ ------- ------- ------- ------ ------ ------
Total..................................... 2,745 1,819 9,951 4,218 2,368 1,610 1,071
------ ------- ------- ------- ------ ------ ------
Income (loss) from operations...................... (655) (1,352) 377 (1,874) (210) (126) 798
Equity in profits (losses) of investees............ 9 87 (20) 97 67 265 211
Interest income, net............................... 33 2 56 10 17 52 54
------ ------- ------- ------- ------ ------ ------
Income (loss) before income taxes.................. (613) (1,263) 413 (1,767) (126) 191 1,063
(Benefit) provision for income taxes............... (230) -- (537) (40) (11) 57 148
------ ------- ------- ------- ------ ------ ------
Net income (loss).................................. $ (383) $(1,263) $ 950 $(1,727) $ (115) $ 134 $ 915
====== ======= ======= ======= ====== ====== ======
Net income (loss) per share(1)..................... $ (.15) $ (.58) $ .23 $ (.80) $ (.05) $ .04 $ .28
====== ======= ======= ======= ====== ====== ======
Weighted average number of common shares
outstanding(1)................................... 2,526 2,193 4,070 2,165 2,147 3,232 3,221
====== ======= ======= ======= ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, -----------------------------------------------
1996 1995 1994 1993 1992 1991
--------- ------- ------ ------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and equivalents....................................... $ 3,703 $ 4,701 $ 824 $ 718 $1,467 $1,375
Marketable securities...................................... 15,060 16,680 -- -- -- --
Working capital............................................ 10,273 11,567 160 1,420 1,519 1,425
Total assets............................................... 21,505 24,793 3,090 3,268 2,757 2,335
Non-current portion of capital lease obligations........... 9 12 23 54 88 --
Stockholders' equity....................................... 11,528 12,807 839 2,005 2,102 1,815
</TABLE>
- ---------------
(1) See Note 1 of Notes to RSA's Consolidated Financial Statements.
29
<PAGE> 40
SELECTED UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------- -------------------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
PRO FORMA COMBINED STATEMENT OF
OPERATIONS DATA:
Revenue.................................. $14,862 $ 6,830 $45,404 $20,649 $15,112
Net income (loss)........................ 2,168 (146) 6,762 588 1,558(1)
Net income per share..................... .12 (.01) .42 .05 .13
Shares used to compute net income
per share.............................. 18,137 13,587 16,062 11,833 11,725
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1996
--------------
(IN THOUSANDS)
<S> <C>
PRO FORMA COMBINED BALANCE SHEET DATA:
Cash and equivalents........................................................... $ 21,358
Marketable securities.......................................................... 88,592
Working capital................................................................ 98,810
Total assets................................................................... 127,354
Stockholders' equity........................................................... 104,036
</TABLE>
- ---------------
(1) Income before cumulative effect of change in accounting.
30
<PAGE> 41
COMPARATIVE PER SHARE DATA
(UNAUDITED)
The following table sets forth as of the dates and for the periods
indicated selected historical per share data of SDI and RSA and the
corresponding pro forma and pro forma equivalent per share amounts after giving
effect to the Merger. The data presented are based upon the audited and
unaudited historical financial statements and related notes of SDI and of RSA
which are included elsewhere herein, and the Pro Forma Condensed Combining
Financial Statements appearing elsewhere herein. This information should be read
in conjunction with such historical and pro forma financial statements and
related notes thereto. The assumptions used in the preparation of this table
appear elsewhere herein. See "Pro Forma Condensed Combining Financial
Statements" and the respective "Consolidated Financial Statements of SDI and
RSA" included elsewhere herein. The unaudited pro forma combined financial data
are not necessarily indicative of the results of operations or the future
operations of the combined organization or the actual results that would have
occurred if the Merger had been consummated as of the beginning of the earliest
period presented.
<TABLE>
<CAPTION>
SDI/RSA RSA
SDI RSA PRO FORMA PRO FORMA
HISTORICAL HISTORICAL COMBINED EQUIVALENT(1)
---------- ---------- --------- -------------
<S> <C> <C> <C> <C>
Book value per common share(2):
March 31, 1996..................................... $ 7.22 $ 2.87 $6.16 $5.12
December 31, 1995.................................. 7.06 3.19 6.10 5.07
Cash dividends per common share(3)................... -- -- -- --
Income (loss) per common share from continuing
operations:
Three months ended March 31, 1996.................. $ .18 $ (.15) $ .12 $ .10
Three months ended March 31, 1995.................. .09 (.58) (.01) (.01)
Year ended December 31, 1995....................... .46 .23 .42 .35
Year ended December 31, 1994....................... .25 (.80) .05 .04
Year ended December 31, 1993(4).................... .19 (.05) .13 .11
</TABLE>
NOTES TO COMPARATIVE PER SHARE DATA
(1) RSA's pro forma equivalents represent the combined pro forma earnings and
book value per share multipled by .83056, the Conversion Ratio.
(2) Historical book value per share is computed by dividing total stockholders'
equity by the number of shares of common stock outstanding at the end of the
period. Pro forma book value per share is computed by dividing pro forma
stockholders' equity by the pro forma number of shares of common stock
outstanding at the end of the period. Historical and pro forma book value
per share do not reflect the exercise of outstanding options. Historical and
pro forma book value per share give effect to the assumed conversion of
RSA's convertible preferred stock into RSA Common Stock. If RSA's
convertible preferred stock is not converted into RSA Common Stock, the RSA
historical book value per common share, the SDI/RSA pro forma combined book
value per common share, and the RSA pro forma equivalent book value per
common share as of March 31, 1996 would be $2.85, $6.16 and $5.12,
respectively. If RSA's convertible preferred stock is not converted into RSA
Common Stock, the RSA historical book value per common share, the SDI/RSA
pro forma combined book value per common share and the RSA pro forma
equivalent book value per common share as of December 31, 1995 would be
$3.19, $6.10 and $5.07, respectively.
(3) SDI and RSA have never paid dividends on their respective shares of Common
Stock and SDI does not intend to pay dividends on shares of SDI Common Stock
in the foreseeable future.
(4) SDI's historical income per share for the year ended December 31, 1993 is
before cumulative effect of change in accounting.
31
<PAGE> 42
MARKET PRICE INFORMATION AND DIVIDEND POLICIES
The SDI Common Stock is traded on the Nasdaq National Market under the
symbol "SDTI." There is no established public trading market for the RSA Stock.
The SDI Common Stock began trading on the Nasdaq National Market on
December 14, 1994. The following table sets forth for the periods indicated the
high and low sale prices per share of SDI Common Stock on the Nasdaq National
Market:
<TABLE>
<CAPTION>
HIGH LOW
-------- --------
<S> <C> <C>
1994
Fourth Quarter (from December 14, 1994).................................. $ 10.125 $ 7.000
1995
First Quarter............................................................ 18.875 8.813
Second Quarter........................................................... 23.125 15.500
Third Quarter............................................................ 24.875 17.625
Fourth Quarter........................................................... 58.250 22.875
1996
First Quarter............................................................ 67.500 42.500
Second Quarter (through June 27, 1996)................................... 109.000 46.250
</TABLE>
The last reported sale price per share of the SDI Common Stock on the
Nasdaq National Market on April 12, 1996, the last full trading day prior to the
public announcement of the proposed Merger, was $49.625. The last reported sale
price per share of the SDI Common Stock on June 27, 1996 was $84.3125. Based
upon the last reported sale price of SDI Common Stock on June 27, 1996, and a
Conversion Ratio equal to 0.83056, each share of RSA Stock would be converted in
the Merger into SDI Common Stock having a market value of $70.03.
Because the market price of SDI Common Stock is subject to fluctuation, the
market value of the shares of SDI Common Stock that holders of RSA Stock will
receive in the Merger may increase or decrease prior to the Merger. SDI and RSA
stockholders are urged to obtain a current market quotation for the SDI Common
Stock.
On the SDI Record Date, SDI had 187 stockholders of record. On the RSA
Record Date, there were 51 holders of record of RSA Common Stock, two holders of
record of RSA Series A Preferred Stock, 16 holders of record of RSA Series B
Preferred Stock, two holders of record of RSA Series C Preferred Stock and five
holders of record of RSA Series D Preferred Stock.
Neither SDI nor RSA has ever declared or paid cash dividends. SDI does not
intend to declare or pay any cash dividends in the foreseeable future. Future
cash dividends, if any, will be determined by the SDI Board and will be based
upon SDI's earnings, capital requirements, financial condition and other factors
deemed relevant by the SDI Board.
RSA has agreed in the Merger Agreement not to declare, set aside or pay any
dividends on its capital stock prior to the Effective Time. See "The Merger
Agreement -- Certain Covenants and Agreements."
32
<PAGE> 43
STOCKHOLDINGS AFTER THE MERGER
Based upon the capitalization of SDI and RSA as of June 3, 1996, if the
proposed Merger is approved and becomes effective, persons who owned all of the
outstanding shares of SDI Common Stock immediately prior to the Effective Time
will own approximately 80.4% of the outstanding SDI Common Stock at the
Effective Time (approximately 78.9% on a fully-diluted basis), and persons who
owned all of the outstanding shares of RSA Stock immediately prior to the
Effective Time will own approximately 19.6% of the outstanding SDI Common Stock
at the Effective Time (approximately 21.1% on a fully-diluted basis). See
"Management -- SDI -- Security Ownership of Certain Beneficial Owners and
Management" and "Management -- RSA -- Security Ownership of Certain Beneficial
Owners and Management."
33
<PAGE> 44
THE SDI SPECIAL MEETING
GENERAL
This Joint Proxy Statement and Prospectus is being furnished to holders of
SDI Common Stock in connection with the solicitation of proxies by the SDI Board
for use at the SDI Special Meeting and any adjournments or postponements
thereof. Each copy of this Joint Proxy Statement and Prospectus mailed to
holders of SDI Common Stock is accompanied by a form of proxy card for use at
the SDI Special Meeting.
This Joint Proxy Statement and Prospectus and the accompanying forms of
proxy cards are first being mailed to stockholders of SDI and RSA on or about
July 3, 1996.
SDI STOCKHOLDERS ARE REQUESTED TO COMPLETE, SIGN AND DATE THE ACCOMPANYING
PROXY CARD AND RETURN IT PROMPTLY TO SDI IN THE ENCLOSED, POSTAGE-PAID ENVELOPE.
PURPOSE OF THE SDI SPECIAL MEETING
At the SDI Special Meeting, the holders of SDI Common Stock eligible to
vote will be asked to consider and vote upon: (i) the issuance of up to an
aggregate of 4,000,000 shares of SDI Common Stock in exchange for shares of RSA
Stock pursuant to the Merger Agreement, (ii) an amendment to the SDI Certificate
to increase the number of shares of SDI Common Stock that SDI is authorized to
issue from 30,000,000 to 80,000,000 shares, and (iii) such other matters as may
properly come before the SDI Special Meeting or any adjournments or
postponements thereof.
BOARD OF DIRECTORS RECOMMENDATION
The SDI Board has unanimously approved the Merger Proposal and the Charter
Amendment and recommends a vote FOR approval of such proposals.
DATE, TIME AND PLACE
The SDI Special Meeting is scheduled to be held on Friday, July 26, 1996 at
10:00 a.m., local time, at the offices of Hale and Dorr, 60 State Street,
Boston, Massachusetts 02109.
RECORD DATE; SHARES OUTSTANDING
The SDI Board has fixed the close of business on June 3, 1996 as the SDI
Record Date for the determination of SDI stockholders entitled to notice of and
to vote at the SDI Special Meeting and at any adjournments or postponements
thereof. On the SDI Record Date, there were 13,656,760 outstanding shares of SDI
Common Stock held by 187 stockholders of record.
VOTING AT THE SDI SPECIAL MEETING
The presence, either in person or by proxy, of the holders of a majority of
the shares of SDI Common Stock issued and outstanding and entitled to vote at
the SDI Special Meeting is necessary to constitute a quorum at the SDI Special
Meeting.
The affirmative vote of holders of a majority of the shares of SDI Common
Stock voting in person or by proxy is required to approve the Merger Proposal.
The affirmative vote of the holders of a majority of the outstanding shares of
SDI Common Stock is required to approve the Charter Amendment. Approval of the
Charter Amendment is not a condition to approval of the Merger Proposal. Each
share of SDI Common Stock is entitled to one vote on all matters presented at
the SDI Special Meeting. The approval of the Merger Proposal is required by the
rules of the NASD governing corporations with securities listed on the Nasdaq
National Market.
34
<PAGE> 45
All directors and executive officers of SDI have indicated their intention
to vote all shares over which they exercise voting control (an aggregate of
781,943 shares of SDI Common Stock or approximately 5.7% of the outstanding
shares on June 3, 1996) FOR the approval of the Merger Proposal.
If a stockholder attends the SDI Special Meeting, such stockholder may vote
by ballot. However, many of SDI's stockholders may be unable to attend the SDI
Special Meeting. Therefore, the SDI Board is soliciting proxies so that each
holder of SDI Common Stock on the SDI Record Date has the opportunity to vote on
the proposals to be considered at the SDI Special Meeting. When a proxy is
returned properly signed and dated, the shares represented thereby will be voted
in accordance with the instructions on the proxy card. If an SDI stockholder
does not return a signed proxy card, such stockholder's shares will not be
voted. Stockholders are urged to mark the boxes on the proxy card to indicate
how their shares are to be voted. If a holder of SDI Common Stock returns a
signed proxy card, but does not indicate how such stockholder's shares are to be
voted, the shares represented by the proxy will be voted for approval of the
Merger Proposal and the Charter Amendment. The proxy card also confers
discretionary authority on the individuals appointed by the SDI Board and named
on the proxy card to vote the shares represented thereby on any other matter
that may properly arise at the SDI Special Meeting.
Any SDI stockholder who executes and returns a proxy card may revoke such
proxy at any time before it is voted by (i) notifying in writing the Secretary
of SDI at One Alewife Center, Cambridge, Massachusetts 02140, (ii) granting a
subsequent proxy, or (iii) appearing in person and voting at the SDI Special
Meeting. Attendance at the SDI Special Meeting will not in and of itself
constitute revocation of a proxy.
As of the date of this Joint Proxy Statement and Prospectus, the SDI Board
does not know of any other matters to be presented for action by SDI
stockholders at the SDI Special Meeting. If, however, any other matters not now
known are properly brought before the SDI Special Meeting, including among other
things consideration of a motion to adjourn the SDI Special Meeting to another
time and/or place (including without limitation for the purpose of soliciting
additional proxies), the persons appointed as the named proxies will have
discretion to vote or act thereon according to their best judgment.
SOLICITATION OF PROXIES
All expenses of SDI's solicitation of proxies, including the cost of
preparing and mailing this Joint Proxy Statement and Prospectus, will be borne
by SDI. In addition to solicitation by use of the mails, proxies may be
solicited by directors, officers and employees of SDI in person or by telephone,
telecopy, telegram or other means of communication. Such directors, officers and
employees soliciting proxies will not be additionally compensated, but may be
reimbursed for reasonable out-of-pocket expenses in connection with such
solicitation. SDI has retained a proxy solicitation firm for assistance in
connection with the SDI Special Meeting at an estimated expense of approximately
$7,000, plus reasonable out-of-pocket expenses. Arrangements will also be made
with custodians, nominees and fiduciaries for forwarding of proxy solicitation
materials to beneficial owners of shares held of record by such custodians,
nominees and fiduciaries, and SDI will reimburse such persons for reasonable
expenses incurred in connection therewith.
EFFECT OF ABSTENTIONS AND "BROKER NON-VOTES"
At the SDI Special Meeting, abstentions and "broker non-votes" will be
counted for purposes of determining the presence or absence of a quorum. In
determining whether the proposal to approve the Merger Proposal has received the
requisite number of affirmative votes, abstentions will have the same effect as
a vote against such proposal and broker non-votes will have no effect on the
outcome of the vote. In determining whether the proposal to approve the Charter
Amendment has received the requisite number of affirmative votes, abstentions
and broker non-votes will have the same effect as a vote against such proposal.
APPRAISAL RIGHTS
Holders of SDI Common Stock will not be entitled to any appraisal rights in
connection with the matters to be voted upon at the SDI Special Meeting. See
"The Merger -- Appraisal Rights."
35
<PAGE> 46
THE RSA SPECIAL MEETING
GENERAL
This Joint Proxy Statement and Prospectus is being furnished to holders of
RSA Stock in connection with the solicitation of proxies by the RSA Board for
use at the RSA Special Meeting and any adjournments or postponements thereof.
Each copy of this Joint Proxy Statement and Prospectus mailed to holders of RSA
Stock is accompanied by a form of proxy card for use at the RSA Special Meeting.
This Joint Proxy Statement and Prospectus and the accompanying forms of
proxy cards are first being mailed to stockholders of SDI and RSA on or about
July 3, 1996.
RSA STOCKHOLDERS ARE REQUESTED TO COMPLETE, SIGN AND DATE THE ACCOMPANYING
PROXY CARD AND RETURN IT PROMPTLY TO RSA IN THE ENCLOSED, POSTAGE-PAID ENVELOPE.
RSA STOCKHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY
CARDS.
PURPOSE OF THE RSA SPECIAL MEETING
At the RSA Special Meeting, the holders of RSA Stock eligible to vote will
consider and vote upon: (i) the approval and adoption of the Merger Agreement
and the Merger and (ii) such other matters as may properly come before the RSA
Special Meeting or any adjournments or postponements thereof.
BOARD OF DIRECTORS RECOMMENDATION
The RSA Board has unanimously approved the Merger Agreement and the Merger
and recommends a vote FOR approval and adoption of the Merger Agreement and the
Merger.
DATE, TIME AND PLACE
The RSA Special Meeting is scheduled to be held on Friday, July 26, 1996 at
10:00 a.m., local time, at the offices of Fenwick & West LLP, Two Palo Alto
Square, Palo Alto, California 94306.
RECORD DATE; SHARES OUTSTANDING
The RSA Board has fixed the close of business on June 28, 1996 as the RSA
Record Date for the determination of RSA stockholders entitled to notice of and
to vote at the RSA Special Meeting and at any adjournments or postponements
thereof.
On the RSA Record Date, there were outstanding 2,530,833 shares of RSA
Common Stock held by 51 stockholders of record, 250,000 shares of RSA Series A
Preferred Stock held by two stockholders of record, 499,950 shares of RSA Series
B Preferred Stock held by 16 stockholders of record, 360,000 shares of RSA
Series C Preferred Stock held by two stockholders of record and 380,334 shares
of RSA Series D Preferred Stock held by five stockholders of record.
VOTING AT THE RSA SPECIAL MEETING
The presence, either in person or by proxy, of the holders of a majority of
the outstanding shares of the RSA Stock issued and outstanding and entitled to
vote at the RSA Special Meeting is necessary to constitute a quorum at the RSA
Special Meeting.
The affirmative vote of the holders of a majority of the outstanding shares
of RSA Stock, voting together as a single class, is required to approve and
adopt the Merger Agreement and the Merger. Each share of RSA Stock is entitled
to one vote on the approval and adoption of the Merger Agreement and the Merger.
Under applicable Delaware law, in tabulating the vote on each such matter,
abstentions will have the same effect as a vote against the proposal to approve
and adopt the Merger Agreement and the Merger.
36
<PAGE> 47
Pursuant to the Stockholder Agreements, each of Messrs. Bidzos, Fischer and
Rivest has agreed to vote all shares of RSA Stock then owned by such stockholder
in favor of the Merger Agreement and the Merger. As of June 28, 1996, such
stockholders owned an aggregate of 2,947,767 shares of RSA Stock, representing
approximately 73% of the outstanding shares of RSA Stock. Accordingly, approval
of the Merger Agreement and the Merger by the stockholders of RSA is assured.
See "The Merger Agreement -- Related Agreements -- Stockholder Agreements."
Approval of the Merger Agreement and the Merger shall constitute approval
of the appointment of Messrs. Bidzos, Fischer and Rivest as representatives of
the RSA stockholders under, as well as the terms of, the Escrow Agreement.
When a proxy card is returned properly signed and dated, the shares
represented thereby will be voted in accordance with the instructions on the
proxy card. If a stockholder does not return a signed proxy card, his or her
shares will not be voted. Stockholders are urged to mark the boxes on the proxy
card to indicate how their shares are to be voted. If a stockholder returns a
signed proxy card, but does not indicate how such holder's shares are to be
voted, the shares represented by the proxy card will be voted for the approval
and adoption of the Merger Agreement and the Merger.
Any RSA stockholder who executes and returns a proxy card may revoke such
proxy at any time before it is voted by (i) notifying in writing the Secretary
of RSA at 100 Marine Parkway, Suite 500, Redwood City, California 94065, (ii)
granting a subsequent proxy, or (iii) appearing in person and voting at the RSA
Special Meeting. Attendance at the RSA Special Meeting will not in and of itself
constitute revocation of a proxy.
The RSA Board is not currently aware of any matters to come before the RSA
Special Meeting other than as described herein. If, however, other matters are
properly brought before the RSA Special Meeting, including among other things
consideration of a motion to adjourn the RSA Special Meeting to another time
and/or place (including without limitation for the purpose of soliciting
additional proxies), the persons appointed as the named proxies will have
discretion to vote or act thereon according to their best judgment.
SOLICITATION OF PROXIES
In addition to solicitation by mail, directors, officers and employees of
RSA, who will not be compensated for such services, may solicit proxies from RSA
stockholders personally or by telephone, telecopy or telegram or other forms of
communication.
APPRAISAL RIGHTS
Holders of the RSA Stock will be entitled to appraisal rights in connection
with the approval and adoption of the Merger Agreement and the Merger. See "The
Merger -- Appraisal Rights."
37
<PAGE> 48
THE MERGER
BACKGROUND OF THE MERGER
Commencing in late 1992 through the fall of 1994, Charles R. Stuckey, Jr.,
President and Chief Executive Officer of SDI, and D. James Bidzos, President and
Chief Executive Officer of RSA, met on several occasions to discuss the
technologies and product compatibilities of their respective businesses and ways
that SDI and RSA could work together, including the possibility of a business
combination. Such discussions were general in nature, did not refer to absolute
or relative valuations of the companies and did not result in any formal actions
or consideration by their respective Boards of Directors.
On March 1, 1995, Mr. Stuckey, together with representatives of Alex. Brown
& Sons Incorporated, the lead underwriter for SDI's two public offerings ("Alex.
Brown"), met with Mr. Bidzos in San Francisco, California regarding a possible
business combination between SDI and RSA. General valuation parameters, but not
specific valuations, were discussed. At that meeting Mr. Bidzos noted that RSA
was considering a sale of equity interests in VeriSign, Inc. ("VeriSign"), an
affiliated company newly formed by RSA to assign and deliver digital
certificates for use with RSA's public key encryption system.
In subsequent telephone conversations, Messrs. Bidzos and Stuckey discussed
SDI's possible investment in VeriSign. In April 1995, SDI made an investment in
VeriSign.
In July 1995, SDI retained Alex. Brown to act as its financial advisor with
respect to a number of potential merger candidates, including RSA. Attempts to
schedule meetings with RSA at SDI's offices in Cambridge, Massachusetts to
continue the March 1, 1995 discussions concerning a possible business
combination were not successful.
Commencing in the late summer of 1995, Messrs. Bidzos and Stuckey and other
representatives of RSA and SDI began discussions concerning a possible licensing
of technology by RSA to SDI. These discussions continued through the end of
1995.
Prior to November 1995, RSA received various unsolicited acquisition
proposals from third parties other than SDI. No agreement was reached with
respect to any of these acquisition proposals.
Between November 1995 and February 1996, Mr. Bidzos and other members of
RSA senior management held separate discussions with other companies regarding a
possible business combination. Three companies performed due diligence on RSA
during this period. Two companies discussed broad valuation parameters with RSA,
but no agreement was reached with any of these companies.
On November 29, 1995, Messrs. Bidzos and Stuckey met on an airplane and, in
discussions that continued later that day and the following day at RSA's offices
in Redwood City, California, explored the possibility of a business combination
between SDI and RSA. The discussions were again general in nature.
On February 27, 1996, Messrs. Bidzos and Stuckey, Arthur W. Coviello, Jr.,
Executive Vice President and Chief Financial Officer of SDI, and other
representatives of RSA and SDI met at RSA's offices to complete negotiations
concerning the licensing of RSA technology to SDI. Messrs. Bidzos, Stuckey and
Coviello met separately and renewed discussions concerning a possible business
combination between RSA and SDI. They agreed to continue such discussions the
following day at a technology conference sponsored by RS & Co. in San Francisco,
California.
On February 28, 1996, Messrs. Stuckey and Coviello met with Michael
McCaffery and other representatives of RS & Co. to discuss the possible merits
of a business combination with RSA and valuation methodologies. Mr. McCaffery
then met with Mr. Bidzos to discuss the merits of a business combination and
general valuation issues. Thereafter, Messrs. Bidzos, Stuckey and Coviello met
and discussed potential synergies and broad valuation parameters. Mr. Bidzos
agreed to discuss a possible business combination with the RSA Board.
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On March 1, 1996, Mr. Bidzos met with Mr. McCaffery to discuss the market
opportunities that might result from a business combination of RSA and SDI. On
March 2, 1996, at a special meeting the RSA Board discussed the possible
business combination.
On March 1, 1996, Messrs. Stuckey and Coviello and Kenneth P. Weiss, the
former Chairman and Chief Technical Officer of SDI, met with representatives of
RS & Co. to discuss the merits of a business combination with RSA, valuation
methodologies and possible valuation ranges. On March 2 and 3, 1996, Mr. Stuckey
spoke individually with other members of the SDI Board to inform them of the
discussions that had taken place.
On March 14, 1996, Mr. Coviello and representatives of RS & Co. met with
Mr. Bidzos and Kathryn Conrow, Chief Financial Officer of RSA, at RSA's offices.
The discussions related to RSA's financial statements, business trends,
licensing arrangements and the Litigation.
On March 20, 1996, at a previously scheduled meeting of the SDI Board,
management reported on the preliminary discussions with respect to a possible
business combination with RSA. The SDI Board authorized and instructed
management to explore the possibility of a merger with RSA and to continue
discussions with representatives of RSA.
On March 22, 1996, Mr. Stuckey and representatives of RS & Co. met with
Ronald L. Rivest, a director of RSA, and discussed potential synergies resulting
from a business combination and general valuation ranges.
On March 23, 1996, at a special meeting, the RSA Board discussed the
possible business combination, including potential risks associated with RSA's
business and the proposed business combination, the relative merits of a
business combination versus a public offering and the potential synergies and
strategic value of a business combination with SDI.
On March 25, 1996, a letter from Mr. Stuckey was sent to Mr. Bidzos
outlining the possible benefits from a business combination involving the two
companies and proposing an exchange of 3,500,000 shares of SDI Common Stock for
all the equity interests of RSA, subject to a number of conditions (including
completion of due diligence, negotiation of definitive documentation and SDI
Board approval).
On March 26, 1996, Mr. Bidzos discussed the terms set forth in Mr.
Stuckey's letter separately with each member of the RSA Board. On the same day,
Mr. Weiss met with Mr. Rivest to discuss the RSA/MIT Patent and other patents in
the area of public key cryptography.
On March 27, 1996, in a conversation with Mr. Coviello, Mr. Bidzos proposed
an exchange of 4,500,000 shares of SDI Common Stock for the equity interests of
RSA. Messrs. Bidzos and Coviello agreed that representatives of RSA and SDI
would meet in RSA's offices commencing on April 1, 1996 to continue discussions.
On March 29, 1996, at a special meeting of the SDI Board, management and
representatives of RS & Co. reviewed the status of the merger discussions, and
the SDI Board discussed the strategic impact of a merger, the management and
cultural compatibility of the two companies, the business and prospects of the
companies and other related issues.
On April 1 and 2, 1996, representatives of SDI and RSA, their respective
legal counsel and representatives of RS & Co. met and reached an agreement in
principle as to the general structure of a transaction and the relative
valuations of the two companies. Legal counsel for SDI and RSA then commenced
preparation and negotiation of definitive merger documents, with such
negotiations continuing through April 14, 1996. Between April 2 and April 14,
1996, SDI and its counsel, accountants and financial advisors conducted
business, legal, financial and technical due diligence and senior management of
RSA and SDI discussed future organizational, product and marketing plans as a
combined entity.
On April 8, 1996, SDI retained RS & Co. as its financial advisor to render
a fairness opinion as to the consideration to be paid by SDI in the proposed
merger.
On April 10 and 11, 1996, SDI consulted with and received advice from
representatives of Alex. Brown in connection with the proposed merger.
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On April 12, 1996, at a special meeting of the SDI Board, (i) management
and legal counsel reviewed the results of SDI's due diligence review of RSA;
(ii) management reviewed the possible benefits and risks relating to the Merger;
(iii) the directors reviewed the principal terms of the proposed Merger
Agreement and related agreements; and (iv) RS & Co. made a presentation
regarding the Merger and delivered its oral opinion, subsequently confirmed in
writing, that the consideration to be paid by SDI in the Merger is fair to SDI
from a financial point of view. See "The Merger -- Opinion of SDI's Financial
Advisor." At the meeting, the SDI Board unanimously approved the Merger and the
Merger Agreement.
On April 14, 1996, at a special meeting of the RSA Board, (i) management
reviewed the possible benefits and risks relating to the Merger; (ii) management
and legal counsel to RSA presented the results of their due diligence review of
SDI; and (iii) the directors reviewed the principal terms of the proposed Merger
Agreement. At the meeting, the RSA Board unanimously approved the Merger and the
Merger Agreement.
Later on April 14, 1996, the parties executed the Merger Agreement. On
April 15, 1996, the parties issued a joint news release announcing the execution
of the Merger Agreement.
REASONS FOR THE MERGER; RECOMMENDATIONS OF THE BOARDS OF DIRECTORS
The SDI Board unanimously recommends that the stockholders of SDI vote FOR
approval of the Merger Proposal for the reasons set forth below.
The RSA Board unanimously recommends that the stockholders of RSA vote FOR
approval and adoption of the Merger and Merger Agreement for the reasons set
forth below.
SDI's Reasons for the Merger
In reaching its decision to approve the Merger Agreement, the SDI Board
consulted with its legal counsel regarding the legal terms of the transaction
and the SDI Board's obligations in its consideration of the proposed
transaction, and with its financial advisors regarding the financial aspects of
the proposed transaction and the fairness of the consideration to be paid by SDI
in the Merger, as well as with management of SDI. The SDI Board considered the
following information and factors:
- SDI's belief that data encryption will be a key enabling technology for
developing data security, integrity and non-repudiation applications that
are necessary for the protection of corporate information resources and
electronic commerce and that RSA's data encryption technology is
recognized as the de facto standard in the data encryption industry.
- SDI's belief that implementation of its strategy of expanding its product
offerings for the computer and network security market would require
encryption technology and engineering capabilities as a core competency
to meet future customer demands for enhanced data security, integrity and
non-repudiation product features. Further, the acquisition of such
competency through the proposed business combination with RSA was
superior to developing such competency internally.
- The complementary nature of SDI's and RSA's management, engineering and
marketing staffs, distribution channels, products and geographic presence
and, in particular, the fact that SDI's products are focused on
identification and authentication, while RSA's products are focused on
data encryption technologies.
- Information concerning the financial performance, condition, business
operations and prospects of each of RSA and SDI.
- The current and future markets for network and computer security products
and, in particular, the potential for SDI to gain access to RSA's
predominantly Internet focused customer base to take advantage of the
growth in distributed and remote computing, including the perceived
demand for enhanced security on the Internet.
- The ability of SDI's management personnel to assume the additional
responsibilities resulting from the Merger.
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- The financial and other significant terms of the proposed Merger,
including the terms and conditions of the Merger Agreement and the
related agreements.
- The oral presentation and opinion of its financial advisor, RS & Co., to
the effect that the consideration to be paid by SDI in the Merger is
fair, from a financial point of view, to SDI.
The SDI Board also considered the terms of the proposed Merger Agreement,
and noted that the Merger is expected to be accounted for as a pooling of
interests and that no goodwill is expected to be created on the books of the
combined company as a result thereof.
The SDI Board also considered the following potentially negative factors
relating to the Merger: (i) the risks associated with the on-going litigation
between RSA and Cylink described above under "Risk Factors -- Risks Relating to
RSA -- RSA Litigation;" (ii) the risk that the issuance of SDI Common Stock in
the Merger might be dilutive to the SDI stockholders; (iii) the risk that the
trading price of SDI Common Stock might be adversely affected by the
announcement of the Merger; (iv) the risk that the benefits sought in the Merger
would not be fully achieved; (v) the charges expected to be incurred in
connection with the Merger, including costs of integrating the business and
transaction expenses arising from the Merger, which SDI estimates to be
approximately $6.1 million; (vi) the risk that the Merger would not be
consummated following the public announcement thereof; and (vii) the difficulty
of managing two separate operations in distant geographic locations.
In view of the wide variety of factors, both positive and negative,
considered by the SDI Board, the SDI Board did not find it practical to, and did
not, quantify or otherwise assign relative weights to the specific factors
considered. After taking into consideration all of the factors set forth above,
the SDI Board concluded that the Merger was in the best interests of SDI and its
stockholders and that SDI should proceed with the proposed Merger at this time.
RSA's Reasons for the Merger
In reaching its decision to approve the terms of the Merger Agreement and
the Merger, the RSA Board consulted with its legal advisors regarding the legal
terms of the transaction and the RSA Board's obligations in its consideration of
the proposed transaction and with RSA's management. The RSA Board considered the
following information and factors:
- Information concerning the historical financial performance, business
operations, financial condition and prospects of SDI. RSA's directors
reviewed information on SDI, which included SDI's periodic reports filed
with the Commission and publicly available financial information
regarding SDI, including RS & Co. Research and third-party analysts'
reports, analysts' projections and analysts' comments and historical
stock price, volatility and volume data. In addition, RSA's directors
interviewed SDI executives regarding SDI's revenues, products, business
strategy and prospects and the market for SDI's products.
- As a result of these due diligence interviews and during the course of
its deliberations, RSA's Board identified and deemed equally important
the following potential business benefits of the Merger: the potential
ability of RSA to develop products more quickly as a result of having
access to SDI's greater financial, development, personnel and other
resources and SDI's complementary user identification and authentication
technology; RSA's potential ability to increase revenues and even out its
revenue stream as a result of being able to sell to SDI's end user
customer base using SDI's larger, dedicated sales force in addition to
continuing to sell to RSA's traditional OEM customer base; RSA's
potential ability to better manage anticipated and necessary growth as a
result of access to SDI's greater management resources and greater
management experience in growth and public company management; and the
potential ability of the combined company, as a result of the above
factors, to more effectively compete with other existing and potential
market participants both in selling into the electronic data security
market and, from the combined company's locations in Massachusetts and
California technology centers, in seeking to attract critical and scarce
engineering talent. RSA's Board also believed it was
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important that SDI management's strategy was to allow RSA to continue to
operate as an independent company to the extent possible, although SDI
gave no assurances in that regard.
- The financial and other significant terms of the proposed Merger,
including the terms and conditions of the Merger Agreement and the
related agreements.
- The current and prospective markets for network and computer security
solutions, including cryptographic and electronic data security
solutions.
- The need for rapid expansion of RSA's product line, employee and
management base and infrastructure in order to develop integrated
cryptographic and electronic data security solutions increasingly
demanded by corporate and Internet users to enable secure electronic
commerce over the rapidly evolving Internet and intranets.
- The competitive advantages of combining SDI's user identification and
authentication technology and products and RSA's encryption technology
and products in a combined, potentially integrated product offering in
response to the increasingly competitive electronic security market. In
this connection, it was noted that SDI's technology had been publicly
recognized as a de facto standard in the user identification and
authentication segment of the electronic security market.
- The anticipated benefits to RSA from being able to utilize SDI's
distribution channels and marketing capability.
- The increased liquidity that the transaction will provide the
stockholders of RSA, in that SDI Common Stock is publicly traded.
- The benefits of becoming a wholly-owned subsidiary of SDI, including
giving RSA access to the significantly greater financial, development,
personnel and other resources of a larger consolidated organization that
should enable it to more effectively address the electronic security
needs of and compete in the rapidly expanding and evolving Internet and
intranet markets.
- The matters described in "Summary -- Interests of Certain Persons In The
Merger" above and "Certain Transactions -- RSA" below.
In considering the proposed Merger, the RSA Board also considered whether
alternative strategies might achieve the anticipated benefits of the Merger to
RSA's stockholders:
- Among the factors considered by the RSA Board in pursuing the proposed
Merger at this time in lieu of attempting to identify and commence
negotiations with a potential third party acquiror were the more
favorable deal value represented by the proposed Merger as compared to
the range of deal values proposed by other companies in unsolicited
acquisition proposals to RSA (specifically, RSA had, over the course of
the four year period ending in February 1996, received acquisition
proposals, valued by the RSA Board at approximately $20 million, $50
million, $125 million and $80-100 million, from an electronic data
security company, two Internet products companies and a computer
manufacturer, respectively, but no agreements were reached with any such
party), the benefits anticipated to be afforded by the proposed Merger
relative to those in other possible business combinations, RSA's
potentially more significant role in and impact on the combined company
following the Merger with SDI relative to the more modest role and impact
RSA would be likely to have as a result of a business combination
involving another, probably much larger, potential acquiror and the risks
and possible delays associated with, and the additional RSA management
time required with respect to, identifying and commencing negotiations
with a potential third party acquiror rather than consummating the
proposed Merger with SDI on terms that had already been negotiated. In
view of these factors, the RSA Board determined that the Merger was
likely to be more favorable to RSA stockholders than any other potential
business combination then identified by the RSA Board. As a result,
beginning in late February 1996, RSA did not directly or indirectly make
solicitations to other parties with regard to a possible business
combination and did not engage in merger discussions with any party other
than SDI.
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- Among the factors considered by RSA's Board in pursuing the proposed
Merger at this time in lieu of an initial public offering (an "IPO") were
the greater aggregate value anticipated to be realized by the current RSA
stockholders in the Merger as compared to an IPO (given the 20-30%
anticipated dilution to current RSA stockholders anticipated to result
from the issuance of additional shares to the public in an IPO, assuming
a constant aggregate valuation for RSA in each case), the likely timing
of an IPO as compared to the Merger, the relative uncertainties
associated with each potential course of action, including IPO-related
uncertainties as to (i) if and when an IPO would be possible at an
acceptable valuation given, among other factors, RSA's current growth
rate, the increase in personnel needed to position RSA for an IPO and the
need for underwriters and investors to understand and accept the risks
associated with the Litigation, (ii) when stockholder liquidity could be
achieved given the longer time period involved in an IPO and the expected
underwriter's market stand back restriction on stock sales following an
IPO, and (iii) whether RSA could sustain the growth necessary to maintain
stockholder value as a stand alone public company, and Merger-related
uncertainties as to (A) the likelihood that the Merger would be
consummated, (B) the market risk to former RSA stockholders of holding
SDI Common Stock prior to being able to sell same in compliance with
applicable pooling of interests accounting, tax principles and securities
law, and (C) the performance of the combined company, the success of
integration of the two companies and the effect of the Merger on RSA's
ability to retain and attract key employees; the synergies associated
with the Merger as compared to those available through other means
following an IPO; the benefits of the product diversification associated
with the Merger as compared to that achievable as a stand-alone company
following an IPO; the relative speed of return on investment to RSA
stockholders and the comparative volatility and liquidity of RSA stock
following an IPO relative to that of the combined company following the
Merger. The RSA Board concluded that the trading price of the combined
company's stock would be less volatile than that of RSA's stock following
an IPO. Considering each of the above factors and the relative merits and
risks of an IPO and the Merger, the RSA Board concluded that, on balance,
the Merger was likely to be more favorable to the RSA stockholders than
an IPO.
The RSA Board also considered the following potentially negative factors
relating to the Merger: (i) the risks associated with the Litigation as they
bear on a possible recovery by Cylink under the indemnification provisions in
the Merger Agreement (which is limited in the manner described in the Escrow
Agreement); (ii) the risks associated with having the deal value being expressed
as a set number of shares of SDI Common Stock, regardless of the value thereof
at the Effective Time of the proposed Merger; (iii) the risk that the trading
price of SDI Common Stock might be adversely affected by the announcement of the
Merger; (iv) the risk that the benefits sought in the Merger would not be fully
achieved; (v) the substantial charges expected to be incurred in connection with
the Merger, including costs of integrating the business and transaction expenses
arising from the Merger; (vi) the risk that the Merger would not be consummated
following the public announcement thereof; (vii) the difficulty of and risks
associated with integrating the combined company and managing two separate
operations in distant geographic locations; (viii) the risks associated with
expiration of the RSA/MIT Patent; and (ix) the risks of RSA suffering employee
attrition and of failing to attract key personnel due to uncertainties
associated with the pending Merger.
In view of the wide variety of factors, both positive and negative,
considered by the RSA Board, the RSA Board did not find it practical to, and did
not, quantify or otherwise assign relative weights to the specific factors
considered. After taking into consideration all of the factors set forth above,
the Board of Directors of RSA concluded that the Merger was in the best
interests of RSA and its stockholders and superior to alternative courses of
action perceived to be available to RSA and that RSA should proceed with the
proposed Merger at this time.
OPINION OF SDI'S FINANCIAL ADVISOR
SDI retained RS & Co. to act as its financial advisor in connection with
the Merger and to render an opinion as to the fairness, from a financial point
of view, to SDI of the consideration to be paid. At the April 12, 1996 meeting
of the SDI Board, RS & Co. delivered an oral opinion, which was subsequently
confirmed in writing on April 14, 1996, that as of such dates and based on the
matters described therein, the
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consideration to be paid is fair to SDI from a financial point of view. The
complete text of the written opinion of RS & Co. dated April 14, 1996, which
sets forth the assumptions made, procedures followed, matters considered and
scope of the review undertaken by RS & Co. in rendering its opinion, is attached
hereto as Annex B. SDI stockholders are urged to read RS & Co.'s opinion in its
entirety.
RS & Co. did not recommend to the SDI Board that any specific amount of
consideration constituted the appropriate consideration for the Merger. No
limitations were imposed by the SDI Board on RS & Co. with respect to the
investigations made or procedures followed by it in rendering its opinion. RS &
Co.'s opinion to the SDI Board addresses only the fairness from a financial
point of view of the consideration to be paid by SDI, and does not constitute a
recommendation to any SDI stockholder as to how such stockholder should vote at
the SDI Special Meeting. RS & Co. expressed no opinion as to the tax
consequences of the Merger, and RS & Co.'s opinion as to the fairness of the
consideration to be paid does not take into account the particular tax status or
position of any holder of SDI Common Stock. The summary of the opinion of RS &
Co. set forth in this Joint Proxy Statement and Prospectus is qualified in its
entirety by reference to the full text of such opinion.
In connection with the preparation of its opinion dated April 14, 1996, RS
& Co.: (i) reviewed historical financial information of SDI and RSA furnished to
RS & Co. by both companies, including non-public audited and unaudited annual
and unaudited interim financial statements, supporting schedules for individual
elements of RSA's historical financial statements and a summary of key terms of
RSA's OEM agreements, in each case provided by RSA to SDI and RS & Co. These
financial statements consisted of balance sheets, statements of operations and
cash flows provided by the management of RSA and forecasts for RSA prepared by
the management of SDI, while SDI provided only publicly available historical
financial information to RSA and RS & Co. and did not confirm or qualify any
publicly available research estimates of SDI's financial performance; (ii)
reviewed publicly available information; (iii) held discussions with the
management of SDI and RSA concerning their businesses, past and current business
operations, financial condition and the strategic significance of the Merger,
specifically the potential benefits of (a) combining SDI's and RSA's product
lines to provide a wider range of solutions to the electronic data security
market than either company could provide individually, (b) SDI gaining access to
RSA's Internet-focused customer base, (c) combining elements of SDI's and RSA's
security products to create new electronic data security solutions, (d) selling
current RSA products into SDI's customer base, and (e) SDI's access to software
development personnel on the West Coast; (iv) reviewed the Merger Agreement; (v)
reviewed the stock price and trading history of SDI; (vi) reviewed the
contribution by each company to pro forma combined revenue, gross profit,
operating income, pre-tax income and net income; (vii) reviewed the valuations
of publicly traded companies which RS & Co. deemed comparable to SDI and RSA;
(viii) compared the financial terms of the Merger with other transactions which
RS & Co. deemed relevant; (ix) prepared a discounted cash flow analysis of RSA;
(x) analyzed the pro forma earnings per share of the combined company; and (xi)
made such other studies and inquiries, and reviewed such other data, as RS & Co.
deemed relevant.
The following paragraphs summarize all material quantitative and
qualitative analyses performed by RS & Co. in arriving at its opinion and all
such analyses reviewed with the SDI Board but does not purport to be a complete
description of the analyses performed by RS & Co. RS & Co. used information on
the financial condition of SDI and RSA as of a date or dates shortly before the
Merger Agreement was executed on April 14, 1996 and stock price information
through the close of the market on April 11, 1996. Due to the uncertainty
surrounding projected attorney's fees, court costs and similar expenses related
to the Litigation ("Litigation Expenses"), RS & Co. conducted its analyses both
with the full impact of Litigation Expenses taken into consideration and without
any Litigation Expenses where appropriate. The Litigation Expenses did not
include any provision for future damage awards or settlement amounts.
Stock Price and Trading Analysis. RS & Co. reviewed the trading activity,
including share price and trading volume, of SDI Common Stock for the period
April 5, 1995 to April 4, 1996. RS & Co. noted that, since April 5, 1995, the
daily closing prices of SDI Common Stock ranged from a high of $66.25 on
February 23, 1996 to a low of $16.00 on April 7, 1995. RS & Co. also noted that
the average closing price for the 20 trading days, 50 trading days and 100
trading days up to and including April 4, 1996 was $53.631, $56.978 and $51.860,
respectively. In addition, RS & Co. compared the indexed performance of SDI
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Common Stock for the period April 5, 1995 to April 4, 1996 to a composite index
of companies RS & Co. deemed comparable to SDI (the "SDI Comparable Companies
Index") and the Nasdaq Composite Index. The companies that RS & Co. deemed
comparable to SDI (the "SDI Comparable Companies") included selected companies
in the network security industry. A complete list of the SDI Comparable
Companies is as follows: Ascend Communications, Inc.; Citrix Systems, Inc.;
Cylink Corporation; Raptor Systems, Inc.; and Secure Computing Corporation. RS &
Co. noted that the price of the SDI Common Stock outperformed the SDI Comparable
Companies Index and the Nasdaq Composite Index for the period. RS & Co. believes
that SDI's trading history supported RS & Co.'s view that the consideration to
be paid is fair to SDI from a financial point of view, because the consideration
to be paid was determined based upon a market valuation of SDI Common Stock that
was consistent with historical trading levels for the period from April 5, 1995
to April 4, 1996.
Contribution Analysis. RS & Co. compared the contribution of SDI and RSA
to historical and projected pro forma combined revenue, gross profit, operating
income, pre-tax income and net income, based on SDI's and RSA's actual results
for the year ended December 31, 1995, SDI management's forecasts of RSA's
financial performance (based on RSA's historical performance and following
discussions with RSA management concerning certain income statement assumptions
underlying such forecasts) and Robertson, Stephens & Company Research estimates
of SDI's financial performance for calendar 1996 and 1997. For such periods,
excluding RSA's actual and projected Litigation Expenses, RS & Co. noted that
SDI would contribute 74.5% to 78.8% of pro forma combined revenue, 72.5% to
75.8% of pro forma combined gross profit, 59.5% to 74.1% of pro forma combined
operating income, 64.0% to 76.2% of pro forma combined pre-tax income and 64.0%
to 76.2% of pro forma combined net income. For such periods, including the
Litigation Expenses, RS & Co. noted that SDI would contribute 76.2% to 87.0% of
pro forma combined operating income, 76.3% to 87.1% of pro forma combined
pre-tax income and 76.3% to 87.1% of pro forma combined net income. RS & Co.
compared these historical and projected contribution percentages to 78.4%, the
approximate pro forma ownership (implied by the consideration to be paid) of the
combined company by SDI stockholders.
Comparable Company Analysis Related to SDI. RS & Co. compared certain
financial data and multiples of income statement parameters for the 1995, 1996
and 1997 calendar years accorded to the SDI Comparable Companies. Financial data
compared included equity value (public market value of the common and common
equivalent shares outstanding), aggregate value (equity value less cash and
equivalents plus debt), revenues, earnings per share, operating margin, pre-tax
margin, net margin, revenue growth and projected earnings per share growth rate
as reported by Robertson, Stephens & Company Research, FIRST CALL Research and
ZACKS Investment Research. Multiples compared included aggregate value to
revenue and equity value to net income.
Aggregate value to revenue multiples ranged from 4.9 to 73.6x for calendar
1995, 3.2 to 22.4x for projected calendar 1996 and 2.1 to 12.2x for projected
calendar 1997 for the SDI Comparable Companies as of April 11, 1996. The
aggregate value to revenue multiples for SDI were 16.8x, 10.0x and 6.3x for
calendar 1995, 1996 and 1997, respectively. Price per share to earnings per
share multiples ranged from 51.7 to 150.0x for projected calendar 1996 and 24.5
to 74.3x for projected calendar 1997 for the SDI Comparable Companies as of
April 11, 1996. The price per share to earnings per share multiples for SDI were
64.6x and 45.2x for calendar 1996 and 1997, respectively. RS & Co. believes that
these multiples supported RS & Co.'s view that the consideration to be paid is
fair to SDI from a financial point of view, because the consideration to be paid
was determined based upon a market valuation of SDI Common Stock that was within
the range of selected multiples of the SDI Comparable Companies at the time of
RS & Co.'s opinion.
Comparable Company Analysis Related to RSA. RS & Co. compared certain
financial data and multiples of income statement parameters for the 1995, 1996
and 1997 calendar years accorded to companies RS & Co. deemed comparable to RSA.
The companies RS & Co. deemed comparable to RSA (the "RSA Comparable Companies")
included selected companies in the network security industry as well as the
Internet tools industry. A complete list of the RSA Comparable Companies is as
follows: Citrix Systems, Inc.; Cylink Corporation; Inso Corporation; Netscape
Communications Corporation; Open Text Corporation; Raptor Systems, Inc.; Secure
Computing Corporation; SDI; Spyglass, Inc.; and Verity, Inc. Financial data
compared included equity value (public market value of the common and common
equivalent shares outstanding),
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aggregate value (equity value less cash and equivalents plus debt), revenues,
earnings per share, operating margin, pre-tax margin, net margin, revenue growth
and projected earnings per share growth rate as reported by Robertson, Stephens
& Company Research, FIRST CALL Research and ZACKS Investment Research. Multiples
compared included aggregate value to revenue and equity value to net income.
Based on aggregate value to revenue multiples of approximately 14.0 to
18.0x for calendar 1995 for the RSA Comparable Companies and after adjusting for
RSA's net cash and equivalents, RSA's public market implied equity valuation
ranged from $183 million to $229 million. Based on aggregate value to revenue
multiples of approximately 9.0 to 13.0x for projected calendar 1996 for the RSA
Comparable Companies and after adjusting for RSA's net cash and equivalents,
RSA's public market implied equity valuation ranged from $161 million to $223
million. Based on aggregate value to revenue multiples of approximately 6.0 to
10.0x for projected calendar 1997 for the RSA Comparable Companies and after
adjusting for RSA's net cash and equivalents, RSA's public market implied equity
valuation ranged from $166 million to $263 million. Based on equity value to net
income multiples of approximately 100 to 110x for calendar 1995 for the RSA
Comparable Companies and excluding the Litigation Expenses, RSA's public market
implied equity valuation ranged from $314 million to $346 million. Based on
equity value to net income multiples of approximately 45 to 60x for projected
calendar 1996 for the RSA Comparable Companies and excluding the Litigation
Expenses, RSA's public market implied equity valuation ranged from $157 million
to $210 million. Based on equity value to net income multiples of approximately
35 to 50x for projected calendar 1997 for the RSA Comparable Companies, and
excluding the Litigation Expenses, RSA's public market implied equity valuation
ranged from $228 million to $325 million. Including the Litigation Expenses,
RSA's public market implied equity valuation ranged from $99 million to $109
million, $74 million to $99 million and $180 million to $257 million based on
equity value to net income multiples of the RSA Comparable Companies for
calendar years 1995, 1996 and 1997, respectively.
RS & Co. believes that these implied equity value ranges supported RS &
Co.'s view that the consideration to be paid is fair to SDI from a financial
point of view, because taken as a whole, the consideration valued at the time of
RS & Co.'s opinion (approximately $199 million as of April 11, 1996) was within
the range implied by selected multiples.
Precedent Transaction Analysis. RS & Co. analyzed publicly available
information for selected pending or completed acquisitions and mergers within
the network security and Internet tools industries. In examining these
transactions, RS & Co. analyzed certain financial parameters of the acquired
company relative to the consideration offered. Financial indicators compared
included the equity consideration (total value of the consideration paid to the
equity owners of the acquired company) plus net debt assumed ("aggregate
consideration") to latest twelve months revenue, aggregate consideration to
latest twelve months operating income and equity consideration to latest twelve
months net income. The acquisitions reviewed in the network security and
Internet tools industries were: Quarterdeck Corporation/DATASTORM TECHNOLOGIES
Inc.; Ascend Communications, Inc./Morning Star Technologies, Inc.; IBM
Corporation/Tivoli Systems Inc.; Informix Software, Inc./Illustra Information
Technologies, Inc.; Fore Systems, Inc./ALANTEC Corporation; and Netscape
Communications Corporation/Collabra Software, Inc. (the "Precedent
Transactions").
Based on aggregate consideration offered to latest twelve months revenue
multiples of approximately 15.0 to 18.0x for the Precedent Transactions,
excluding the Litigation Expenses, RSA's implied equity value ranged from $195
million to $229 million. Based on aggregate consideration offered to latest
twelve months operating income multiples of approximately 50 to 70x for the
Precedent Transactions, excluding the Litigation Expenses, RSA's implied equity
value ranged from $285 million to $390 million. Based on equity consideration
offered to latest twelve months net income multiples of approximately 70 to 100x
for the Precedent Transactions, excluding the Litigation Expenses, RSA's implied
equity value ranged from $220 million to $314 million. Including the Litigation
Expenses, RSA's implied equity value ranged from $195 million to $229 million,
$110 million to $145 million and $69 million to $99 million based on the latest
twelve months revenue, operating income and net income multiples, respectively.
RS & Co. believes that these implied equity value ranges supported RS & Co.'s
view that the consideration to be paid is fair to SDI from a financial point of
view, because taken as a whole, the consideration valued at the time of RS &
Co.'s opinion (approximately $199 million as of April 11, 1996) was within the
range implied by selected multiples.
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Discounted Cash Flow Analysis Related to RSA. RS & Co. performed a
discounted cash flow analysis to estimate the present value of the stand-alone
unlevered (before interest expense) after-tax cash flows of RSA financial
projections prepared by the management of SDI. RS & Co. first discounted the
projected, unlevered after-tax cash flows through 2000 using a range of discount
rates. In determining the appropriate range of discount rates, RS & Co.
considered (i) the weighted average cost of capital of the RSA Comparable
Companies (which ranged from 12.7% to 14.3%); (ii) RSA's size, length of
operating history and rate of growth relative to the RSA Comparable Companies;
and (iii) RSA's status as a privately owned company. Based on these
considerations, RS & Co. applied a discount rate range of 20% to 40%. RS & Co.
chose a discount rate range significantly higher than the weighted average cost
of capital of the RSA Comparable Companies (which ranged from 12.7% to 14.3%)
due to RSA's small size, short length of operating history and high rate of
growth relative to the RSA Comparable Companies. RS & Co. chose a wide discount
rate range due to the lack of publicly available data for companies of RSA's
size, operating history and rate of growth. The use of a higher and wider
discount rate range results in a more conservative valuation of RSA than would
be derived using the range of weighted average cost of capital of the RSA
Comparable Companies. RSA's unlevered after-tax cash flows were calculated as
the after-tax operating earnings of RSA adjusted for the add-back of non-cash
expenses and the deduction of uses of cash not reflected in the income
statement. RS & Co. then added to the present value of the cash flows the
terminal value of RSA in the fiscal year 2000, discounted back at the same
discount rate. The terminal value was computed by multiplying RSA's projected
operating income in the fiscal year 2000 by terminal multiples ranging from 20.0
to 30.0x. In determining the appropriate range of terminal multiples, RS & Co.
considered the aggregate consideration offered to latest twelve months operating
income multiples of approximately 50 to 70x for the Precedent Transactions and
the growth rate of the unlevered after-tax cash flows in the terminal year. RS &
Co. chose a terminal multiple range significantly lower than the aggregate
consideration offered to latest twelve months operating income multiples for the
Precedent Transactions due to the assumed lower rate of growth of the cash flows
in the terminal year relative to the acquired companies in the Precedent
Transactions. The use of a lower terminal multiple range results in a more
conservative valuation of RSA than would be derived using the aggregate
consideration offered to latest twelve months operating income multiples for the
Precedent Transactions. The discounted cash flow valuation indicated implied
equity valuations from $158 million to $400 million with an average of $279
million. RS & Co. believes that the discounted cash flow analysis supported RS &
Co.'s view that the consideration to be paid is fair to SDI from a financial
point of view, because the consideration valued at the time of RS & Co.'s
opinion (approximately $199 million as of April 11, 1996) was within the range
of present values of RSA's future cash flows.
Pro Forma Merger Analysis. RS & Co. analyzed the pro forma annual earnings
per share of the combined company based on the consideration to be paid, SDI and
RSA managements' forecasts of RSA's financial performance and Robertson,
Stephens & Company Research estimates of SDI's financial performance. Such
analysis indicated that, excluding the Litigation Expenses and in the absence of
synergies, pro forma earnings per share of the combined company, compared to SDI
as a stand-alone entity, would be increased by 2.6% and 9.4% for calendar years
1996 and 1997, respectively. Including the Litigation Expenses, pro forma
earnings per share of the combined company, compared to SDI as a stand-alone
entity, would be decreased by 10.3% and increased by 2.9% for calendar years
1996 and 1997, respectively.
RS & Co. also analyzed the pro forma quarterly earnings per share of the
combined company based on the consideration to be paid, SDI and RSA managements'
forecasts of RSA's financial performance and Robertson, Stephens & Company
Research estimates of SDI's financial performance. Such analysis indicated that,
excluding the Litigation Expenses and in the absence of synergies, pro forma
earnings per share of the combined company, compared to SDI as a stand-alone
entity, would be increased by 1.6%, 0.5% and 11.7% for the quarters ending June
30, September 30 and December 31, 1996, respectively. Including the Litigation
Expenses and in the absence of synergies, pro forma earnings per share of the
combined company, compared to SDI as a stand-alone entity, would be decreased by
16.3%, decreased by 7.8% and increased by 4.4% for the quarters ending June 30,
September 30 and December 31, 1996, respectively.
The preparation of fairness opinions involves various determinations as to
the most appropriate and relevant quantitative and qualitative methods of
financial analyses and the application of those methods to the
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particular circumstances; therefore, such opinions are not readily susceptible
to summary description. In arriving at its opinion, RS & Co. did not attribute
any particular weight to any analysis or factor considered by it, but rather
made qualitative judgments as to the significance and relevance of each analysis
and factor. Accordingly, RS & Co. believes its analyses must be considered as a
whole and that considering any portion of such analyses and current factors
could create a misleading or incomplete view of the process underlying the
preparation of fairness opinions. In its analyses, RS & Co. made numerous
assumptions with respect to industry performance, general business and other
conditions and matters, many of which are beyond the control of SDI and RSA. Any
estimates contained in these analyses are not necessarily indicative of actual
values or predictive of future results or values, which may be significantly
more or less favorable than as set forth therein. In addition, analyses relating
to the value of businesses do not purport to be appraisals or to reflect the
prices at which businesses actually may be sold.
Based on past activities, RS & Co. has a substantial degree of familiarity
with SDI. In addition, in the course of its engagement, RS & Co. conducted
further investigation of SDI and RSA. In arriving at its opinion, however, RS &
Co. did not independently verify any of the foregoing information and relied on
all such information being complete and accurate in all material respects.
Furthermore, RS & Co. did not obtain any independent appraisal of the properties
or assets of SDI or RSA. With respect to the financial and operating forecasts
(and the assumptions and bases therefor), estimates and analyses provided to RS
& Co. by SDI and RSA, RS & Co. assumed that such projections, estimates and
analyses were reasonably prepared in good faith and represent the best currently
available estimates and judgments of SDI and RSA management as to the future
financial performance of RSA. RS & Co. noted, among other things, that its
opinion is necessarily based upon market, economic and other conditions existing
as of the date of the opinion, and information available to RS & Co. as of the
date thereof.
RS & Co. was retained based on RS & Co.'s experience as a financial advisor
in connection with mergers and acquisitions and in securities valuations
generally as well as RS & Co.'s investment banking relationship and familiarity
with SDI. RS & Co. has provided financial advisory and investment banking
services to SDI from time to time, including acting as a managing underwriter
for each of the two public offerings of shares of the SDI Common Stock. With
respect to both transactions, RS & Co. has been compensated for such services in
the form of customary underwriting discounts and commissions. In addition, RS &
Co. maintains a market in shares of SDI Common Stock.
SDI engaged RS & Co. by means of an engagement letter, dated April 8, 1996.
Such letter provides that, for its services, RS & Co. is to be paid a
transaction fee of $2,000,000 for acting as financial advisor in connection with
the Merger, including the rendering of its fairness opinion. Payment of $500,000
was due and payable upon delivery of RS & Co.'s fairness opinion to the SDI
Board and execution of the Merger Agreement. The remainder is due and payable
upon consummation of the Merger. SDI has also agreed to indemnify RS & Co. for
certain liabilities relating to or arising out of services provided by RS & Co.
as financial advisor to SDI.
SDI also engaged and consulted with Alex. Brown in connection with the
proposed Merger. Alex. Brown has provided financial advisory and investment
banking services to SDI since 1993. Alex. Brown acted as the lead managing
underwriter for SDI's initial and follow-on public offerings in 1994 and 1995,
respectively. With respect to both transactions, Alex. Brown has been
compensated for such services in the form of customary underwriting discounts
and commissions. Alex. Brown also makes a market in the SDI Common Stock. In the
course of its market-making and other activities, Alex. Brown may from time to
time have a long or short position in, and sell securities of, SDI.
SDI engaged Alex. Brown to provide advisory services with respect to
potential mergers and acquisitions in July 1995. SDI has agreed to pay Alex.
Brown a fee of $500,000 in consideration of its services in connection with the
Merger. SDI has also agreed to reimburse Alex. Brown for its reasonable
out-of-pocket expenses and to indemnify Alex. Brown for certain liabilities
relating to or arising out of services provided by Alex. Brown as a financial
advisor to SDI.
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INTERESTS OF CERTAIN PERSONS IN THE MERGER
As of June 3, 1996, directors and executive officers of SDI and their
affiliates may be deemed to be beneficial owners of approximately 5.7% of the
outstanding shares of SDI Common Stock. See "Management -- SDI -- Security
Ownership of Certain Beneficial Owners and Management" for additional
information concerning such ownership. Each of the directors and executive
officers of SDI has advised SDI that he or she intends to vote or direct the
vote of all the outstanding shares of SDI Common Stock over which he or she has
voting control in favor of approval of the Merger Proposal.
As of June 28, 1996, directors of RSA and their affiliates may be deemed to
be beneficial owners of approximately 73% of the outstanding shares of RSA
Stock. See "Management -- RSA -- Security Ownership of Certain Beneficial Owners
and Management" for additional information concerning such ownership. As
discussed below under "The Merger Agreement -- Related Agreements -- Stockholder
Agreements," each of the directors of RSA has agreed to vote or direct the vote
of all of the outstanding shares of RSA Stock over which he has voting control
in favor of the approval of the Merger Agreement and the Merger.
Simultaneously with the execution of the Merger Agreement, SDI, RSA and D.
James Bidzos entered into an Employment Agreement pursuant to which Mr. Bidzos
will serve as the President of the Surviving Corporation for a period of two
years following the Effective Time, subject to earlier termination in accordance
with the terms of such Agreement. In addition, a condition to SDI's obligations
to consummate the Merger pursuant to the Merger Agreement is the execution of
three-year employment agreements with RSA by C. Victor Chang, Burton Kaliski and
Paul Livesay, employees of RSA. See "The Merger Agreement -- Related
Agreements -- Other Employment Agreements."
It is currently anticipated that, following the Effective Time, the SDI
Board will vote to expand the size of the SDI Board by one and to elect Mr.
Bidzos to the SDI Board.
Pursuant to the Stockholder Agreements, SDI has agreed to provide Messrs.
Bidzos, Fischer and Rivest, the directors of RSA, with certain rights with
respect to the registration under the Securities Act of the shares of SDI Common
Stock to be held by Messrs. Bidzos, Fischer and Rivest following the Effective
Time of the Merger, including the right in certain circumstances to require SDI
to prepare and file registration statements under the Securities Act with
respect to such shares and the right to include such shares in any registration
conducted by SDI, subject to certain cutbacks. See "The Merger
Agreement -- Related Agreements -- Stockholder Agreements."
In addition, pursuant to the Stockholder Agreements, each of Messrs.
Bidzos, Fischer and Rivest has appointed each of the directors of SDI as such
stockholder's proxy during the period specified in the Stockholder Agreements to
vote all RSA Stock then owned by such stockholder in favor of approval of the
Merger and the Merger Agreement and against approval of any proposal made in
opposition to or in competition with the consummation of the Merger and the
Merger Agreement, including any merger, consolidation, sale of assets,
reorganization or recapitalization of RSA with any party other than SDI and
against any liquidation or winding up of RSA. See "The Merger
Agreement -- Related Agreements -- Stockholder Agreements."
Ms. Conrow, the Chief Financial Officer of RSA, holds an option to acquire
shares of RSA Common Stock subject to repurchase rights in favor of RSA, which
repurchase rights will terminate with respect to 10,000 shares upon the closing
of the Merger pursuant to the terms of an employment agreement between RSA and
Ms. Conrow.
ACCOUNTING TREATMENT
The Merger is intended to qualify as a pooling of interests for accounting
and financial reporting purposes. It is a condition to the Merger that SDI shall
have received a letter from Ernst & Young LLP, independent auditors for RSA,
stating that RSA meets the accounting requirements for the Merger to be
accounted for as a "pooling of interests" and a letter from Deloitte & Touche
LLP, independent auditors for SDI, to the effect that SDI may treat the Merger
as a "pooling of interests" for accounting and financial reporting purposes
under Accounting Principles Board Opinion No. 16. Under this method of
accounting, the recorded assets and
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liabilities of SDI and RSA will be carried forward to the combined company at
their recorded amounts, income of the combined company will include income of
SDI and RSA for the entire fiscal year in which the combination occurs and the
reported income of the separate companies for prior periods will be combined and
restated as income of the combined company. See "The Merger
Agreement -- Conditions" and "Pro Forma Condensed Combining Financial
Statements."
Each of the affiliates of RSA has executed a written agreement to the
effect that such person will not transfer shares of stock of either RSA or SDI
during the period beginning 30 days preceding the Effective Time and ending on
the date that SDI publishes financial statements which reflect 30 days of
combined operations of SDI and RSA (which agreements relate to the ability of
SDI to account for the Merger as a pooling of interests).
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion addresses the material federal income tax
considerations of the Merger that are generally applicable to holders of RSA
Stock. This discussion reflects the opinions of counsel attached as Exhibits 8.1
and 8.2 to the Registration Statement of which this Joint Proxy Statement and
Prospectus is a part (the "Exhibit Opinions"). The Exhibit Opinions each include
an opinion to the effect that the Merger will constitute a "reorganization" (a
"Reorganization") within the meaning of Section 368(a) of the Code. The Exhibit
Opinions, which are based on certain assumptions and subject to certain
limitations and qualifications as noted in the opinions, were prepared by Hale
and Dorr, counsel to SDI, and Tomlinson Zisko Morosoli & Maser LLP, counsel to
RSA.
RSA stockholders should be aware that the following discussion does not
deal with all federal income tax considerations that may be relevant to
particular RSA stockholders in light of their particular circumstances, such as
stockholders who are dealers in securities, tax-exempt entities, corporations
that treat the Merger as producing gain for financial statement purposes or
persons who are foreign persons or who acquired their RSA Stock through stock
option or stock purchase programs or in other compensatory transactions. In
addition, the following discussion does not address the tax consequences of
transactions effectuated prior to or after the Merger (whether or not such
transactions are in connection with the Merger), including without limitation
the exercise of options or rights to purchase RSA Stock in anticipation of the
Merger and the surrender of stock in the escrow. Finally, no foreign, state or
local tax considerations are addressed herein. ACCORDINGLY, RSA STOCKHOLDERS ARE
URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO THE SPECIFIC TAX CONSEQUENCES TO
THEM OF THE MERGER, INCLUDING THE APPLICABLE FEDERAL, STATE, LOCAL AND FOREIGN
TAX CONSEQUENCES TO THEM OF THE MERGER.
The following discussion is based on the companies' respective counsels'
interpretation of the Code, applicable Treasury Regulations, judicial authority
and administrative rulings and practice, all as of the date hereof. The IRS is
not precluded from adopting a contrary position. In addition, there can be no
assurance that future legislative, judicial or administrative changes or
interpretations will not adversely affect the accuracy of the statements and
conclusions set forth herein. Any such changes or interpretations could be
applied retroactively and could affect the tax consequences of the Merger to
SDI, RSA and/or their respective stockholders.
Subject to the limitations and qualifications referred to herein, and as a
result of the Merger's qualifying as a Reorganization, the companies' respective
counsel are of the following opinion (subject to the qualifications set forth
immediately following the numbered paragraphs):
(i) The Merger will constitute a reorganization within the meaning
of Section 368(a) of the Code;
(ii) No gain or loss will be recognized by SDI, the Merger Subsidiary,
or RSA solely as a result of the Merger;
(iii) No gain or loss will be recognized by the holders of RSA Stock
upon the exchange of RSA Stock solely for shares of SDI Common Stock as a
result of the Merger;
(iv) Cash received by the holders of RSA Stock in lieu of fractional
shares of SDI Common Stock will be treated as received as a distribution in
redemption of such fractional shares, subject to the provisions of Section
302 of the Code, as if such fractional shares had been issued in the Merger
and then redeemed by SDI;
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(v) The tax basis of the shares of SDI Common Stock received by the
holders of RSA Stock in the Merger will be equal to the tax basis of the
shares of RSA Stock exchanged therefor in the Merger, reduced by any basis
allocable to a fractional share of SDI Common Stock treated as sold or
exchanged under Section 302 of the Code; and
(vi) The holding period for the shares of SDI Common Stock received by
the holders of RSA Stock will include the holding period for the shares of
RSA Stock exchanged therefor in the Merger, provided that the shares of RSA
Stock are held as capital assets at the Effective Time.
Notwithstanding the foregoing, the escrow account established pursuant to
the Merger Agreement and the Escrow Agreement does not comply in all respects
with certain IRS guidelines for the issuance of advance letter rulings regarding
the tax consequences of transactions intended to qualify as reorganizations
under Section 368(a) of the Code. Although the IRS has specifically indicated
that such guidelines are only applicable for purposes of obtaining advance
letter rulings and do not necessarily constitute substantive rules of law, there
can be no assurances that the IRS will not attempt to assert the guidelines as
substantive legal requirements. If the IRS were to make such an attempt, the
companies' respective counsel are of the opinion that it should fail.
Nevertheless, because of the lack of clear authority regarding the tax
consequences of provisions in escrow arrangements such as those contained in the
Escrow Agreement, no assurances can be given that any such IRS attempt would not
be successful. If such attempt were successful, some (or, as discussed below,
all) of the conclusions set forth in the foregoing numbered paragraphs would be
inapplicable.
In particular, if such an attempt were successful but, after the Merger,
the former stockholders of RSA maintained a continuing interest in the SDI
Common Stock received in the Merger other than the Escrow Shares, as defined
below (the "Initial Shares"), equal in value to at least 50% of the value of all
of the formerly outstanding RSA Stock, then, for purposes of the conclusion set
forth in paragraph number (iii) above, an RSA stockholders could be required to
recognize gain (if any) on the exchange of RSA Stock in the Merger to the extent
of the fair market value of the stockholder's right to receive the Escrow
Shares. In addition, for purposes of the conclusion set forth in paragraph
number (v) above, the RSA stockholder could acquire a tax basis in the Initial
Shares received in the Merger equal to the tax basis of the shares of RSA Stock
exchanged in the Merger, decreased by the fair market value of the right to
receive the Escrow Shares and increased by the amount of gain recognized by the
stockholder in the Merger (which aggregate tax basis would be further reduced by
the amount of any tax basis allocable to a fractional share of SDI Common Stock
treated as sold or exchanged under Section 302 of the Code). Finally, the
conclusion expressed in paragraph number (vi) above could be applicable solely
to the Initial Shares received by the RSA stockholder.
Moreover, if such an attempt by the IRS were successful and, after the
Merger, the former stockholders of RSA did not maintain a continuing interest in
the Initial Shares equal in value to at least 50% of the value of all of the
formerly outstanding RSA Stock, then all of the conclusions set forth in the
foregoing numbered paragraphs could be inapplicable. Under such circumstances,
an RSA stockholder could be required to recognize gain or loss in an amount
equal to the difference between the stockholder's tax basis in the RSA Stock
exchanged in the Merger and the fair market value of the SDI Common Stock and
all other consideration, including the right to receive the Escrow Shares,
exchanged for the RSA Stock. If an RSA stockholder were required to recognize
such gain or loss, then the stockholder's tax basis in the SDI Common Stock
received in the Merger generally would be equal to its fair market value at the
Effective Time, and the stockholder's holding period for such stock generally
would not include the stockholder's holding period for the shares of RSA Stock
exchanged therefor in the Merger.
Neither SDI nor RSA has requested a ruling from the IRS in connection with
the Merger. However, it is a condition of the respective obligations of SDI and
RSA to consummate the Merger that such parties receive confirming tax opinions
from their respective legal counsel to the effect that for federal income tax
purposes, the Merger will constitute a Reorganization. The Exhibit Opinions are
not intended to satisfy this closing condition. These closing opinions, which
are collectively referred to herein as the "Tax Opinions," neither bind the IRS
nor preclude the IRS from adopting a contrary position. As with the Exhibit
Opinions, the Tax Opinions will be subject to certain assumptions and
qualifications and will be based on the truth and accuracy of certain
representations of SDI, RSA and the Merger Subsidiary, including representations
in certain
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certificates of the respective managements of SDI, RSA and the Merger Subsidiary
dated on or prior to the date of this Joint Proxy Statement and Prospectus. Of
particular importance will be an assumption that the "continuity of interest"
requirement for treatment of the Merger as a "reorganization" will be satisfied
and representations (described below) relating to that requirement. To satisfy
the continuity of interest requirement, RSA stockholders must not, pursuant to a
plan or intent existing at or prior to the Merger, dispose of or transfer so
much of either (i) their RSA Stock in anticipation of the Merger or (ii) the SDI
Common Stock to be received in the Merger (collectively, "Plan Dispositions"),
such that the RSA stockholders, as a group, would no longer have a significant
equity interest in the RSA business conducted by SDI after the Merger. Each
counsel rendering a tax opinion will receive, as a condition of issuing such tax
opinion, representations from SDI and RSA that neither has knowledge of any such
plan or intent and representations from RSA affiliates that they are not
participating in and are not aware of any such plan or intent.
A successful IRS challenge to the Reorganization status of the Merger would
result in a RSA stockholder recognizing gain or loss with respect to each share
of RSA Stock surrendered equal to the difference between the stockholder's basis
in such share and the fair market value, as of the Effective Time, of the SDI
Common Stock received in exchange therefor. In such event, a RSA stockholder's
aggregate basis in the SDI Common Stock so received would equal its fair market
value, and the stockholder's holding period for such stock would begin the day
after the Merger.
Even if the Merger qualifies as a Reorganization, a recipient of shares of
SDI Common Stock would recognize gain to the extent that such shares were
considered to be received in exchange for services or property (other than
solely RSA Stock). All or a portion of such gain may be taxable as ordinary
income. Gain would also have to be recognized to the extent that an RSA
stockholder was treated as receiving (directly or indirectly) consideration
other than SDI Common Stock in exchange for the RSA Stock.
REGULATORY APPROVALS
Under the HSR Act and the rules promulgated thereunder by the FTC, the
Merger may not be consummated until notifications have been given and certain
information has been furnished to the FTC and the Antitrust Division and
specified waiting period requirements have been satisfied. SDI and certain
stockholders of RSA filed notification and report forms under the HSR Act with
the FTC and the Antitrust Division on May 16, 1996. On May 28, 1996, SDI and
such stockholders received notice of early termination of the waiting period. At
any time before or after consummation of the Merger, the Antitrust Division or
the FTC could take such action under the antitrust laws as it deems necessary or
desirable in the public interest, including seeking to enjoin the consummation
of the Merger or seeking divestiture of substantial assets of SDI or RSA. At any
time before or after the Effective Time of the Merger, and notwithstanding that
the HSR Act waiting period has been terminated, any state could take such action
under state antitrust laws as it deems necessary or desirable in the public
interest. Such action could include seeking to enjoin the consummation of the
Merger or seeking divestiture of RSA or businesses of SDI or RSA. Private
parties may also seek to take legal action under the antitrust laws under
certain circumstances.
Based on information available to them, SDI and RSA believe that the Merger
can be effected in compliance with federal and state antitrust laws. However,
there can be no assurance that a challenge to the consummation of the Merger on
antitrust grounds will not be made or that, if such a challenge were made, SDI
and RSA would prevail or would not be required to accept certain conditions
possibly including certain divestitures in order to consummate the Merger.
FEDERAL SECURITIES LAW CONSEQUENCES
All shares of SDI Common Stock received by RSA stockholders in the Merger
will be freely transferable, except that shares of SDI Common Stock received by
persons who are deemed to be "affiliates" (as such term is defined under the
Securities Act) of RSA prior to the date of the RSA Special Meeting or who
became affiliates of SDI may be resold by them only in transactions permitted by
the resale provisions of Rule 145 promulgated under the Securities Act or as
otherwise permitted under the Securities Act. Persons who may be deemed to be
affiliates of RSA or SDI generally include individuals or entities that control,
are controlled by, or are under common control with, such party and may include
certain officers and directors of such party as
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well as principal stockholders of such party. The Merger Agreement requires RSA
to cause each of its affiliates to execute a written agreement to the effect
that such person will not offer or sell or otherwise dispose of any of the
shares of SDI Common Stock issued to such person in or pursuant to the Merger in
violation of the Securities Act or the rules and regulations promulgated by the
Commission thereunder.
NASDAQ NATIONAL MARKET LISTING
It is a condition to the Merger that the shares of SDI Common Stock to be
issued pursuant to the Merger Agreement and required to be reserved for issuance
in connection with the Merger be authorized for listing on the Nasdaq National
Market. An application has been filed for listing the shares of SDI Common Stock
on the Nasdaq National Market.
APPRAISAL RIGHTS
Holders of SDI Common Stock are not entitled to dissenters' appraisal
rights under the DGCL in connection with the Merger because SDI is not a
constituent corporation in the Merger.
Holders of RSA Stock are entitled to rights of appraisal under Section 262
of the DGCL ("Section 262") in connection with the Merger. If the Merger is
consummated, holders of RSA Stock who hold such shares of record on the date of
making a written demand for appraisal as described below, continuously hold such
shares through the Effective Time and otherwise comply fully with the procedures
prescribed in Section 262 will be entitled to a judicial determination of the
"fair value" of their shares (exclusive of any element of value arising from the
accomplishment or expectation of the Merger) and to receive from the Surviving
Corporation payment of such fair value in cash.
Shares of RSA Stock which are outstanding immediately prior to the
Effective Time and with respect to which appraisal shall have been properly
demanded in accordance with Section 262 shall not be converted into the right to
receive shares of SDI Common Stock in the Merger at or after the Effective Time
unless and until the holder of such shares withdraws his or her demand for such
appraisal or becomes ineligible for such appraisal.
Under Section 262, not less than 20 days prior to the RSA Special Meeting,
RSA is required to notify each stockholder eligible for appraisal rights of the
availability of such appraisal rights. The Notice of Special Meeting of
Stockholders of RSA dated July 3, 1996 constitutes notice to holders of RSA
Stock that appraisal rights are available to them.
The following is a brief summary of the statutory procedures to be followed
by a holder of RSA Stock in order to perfect appraisal rights under the DGCL.
ALTHOUGH SETTING FORTH THE MATERIAL TERMS OF SECTION 262, THIS SUMMARY IS NOT
INTENDED TO BE COMPLETE AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SECTION
262 WHICH IS ATTACHED HERETO AS ANNEX D AND IS INCORPORATED HEREIN BY REFERENCE.
ANY RSA STOCKHOLDER CONSIDERING DEMANDING APPRAISAL IS ADVISED TO READ THE FULL
TEXT OF SECTION 262 CONTAINED IN ANNEX D AND TO CONSULT LEGAL COUNSEL.
If any holder of RSA Stock elects to exercise such stockholder's appraisal
rights, such stockholder must satisfy each of the following conditions:
(i) A written demand for appraisal of shares of RSA Stock must be
delivered to RSA by any holder thereof seeking appraisal before the taking
of the vote on the Merger and the Merger Agreement at the RSA Special
Meeting. Such demand must reasonably inform RSA that the stockholder
intends thereby to demand appraisal of his or her shares. Merely voting
against, or failing to vote in favor of, the approval of the Merger and the
Merger Agreement will not constitute a demand for appraisal within the
meaning of Section 262.
(ii) Stockholders electing to exercise their appraisal rights under
Section 262 must not vote for approval of the Merger and the Merger
Agreement. A failure to vote will satisfy this condition. If, however, a
stockholder votes for approval of the Merger and the Merger Agreement or
returns a signed proxy but does not specify a vote against the approval of
the Merger and the Merger Agreement or a
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direction to abstain, the proxy will be voted for the approval of the
Merger and the Merger Agreement, which will have the effect of waiving such
stockholder's appraisal rights.
(iii) Such stockholder must continually hold such shares from the date
of making of the demand through the Effective Time.
(iv) A demand for appraisal must be executed by or for the RSA
stockholder of record, fully and correctly, as such stockholder's name
appears on his or her RSA stock certificates. If RSA Stock is owned of
record in a fiduciary capacity, such as by a trustee, guardian or
custodian, such demand must be executed by the fiduciary. If RSA Stock is
owned of record by more than one person, as in a joint tenancy or tenancy
in common, such demand must be executed by all joint owners. An authorized
agent, including an agent for two or more joint owners, may execute the
demand for appraisal for a stockholder of record, so long as the agent
identifies the record owner and expressly discloses the fact that, in
exercising the demand, such agent is acting as agent for the record owner.
A record owner who holds RSA Stock as a nominee for others may exercise
appraisal rights with respect to the shares held for all or fewer than all
beneficial owners of shares of RSA Stock as to which the holder is the record
owner. In such case, the written demand must set forth the number of shares
covered by such demand. Where the number of shares is not expressly stated, the
demand will be presumed to cover all shares of RSA Stock outstanding in the name
of such record owner. BENEFICIAL OWNERS WHO ARE NOT RECORD OWNERS AND WHO INTEND
TO EXERCISE APPRAISAL RIGHTS SHOULD INSTRUCT THE RECORD OWNER TO COMPLY STRICTLY
WITH THE STATUTORY REQUIREMENTS WITH RESPECT TO THE DELIVERY OF WRITTEN DEMAND
FOR APPRAISAL. A DEMAND FOR APPRAISAL SUBMITTED BY A BENEFICIAL OWNER WHO IS NOT
THE RECORD OWNER WILL NOT BE HONORED.
If any holder of RSA Stock fails to comply with any of the conditions of
Section 262 and the Merger becomes effective, such stockholder will be entitled
to receive the consideration provided for in the Merger Agreement, but will have
no appraisal rights with respect to such stockholder's RSA Stock.
A RSA stockholder who elects to exercise appraisal rights must mail or
deliver the written demand for appraisal to: RSA Data Security, Inc., 100 Marine
Parkway, Suite 500, Redwood City, California 94065-1031, Attention: Corporate
Secretary. The written demand for appraisal should specify the stockholder's
name and mailing address and the number of shares of RSA Stock covered by the
demand, and should state that the stockholder is thereby demanding appraisal in
accordance with Section 262.
Within 10 days after the Effective Time, the Surviving Corporation must
provide notice as to the date of effectiveness of the Merger to all RSA
stockholders who have duly and timely delivered demands for appraisal and
otherwise complied with Section 262 ("Dissenting Stockholders").
Within 120 days after the Effective Time, any Dissenting Stockholder is
entitled, upon written request, to receive from the Surviving Corporation a
statement setting forth the aggregate number of shares not voted in favor of the
Merger and with respect to which demands for appraisal have been received by
RSA, and the number of holders of such shares. Such statement must be mailed
within 10 days after the written request therefor has been received by the
Surviving Corporation.
Within 120 days after the Effective Time, either the Surviving Corporation
or any Dissenting Stockholder may file a petition in the Delaware Court of
Chancery demanding a determination of the fair value of each share of RSA Stock.
If a petition for an appraisal is timely filed, after a hearing on such
petition, the Delaware Court of Chancery will determine which RSA stockholders
are entitled to appraisal rights and thereafter will appraise the shares of RSA
Stock owned by such stockholders, determining the fair value of such shares,
exclusive of any element of value arising from the accomplishment or expectation
of the Merger, together with a fair rate of interest to be paid, if any, upon
the amount determined to be fair value.
In determining fair value, the Delaware Court of Chancery is to take into
account all relevant factors. In Weinberger v. UOP, Inc., et al., the Delaware
Supreme Court discussed the factors that could be considered in determining fair
value in an appraisal proceeding, stating that "proof of value by any techniques
or methods which are generally considered acceptable in the financial community
and otherwise admissible in court" should be considered and that "[f]air price
obviously requires consideration of all relevant factors involving
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the value of a company." The Delaware Supreme Court stated that in making this
determination of fair value, the Delaware Court of Chancery and the appraiser
may consider "all factors and elements which reasonably might enter into the
fixing of value," including "market value, asset value, dividends, earnings
prospects, the nature of the enterprise and any other factors which were known
or which could be ascertained as of the date of merger and which throw any light
on future prospects of the merged corporation . . . ." The Delaware Supreme
Court has construed Section 262 to mean that "elements of future value,
including the nature of the enterprise, which are known or susceptible of proof
as of the date of the merger and not the product of speculation, may be
considered." However, the Court noted that Section 262 provides that fair value
is to be determined "exclusive of any element of value arising from the
accomplishment or expectation of the merger."
Stockholders of RSA considering whether to seek appraisal should bear in
mind that the fair value of their RSA Stock determined under Section 262 could
be more than, the same as or less than the value of the consideration to be paid
pursuant to the Merger Agreement, and that an opinion of an investment banking
firm as to fairness from a financial point of view is not necessarily an opinion
as to fair value under Section 262 of the DGCL.
The cost of the appraisal proceeding may be determined by the Delaware
Court of Chancery and assessed upon the parties as the Court deems equitable in
the circumstances. Upon application of a Dissenting Stockholder, the Court may
order that all or a portion of the expenses incurred by any Dissenting
Stockholder in connection with the appraisal proceeding, including without
limitation reasonable attorneys' fees and the fees and expenses of experts, be
charged pro rata against the value of all shares entitled to appraisal. In the
absence of such a determination or assessment, each party bears its own
expenses.
A Dissenting Stockholder who has duly demanded appraisal in compliance with
Section 262 will not, after the Effective Time, be entitled to vote for any
purpose the RSA Stock subject to such demand or to receive payment of dividends
or other distributions on such RSA Stock except for dividends or other
distributions payable to stockholders of record at a date prior to the Effective
Time.
At any time within 60 days after the Effective Time, any Dissenting
Stockholder may withdraw his or her demand for appraisal and accept the
consideration to be paid under the Merger Agreement without interest. After this
period, a Dissenting Stockholder may withdraw his or her demand for appraisal
only with the consent of the Surviving Corporation. If no petition for appraisal
is filed with the Delaware Court of Chancery within 120 days after the Effective
Time, Dissenting Stockholders' rights to appraisal shall cease and they shall be
entitled to receive the consideration to be paid under the Merger Agreement
without interest. Inasmuch as the Surviving Corporation has no obligation or
intention to file such a petition, any RSA stockholder who desires such a
petition to be filed is advised to file it on a timely basis. No petition timely
filed in the Delaware Court of Chancery demanding appraisal shall be dismissed
as to any RSA stockholder without the approval of the Delaware Court of
Chancery, and such approval may be conditioned upon such terms as the Delaware
Court of Chancery deems just.
FAILURE TO TAKE ANY REQUIRED STEP IN CONNECTION WITH THE EXERCISE OF
APPRAISAL RIGHTS MAY RESULT IN THE TERMINATION OR WAIVER OF SUCH RIGHTS.
THE MERGER AGREEMENT
The following is a brief summary of certain provisions of the Merger
Agreement, a copy of which is attached as Annex A to this Joint Proxy Statement
and Prospectus and incorporated herein by reference. Although this section
summarizes the material terms of the Merger Agreement, such summary is qualified
in its entirety by reference to the Merger Agreement. Stockholders of SDI and
RSA are urged to read the Merger Agreement in its entirety for a more complete
description of the Merger.
THE MERGER
The Merger Agreement provides that, following the approval of the Merger
Proposal by the stockholders of SDI, the approval and adoption of the Merger and
the Merger Agreement by the stockholders of RSA and the satisfaction or waiver
of the other conditions to the Merger, the Merger Subsidiary will be merged with
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and into RSA, with RSA continuing as the Surviving Corporation, which will be a
wholly-owned subsidiary of SDI.
If all such conditions to the Merger are satisfied or waived, the Merger
will become effective upon the filing by the Surviving Corporation of a duly
executed Certificate of Merger with the Secretary of State of the State of
Delaware.
CONVERSION OF SECURITIES
Upon consummation of the Merger, pursuant to the Merger Agreement, each
issued and outstanding share of RSA Stock (other than shares of RSA Stock owned
beneficially by SDI or the Merger Subsidiary, shares of RSA Stock for which
demands for appraisal under the DGCL have been duly and timely delivered and
shares of RSA Stock held in RSA's treasury) will be converted into the right to
receive a number of shares of SDI Common Stock equal to the Conversion Ratio.
Based upon the capitalization of RSA and SDI as of June 28, 1996, it is
currently anticipated that each share of RSA Stock will be converted into the
right to receive 0.83056 shares of SDI Common Stock. If any holder of shares of
RSA Stock would be entitled to receive a number of shares of SDI Common Stock
that includes a fraction, then, in lieu of a fractional share, such holder will
be entitled to receive cash in an amount equal to such fractional part of a
share of SDI Common Stock multiplied by the average of the last reported sale
price of SDI Common Stock, as reported on the Nasdaq National Market, on each of
the 15 consecutive trading days immediately preceding the date of the Effective
Time. Each share of Common Stock of the Merger Subsidiary issued and outstanding
immediately prior to the Effective Time will be converted into one share of
common stock of the Surviving Corporation.
As soon as practicable after the Effective Time, State Street Bank and
Trust Company (the "Exchange Agent") will mail transmittal forms and exchange
instructions to each holder of record of RSA Stock to be used to surrender and
exchange certificates evidencing shares of RSA Stock for certificates evidencing
the shares of SDI Common Stock to which such holder has become entitled. After
receipt of such transmittal forms, each holder of certificates formerly
representing RSA Stock will be able to surrender such certificates to the
Exchange Agent, and each such holder will receive in exchange therefor
certificates evidencing the number of whole shares of SDI Common Stock to which
such holder is entitled and any cash which may be payable in lieu of a
fractional share of SDI Common Stock, subject to the escrow obligations
described below under "The Merger Agreement -- Escrow." Such transmittal forms
will be accompanied by instructions specifying other details of the exchange.
RSA STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THEY RECEIVE A
TRANSMITTAL FORM.
After the Effective Time, each certificate evidencing RSA Stock, until so
surrendered and exchanged, will be deemed, for all purposes, to evidence only
the right to receive the number of whole shares of SDI Common Stock which the
holder of such certificate is entitled to receive (subject to the Escrow
Agreement) and the right to receive any cash payment in lieu of a fractional
share of SDI Common Stock. The holder of such unexchanged certificate will not
be entitled to receive any dividends or other distributions payable by SDI until
the certificate has been exchanged. Subject to applicable laws, such dividends
and distributions, together with any cash payment in lieu of a fractional share
of SDI Common Stock, will be paid without interest.
STOCK OPTION AND BENEFIT PLANS
At the Effective Time, each outstanding RSA Option under RSA's 1987 Stock
Option Plan (the "RSA Option Plan"), whether vested or unvested or subject to
repurchase by RSA following such exercise, shall be deemed to constitute an
option to acquire, on the same terms and conditions as were applicable under
such RSA Option, the number of shares of SDI Common Stock (rounded down to the
next lowest whole number) equal to the number of shares of RSA Common Stock
issuable upon exercise of such RSA Option multiplied by the Conversion Ratio, at
a price per share (rounded up to the next highest whole cent) equal to the
exercise price per share of such RSA Option divided by the Conversion Ratio. As
of June 28, 1996, options to acquire 794,900 shares of RSA Common Stock were
outstanding under the RSA Option Plan.
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SDI has agreed to reserve for issuance a sufficient number of shares of SDI
Common Stock for delivery under the RSA Option Plan assumed as described above.
Prior to the Effective Time, SDI will file a registration statement on Form S-8
with respect to the shares of SDI Common Stock subject to such options and shall
use its best efforts to maintain the effectiveness of such registration
statement for so long as such options remain outstanding.
Employees of RSA as of the Effective Time shall be permitted to participate
in SDI's 1994 Employee Stock Purchase Plan commencing on the first enrollment
date (currently contemplated to be August 1, 1996) following the Effective Time,
subject to compliance with the eligibility provisions of the plan. Employees of
RSA will each receive credit, for purposes of such eligibility provisions, for
prior service with RSA.
REPRESENTATIONS AND WARRANTIES
The Merger Agreement includes various customary representations and
warranties of the parties. The Merger Agreement includes representations and
warranties by RSA as to, among other things: (i) organization, good standing and
corporate power of RSA and its subsidiaries; (ii) ownership of subsidiaries;
(iii) authorization, execution, delivery and enforceability of the Merger
Agreement and related agreements, the Merger Agreement's noncontravention of
charter documents, laws, regulations, governmental orders, mortgages, credit
agreements, leases and other agreements and the need to obtain governmental or
third-party consents or approvals (except for certain approvals or filings
specified in the Merger Agreement); (iv) capitalization; (v) delivery, accuracy
and compliance as to generally accepted accounting principles of RSA's financial
statements; (vi) the absence of certain material adverse changes or events;
(vii) undisclosed liabilities; (viii) taxes, tax returns and audits; (ix)
ownership and condition of assets; (x) intellectual property; (xi) real property
leases; (xii) agreements, contracts and commitments; (xiii) insurance; (xiv)
litigation; (xv) employees; (xvi) employee benefit plans; (xvii) environmental
matters; (xviii) compliance with laws; (xix) permits; (xx) interested party
transactions; (xxi) broker's and finder's fees; (xxii) eligibility of the Merger
for pooling of interests treatment; and (xxiii) accuracy of information supplied
by RSA for inclusion in the Registration Statement and this Joint Proxy
Statement and Prospectus.
The Merger Agreement also includes representations and warranties by SDI
and the Merger Subsidiary as to, among other things: (i) organization, good
standing and corporate power of SDI and the Merger Subsidiary; (ii)
authorization, execution, delivery and enforceability of the Merger Agreement
and related agreements, the Merger Agreement's noncontravention of charter
documents, laws, regulations, governmental orders, mortgages, credit agreements,
leases and other agreements, and absence of any need to obtain governmental or
third-party consents or approvals (except for certain approvals or filings
specified in the Merger Agreement); (iii) capitalization; (iv) issuance of SDI
Common Stock in the Merger; (v) documents and financial statements filed by SDI
with the Commission and the accuracy of information contained therein; (vi) the
absence of certain material adverse changes or events; (vii) eligibility of the
Merger for pooling of interests treatment; (viii) broker's and finder's fees;
(ix) the accuracy of information in the Registration Statement and this Joint
Proxy Statement and Prospectus (other than information supplied by RSA); and (x)
receipt of an opinion of SDI's financial advisor.
CERTAIN COVENANTS AND AGREEMENTS
Each of the parties to the Merger Agreement has agreed to: (i) use its best
efforts to consummate the transactions contemplated by the Merger Agreement;
(ii) use its best efforts to obtain all waivers, permits, consents, approvals or
other authorizations from third parties and governmental entities necessary for
the consummation of the transactions contemplated by the Merger Agreement; (iii)
jointly prepare and file with the Commission under the Exchange Act proxy
materials for the purpose of soliciting proxies from (a) RSA stockholders to
vote in favor of the Merger and the Merger Agreement and (b) SDI stockholders to
vote in favor of the Merger Proposal; and (iv) promptly notify the other party
in writing of the occurrence of any event or development that would (a) render
any statement, representation or warranty of any other party in the Merger
Agreement inaccurate or incomplete in any material respect or (b) constitute or
result in a breach by any other party or failure by any other party to comply
with any agreement or covenant in the Merger Agreement applicable to such party.
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RSA has also agreed that, during the period from the date of the Merger
Agreement until the Effective Time, except as otherwise consented to in writing
by SDI or as contemplated by the Merger Agreement, RSA and its subsidiaries
will: (i) carry on its business in the ordinary course in substantially the same
manner as previously conducted and in compliance with applicable laws and
regulations, including the use of reasonable efforts to (a) preserve intact its
current business organization, (b) keep available the services of its current
officers and employees and (c) preserve its relationships with customers,
suppliers and others having business dealings with it; (ii) not issue, authorize
the issuance of, redeem or repurchase any shares of its capital stock or
securities convertible into shares of its capital stock, or any rights, warrants
or options to acquire, or other agreements obligating it to issue any such
shares or other convertible securities, subject to certain exceptions; (iii) not
split, combine or reclassify any shares of its capital stock or declare or pay
any dividends on or make other distributions in respect of any of its capital
stock; (iv) not create, incur or assume indebtedness (or guarantees thereof),
assume or guarantee the obligations of any other person or entity, or make any
loans or advances to or investments in any other person or entity other than in
the ordinary course of business consistent with past practice; (v) not increase
the compensation payable to its officers or employees (except for increases in
the ordinary course of business consistent with past practice) or establish,
adopt, enter into or amend any plan for the benefit of its directors, officers
or employees, subject to certain exceptions; (vi) not acquire, sell, lease,
encumber or dispose of any assets or property, other than in the ordinary course
of business consistent with past practice; (vii) not amend its charter or
by-laws; (viii) not change in any material respect its accounting methods,
principles or practices, subject to certain exceptions; (ix) not discharge or
satisfy any Security Interest (as defined in the Merger Agreement) or pay any
obligation or liability other than in the ordinary course of business consistent
with past practice; (x) not mortgage or pledge any of its properties or assets
or subject any such assets to any Security Interest; (xi) not sell, assign,
transfer or license any Intellectual Property (as defined in the Merger
Agreement) other than in the ordinary course of business consistent with past
practice; (xii) not enter into, amend, terminate, take or omit to take any
action that would constitute a violation of or default under any material
contract or agreement; (xiii) not make or commit to make any capital expenditure
in excess of $50,000 per item; (xiv) not take any action or fail to take any
action with the knowledge that such action or failure to take action would
result in any of its representations and warranties in the Merger Agreement
becoming untrue or any of the conditions of closing not being satisfied; and
(xv) not take any action that would jeopardize the treatment of the Merger as a
pooling of interests for accounting purposes.
NO SOLICITATION
The Merger Agreement provides that RSA will not, directly or indirectly,
through any officer, director, employee, representative or agent of RSA, (i)
solicit, initiate, engage or participate in or knowingly encourage discussions
or negotiations with any person or entity concerning any merger, consolidation,
business combination, sale of material assets, sale of shares of capital stock
or similar transactions involving RSA or any of its subsidiaries, other than the
transactions contemplated by the Merger Agreement (any of the foregoing being
referred to as an "Acquisition Proposal"), or (ii) provide any non-public
information concerning RSA's business, properties or assets to any person or
entity other than SDI. RSA is required to immediately notify SDI of, and to
disclose to SDI all details of, any inquiries, discussions or negotiations
relating to an Acquisition Proposal after receipt of any Acquisition Proposal or
request for non-public information or access to its business, properties or
assets.
RELATED MATTERS AFTER THE MERGER
At the Effective Time, the Merger Subsidiary will be merged with and into
RSA, and RSA will be the Surviving Corporation and a wholly-owned subsidiary of
SDI. Each share of common stock of the Merger Subsidiary issued and outstanding
immediately prior to the Effective Time will be converted into and exchanged for
one validly issued, fully paid and nonassessable share of RSA Common Stock. Each
stock certificate of the Merger Subsidiary evidencing ownership of any such
shares shall continue to evidence ownership of such shares of RSA Common Stock.
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At the Effective Time the Certificate of Incorporation of the Surviving
Corporation shall be amended in the manner set forth on Exhibit B to the Merger
Agreement. The By-Laws of the Merger Subsidiary, as in effect immediately prior
to the Effective Time, will be the By-Laws of the Surviving Corporation.
Messrs. Bidzos, Coviello and Stuckey, the directors of the Merger
Subsidiary immediately prior to the Effective Time, will be the initial
directors of the Surviving Corporation, and the officers of RSA immediately
prior to the Effective Time will be the initial officers of the Surviving
Corporation.
CONDITIONS
The respective obligations of SDI and RSA to effect the Merger are subject
to the following conditions, among others: (i) the Merger Proposal shall have
been approved by the stockholders of SDI and the Merger and the Merger Agreement
shall have been approved and adopted by the stockholders of RSA; (ii) the
waiting period applicable to the consummation of the Merger under the HSR Act
shall have expired or been terminated; (iii) the Registration Statement shall
have become effective and shall not be the subject of a stop order or
proceedings seeking a stop order; (iv) no temporary restraining order,
preliminary or permanent injunction or other order shall be in effect nor shall
there be any proceeding seeking any of the foregoing that prevents, or seeks to
prevent, the consummation of the Merger; (v) no action shall be taken, nor any
statute, rule, regulation, or order enacted, entered, enforced or deemed
applicable to the Merger which makes the consummation of the Merger illegal;
(vi) receipt by SDI of all state securities or "Blue Sky" permits and other
authorizations necessary to issue shares of SDI Common Stock pursuant to the
Merger; (vii) receipt by SDI of a written opinion from Hale and Dorr, counsel to
SDI, and receipt by RSA of an opinion of Tomlinson Zisko Morosoli & Maser LLP,
counsel to RSA, both to the effect that the Merger will be treated for Federal
income tax purposes as a reorganization within the meaning of Section 368(a) of
the Code (see "The Merger -- Certain Federal Income Tax Consequences"); and
(viii) the authorization of the shares of SDI Common Stock to be issued in the
Merger for listing on the Nasdaq National Market.
The obligation of SDI to consummate the Merger also is subject to certain
additional conditions, including among others that: (i) RSA shall have received
all material waivers, permits, consents, approvals or other authorizations; (ii)
RSA's representations and warranties contained in the Merger Agreement shall be
true and correct in all material respects as of the date of the Merger Agreement
and as of the Effective Time, subject to certain limited exceptions; (iii) RSA
shall have performed or complied with in all material respects its agreements
and covenants required to be performed or complied with by it under the Merger
Agreement as of or prior to the Effective Time; (iv) SDI shall have received
from Fenwick & West LLP, counsel to RSA, an opinion in the form set forth as
Exhibit D to the Merger Agreement; (v) SDI shall have received a "cold comfort"
letter dated as of a date not more than two days prior to the date that the
Registration Statement is declared effective and shall have received a
subsequent similar letter dated as of a date not more than two days prior to the
Effective Time from Ernst & Young LLP, auditors for RSA, in a customary form
reasonably satisfactory to SDI; (vi) SDI shall have received a letter from Ernst
& Young LLP, independent auditors for RSA, in a form reasonably satisfactory to
SDI, stating that RSA meets the accounting requirements for the Merger to be
accounted for as a "pooling of interests" and a letter from Deloitte & Touche
LLP, independent auditors for SDI, in a form reasonably satisfactory to SDI, to
the effect that SDI may treat the Merger as a "pooling of interests" for
accounting purposes; (vii) D. James Bidzos shall be available for continued
employment by SDI and SDI shall have entered into employment and non-competition
agreements with each of C. Victor Chang, Burton Kaliski and Paul Livesay,
employees of RSA, on the terms outlined below under "The Merger
Agreement -- Related Agreements"; (viii) appraisal rights shall not have been
properly demanded in accordance with the DGCL as to more than 5% of the
outstanding shares of RSA Stock; and (ix) SDI, RSA, the Escrow Agent and certain
representatives of the holders of RSA Stock and RSA Options (the
"Indemnification Representatives") shall have entered into the Escrow Agreement
described below under the caption "The Merger Agreement -- Escrow."
The obligation of RSA to consummate the Merger is subject to certain
additional conditions, including among others that: (i) the representations and
warranties of SDI and the Merger Subsidiary contained in the Merger Agreement
shall be true and correct in all material respects as of the date of the Merger
Agreement and as of the Effective Time, subject to certain limited exceptions;
(ii) each of SDI and the Merger
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Subsidiary shall have performed or complied with in all material respects its
agreements and covenants required to be performed or complied with by it under
the Merger Agreement as of or prior to the Effective Time; and (iii) RSA shall
have received from Hale and Dorr, counsel to SDI and the Merger Subsidiary, an
opinion in the form set forth as Exhibit F to the Merger Agreement.
INDEMNIFICATION
The Merger Agreement provides that the holders of RSA Stock and RSA Options
(collectively, the "Indemnifying Persons") shall indemnify and hold harmless SDI
and the Surviving Corporation from any debts, obligations, monetary damages,
fines, fees, deficiencies and the like ("Damages"): (i) arising from a
misrepresentation or breach of a warranty of RSA in the Merger Agreement; (ii)
resulting from failure to perform a covenant or agreement of RSA in the Merger
Agreement; (iii) resulting from or arising out of the subject matter of the
Litigation; or (iv) resulting from any claim by a stockholder or former
stockholder of RSA or any other person seeking to assert or based upon (a)
ownership or rights to ownership of any shares of stock of RSA, (b) any rights
of a stockholder (other than the right to receive SDI Common Stock pursuant to
the Merger Agreement or appraisal rights under the DGCL), (c) any rights under
the Certificate of Incorporation or By-Laws of RSA, or (d) any claim that his,
her or its shares were wrongfully repurchased by RSA.
The Merger Agreement provides that if the closing of the Merger occurs, and
subject to the following paragraph, (i) the aggregate liability of the
Indemnifying Persons for Damages shall not exceed an amount equal to the fair
market value of the Escrow Shares (as defined below), (ii) the Indemnifying
Persons shall be liable under clauses (i), (ii) and (iv) of the prior paragraph
(the "General Indemnification Provisions") for only that portion of the
aggregate Damages which exceeds $500,000, and (iii) the aggregate liability of
the Indemnifying Persons for Damages pursuant to the General Indemnification
Provisions and for Damages pursuant to clause (iii) of the prior paragraph (the
"Litigation Indemnification Provisions") shall be limited as described below
under "The Merger Agreement -- Escrow."
The Merger Agreement provides that (i) the indemnification obligations of
the Indemnifying Persons for Damages arising under the General Indemnification
Provisions shall continue until the earlier of (a) the first anniversary of the
date of the Effective Time or (b) the issuance of SDI's audited financial
statements for the year ending December 31, 1996 (except in the case of claims
asserted prior to the termination of such period) (the "General Indemnification
Release Date"), and (ii) the indemnification obligations of the Indemnifying
Persons for Damages arising under the Litigation Indemnification Provisions
shall continue until the Litigation is finally resolved (the "Litigation
Indemnification Release Date").
ESCROW
In order to secure the indemnification obligations of the Indemnifying
Persons under the Merger Agreement, 12.5% of the shares of SDI Common Stock
issued to the Indemnifying Persons in the Merger (the "Escrow Shares") will be
held in escrow. At the Closing, SDI, RSA, the Indemnification Representatives
(on behalf of the holders of RSA Stock and RSA Options) and the Escrow Agent
will enter into the Escrow Agreement. The Indemnification Representatives will
be entitled to vote the Escrow Shares while held in escrow. Any securities, cash
dividends or other property distributed with respect to the Escrow Shares,
whether by way of stock dividends, stock splits or otherwise, will be delivered
to the Escrow Agent and held in escrow pursuant to the Escrow Agreement.
APPROVAL OF THE MERGER AGREEMENT AND THE MERGER BY THE RSA STOCKHOLDERS AT
THE RSA SPECIAL MEETING SHALL CONSTITUTE APPROVAL OF THE APPOINTMENT OF MESSRS.
BIDZOS, FISCHER AND RIVEST AS THE INDEMNIFICATION REPRESENTATIVES AND THE TERMS
OF THE ESCROW AGREEMENT.
SDI will be entitled to make claims for indemnification against the Escrow
Shares in accordance with the procedures established in the Escrow Agreement and
the Merger Agreement. In the event of a dispute as to SDI's entitlement to be
indemnified, such dispute will be settled by binding arbitration in San
Francisco, California. All arbitration proceedings will be conducted by a single
arbitrator mutually acceptable to SDI and the Indemnification Representatives,
or, if they are unable to agree on a single arbitrator, by a panel of three
60
<PAGE> 71
arbitrators. The arbitrator or arbitrators will be required to resolve the
dispute within 60 days of appointment in accordance with the Commercial
Arbitration Rules of the American Arbitration Association. Their decision will
relate solely to whether SDI is entitled to receive Escrow Shares in
satisfaction of its claim for indemnification and will constitute a conclusive
determination of the issue in question. In satisfying claims for
indemnification, Escrow Shares will be valued at the average of the last sale
price per share of the SDI Common Stock for the 15 trading days prior to the
date of the Effective Time.
Up to 5% of the shares of SDI Common Stock issued to the Indemnifying
Persons in the Merger will be available for claims under the General
Indemnification Provisions. Such claims may be made by SDI prior to the General
Indemnification Release Date. Up to 10% of the shares of SDI Common Stock issued
to the Indemnifying Persons in the Merger will be available for claims under the
Litigation Indemnification Provisions. Such claims may be made by SDI at any
time prior to the Litigation Indemnification Release Date. As potentially
significant future legal costs with respect to such identified litigation are
anticipated to be incurred irrespective of the outcome of the litigation, it is
expected that there will at least be some recovery by SDI pursuant to these
indemnity and escrow provisions, thereby reducing the number of shares of SDI
Common Stock ultimately received by holders of RSA Stock as a result of the
Merger.
Certain of the shares of SDI Common Stock issued to the Indemnifying
Persons in the Merger will be distributed to the Indemnifying Persons on the
General Indemnification Release Date and the Litigation Indemnification Release
Date, except that, in the event there is on either such date a pending claim for
indemnification, the Escrow Agent shall retain in escrow at least sufficient
shares to satisfy the pending claim. All distributions of Escrow Shares among
the Indemnifying Persons shall be made pro rata in relation to each such
person's proportionate percentage of shares of SDI Common Stock received in the
Merger. Holders of RSA Options will forfeit a portion of the "spread" on the RSA
Options (computed based upon the difference between the exercise prices of such
options and the average of the last sale price of SDI Common Stock for the 15
trading days prior to the date of the Effective Time) equivalent to their pro
rata share of such damages and costs indemnified. Upon certain circumstances,
holders of RSA Options may be required to deposit into escrow up to 12.5% of the
shares of SDI Common Stock acquired upon exercise of such Options.
The Indemnification Representatives will have full authority to defend any
claims by third parties for which the Indemnifying Persons may be required to
indemnify SDI, subject to SDI's right to consent to any settlement of such
claims. In certain limited circumstances, SDI may assume joint or sole control
of the defense of such third-party claims. All decisions and actions by the
Indemnification Representatives under the Escrow Agreement will be binding upon
all Indemnifying Persons. SDI will pay the Escrow Agent's fees and, in general,
SDI and the Indemnifying Persons will each share the fees and expenses of any
arbitration proceeding equally. The Indemnifying Persons will be obligated to
reimburse the Indemnification Representatives for their reasonable expenses
(including attorneys' fees) incurred in connection with the performance of their
duties as the Indemnification Representatives. The Escrow Agreement limits the
liability of the Escrow Agent in various ways and requires SDI and the
Indemnifying Persons to indemnify the Escrow Agent against certain losses,
liabilities and expenses, except to the extent resulting from the Escrow Agent's
willful misconduct or negligence.
TERMINATION
The Merger Agreement may be terminated at any time prior to the Effective
Time, whether before or after approval of the matters presented in connection
with the Merger by the stockholders of SDI and RSA:
(i) by mutual written consent of SDI and RSA;
(ii) by SDI or RSA, if there has been a breach of any material
representation, warranty or covenant on the part of the other party set
forth in the Merger Agreement, which breach shall not have been cured
within 10 days following receipt by the breaching party of written notice
of such breach from the other party;
(iii) by SDI or RSA, if, at the SDI Special Meeting or RSA Special
Meeting (including any adjournment or postponement thereof), the requisite
vote of the stockholders of SDI in favor of the
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<PAGE> 72
Merger Proposal or the stockholders of RSA in favor of the Merger Agreement
and the Merger shall not have been obtained; or
(iv) by either SDI or RSA if the Merger shall not have been
consummated by August 31, 1996 (provided that the right to terminate the
Merger Agreement under this clause shall not be available to any party
whose failure to fulfill any obligation under the Merger Agreement has been
the cause of or resulted in the failure of the Merger to occur on or before
such date).
In the event of any termination of the Merger Agreement by either SDI or
RSA as provided above, the Merger Agreement will become void and there will be
no liability or obligation on the part of SDI, RSA or the Merger Subsidiary,
except to the extent that such termination results from the breach by a party of
any of its representations, warranties or covenants set forth in the Merger
Agreement.
Whether or not the Merger is consummated, all fees, costs and expenses
incurred in connection with the Merger Agreement and the transactions
contemplated thereby shall be paid by the party incurring such expenses, except
(i) as otherwise provided in the Escrow Agreement, and (ii) that if the Merger
is consummated, the legal fees and expenses of RSA may not exceed $400,000.
AMENDMENT AND WAIVER
The Merger Agreement may be amended at any time by action taken or
authorized by the respective Boards of Directors of SDI and RSA, but after
approval by the stockholders of SDI and RSA of the matters presented in
connection with the Merger to them, no amendment shall be made which by law
requires further approval by such stockholders, without such further approval.
SDI and RSA, by action taken or authorized by their respective Boards of
Directors, may extend the time for performance of the obligations or other acts
of the other parties to the Merger Agreement, may waive inaccuracies in the
representations or warranties contained in the Merger Agreement and may waive
compliance with any agreements or conditions contained in the Merger Agreement.
RELATED AGREEMENTS
The agreements summarized below are related to the Merger Agreement and the
transactions contemplated thereby.
Stockholder Agreements. Concurrent with the execution of the Merger
Agreement, Messrs. Bidzos, Fischer and Rivest (the "Principal Stockholders"),
who, as of June 28, 1996, held in the aggregate approximately 73% of the
outstanding capital stock of RSA, each entered into a Stockholder Agreement with
RSA and SDI, the form of which is attached hereto as Annex C.
Pursuant to the terms of the Stockholder Agreements, the Principal
Stockholders have agreed that, for a period beginning 30 days prior to the
closing of the Merger and ending on the date of the Effective Time (or such
earlier date on which the Merger Agreement is terminated in accordance with its
terms), such Principal Stockholders will not transfer, sell, exchange, pledge or
otherwise encumber any shares of RSA capital stock owned or acquired prior to or
during such period.
The Principal Stockholders have also agreed pursuant to the Stockholder
Agreements to vote their shares of capital stock of RSA in favor of approval and
adoption of the Merger and the Merger Agreement and against approval of any
proposal made in opposition to or in competition with the consummation of the
Merger, including any other merger, consolidation, sale of assets,
reorganization, recapitalization or the dissolution of RSA (each, an "Opposing
Proposal"). In connection with such obligations, each Principal Stockholder has
granted SDI an irrevocable proxy authorizing each member of the SDI Board, at
any time prior to the Effective Time or the termination of the Merger Agreement,
to vote all shares of capital stock of RSA owned by such Principal Stockholder
in favor of approval of the Merger Agreement and the Merger and against approval
of any Opposing Proposal.
Pursuant to the terms of the Stockholder Agreements, SDI has agreed that,
beginning 90 days after SDI has published financial results covering at least 30
days of combined operations of SDI and RSA ("the
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<PAGE> 73
"Registration Rights Commencement Date"), upon the request of a Principal
Stockholder, SDI will file a registration statement on Form S-3 with respect to
shares of SDI Common Stock held by such Principal Stockholder as a result of the
Merger ("Registerable Shares") and will use its best efforts to cause the
registration statement to become and remain effective; provided, however, that
SDI will not be required to file a registration statement if the aggregate
offering price of such Registerable Shares is less than $1 million. Each
Principal Stockholder may request one such registration on Form S-3. In
addition, in the event that SDI proposes to file a registration statement under
the Securities Act at any time after the Registration Rights Commencement Date
with respect to an offering by SDI for its own account or the account of another
(including a registration statement on Form S-3 for the account of another
Principal Stockholder), SDI shall notify each Principal Stockholder of such
pending registration and will use its best efforts to cause the inclusion of any
requested Registerable Shares in such registration statement. If such offering
involves an underwriting, the managing underwriter of such offering may exclude
some or all of the requested Registerable Shares from such registration if and
to the extent that inclusion of such shares would adversely affect the marketing
of the shares to be sold by SDI. In such event, the amount of Registerable
Shares to be offered for the accounts of the Principal Stockholders shall be
reduced pro rata among all of the requesting Principal Stockholders based upon
the number of shares to be included in such registration by all requesting
Principal Stockholders. The registration rights granted to the Principal
Stockholders are subject to certain conditions and limitations set forth in the
Stockholder Agreements. SDI is generally required to bear the expenses of all
such registrations, except underwriting discounts and commissions. These
registration rights expire on the earliest of (i) the termination of the Merger
Agreement, (ii) with respect to a Principal Stockholder, the date on which all
Registerable Shares held by such Principal Stockholder are eligible for sale
pursuant to Rule 144 under the Securities Act within a three-month period, or
(iii) the fifth anniversary of the Effective Time.
Bidzos Employment Agreement. Concurrent with the execution of the Merger
Agreement, RSA entered into an employment agreement with Mr. Bidzos for a
two-year period commencing on the date of the closing of the Merger (the
"Commencement Date"). Under the agreement, which was amended on June 6, 1996,
Mr. Bidzos will serve as President of the Surviving Corporation (or in such
other position as the Board of the Surviving Corporation determines). Mr.
Bidzos' compensation will consist of: (i) an annual base salary of $200,000 for
the first year of the agreement, subject to adjustment thereafter as determined
by the Board of Directors of the Surviving Corporation, provided, that in no
event may Mr. Bidzos' aggregate annual compensation (including bonus) be less
than $250,000; (ii) an annual bonus if he satisfies discrete revenue objectives
to be agreed upon by the Surviving Corporation and Mr. Bidzos; and (iii) subject
to approval by the Compensation Committee of SDI, an option to purchase 150,000
shares of SDI Common Stock at a per share price equal to the lesser of (a) the
last reported sale price of SDI Common Stock on the Nasdaq National Market on
the Commencement Date or (b) the average of the last reported sale prices of SDI
Common Stock on the Nasdaq National Market for the five trading days prior to
the Commencement Date. Options granted to Mr. Bidzos pursuant to the agreement
will have a term of ten years and vest with respect to 37,500 shares on the
first anniversary of the Commencement Date and, with respect to the remaining
112,500 shares, in 12 equal installments of 9,375 shares at the end of each
three-month period following the first anniversary of the Commencement Date.
The agreement will be terminable (i) at the end of the initial two-year
term, (ii) at the election of the Surviving Corporation for cause, (iii) upon
Mr. Bidzos' death or disability, or (iv) at the election of the Surviving
Corporation upon 30 days' prior written notice. In the event that the Surviving
Corporation terminates Mr. Bidzos for cause or upon death or disability, the
Surviving Corporation will pay Mr. Bidzos (or his estate) compensation and
benefits through the last day of his actual employment. If the Surviving
Corporation terminates Mr. Bidzos without cause, the Surviving Corporation will
pay Mr. Bidzos the compensation otherwise payable through the last day of the
Non-compete Period (as defined below), as and when such payments would otherwise
be payable under the agreement. Mr. Bidzos' options cease vesting upon the
termination of his employment for any reason.
Mr. Bidzos has agreed that, subject to certain exceptions, during the term
of his employment by the Surviving Corporation and for a period extending
through the later of two years after the Commencement Date or the first
anniversary after which he ceases to be employed by the Surviving Corporation,
SDI or any
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<PAGE> 74
affiliate of SDI (the "Non-compete Period"), he will not directly or indirectly
engage in any business which offers products or services that are competitive
with the products or services of the Surviving Corporation, SDI or any such
affiliate. In addition, Mr. Bidzos has agreed not to solicit the employees or
customers of the Surviving Corporation, SDI or any such affiliate during the
Non-compete Period. The devotion of not more than 10% of Mr. Bidzos' business
time, attention and energies to certain investments with which Mr. Bidzos has
historically been associated is expressly excluded from the non-compete
provisions of the employment agreement.
Other Employment Agreements. SDI's obligation to proceed with the Merger
is also subject to the execution of employment agreements between the Surviving
Corporation, SDI (with respect to certain option provisions) and each of Messrs.
Chang, Kaliski and Livesay (each, an "Employee"). The form of employment
agreement to be entered into generally provides as follows:
Each employment agreement will have a three-year term commencing on the
date of the closing of the Merger (the "Commencement Date"). Under each
agreement, the Employee's compensation will consist of: (i) an annual salary to
be agreed upon by SDI and the Employee prior to the Commencement Date, provided
that the annual salary will increase by not less than 5% for each year
subsequent to the first year of employment; (ii) participation in benefit
programs consistent with the Employee's position, tenure, salary, age, health
and other qualifications; and (iii) subject to approval by the Compensation
Committee of SDI, an option to purchase a number of shares of SDI Common Stock
to be determined prior to the Commencement Date at a per share price equal to
the lesser of (x) the last reported sale price of SDI Common Stock on the Nasdaq
National Market on the Commencement Date or (y) the average of the last reported
sale prices of SDI Common Stock on the Nasdaq National Market for the five
trading days prior to the Commencement Date. Options granted to each Employee
will have a ten-year term and vest in four equal annual installments on the
first through fourth anniversaries of the Commencement Date.
Each agreement will terminate (i) three years from the Commencement Date,
(ii) at the election of the Surviving Corporation for cause, (iii) upon the
Employee's death or disability, (iv) at the election of the Surviving
Corporation upon 30 days' prior written notice, or (v) at the election of the
Employee upon a breach by the Surviving Corporation of a material term of the
agreement which is not cured within 30 days of notice thereof by the Employee.
In the event that the Surviving Corporation terminates an Employee's employment
for cause or upon death or disability, the Surviving Corporation will pay the
Employee (or his estate) compensation and benefits through the last day of his
actual employment. If the Surviving Corporation terminates the Employee without
cause, or if the Employee terminates the agreement upon a breach of a material
term of the agreement by the Surviving Corporation, the Surviving Corporation
will pay the Employee the compensation otherwise payable during the remainder of
the term of the agreement, as and when such payments would otherwise be payable
under the agreement. An Employee's options will cease vesting upon the
termination of his employment for any reason.
Each employment agreement provides that, during the term of an Employee's
employment by the Surviving Corporation and for a period extending through the
later of four years after the Commencement Date or the first anniversary after
which he ceases to be employed by the Surviving Corporation, SDI or any
affiliate of SDI (the "Non-compete period"), he will not directly or indirectly
engage in any business which develops, produces, markets or sells products of
the kind or type developed (or being developed), produced, marketed or sold by
the Surviving Corporation, SDI or any such affiliate while the Employee was
employed by the Surviving Corporation, SDI or any such affiliate. In addition,
each employment agreement provides that the Employee will not solicit the
employees or customers of the Surviving Corporation, SDI or any affiliate during
the Non-compete Period.
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<PAGE> 75
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.
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<PAGE> 76
PRO FORMA CONDENSED COMBINING BALANCE SHEET
AS OF MARCH 31, 1996
(IN THOUSANDS)
<TABLE>
<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.
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<PAGE> 77
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<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> 78
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<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> 79
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1994
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<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.
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<PAGE> 80
PRO FORMA CONDENSED COMBINING STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1993
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<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.
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<PAGE> 81
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.
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<PAGE> 82
BUSINESS -- SDI
SDI designs, develops, markets and supports a family of security products
used to protect and manage access to computer-based information resources. SDI's
family of products employs a patent-protected combination of super smart card
technology and software or hardware access control products to authenticate the
identity of users accessing networked or stand-alone computing resources. SDI's
SecurID Cards and other "tokens" and its access control products, including its
ACE/Server Software and ACM software and hardware products, are designed to
interface with a wide variety of operating systems and hardware platforms on
client/server, mainframe and mid-range systems to enable enterprise-wide
security coverage. In the fourth quarter of 1995, SDI began shipping a second
generation of its ACE/server software to meet the evolving enterprise security
needs of its customers.
In recent years, the task of managing access to computer-based information
resources has become increasingly difficult due to a variety of factors,
including: (i) the evolution of enterprise computing from centralized host-based
systems to distributed environments; (ii) the proliferation of desktop and
portable computers; (iii) the linking of local area networks and wide area
networks to mainframes and mid-range systems through internetworking solutions;
and (iv) the rapid increase in remote computing applications and use of the
Internet. As a result of these trends and technologies, the number of users with
direct access to information resources, as well as the number of potential
access points to these resources, has increased dramatically. Sensitive data
accessible from multiple locations include financial results, medical records,
personnel files, research and development projects, marketing plans and other
business information. Unauthorized access to information resources has become a
growing and costly problem for businesses and other enterprises and continues to
be identified by information system professionals as a priority in their system
designs.
SDI's products combine a user's personal identification number or "PIN" and
a code automatically generated by a SecurID token to authenticate the identity
of the user. Each SecurId token contains SDI's proprietary algorithm, which
generates a sequence of pseudorandom token codes displayed on the SecurID token
at set intervals, typically every 60 seconds. When attempting to log-in, the
user is prompted by SDI's ACE/Server software or ACM software or hardware access
control product to enter both the PIN and the current token code. If the PIN and
the code generated by the access control product match those input by the user,
access is granted.
SDI's products are sold or licensed primarily through its direct sales
force, which is supported by a number of strategic marketing relationships. As
of March 31, 1996, SDI had sold or licensed over 4,000 software and hardware
access control products and over 1,000,000 SecurID tokens to over 1,100
customers worldwide. SDI's customers include Fortune 500 companies and financial
institutions as well as academic institutions, research laboratories, hospitals
and federal, state and foreign government organizations. A significant portion
of SDI's revenue has historically been attributable to follow-on sales to
existing customers, either to support additional users or platforms or to
replace SecurID tokens at the expiration of their programmed lives.
INDUSTRY BACKGROUND
Enterprise computing has been evolving over the last three decades from
host-based systems towards distributed network computing. During the 1980's, the
ease-of-use and low cost of personal computers and the development of personal
productivity software had led to rapid growth in the number of personal computer
users throughout organizations. These organizations increasingly began to
interconnect their personal computers into local area networks ("LANs") in order
to share files within work groups. Many enterprise applications continued to
operate on separate mainframe or minicomputers. Since the late 1980's,
specialized internetworking products have made it easier for organizations to
connect their disparate LANs both locally in a single facility and, through wide
area networks ("WANs"), in geographically dispersed locations. Organizations are
also increasingly integrating their LANs with their minicomputers and
mainframes, thus enabling users to communicate, exchange information and share
computing resources within and between organizations. Many of these
organizations are seeking to develop client/server implementations of their
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<PAGE> 83
enterprise applications to more fully exploit their distributed networks, many
of which are increasingly accessed by disparate users via remote, LAN and
Internet connections. These new enterprise-wide networks require a comprehensive
set of network products that can integrate a large number of users and
heterogeneous computing resources into a consistent, manageable and secure
computing environment.
As a result of the increase in the number of users having direct access to
enterprise networks and corporate data, unauthorized access to information
resources has become a growing and costly problem for businesses. Sensitive data
that require protection from unauthorized use include financial results, medical
records, personnel files, research and development projects, marketing plans and
other business information. Unauthorized access to these data may go undetected
by the computer user or system administrator, especially if the information is
not altered by the unauthorized party. Companies are vulnerable not only to
unauthorized access to information resources by suppliers, customers and other
third parties, but also to abuse by employees within their own organizations.
Computer and network security has historically been the focus of businesses
engaged in security-conscious industries such as banking, telecommunications,
aerospace and defense. However, with the increased use of enterprise-wide
computing and remote access, network security is of increasing concern to
businesses and other organizations in most industries that use computer or
network-based information resources.
Hierarchy of Computer and Network Security
Products for the protection of information resources on a computer system
or network can be grouped into the following four classes: (i) user
identification and authentication, (ii) privilege definition, (iii) encryption,
and (iv) audit. The effectiveness of each succeeding class of security products
is either dependent on or enhanced by the availability and effectiveness of one
or more of the preceding classes. For example, without proper authentication of
the identity of a user, it is difficult to assure that the privileges granted
after accessing a system or network are being granted to the proper authorized
user. SDI's current products are targeted at the fundamental need to
authenticate the identity of system and network users.
Identification and Authentication
Reliable authentication of the identity of users is necessary to prevent
unauthorized access to computer and network resources. There are three generally
accepted methods of user identification: (i) something secret the user knows,
such as a word, phrase, personal identification number ("PIN"), code or fact,
(ii) something physical the user possesses, such as a key, smart card, badge or
other form of discrete "token," which is resistant to counterfeiting, and (iii)
something unique to the user, such as a fingerprint, signature, retinal pattern,
voice print or other measurable personal characteristic or "biometric." SDI
believes that the use of a two-factor authentication system, combining two of
the three generally accepted methods of user identification, is required for
reliable computer and network security.
Enterprise Security
SDI believes that there is an emerging market for enterprise-wide security
solutions and, increasingly, for inter-enterprise security solutions (e.g.,
between the enterprise and its vendors and customers). These solutions must
address the need for:
- Ease of use;
- Interoperability with heterogeneous enterprise environments;
- Scalability;
- Ease of administration;
- Integration with existing customer applications; and
- System reliability and availability.
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<PAGE> 84
To date, most approaches to network security have been limited in scope and
have failed to address one or more of these requirements. SDI believes that, in
order to compete effectively in this market, vendors of computer and network
security products must develop a comprehensive set of network security services
that can accommodate a large number of users and integrate heterogeneous
computing resources into a consistent, manageable, reliable and secure computing
environment.
SDI SOLUTION
SDI designs, develops, markets and supports a family of security products
used to protect and manage access to computer-based information resources. SDI's
family of products employs a patent-protected combination of super smart card
technology and software or hardware access control products to authenticate the
identity of users accessing networked or stand-alone computing resources.
SDI's products combine two methods of user identification -- something
secret the user knows (a PIN) and something the user possesses (the SecurID
Token). To gain access to a protected resource, a user enters his or her PIN and
the token code automatically computed and displayed on the liquid crystal
display ("LCD") of the user's SecurID Token. The PIN and the token code together
form the user's "PASSCODE." With a valid PASSCODE, the authorized user is
identified and authenticated by the access control product and granted access to
appropriate information resources. If the PASSCODE generated by the system and
the PASSCODE entered by the user match, system access is authorized. If not,
system entry is blocked. In either case, a record is logged and an audit trail
is maintained by the system.
Each SecurID token contains SDI's proprietary algorithm and is programmed
with a secret, randomly generated seed number which is unique to the token. The
algorithm uses the seed number and Greenwich Mean Time to produce a sequence of
token codes at set intervals (typically every 60 seconds). SDI's access control
products, available in both software and hardware versions, use the same
algorithm, seed number and Greenwich Mean Time to generate a token code
corresponding to the token code generated by the user's SecurID token.
SDI's patented time synchronization software residing within the access
control product assures that the codes generated by the system stay synchronized
with the codes generated by the user's SecurID token. SDI's proprietary programs
are designed to intercept attempted system abuse and automatically take action
if the system suspects that a token is lost or stolen or a PIN is compromised.
During the fourth quarter of 1995, SDI began shipping a second generation
of its ACE/Server v2.0 to meet the evolving enterprise security needs of its
customers. ACE/Server v2.0 incorporates Progress Software Corporation's
commercial relational database and is designed to provide a higher degree of
scalability, facilitate interoperability of ACE/Server v2.0 with enterprise
environments and existing customer applications through the use of a standard
SQL interface and provide greater system reliability and availability. ACE/
Server v2.0 also incorporates an easy-to-use graphical user interface ("GUI")
and flexible administration tools to simplify network security management.
SDI believes that the new architecture of ACE/Server v2.0 provides the
foundation for future enhancements to SDI's enterprise-wide security solution.
Areas for future development currently being pursued by SDI include: (i) server
to server authentication (cross realm or domain authentication) to support
mobile users by allowing access to protected resources over multiple
ACE/Servers; (ii) enhanced redundancy for each ACE/Server for increased
availability in large installations; (iii) use of standard SQL interfaces to
allow customer and third-party integrators to customize their applications and
integrate ACE/Server with network management software such as HP Openview, Sun
NetManager and CA Unicenter and to facilitate the support of industry standard
development tools such as PowerBuilder from Sybase and PeopleTools from
PeopleSoft; (iv) directory services to simplify the administration of customer
network resources; and (v) tools for building customized GUIs for administrative
applications. ACE/Server v2.0 is also designed to provide an enterprise-enabled
platform from which SDI can address other classes of the network security
hierarchy to deliver integrated solutions for protecting information resources.
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STRATEGY
SDI'S objective is to be a leader in the computer and network security
market. Key elements of SDI's strategy to achieve this objective are listed
below:
- Enhance Enterprise-Enabled Identification and Authentication Product
Line. SDI plans to continue to add new capabilities and features to its
computer and network security products to meet its customers'
identification and authentication needs within the context of an evolving
enterprise environment. For example, during the third quarter of 1995,
SDI acquired Infratel S.A.R.L.'s ("Infratel") SecurADM technology, which
is designed to provide secure single sign-on and network security
management technology to enhance ease of use and centralized
network/system security administration. SDI continues to develop
significant expertise in the field of enterprise-wide resource protection
and its application to client/server architecture, which it intends to
use to develop and exploit the technologies best suited to satisfy the
security requirements of its customers.
- Expand Products into Additional Client/Server and Legacy
Environments. SDI intends to continue to expand its products into
additional client/server and legacy environments. SDI currently offers
ACE/Server software on a variety of popular UNIX server platforms,
including Hewlett-Packard HP-UX, Sun Solaris and SunOS, IBM AIX, Digital
UNIX and SCO (Santa Cruz Operations) UNIX. SDI is developing a version of
its ACE/Server software for use on Microsoft Windows NT and expects to
develop versions for other platforms as market needs dictate. SDI also
offers versions of its ACE/Server client software that operate in most
UNIX operating environments, including Hewlett-Packard HP-UX, Sun Solaris
and SunOS, IBM AIX and SCO UNIX. In addition, SDI offers versions of its
ACE/Server client software that operate on Novell NetWare (Versions 3.11
and 3.12), NetWare Connect (Version 2.0), Microsoft Windows NT and NT
RAS, Apple Computer Inc.'s AppleTalk and Digital Equipment Corporation's
OSF1. SDI continues to work with third-party partners to integrate or
otherwise make its client software compatible with a number of widely
used management products, including gateway and communication products.
- Expand Product Offerings Within the Security Hierarchy. SDI's products
currently offer user identification and authentication and security audit
trail capabilities. SDI intends to combine these products with products
developed by SDI and third parties that address other classes of the
network security hierarchy to deliver integrated solutions for protecting
information resources. SDI continues to identify and prioritize various
technologies addressing other classes of the security hierarchy to
determine potential future product offerings by SDI, such as products for
encryption and control of user privileges. For example, SDI anticipates
that the proposed business combination with RSA will provide SDI with
encryption technology and engineering capabilities that will assist SDI
in developing applications for data security, integrity and
non-repudiation. Previously, in the second quarter of 1995 and the first
quarter of 1996, SDI acquired minority equity interests in VeriSign, a
company affiliated with and formed by RSA to provide digital certificate
and related services that use public key cryptography to protect the
privacy of electronic transmissions on public and private networks.
- Expand Direct Sales and Support Channel. SDI currently sells its
products in North America and in targeted major markets abroad through
its direct sales force. SDI believes that a direct sales force is well
suited to differentiate SDI's products from those of its competitors and
to obtain insights into the future security requirements of SDI's
customers. SDI intends to continue to expand its direct sales and support
organization and to enhance its direct sales efforts by adding additional
original equipment manufacturers ("OEMs"). During 1995, SDI added 26
sales and support personnel, representing an increase of 70% over the
sales and support personnel at the end of 1994.
- Expand International Presence. Sales outside North America represented
16.3% of SDI's total revenue for 1995. SDI's operations outside North
America currently consist of sales offices in London, Paris, Frankfurt,
Oslo and Singapore and independent local distributors located in 16 key
foreign markets. Additional support is provided to SDI's international
operations from its headquarters in Cambridge, Massachusetts. SDI
believes that international markets present a large, relatively new
market for computer and network security products, and plans to continue
to expand its business
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outside North America through the hiring of sales personnel and the
establishment of additional distribution arrangements, primarily in
Europe and the Far East.
To enhance each of the foregoing strategies, SDI has established, and
expects to continue to establish, strategic marketing and other third-party
relationships with vendors of operating systems and network operating systems
(OS/NOS), remote access products, Internet-related products and application
software. As of March 31, 1996, SDI's strategic marketing or other relationships
included the following:
<TABLE>
<S> <C>
OS/NOS REMOTE ACCESS PRODUCTS
Apple Computer Inc. (AppleTalk) 3 Com Corp. (Access Builder)
Cisco Systems, Inc. (TACACS and TACACS +) Ascend Communications Inc. (Max, Pipeline)
Microsoft Corporation (Windows NT and Attachmate Corp. (Remote Lan Node)
NT RAS) Bay Networks, Inc. (Lattis System 3000,
Novell (NetWare Versions 3.11 and 3.12 and 9000, BAY RS)
NetWare Connect Version 2.0) Cisco Systems, Inc. (TACACS and TACACS +
INTERNET-RELATED PRODUCTS supported)
Advanced Network Services, Inc. (Interlock Emulex Corporation (Connect+Pro)
Service) Gandalf Technologies Inc. (XpressWay)
Border Networks Technologies, Inc. (Janus) IBM (8235, Lan Distance)
Checkpoint Systems, Inc. (Firewall-1) Kasten Chase Applied Research, Inc. (Optiva)
IBM (NetSP Firewall) Livingston Enterprises, Inc. (PortMaster)
Milky Way Networks Corporation (Black Hole) Microcom, Inc. (Lan Express)
NeXT Software, Inc. (Web Objects) Penril Datability Networks (CSX)
Raptor Systems, Inc. (Eagle) Rockwell (NetHopper)
Secure Computing Corporation (Sidewinder) Shiva Corporation (LanRover)
SOS Corporation (Brimstone) TechSmith Inc. (Enterprise Wide)
Technologic Inc. (Firewall) Telebit Corporation (NetBlazer)
Trusted Information Systems Inc. (Gauntlet) U.S. Robotics (Sportster Modem)
APPLICATION SOFTWARE Xylogics, Inc. (Annex)
Advantis (Dial Services) Xyplex, Inc. (MaxServer, Network 9000
CyberSAFE Corporation (Challenger) Server)
IBM (NetSP)
Mergent International Inc. (PC DACS)
Oracle Corporation (Secure Network Services)
OTG, Incorporated (Call Control System)
TGV Inc. (Secure/IP)
</TABLE>
SDI believes its strategic marketing relationships provide it with a competitive
advantage by enabling SDI to expand its network coverage, increase its installed
customer base and increase SecurID token usage.
An overriding goal of SDI in pursuing its strategy is to achieve a high
level of customer satisfaction through technological support, product
performance and reliability, and prompt and accurate order processing.
PRODUCTS
SDI's family of security products includes SecurID tokens and ACE/Server
and ACM software and ACM hardware access control products. All of SDI's products
use the patented SecurID token technology as a common user interface. SDI
currently offers three types of tokens and a number of software and hardware
access control products designed to function with a wide variety of operating
systems, network environments and third-party hardware and software products,
thus enabling customers to select optimal configurations for the installation of
SDI's computer and network security products.
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<PAGE> 87
SecurID Tokens
SDI's current SecurID tokens contain LCD displays and are offered in a
number of numeric and alphanumeric display configurations. Both the SecurID Card
and the SecurID PINPAD Card are credit-card sized super smart cards, and the
SecurID Key Fob is a key fob for customers requiring a durable and compact token
that can be carried with a user's keys. The SecurID PINPAD Card includes a
keypad on the face of the SecurID Card to permit direct entry of a user's PIN
into the Card, thus reducing the risk of electronic eavesdropping by enabling a
user to transmit an embedded combination of the user's PIN and token code.
SDI currently offers the following SecurID tokens:
<TABLE>
<CAPTION>
COMMERCIAL CURRENT U.S.
SECURID TOKEN INTRODUCTION LIST PRICE*
- -------------------- ------------ ------------
<S> <C> <C>
SecurID Card 1986 $34 - $90
SecurID PINPAD Card 1989 $42 - $98
SecurID Key Fob 1995 $34 - $90
</TABLE>
- ---------------
* Token prices vary based on programmed life and functionality.
SecurID tokens can be programmed to operate for any period of time from one
to four years, as specified by the customer. At the end of its programmed life,
a SecurID token will automatically cease to function and must be replaced,
thereby providing an additional level of security for SDI's customers. SecurID
tokens can also be configured with multiple seeds for use by users who otherwise
might require multiple cards.
ACE/Server
SDI's ACE/Server software, an integrated security server, manages access to
network resources via the Internet, public gateways, remote dial-up modems,
leased lines, workstations, terminals, personal computers or direct connection.
It permits centralized user authentication and security administration for all
customer resources protected on a TCP/IP network. The ACE/ Server software
consists of a combination of server software and client-resident software. The
server software contains administrative and reporting functions, the algorithm,
the synchronization code and a database of protected resources or "clients."
Clients may include workstations, personal computers and third-party
communications, gateway and network software and hardware. The server software
allows a network administrator to restrict user access to identified clients.
SDI's ACE/Server software is currently available for the following UNIX-based
operating systems at list prices (not including negotiated, world-wide licenses)
currently ranging from $2,450 to $150,000, based on the number of users:
<TABLE>
<CAPTION>
COMMERCIAL
ACE/SERVER MODEL INTRODUCTION OPERATING SYSTEM
- ---------------- ------------ ---------------------
<C> <C> <S>
ACM/8101 1991* Sun SunOS
ACM/5201 1992 Digital Ultrix
ACM/6201 1992* IBM AIX
ACM/9101 1992 Silicon Graphics IRIX
ACM/9601 1992* Hewlett-Packard HP-UX
ACM/8201 1994* Sun Solaris
ACM/9201 1995 SCO UNIX
ACM/5301 1995 Digital UNIX
</TABLE>
- ---------------
* SDI's ACE/Server v2.0 is commercially available for this operating
system. All other ACE/Server models are Version 1.x.
ACM Software
SDI's ACM software products interface directly with the host computer's
operating system to restrict access to the protected system or resource. SDI's
ACM software products can accommodate an unlimited
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<PAGE> 88
number of users and provide security audit trails, user accountability and
activity reporting. SDI currently offers the following ACM software products:
<TABLE>
<CAPTION>
COMMERCIAL CURRENT U.S.
MODEL INTRODUCTION OPERATING SYSTEM LIST PRICE
- --------- ------------ ---------------- -----------------
<S> <C> <C> <C>
ACM/5100 1988 Digital VAX/VMS $ 1,950 - $25,000*
ACM/6150 1988 IBM MVS, MVS/ESA $18,500 - $32,500*
ACM/7100 1988 Cray UNICOS $26,700
</TABLE>
- ---------------
* List prices vary depending upon the number of authorized users.
ACM Hardware
SDI's ACM hardware products employ a multi-tasking operating system for
communication control, user authentication, auditing of access attempts,
automatic response to unauthorized access, report generation and management of
the system's internal database of SecurID token data. Each ACM contains a custom
single-board computer that connects directly with any RS-232 asynchronous host
and provides access control through leased lines, dial-up modems, networks, X.25
networks, ISDN lines, workstations or terminals located near the host computer.
SDI currently offers the following ACM hardware products:
<TABLE>
<CAPTION>
COMMERCIAL CURRENT U.S.
MODEL INTRODUCTION NUMBER OF PORTS/USERS LIST PRICE
- ----------- ------------ ------------------------------------------------------ ------------
<S> <C> <C> <C>
ACM/1600 1986 16 RS-232 Ports; 400 users; expandable to
256 ports, 6400 users; up to 38.4k baud $ 12,520
ACM/1600HS 1995 16 RS-232 Ports; 400 users; expandable to 256 ports,
6400 users; up to 115.2k baud $ 12,520
ACM/400HS 1995 4 RS-232 Ports; 200 users; up to 115.2k baud $ 3,800
ACM/100HS 1995 1 RS-232 Port; 100 users; up to 115.2k baud $ 650
</TABLE>
SecurADM Software
SDI acquired Infratel's SecurADM technology during the third quarter of
1995. SecurADM software provides secure single sign-on and central
administration and management for heterogeneous network environments. SecurADM
software utilizes SDI's SecurID technology to manage, encrypt and propagate
passwords and security information across multiple platforms. Working with
ticket granting technology from third-party vendors such as Hewlett-Packard,
Computer Associates and Sun Microsystems or with IBM's NetSP product, SecurADM
software manages and authenticates user access to secure applications and
services, allowing the user to log on once to the enterprise and access multiple
protected resources.
Version 2.0 of SecurADM software, which was introduced in 1995, addresses
customer environments that include centralized and distributed legacy mainframe
and UNIX-based client/server applications in local and wide area networks.
SecurADM software is currently installed in a number of European insurance
companies and financial institutions and is being marketed by SDI in Europe
through SDI's direct sales force and its European distributors.
SALES AND MARKETING
SDI has established a multi-channel distribution and sales network to serve
the computer and network security market. SDI sells and licenses its products in
North America, the United Kingdom, France, Germany, Norway and Singapore
directly to end users through its direct sales force and indirectly through a
limited number of OEMs. It also employs independent distributors outside the
United States. In addition, SDI supports its direct and indirect sales efforts
through strategic marketing relationships and public relations programs, trade
shows and other marketing activities. SDI sells and licenses its products
through written sales and license agreements under terms and conditions that SDI
believes are consistent with industry practice.
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Sales
SDI believes that a direct sales force is well suited to differentiate
SDI's products from those of its competitors, to work with customers to provide
security solutions for the protection of information resources and to obtain
insights into customers' future security requirements. SDI's direct sales staff
solicits prospective customers, provides technical advice and support with
respect to SDI products and works closely with customers and SDI distributors
and OEMs. As of March 31, 1996, SDI's direct sales organization consisted of 49
sales and support personnel operating at 33 locations in North America and 22
sales and support personnel operating at four locations in Europe and one
location in Singapore. SDI's revenue from direct sales efforts for the years
ended December 31, 1993, 1994 and 1995 was approximately 95%, 94% and 96% of
total revenue, respectively.
SDI also markets, sells and licenses its products indirectly through
distributors and OEMs. As of March 31, 1996, SDI had relationships with 26
distributors, two of which were OEMs. SDI's OEMs sublicense, on a nonexclusive
basis, SDI's ACE/Server client software and/or ACM software products and are
generally selected for their capability to offer SDI's products in combination
with related products and services, as well as for their capability to serve
particular markets or platforms. Customers of SDI's OEMs purchase all of their
ACE/Server software and SecurID tokens directly from SDI.
SDI's international sales are being made through its direct sales force as
well as through 24 distributors located in Europe, the Middle East, South
America and the Pacific Rim. SDI's international distributors provide initial
sales support, installation, technical support and follow-on service to local
customers. SDI generally grants its distributors non-exclusive distribution
rights.
Marketing
In support of its sales efforts, SDI conducts sales training courses,
comprehensive targeted marketing programs, including direct mail, public
relations, advertising, seminars, trade shows and telemarketing, and ongoing
customer and third-party communications programs. SDI also seeks to stimulate
interest in computer and network security through its public relations program,
speaking engagements, white papers, technical notes and other publications.
With competing vendors offering different solutions, customers in the
market for computer and network security tend to evaluate thoroughly new
products and vendors. SDI offers a Trial Sale Program for prospective customers
desiring first-hand experience in using the SecurID system prior to making a
purchase decision. Under this program, prospective customers install a
demonstration version of one of SDI's access control products on their own
system and generally run pilot programs with up to ten SecurID token users.
SDI has entered into strategic marketing relationships with various vendors
of operating systems and network operating systems, remote access products,
Internet-related products and application software. Certain of these vendors
integrate SDI's client software into their products to provide compatibility
between their product offerings and SDI's ACE/Server software. Other vendors
build call routines, software hooks or application program interfaces (API's)
into their products to provide compatibility with SDI's ACE/Server software. SDI
has also entered into strategic relationships with vendors that share technical
information with SDI to enable it to develop products which will be
interoperable with the vendors' products. SDI has developed a separate program,
SecurID Ready, to market the compatibility between the vendors' products and
SDI's ACE/Server software. The end-user customers of all of these vendors must
purchase tokens and license ACE/Server software directly from SDI. SDI believes
that these relationships help SDI and its customers to expand their enterprise
network coverage and assist SDI in increasing its installed customer base and
SecurID token usage.
CUSTOMERS
As of March 31, 1996, SDI had sold or licensed over 4,000 ACE/Server and
ACM products and over 1,000,000 SecurID tokens to over 1,100 customers
worldwide. Historically, SDI's principal customers have been in the
telecommunications, pharmaceutical, financial and medical industries as well as
academic
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institutions, research laboratories and government organizations. These
customers are generally sophisticated and knowledgeable purchasers of security
systems and work with highly confidential information. SDI believes that as
corporate networks proliferate and become more complex, the number of industries
concerned with system security and access to information will grow. In the year
ended December 31 1995, no customer accounted for more than 10% of SDI's total
revenue.
CUSTOMER SERVICE AND SUPPORT
SDI maintains a customer support help desk and technical support
organization at its headquarters in Cambridge, Massachusetts and in Wokingham,
United Kingdom. SDI is in the process of adding advanced technical support
personnel to its support staff to address anticipated additional demands arising
from the deployment of SDI's security solutions into larger and more complex
user environments. SDI also has field technical support personnel that work
directly with SDI's direct sales force, distributors and customers. Most of
SDI's products are designed for easy customer installation. Accordingly, a
significant portion of SDI's service and support activities is provided remotely
from SDI's headquarters in Cambridge, Massachusetts. As of March 31, 1996, SDI's
customer support organization consisted of an aggregate of 28 full-time
employees located in Massachusetts, the United Kingdom, Germany, France and
Singapore.
SDI's standard practice is to provide a warranty on all SecurID tokens for
the customer-selected programmed life of the token and to replace any damaged
tokens (other than tokens damaged by a user's negligence or alteration) free of
charge. SDI generally sells each of its other products to customers with a
90-day warranty. After the expiration of the warranty period, customers may
elect to purchase a maintenance contract for 12-month renewable periods. Under
these contracts, SDI agrees to provide (i) corrections for documented program
errors, (ii) version upgrades for both software and firmware, (iii) repair or
replacement of ACM hardware that does not perform in accordance with its
functional specifications, and (iv) telephone consultation.
PRODUCT DEVELOPMENT
SDI's product development efforts are focused on enhancing the
functionality, reliability, performance and flexibility of its existing tokens,
ACE/Server and ACM products. SDI is developing a version of its ACE/Server
software for use on Windows NT and expects to develop versions for other
platforms as market needs dictate. In the fourth quarter of 1995, SDI began
shipping versions of its ACE/Server client software that operate on Novell
NetWare (Versions 3.11 and 3.12), NT RAS and Digital Equipment Corporation's
OSF1. In the first and second quarters of 1996, SDI began shipping versions of
its ACE/Server client software for Microsoft Windows NT and Novell NetWare
Connect (Version 2.0), respectively. SDI is developing technology to enhance the
administrative capabilities of its ACE/Server and ACM products and the
scalability of its ACE/Server. Areas for future development of the ACE/Server
currently being pursued by SDI include cross realm authentication, enhanced
redundancy and interoperability with additional network operating systems and
directory services. SDI also is developing tools to assist customers, strategic
marketing partners and other third-party integrators in integrating SDI's
products with custom and other third-party network or system applications.
In addition to enhancing its existing products, one of SDI's strategies is
to offer products in other classes of the network security hierarchy. SDI
continues to identify and prioritize various technologies for potential future
product offerings. SDI may develop these products internally or enter into
arrangements to license or acquire products or technologies from third parties.
There can be no assurance, however, that SDI will be successful in enhancing or
developing existing products or identifying and successfully acquiring new
technologies.
As of March 31, 1996, SDI's product development staff consisted of 38
full-time employees engaged in engineering and development, including software
and hardware engineering, testing and quality assurance and technical
documentation. SDI also engages outside contractors where appropriate to
supplement SDI's in-house expertise or expedite projects based on customer or
market demand. SDI's total research and development expenses for the years ended
December 31, 1993, 1994 and 1995 were approximately $1.6 million, $2.2 million
and $4.0 million, respectively.
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SDI believes that its future success will depend in large part on its
ability to enhance and broaden its existing product lines to meet the evolving
needs of the computer and network security market. There can be no assurance
that SDI will be able to respond effectively to technological changes or new
industry standards or developments. In addition, SDI could be adversely affected
if it were to incur significant delays or be unsuccessful in developing new
products or enhancing its existing products, or if any such enhancements or new
products do not gain market acceptance.
MANUFACTURING, SUPPLIERS AND QUALITY CONTROL
Manufacturing
SecurID Tokens. SDI has historically contracted for the manufacture of its
SecurID tokens with RJP International, Ltd. ("RJP"), an assembly subcontractor
located in China. This subcontractor is currently producing approximately 35,000
SecurID tokens per month and has indicated that it is capable of producing in
excess of 75,000 tokens per month. SDI has qualified a second source supplier in
the United States for the manufacture of one model of its SecurID token.
Although SDI is continuing to work with this supplier to develop a cost
structure that is comparable with that of RJP, SDI anticipates that RJP may
continue to provide a substantial portion of SDI's SecurID tokens. After
delivery to SDI, SecurID tokens are activated and programmed for, among other
things, the appropriate token life, display configuration, number of discrete
random seeds and length and frequency of change of code display.
ACE/Server and ACM Software Products. SDI has established an in-house
software duplication operation for its UNIX ACE/Server and VAX ACM software
products. SDI purchases duplicating services for its other ACM software products
from outside vendors. SDI's ACE/Server and ACM software products are distributed
as object code on standard magnetic diskettes and tapes, together with printed
documentation.
ACM Hardware Products. SDI contracts for the manufacture of its ACM
hardware products with an assembly operation located in New England. This
subcontractor manufactures products in accordance with SDI's specifications and,
with the exception of microprocessor chips, purchases all components from
independent vendors selected by the subcontractor. SDI specifies the vendor from
which its subcontractor may purchase microprocessor chips for ACM hardware
products.
SDI currently has limited sources for the manufacture of each of its
SecurID tokens and ACM hardware products. SDI has generally been able to obtain
adequate supplies of these products in a timely manner from current vendors and
believes that alternate vendors can be identified if current vendors are unable
to fulfill its needs. However, delays or failure to identify alternate vendors,
if required, or a reduction or interruption in supply or a significant increase
in the manufacturing costs could adversely affect SDI's financial condition or
results of operations and could impact customer relations.
Suppliers
Although SDI generally uses standard parts and components for its products,
certain components are currently available only from a single source or from
limited sources. For example, the microprocessor chips contained in SDI's
SecurID tokens are currently purchased only from Sanyo Electric Co., Ltd.
("Sanyo"), a Japanese computer chip manufacturer. Sanyo has introduced
commercially an alternative chip and is working with SDI on the development and
testing of this chip as a replacement chip for SDI's SecurID tokens. Sanyo has
agreed to give SDI at least 12 months' notice prior to any cessation of
production of the existing chip. There can be no assurance that Sanyo will be
able to furnish SDI with a sufficient number of chips to meet customer demand,
that SDI will be able to purchase chips from Sanyo at commercially acceptable
prices or, if Sanyo discontinues the manufacture of certain chips, that SDI will
be able to procure chips from another supplier on a timely basis and at
commercially acceptable prices. The inability of SDI to obtain a sufficient
number of chips at commercially acceptable prices could result in delays in
product shipments or increase SDI's material costs, either of which would
adversely affect SDI's financial condition or results of operations.
The lithium batteries contained in SDI's SecurID tokens are purchased from
one supplier located in the United States, Gould Electronics ("Gould"). Gould
has agreed to give SDI at least 24 months' notice prior to
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any cessation of production. The inability to obtain sufficient lithium
batteries as required, or to obtain or develop alternative sources at
competitive prices and quality if and as required in the future, could result in
delays in product shipments or increase SDI's material costs, either of which
would adversely affect SDI's financial condition or results of operations.
SDI believes that it would take approximately six months to identify and
commence production of suitable replacements for the microprocessor chip or
lithium battery used in SDI's SecurID tokens. SDI attempts to maintain a
three-month supply of SecurID tokens in inventory.
Quality Control
SDI believes that its success in the market for computer and network
security products will depend in large part on its ability to provide quality
products and services. SDI has a formal quality control program to satisfy its
customers' requirements for high quality and reliable security products. As part
of this program, SDI is working with its suppliers to improve process control
and product design. SDI's SecurID tokens and ACM hardware products are tested by
SDI's subcontractors prior to shipment and tested again by SDI as part of SDI's
acceptance-inspection procedure.
COMPETITION
The market for computer and network security products is highly competitive
and subject to rapid technological change. SDI believes that competition in this
market is likely to intensify as a result of increasing demand for security
products. SDI currently experiences competition from a number of sources,
including (i) software operating systems suppliers and application software
vendors that incorporate a single-factor static password security system into
their products, (ii) token-based password generator vendors promoting
challenge/response technology, such as Digital Pathways, Inc. ("Digital
Pathways"), Enigma Logic, Inc., Leemah DataCom Security Corporation ("Leemah")
and Racal-Guardata, Inc., (iii) smart card security device vendors, such as AT&T
Technologies, Inc., Bull HN Information Systems, Inc. and Schlumberger, Limited,
(iv) biometric security device vendors, such as Eye Dentify Systems (optical
systems), Fingermatrix (U.K.) Limited (finger scanners) and Identix, Inc.
(finger scanners), and (v) dialback security system manufacturers, such as
Digital Pathways and Leemah. In some cases, these vendors also support SDI's
products and those of its competitors. SDI may also face competition from these
and other parties in the future that develop computer and network security
products based upon approaches similar to or different from those employed by
SDI. There can be no assurance that the market for computer and network security
products will not ultimately be dominated by approaches other than the approach
marketed by SDI. While SDI believes that it does not currently compete against
manufacturers of other classes of security products (such as encryption), there
can be no assurance that SDI's customers will not perceive such other companies
as competitors of SDI.
SDI believes that the principal competitive factors affecting the market
for computer and network security products include technical features, ease of
use, quality/reliability, level of security, customer service and support,
distribution channels and price. Although SDI believes that its products
currently compete favorably with respect to such factors, there can be no
assurance that SDI can maintain its competitive position against current and
potential competitors, especially those with significantly greater financial,
marketing, service, support, technical and other competitive resources. See
"Risk Factors -- Risks Relating to SDI -- Competition."
PROPRIETARY RIGHTS
SDI relies on a combination of patent, trade secret, copyright and
trademark law, software licenses and nondisclosure agreements to establish and
protect its proprietary rights in its products. SDI enters into confidentiality
and/or license agreements with all of its employees and distributors, as well as
with its customers and potential customers seeking proprietary information, and
limits access to and distribution of its software, documentation and other
proprietary information. Despite these precautions, it may be possible for
unauthorized third parties to copy aspects of SDI's products or to obtain and
use information that SDI regards
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as proprietary. SDI has applied for patent protection in only certain foreign
jurisdictions. In addition, the laws of many foreign jurisdictions, as well as
the scope of certain foreign counterparts to SDI's patents, do not protect SDI's
proprietary rights to the same extent as do the laws of the United States.
SDI currently holds 13 issued United States patents expiring at various
dates ranging from 2005 to 2014. SDI also has two applications pending for
additional United States patents and a number of foreign counterparts for its
patents in various foreign countries. In addition, SDI has certain registered
and other trademarks.
EMPLOYEES
At March 31, 1996, SDI employed 210 employees. Of these employees, 38 were
involved in research and development, 119 in sales, marketing and customer
support, 23 in production and 30 in administration and finance. No employees are
covered by any collective bargaining agreements. SDI believes that its
relationships with its employees are good.
PROPERTIES
SDI's principal administrative, sales and marketing, research and
development and support facilities consist of approximately 32,500 square feet
of office space in Cambridge, Massachusetts. SDI occupies these premises under a
lease expiring in March 1998. As of December 31, 1995, the annual base rent for
this facility was approximately $575,000. In support of its field sales and
support organization, SDI also leases facilities and offices in 30 other
locations in the United States, three locations in Canada and one location in
each of the United Kingdom, France, Germany, Norway and Singapore. In March
1996, SDI entered into a ten-year lease agreement for a new corporate
headquarters in Bedford, Massachusetts. The new facilities consist of
approximately 75,000 square feet of office space and the annual base rent for
the first year will be approximately $956,000. It is currently anticipated that
SDI will occupy the new premises during the third quarter of 1996.
LEGAL PROCEEDINGS
In December 1995, SDI, together with co-plaintiff Vasco Data Security, Inc.
("Vasco"), filed suit in the U.S. District Court for the Northern District of
California against ActivCard, Inc. and ActivCard S.A. (together, "ActivCard")
alleging that ActivCard infringed certain patents held by SDI (the "SDI
Patents") and by Vasco which cover technology used for secure data access. In
February 1996, in response to SDI's assertion that ActivCard was violating the
SDI Patents but before SDI's suit was served on ActivCard, ActivCard filed a
complaint against SDI in the same court seeking declaratory judgement of non-
infringement, invalidity and unenforceability of the SDI Patents.
On May 31, 1996 ActivCard answered the complaint in the action brought by
SDI and Vasco, and brought counterclaims against SDI and Vasco seeking a
declaratory judgment that the SDI Patents and ActivCard patents are invalid and
unenforceable, and claims for damages asserting that SDI and Vasco have engaged
in an unlawful restraint of trade in violation of Section 1 of the Sherman Act,
attempted to monopolize the token-based user authentication market in the United
States in violation of Section 2 of the Sherman Act, violated the Lanham Act,
violated the California antitrust and unfair competition laws, and interfered
with ActivCard's prospective business advantage. SDI intends to vigorously
prosecute its claims against ActivCard and to defend against ActivCard's claims.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS -- SDI
OVERVIEW
SDI designs, develops, markets and supports a family of hardware and
software security products used to protect and manage access to computer-based
information resources. SDI was founded in 1984, began shipping its SecurID
tokens and ACM hardware products in 1986, and introduced its first ACM software
products for minicomputers and mainframe computers in 1988. Prior to 1986, SDI
was primarily engaged in research and development activities. In December 1991,
SDI introduced its ACE/Server software products for enterprise-wide information
protection using client/server architecture. SDI believes that its growth has
historically been driven by the emergence of local area networks and wide area
networks and the concurrent increase in the number of users having direct access
to core enterprise networks and confidential corporate data.
SDI's revenue is derived principally from sales of SecurID tokens, software
license fees from ACE/Server and ACM software products, sales of ACM hardware
products and charges for maintenance services. Historically, SDI's growth has
been attributable to sales to new customers as well as additional sales to
existing customers. Sales to existing customers include sales of SecurID tokens
and access control products for use by different branches or divisions of SDI's
customers, sales of replacement tokens (which are programmed at the request of
the customer to operate for a fixed period of up to four years) and sales of
additional tokens for use by vendors, suppliers, customers and clients of SDI's
customers.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain
consolidated financial data as a percentage of revenue for the three months
ended March 31, 1996 and 1995 and the years ended December 31, 1995, 1994 and
1993.
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE
---------------------------------------------
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
--------------- -------------------------
1996 1995 1995 1994 1993
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue............................................ 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue.................................... 23.9 19.5 21.4 22.0 22.6
----- ----- ----- ----- -----
Gross profit..................................... 76.1 80.5 78.6 78.0 77.4
----- ----- ----- ----- -----
Costs and expenses:
Research and development......................... 12.2 10.4 12.0 12.7 13.4
Marketing and selling............................ 29.3 36.3 32.7 36.3 33.0
General and administrative....................... 11.6 10.9 11.0 9.3 10.1
----- ----- ----- ----- -----
Total.................................... 53.1 57.6 55.7 58.3 56.5
----- ----- ----- ----- -----
Income from operations............................. 23.0 22.9 22.9 19.7 20.9
Interest income.................................... 10.0 6.2 5.1 0.6 0.3
----- ----- ----- ----- -----
Income before provision for income taxes and
cumulative effect of change in accounting........ 33.0 29.1 28.0 20.3 21.2
Provision for income taxes......................... 12.0 11.2 10.8 7.1 7.4
----- ----- ----- ----- -----
Income before cumulative effect of change in
accounting....................................... 21.0 17.9 17.2 13.2 13.8
Cumulative effect of change in accounting.......... -- -- -- -- 4.7
----- ----- ----- ----- -----
Net income......................................... 21.0% 17.9% 17.2% 13.2% 18.5%
===== ===== ===== ===== =====
</TABLE>
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Three Months Ended March 31, 1996 Compared with Three Months Ended March 31,
1995
Revenue. SDI's revenue is derived principally from sales of SecurID
tokens, software license fees from ACE/Server and ACM software products, sales
of ACM hardware products and charges for maintenance services. Total revenue
increased 95% in the first quarter of 1996 to $12.2 million from $6.2 million in
the first quarter of 1995. This increase in revenue reflected increases in unit
sales of all of SDI's products to existing and new customers. Average selling
prices of SDI's products also increased (except the average selling price of
SDI's ACM/100 and ACM/1600 products). Approximately 52% and 26% of the increase
in revenue was attributable to the increases in unit sales of SecurID tokens and
SDI's ACE/Server and ACM software products, respectively. A further 6% of the
increase in revenue in the first quarter of 1996 was attributable to an increase
in maintenance revenue over the first quarter of 1995. SDI believes that the
increase in unit sales was attributable in part to continuing security concerns
surrounding corporate use of the Internet and network security concerns in
general.
International revenue (excluding Canada) increased to $2.2 million in the
first quarter of 1996 from $1.0 million in the first quarter of 1995 and
accounted for 18% and 16% of total revenue in the first quarter of 1996 and the
first quarter of 1995, respectively. This increase in international revenue was
primarily attributable to the continuing expansion of SDI's direct sales force
and increased market acceptance of SDI's products.
Cost of Revenue and Gross Profit. SDI's cost of revenue consists primarily
of costs associated with the manufacture and delivery of SDI's SecurID tokens
and hardware products from SDI's assembly contractors. Customer support costs
and production costs, which include labor costs associated with the programming
of SecurID tokens, inspection and quality control functions and shipping are
also included in cost of revenue. SDI's gross profit increased 84% in the first
quarter of 1996 to $9.3 million, or 76.1% of revenue, from $5.0 million, or
80.5% of revenue, in the first quarter of 1995. Approximately 59% of the
increase in gross profit was attributable to an increase in the unit sales and
gross profit from the sale of SecurID tokens. In addition, approximately 36% of
the increase in gross profit was attributable to an increase in the sales of
SDI's ACE/Server software upgrades. Gross profit as a percentage of revenue
declined due to the continuing development of the customer support
infrastructure and royalty expenses related to the ACE/Server product.
In the future, gross margin may continue to be affected by several factors,
including changes in product mix and distribution channels, price reductions
(resulting from volume discounts or otherwise), competition, increase in the
cost of revenue (including increases in material costs associated with the
manufacture of SecurID tokens and hardware products) and other factors.
Research and Development. Research and development expenses consist
primarily of personnel costs as well as fees for development services provided
by consultants. Research and development expenses increased 130.8% in the first
quarter of 1996 to $1.5 million from $645,000 in the first quarter of 1995, and
increased as a percentage of revenue to 12.2% from 10.4%. Approximately 37% of
the increase in research and development expenses in the first quarter of 1996
resulted from employment of additional staff and approximately 33% of the
increase was attributable to increases in consulting expenses to develop
enhancements to SDI's product lines, primarily SDI's ACE/Server software product
line. Research and development expenses also increased due to a general increase
in investment in new computer equipment resulting in higher depreciation charges
and maintenance fees.
In accordance with Statement of Financial Account Standards ("SFAS") No.
86, "Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," SDI capitalized software development costs of $0 and
$18,000 in the first quarters of 1996 and 1995, respectively.
Marketing and Selling. Marketing and selling expenses consist principally
of salaries, commissions and travel expenses of direct sales and marketing
personnel and costs associated with marketing programs. Marketing and selling
expenses increased 57.5% in the first quarter of 1996 to $3.6 million from $2.3
million in the first quarter of 1995, but decreased as a percentage of revenue
to 29.3% from 36.3%. Approximately 42% of the increase in marketing and selling
expenses was attributable to the employment of additional staff. Approximately
23% of the increase in marketing and selling expenses was attributable to the
increase in sales
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commission on products sold by SDI's sales force and results from the increase
in revenue. Approximately 8% of the increase in marketing and selling expenses
resulted from an expansion of SDI's general marketing programs, such as trade
show and seminar activity, direct mailing and public relations campaigns.
In addition, international sales expenses increased due to the continuing
expansion of SDI's United Kingdom, German, French and Pacific/Asian sales
offices and the opening of a sales office in Norway.
General and Administrative. General and administrative expenses consist
primarily of personnel costs for administration, finance, human resources and
general management as well as legal and accounting expenses. General and
administrative expenses increased 106.7% in the first quarter of 1996 to $1.4
million, or 11.6% of revenue, from $682,000, or 10.9% of revenue, in the first
quarter of 1995. Approximately 41% of the increase in general and administrative
expenses was due to the growth in SDI's staff needed to support increased levels
of operation. Approximately 25% of the increase was attributable to increased
amortization of leasehold improvements resulting from SDI's impending move to
its new corporate offices in Bedford, Massachusetts. It is currently anticipated
that this move will take place during the third quarter of 1996.
As described in Note 9 of Notes to SDI's Consolidated Financial Statements,
SDI recognized a loss of $100,000 in the first quarter of 1995, representing
SDI's estimate of Infratel's losses during that period.
Interest Income. Interest income consists of interest earned on SDI's cash
balances. Interest income increased 219% to $1.2 million in the first quarter of
1996 from $384,000 in the first quarter of 1995. This increase was due to
increased levels of marketable securities which were purchased from the proceeds
of the secondary offering which took place in the fourth quarter of 1995.
Provision for Income Taxes. The provision for income taxes increased to
$1.5 million in the first quarter of 1996 from $700,000 in the first quarter of
1995, as a result of higher income. SDI's estimated effective tax rate was
reduced to 36.5% in the first quarter of 1996 from 38.5% in the first quarter of
1995 to reflect the benefit of SDI's foreign sales corporation.
Net Income. As a result of the above factors, net income in the first
quarter of 1996 increased to $2.6 million, or 21.0% of revenue, from $1.1
million, or 17.9% of revenue, in the first quarter of 1995.
1995 Compared With 1994
Revenue. Total revenue increased 92.4% in 1995 to $33.8 million from $17.6
million in 1994. This increase in revenue reflected increases in unit sales of
all of SDI's products (other than SDI's ACM/1600 hardware product).
Approximately 63% and 33% of the increase in revenue was attributable to the
increases in unit sales of SecurID tokens and SDI's ACE/Server and ACM software
products, respectively, offset by a decrease in unit sales of SDI's ACM/1600
hardware products. SDI believes that the continuing increase in unit sales was
attributable in part to heightened security concerns surrounding corporate use
of the Internet and network security concerns in general.
International revenue (excluding Canada) increased to $5.5 million in 1995
from $2.2 million in 1994 and accounted for 16.3% and 12.4% of total revenue in
1995 and 1994, respectively. This increase in international revenue was
primarily attributable to an expansion of SDI's direct sales force and increased
market acceptance of SDI's products.
SDI's direct sales in Canada, the United Kingdom, France and Germany are
denominated in the local currency. As a result, fluctuations in currency
exchange rates could affect the profitability in U.S. dollars of SDI's products
sold in these markets. See Note 8 of Notes to SDI's Consolidated Financial
Statements.
Cost of Revenue and Gross Profit. Customer support costs and production
costs, which include labor costs associated with the programming of SecurID
tokens, inspection and quality control functions and shipping are also included
in cost of revenue. SDI's gross profit increased 94.0% in 1995 to $26.6 million,
or 78.6% of revenue, from $13.7 million, or 78.0% of revenue, in 1994.
Approximately 59.6% of the increase in gross profit was attributable to an
increase in the unit sales and gross margin from the sale of SecurID tokens.
Software revenue as a percentage of total revenue in 1995 increased to 25.2% of
revenue from 16.3% of revenue in 1994. These factors, which contributed to an
improvement in the gross margin in 1995, were
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partially offset by ongoing increases in production costs associated with
quality management programs and continued increases in customer support costs in
Europe.
In the future, gross profit may be affected by several factors, including
changes in product mix and distribution channels, price reductions (resulting
from volume discounts or otherwise), competition, increases in the cost of
revenue (including any software license fees or royalties payable by SDI such as
those described below) and other factors.
In December 1994, SDI entered into an agreement with Progress Software, a
vendor of commercial database software, for the right to use certain of Progress
Software's software to enhance the functionality of SDI's ACE/Server software.
SDI began incurring royalties under the Progress Software agreement in the
fourth quarter of 1995 as a result of the commercial introduction of ACE/Server
v2.0 in October 1995. Although SDI raised the prices of its ACE/Server software
in June 1995 to help offset the expected cost of these royalties, amounts
payable by SDI under this agreement, which constitute part of cost of revenue,
lowers gross margins on its ACE/Server software.
Research and Development. Research and development expenses increased
81.9% in 1995 to $4.0 million from $2.2 million in 1994, but decreased as a
percentage of revenue to 12.0% in 1995 from 12.7% in 1994. Approximately 36% of
the increase in research and development expenses in 1995 was related to the
technology purchase described below. Approximately 32% of the increase in
research and development expenses resulted from an increase in payroll costs
associated primarily with the employment of additional staff. Approximately 17%
of the increase was attributable to increases in consulting expenses to develop
enhancements to SDI's product lines, primarily SDI's ACE/Server product line.
During 1995, SDI recorded a non-recurring expense of $0.6 million for
purchased research and development associated with the acquisition of SecurADM
technology from Infratel, one of SDI's original equipment manufacturers.
SecurADM is software designed to provide secure single sign-on capability and
ease the task of security administration in heterogeneous networked data
processing environments. See Note 9 of Notes to SDI's Consolidated Financial
Statements.
SDI capitalized software costs of $66,000 in 1994. During 1995 all
capitalized software costs were fully amortized.
Marketing and Selling. Marketing and selling expenses increased 73.3% in
1995 to $11.1 million from $6.4 million in 1994, but decreased as a percentage
of revenue to 32.7% in 1995 from 36.3% in 1994. Approximately 31% of the
increase in marketing and selling expenses was attributable to the increase in
commissions on products sold by SDI's direct sales force. SDI's commissions on
sales to new customers are higher than its commissions on sales to existing
customers. Approximately 33% of the increase in marketing and selling expenses
was due to an increase in payroll costs associated primarily with the employment
of additional direct sales and marketing personnel and approximately 12% of the
increase in marketing and selling expenses was due to an increase in marketing
programs, such as direct mail and seminar activities, trade shows and public
relations campaigns.
During 1995, international sales expenses increased due to the continued
development of SDI's United Kingdom, German and French sales offices and the
opening of SDI's office in Singapore.
General and Administrative. General and administrative expenses increased
126.8% in 1995 to $3.7 million, or 11.0% of revenue, from $1.6 million, or 9.3%
of revenue, in 1994. Approximately 29% of the increase in general and
administrative expenses was attributable to increases in legal, accounting and
investor relation expenses resulting from the additional costs incurred in
connection with being a public company. Approximately 29% of the increase was
due to an increase in payroll costs associated primarily with the growth in
SDI's staff needed to support increased levels of operation, and approximately
10% of the increase was attributable to allowances relating to SDI's notes
receivable from Infratel. See Note 9 of Notes to SDI's Consolidated Financial
Statements.
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Interest Income. Interest income increased to $1.7 million in 1995 from
$105,000 in 1994. This increase was due primarily to higher average daily
balances in invested cash resulting from SDI's initial public offering in
December 1994 and its follow-on public offering in November 1995.
Provision for Income Taxes. The provision for income taxes increased to
$3.6 million in 1995 from $1.2 million in 1994. This increase was primarily the
result of higher income during 1995. SDI's effective tax rate increased to 38.5%
in 1995 from 35.0% in 1994. The increase in the effective tax rate resulted from
the reduced benefit of SDI's net operating loss carryforwards and tax credits.
For the years ended December 31, 1995 and 1994, the valuation allowance was
reduced by approximately $0.2 million and $0.3 million, respectively, which
resulted in a decrease in the provision for income taxes for the years then
ended. See Notes 1 and 5 of Notes to SDI's Consolidated Financial Statements.
Net Income. As a result of the above factors, net income in 1995 increased
to $5.8 million, or 17.2% of revenue, from $2.3 million, or 13.2% of revenue in
1994.
1994 Compared With 1993
Revenue. Total revenue increased 45.1% in 1994 to $17.6 million from $2.1
million in 1993. This increase in revenue resulted primarily from increases in
unit sales of all of SDI's products (except SDI's ACM/400 hardware product) to
existing and new customers as well as increases in the average selling price of
all of SDI's products. Approximately 62% and 31% of the revenue increases
related to sales of SDI's SecurID tokens and ACE/Server and ACM software
products, respectively. The reduction in ACM/400 sales was more than offset by
sales of SDI's ACM/100 hardware product, which was introduced in the first
quarter of 1994. The increase in unit sales resulted in part from increases in
the size and productivity of SDI's direct sales force as well as growing market
demand for SDI's products.
International revenue (excluding Canada) increased 101.9% in 1994 to $2.2
million from $1.1 million in 1993 and accounted for 12.4% and 8.9% of total
revenue in 1994 and 1993, respectively. This increase in international revenue
resulted from an increase in SDI's sales force, increased market acceptance of
SDI's products and improved economic conditions in Europe.
Cost of Revenue and Gross Profit. SDI's gross profit increased 46.2% in
1994 to $13.7 million, or 78.0% of revenue, from $9.4 million, or 77.4% of
revenue, in 1993. The increase in gross margin was largely attributable to an
increase in software revenue as a percentage of total revenue in 1994. In
addition, there was an increase in customer support costs in 1993 due to an
increase in costs related to a version upgrade to SDI's ACM hardware products.
These two factors, which contributed to an improvement in the gross margin in
1994, were partially offset by an increase in production costs associated with
new quality management programs, an increase in customer support costs in Europe
and an increase in inventory reserves.
Research and Development. Research and development expenses increased
37.5% in 1994 to $2.2 million from $1.6 million in 1993, but decreased as a
percentage of revenue to 12.7% from 13.4%. The increase in research and
development expenses in 1994 resulted primarily from employment of additional
staff to develop enhancements to SDI's product lines, primarily SDI's ACE/Server
product line, and, to a lesser degree, from investment in new computer equipment
resulting in higher depreciation charges and maintenance fees.
In accordance with SFAS 86, SDI capitalized software development costs of
$66,000 and $46,000 for 1994 and 1993, respectively.
Marketing and Selling. Marketing and selling expenses increased 60.0% in
1994 to $6.4 million, or 36.3% of revenue, from $4.0 million, or 33.0% of
revenue, in 1993. The increase in marketing and selling expenses was primarily
due to the employment of 18 additional direct sales and marketing personnel as
well as an increase in marketing programs such as direct mail activities, trade
shows and public relations campaigns. In addition, international sales expenses
increased due to the expansion of SDI's United Kingdom sales office, which
opened in the second quarter of 1992, the establishment of SDI's German sales
office in February 1994 and the organization of SDI's French sales subsidiary in
May 1994. International sales expenses also increased
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as a result of increases in commissions (in absolute numbers and as a percentage
of revenue) on products sold by SDI's direct sales force.
General and Administrative. General and administrative expenses increased
34.4% in 1994 to $1.6 million, or 9.3% of revenue, from $1.2 million, or 10.0%
of revenue, in 1993. The increase in general and administrative expenses was
primarily due to the growth in SDI's staff needed to support increased levels of
operations as well as increases in legal and accounting expenses resulting from
the expansion of SDI's European sales offices described above.
Interest Income. Interest income increased to $105,000 in 1994 from
$37,000 in 1993. This increase was due to higher average daily balances of
invested cash and higher interest rates.
Provision for Income Taxes, Extraordinary Item and Change in Accounting
Principle. The provision for income taxes increased to $1.2 million in 1994
from $0.9 million in 1993. SDI's effective tax rate in 1994 and 1993 was 35.0%.
SDI adopted SFAS No. 109, "Accounting for Income Taxes," as of January 1, 1993.
See Notes 1 and 5 of Notes to SDI's Consolidated Financial Statements.
Net Income. As a result of the above factors, net income in 1994 increased
to $2.3 million, or 13.2% of revenue, from $2.2 million, or 18.5% of revenue, in
1993. Net income for 1993 included the $0.6 million cumulative effect of SDI's
adoption of SFAS No. 109. Excluding the cumulative effect of the adoption of
SFAS No. 109, net income in 1994 increased to $2.3 million, or 13.2% of revenue,
from $1.7 million, or 13.8% of revenue, in 1993.
ACCOUNTING FOR CERTAIN STOCK OPTIONS
On October 18, 1995, January 24, 1996, April 1, 1996 and April 24, 1996,
the SDI Board or the Compensation Committee of the SDI Board granted stock
options to employees to purchase 16,000, 302,800, 100,000 and 19,450 shares of
SDI Common Stock at exercise prices of $28.50, $49.525, $48.60 and $76.40,
respectively, subject to stockholder approval (obtained on May 22, 1996) of an
increase in the number of shares available for grant. The exercise prices
represented the fair market value on the dates of grant. As permitted by SFAS
No. 123, which became effective on January 1, 1996, the Company has elected to
continue to apply the intrinsic value method of APB Opinion No. 25 for
stock-based compensation to employees.
For options granted prior to April 1, 1996, because approval of the
stockholders was required and considered perfunctory, SDI measured compensation
expense on the date of grant by the SDI Board or the Compensation Committee of
the SDI Board. As a result of discussions with the staff of the Securities and
Exchange Commission, SDI changed its accounting policy on options requiring
stockholder approval to measure compensation expense on the approval date. This
change is effective for options granted on or after April 1, 1996. This change
resulted in aggregate compensation expense of approximately $4.5 million
relating to the April 1, 1996 and April 24, 1996 option grants, which SDI will
recognize over the remainder of the four-year vesting period of the options from
May 22, 1996. SDI does not plan to grant options in the future that are subject
to approval by the stockholders.
LIQUIDITY AND CAPITAL RESOURCES
In December 1994, SDI sold 3,000,000 shares of SDI Common Stock in its
initial public offering, which generated $21.6 million of net cash proceeds to
SDI. In January 1995, SDI sold 510,000 shares of SDI Common Stock under the
terms of an over-allotment option granted to the underwriters as part of the
initial public offering, generating an additional $3.8 million in net cash
proceeds. In November 1995, SDI sold an additional 1,560,000 shares of SDI
Common Stock in its follow-on offering, which generated $55.9 million of net
cash proceeds to SDI.
At March 31, 1996, SDI had cash and marketable securities of $91.2 million
and working capital of $94.0 million. Since 1990, SDI has funded its operations
primarily from cash generated from its operating activities. During 1995 and
1996, SDI used the cash provided by operations principally for working capital
needs and property and equipment additions necessary to support SDI's growth.
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SDI's capital expenditures for the first quarter of 1996 were $963,000.
Capital expenditures for the first quarter of 1996 related primarily to
additional leasehold improvements, office furniture and equipment, as well as
computer equipment for product development, testing and support to accommodate
SDI's continued growth.
On February 20, 1996, SDI increased its investment in VeriSign by
purchasing 72,091 shares of Series B Convertible Preferred Stock of VeriSign for
an aggregate purchase price of $176,632. VeriSign was organized to provide
digital certificates and related services that use public key cryptography to
protect the privacy of electronic transmissions on public and private networks.
SDI's investments in VeriSign represent a minority interest of less than 10% of
VeriSign's capitalization. SDI is accounting for its investment at cost. See
Note 2 of Notes to SDI's Consolidated Financial Statements and "Certain
Transactions -- RSA."
In March 1996, SDI entered into a noncancelable operating lease expiring in
2006 for a new corporate executive office in Bedford, Massachusetts and
currently expects to occupy the premises in the third quarter of 1996. The new
facility consists of approximately 75,000 square feet of office space, and the
annual base rent for the first year is approximately $956,000, increasing
annually up to approximately $1,180,000 from years five though ten.
In December 1994, SDI entered into an agreement with Progress Software for
the right to use certain of its software to enhance the functionality of SDI's
ACE/Server software. SDI began incurring royalties under the Progress Software
agreement in the fourth quarter of 1995 and, in order to obtain favorable
pricing, prepaid $1.5 million during the first quarter of 1996.
SDI intends to seek acquisitions of businesses, products and technologies
that are complementary to those of SDI. SDI is continuing to identify and
prioritize additional security technologies which it may wish to develop, either
internally or through the licensing or acquisition of products from third
parties. While SDI engages from time to time in discussions with respect to
potential acquisitions, there can be no assurance that any such acquisitions
will be made or that SDI will be able to successfully integrate any acquired
business. In order to finance such acquisitions, it may be necessary for SDI to
raise additional funds through public or private financings. Any equity or debt
financings, if available at all, may be on terms which are not favorable to SDI
and, in the case of equity financings, may result in dilution to SDI's
stockholders.
SDI believes that the net proceeds from its initial public and follow-on
offerings, together with cash flows from operations and existing cash balances,
will be sufficient to meet its cash requirements through at least 1998.
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MANAGEMENT -- SDI
DIRECTORS AND EXECUTIVE OFFICERS
The directors and executive officers of SDI and their ages as of May 31,
1996 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------ --- ------------------------------------------------------
<S> <C> <C>
Charles R. Stuckey, Jr.(1).... 53 President, Chief Executive Officer and Director
Arthur W. Coviello, Jr........ 43 Executive Vice President, Treasurer and Chief
Financial Officer
Robert W. Fine................ 54 Vice President, North American Sales
James M. Geary................ 39 Vice President, Marketing
Linda E. Saris................ 43 Vice President, Operations
Richard L. Earnest(2)......... 54 Director
George M. Middlemas(1)(2)..... 49 Director
Marino R. Polestra(1)(3)...... 38 Director
Sanford M. Sherizen(2)........ 55 Director
</TABLE>
- ---------------
(1) Member of the Finance Committee.
(2) Member of the Compensation Committee.
(3) Member of the Audit Committee.
Mr. Stuckey joined SDI as President in January 1987 and was appointed Chief
Executive Officer and elected a director of SDI in March 1987. From 1984 to
January 1987, Mr. Stuckey served as Vice President of Scientific Information
Services, a systems and commercial data service company and a division of
Control Data Corporation.
Mr. Coviello joined SDI as Executive Vice President in September 1995 and
was appointed Treasurer and Chief Financial Officer in October 1995. From
January 1994 to August 1995, Mr. Coviello served as Chief Operating Officer and
from March 1992 to January 1994, Mr. Coviello served as Vice President, Finance
and Administration, Chief Financial Officer and Treasurer of CrossComm
Corporation, a developer of inter-networking products. From April 1984 to
January 1992, Mr. Coviello served as Vice President, Finance and Operations of
Autographix, Inc., a computer graphics company.
Mr. Fine joined SDI as Vice President, Sales and Marketing in 1987. In
1990, Mr. Fine was appointed Vice President, U.S. Sales and in 1994 he became
Vice President, North American Sales. From 1981 to 1987, Mr. Fine held sales,
field engineering, marketing support and related positions at NBI, Inc., a
manufacturer of word processing equipment.
Mr. Geary joined SDI as Vice President, Marketing and International Sales
in January 1990. In January 1994, Mr. Geary became Vice President, Marketing of
SDI. From May 1988 to January 1990, Mr. Geary served as the Director of
Marketing for CompuServe Data Technologies, where he was responsible for all
aspects of the firm's worldwide marketing efforts.
Ms. Saris joined SDI as Vice President, Finance and Operations, Treasurer
and Chief Financial Officer in June 1989, and has served as Vice President,
Operations since October 1995. From 1980 to 1989, Ms. Saris served in a number
of positions, including Senior Vice President and General Manager and Vice
President of Finance, with Clinical Data, Inc., a medical technology and
services company.
Mr. Earnest has served on the SDI Board since October 1993. Since April
1995, Mr. Earnest has served as the Chief Executive Officer of Tudor Publishing
Company in San Diego, California. From June 1994 to March 1995, Mr. Earnest
provided consulting services to several start-up companies. From May 1993 to
June 1994, Mr. Earnest served as Chief Executive Office of DEMAX Software, a
provider of centralized security management software. From June 1991 to April
1993, Mr. Earnest was the Chief Executive Office of Advant Edge Systems Group, a
software company.
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Mr. Middlemas has served on the SDI Board from May 1986 to June 1991 and
since July 1992. Since January 1992, Mr. Middlemas has been a General Partner of
Apex Management Partnership, which is the General Partner of Apex Investment
Fund II, L.P. ("Apex"), a venture capital fund. From March 1991 to December
1991, Mr. Middlemas acted as a consultant providing fund raising and other
advisory services. From 1985 to March 1991, Mr. Middlemas was Senior Vice
President and Principal of Inco Venture Capital Management, a venture capital
firm and former stockholder of SDI. Mr. Middlemas serves on the Board of
Directors of Pure Cycle Corporation, a publicly traded company located in
Commerce City, Colorado, and American Communications Services, Inc., a publicly
traded company located in Annapolis Junction, Maryland.
Mr. Polestra has served on the SDI Board since July 1993. Since February
1989, Mr. Polestra has been a Vice President of Burr, Egan, Deleage & Co., a
venture capital firm. Mr. Polestra is a director of IBIS Technology Corporation,
a manufacturer of silicon on insolator wafers, and of Premisys Communications
Holdings, Inc., a telecommunications equipment supplier.
Mr. Sherizen has served on the SDI Board since October 1989. Since 1983,
Mr. Sherizen has served as President of Data Security Systems, Inc., a computer
security consulting firm.
On May 21, 1996, Kenneth P. Weiss resigned as a director and as Chairman of
the Board and Chief Technical Officer of SDI, citing material disagreements with
the operations, policy and practices of SDI and certain directors of SDI. In a
subsequent letter dated May 30, 1996, Mr. Weiss made a number of allegations and
expressed concerns regarding Charles R. Stuckey, Jr., President and Chief
Executive Officer of SDI, and the independence and judgment of SDI's other
directors. Specifically, Mr. Weiss alleged that Mr. Stuckey had "surrounded
[himself] with a Board of Directors that does not, and perhaps is incapable, of
providing [him] with independent objective guidance." Mr. Weiss further alleged
in his letter that Mr. Stuckey influenced the Company's Compensation Committee
to make determinations, including with respect to Mr. Stuckey's compensation,
based on Mr. Stuckey's desires rather than on an objective policy. On June 3,
1996, at the direction of the SDI Board, Mr. Stuckey delivered a response to Mr.
Weiss in which he indicated that Mr. Weiss' correspondence contained
reprehensible and irresponsible misstatements and omissions, the effect of which
was to portray facts and events in a light which was both without merit and not
worthy of individual comment or response. Copies of the correspondence referred
to above are on file with the Commission as exhibits to SDI's Current Report on
Form 8-K dated May 21, 1996, as amended.
BOARD AND COMMITTEE MEETINGS
The SDI Board has a Compensation Committee, which makes recommendations
concerning salaries and incentive compensation for employees of and consultants
to SDI and administers and grants stock options pursuant to SDI's stock option
plans. The members of the Compensation Committee are Messrs. Middlemas, Earnest
and Sherizen.
The SDI Board has an Audit Committee, which reviews the results and scope
of the audit and other services provided by SDI's independent public
accountants. Currently, the sole member of the Audit Committee is Mr. Polestra.
SDI has no nominating committee of the SDI Board.
DIRECTOR COMPENSATION
All of the directors are reimbursed for expenses incurred in connection
with their attendance at Board and committee meetings. Each non-employee
director is paid $2,000 for attendance at each meeting of the Board (other than
committee meetings or telephonic meetings). Other directors are not entitled to
compensation in their capacities as directors.
In July 1990, the SDI Board voted to award Mr. Sherizen 6,250 shares of SDI
Common Stock in each of October 1990, 1991, 1992 and 1993, subject to Mr.
Sherizen's continued service as a director on each such date, in consideration
for his services as a member of the SDI Board. In October 1993, the SDI Board
voted to award Mr. Earnest 6,250 shares of SDI Common Stock in each of October
1994, 1995, 1996 and 1997, subject
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to continued service on the SDI Board on each such date, in consideration for
his services as a member of the SDI Board.
In October 1994, the SDI Board awarded Mr. Sherizen an additional 6,250
shares of SDI Common Stock in consideration for his services on the SDI Board
and voted to issue Mr. Earnest 13,008 restricted shares of SDI Common Stock, at
a purchase price of $.01 per share, in lieu of the awards of SDI Common Stock
which would have issued in 1995, 1996 and 1997. These restricted shares vest
over a period ending on the day preceding SDI's 1997 Annual Meeting of
Stockholders. Under the terms of the restricted stock agreements entered into
with Mr. Earnest, if he ceases to serve as a director at any time prior to the
day preceding SDI's 1997 Annual Meeting of Stockholders, SDI may repurchase a
percentage of the restricted shares at a price of $.01 per share.
1994 Director Stock Option Plan
The 1994 Director Stock Option Plan (the "Director Plan") was adopted by
the SDI Board and approved by the stockholders of SDI in October 1994. Under the
terms of the Director Plan, directors of SDI who are not employees of SDI or any
subsidiary of SDI are eligible to receive non-statutory options to purchase
shares of SDI Common Stock. A total of 150,000 shares of SDI Common Stock may be
issued upon exercise of options granted under the Director Plan.
Initial options to purchase 2,000 shares of SDI Common Stock at an exercise
price of $8.44 per share were granted pursuant to the Director Plan to each of
Messrs. Earnest, Sherizen, Middlemas and Polestra upon the closing of SDI's
initial public offering on December 21, 1994. Options will also be granted to
each eligible director upon his or her initial election to the SDI Board. Such
options will cover the number of shares of SDI Common Stock determined by
multiplying (i) 6,000 by (ii) the quotient of (x) the number of whole calendar
months between the option grant date and the date of the next annual meeting of
stockholders and (y) 12. Options to purchase 6,000 shares of SDI Common Stock
were granted to each of Messrs. Earnest, Sherizen, Middlemas and Polestra on
each of June 13, 1995 and May 22, 1996, the dates of SDI's 1995 and 1996 Annual
Meetings of Stockholders, at exercise prices of $21.54 and $88.425 per share,
respectively. Each eligible director will receive annual options to purchase an
additional 6,000 shares of SDI Common Stock on the date of each subsequent
annual meeting of stockholders.
All options granted under the Director Plan will vest on the first
anniversary of the date of grant (or, in the case of annual options, the day
prior to the first annual meeting of stockholders of SDI following the date of
grant, if earlier). With the exception of the options granted on the closing of
SDI's initial public offering, the exercise price of options granted under the
Director Plan will equal the lesser of (i) the closing price of the SDI Common
Stock on the date of grant or (ii) the average of the closing prices of the SDI
Common Stock on the Nasdaq National Market (or such other nationally recognized
exchange or trading system if the SDI Common Stock is no longer traded on the
Nasdaq National Market) for a period of ten consecutive trading days prior to
such date.
Options granted under the Director Plan are not transferrable by the
optionee except by will or by the laws of descent and distribution. In the event
an optionee ceases to serve as a director, each option may be exercised by the
optionee for the portion then exercisable at any time within 60 days after the
optionee ceases to serve as a director; provided, however, that in the event
that the optionee ceases to serve as a director due to his or her death or
disability, then the optionee, or his or her administrator, executor or heirs
may exercise the exercisable portion of the option for up to 180 days following
the date the optionee ceased to serve as a director. No option is exercisable
after the expiration of ten years from the date of grant.
COMPENSATION OF EXECUTIVE OFFICERS
Employment Agreements
SDI is a party to an employment agreement with Mr. Stuckey for the period
commencing July 9, 1993 and ending July 8, 1996, subject to extension for an
additional two-year term upon mutual agreement of SDI and Mr. Stuckey. Under the
agreement, Mr. Stuckey serves as President and Chief Executive Officer of SDI
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and is entitled to receive an annual base salary of $178,000, subject to
cost-of-living adjustments for each 12-month period commencing January 1, 1994.
In 1995, Mr. Stuckey received a base salary of $192,356. In addition to his base
salary, Mr. Stuckey is eligible to receive annual bonuses if he satisfies
discrete objectives contained in an annual incentive plan established by the SDI
Board. Mr. Stuckey's annual incentive plan for 1995 tied his bonus to certain
targets for SDI's quarterly performance, revenue and net income. Mr. Stuckey may
terminate the agreement upon 60 days' prior written notice to SDI, and SDI may
terminate the agreement for cause (generally defined to include a material
breach of the agreement or his fiduciary duties, gross negligence, willful
disregard of his duties, drug or alcohol abuse or certain felony convictions) or
not for cause upon 30 days' prior written notice. In the event SDI terminates
Mr. Stuckey other than for cause, he is eligible to receive (i) his current
monthly base salary (in a lump sum payment) for the number of months equal to
the greater of (a) the remainder of his employment term or (b) 12 months; (ii)
medical and insurance benefits for the earlier of (x) the 18-month period after
termination or (y) the date of acceptance of new employment by Mr. Stuckey;
(iii) the vesting of the next annual installment of stock options granted to Mr.
Stuckey; and (iv) any bonus payable to Mr. Stuckey with respect to the year in
which such termination shall have occurred (assuming Mr. Stuckey had been
employed by SDI for the entire year). If Mr. Stuckey is terminated for cause he
is eligible to receive medical and insurance benefits for six months after
termination and the pro rata portion of any bonus payable to him with respect to
the year in which such termination shall have occurred.
In the event of a change in control (generally defined to include a
consolidation or merger in which SDI is not the surviving corporation, a sale of
all or substantially all of SDI's assets, or the acquisition by any person of
securities representing more than 50% of the voting power of SDI), Mr. Stuckey
is entitled to receive, if he chooses to leave SDI's management during the first
18 months after the effective date of the change in control, (i) a lump sum
payment of his monthly base salary for the 12-month period following his
departure and (ii) a pro rata portion of any bonus otherwise payable to Mr.
Stuckey with respect to the year in which such change in control shall have
occurred. In addition, all of the stock options granted to Mr. Stuckey which
shall not have vested or remain exercisable shall automatically vest and be free
from repurchase if Mr. Stuckey is terminated other than for cause within one
year after the effective date of the change in control.
SDI is also a party to an employment agreement with Mr. Weiss dated as of
July 1, 1993. Under the agreement, Mr. Weiss served as the Chief Technical
Officer of SDI until his resignation on May 21, 1996 and was entitled to receive
an annual salary, including all bonuses, of $195,000, subject to cost-of-living
adjustments, plus 5%, commencing on May 1, 1994. In 1995, Mr. Weiss received a
base salary of $222,994. Mr. Weiss was also entitled to receive bonuses at the
discretion of the SDI Board.
SDI is also a party to a letter agreement, dated August 21, 1995, with
Arthur W. Coviello, Jr. Under the agreement, Mr. Coviello serves as Executive
Vice President, Treasurer and Chief Financial Officer of SDI and is responsible
for SDI's engineering, administrative, operational and financial organizations.
Mr. Coviello's annual base salary is $175,000, and he is eligible to receive an
annual bonus of up to $50,000. Under the agreement, Mr. Coviello received a
bonus of $20,000 for services rendered in 1995. Mr. Coviello is also entitled to
severance of six months' salary and benefits in the event that his employment is
terminated by SDI. In addition, for each full year of service with SDI (up to a
maximum of six years), Mr. Coviello will receive an additional one month of
severance (thus aggregating up to 12 months of severance). On September 1, 1995,
the Compensation Committee of the Board of Directors granted Mr. Coviello
options to purchase 300,000 shares of SDI Common Stock at an exercise price of
$19.94 per share.
Messrs. Stuckey, Weiss and Coviello have also entered into noncompetition
agreements with SDI. Mr. Stuckey has agreed, for a period of three years
following termination of his association with SDI, not to engage in any business
activity that directly or indirectly competes with SDI or to provide any service
to SDI's competition or its clients. Each of Messrs. Weiss and Coviello has
agreed, through the first anniversary of the date of termination of his
employment with SDI, not to engage in any business activity that is directly or
indirectly in competition with SDI in the United States or with any of the
products or services being developed, provided or sold by SDI at such time. Each
of Messrs. Weiss and Coviello also agreed that he will not, directly or
indirectly, employ any person who is employed by SDI at any time during the term
of the noncompetition agreement.
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SDI also has a severance agreement with Ms. Saris. Under this agreement, if
there is a change in control (as defined) of SDI, and, within one year of such
change in control, Ms. Saris leaves the employ of SDI because of involuntary
termination, a reduction of salary and/or available bonus or a reduction in job
responsibilities, Ms. Saris is entitled to severance in an amount equal to six
months' salary. In addition, following any such event, Ms. Saris' options will
fully vest.
Summary Compensation
The following table sets forth certain information with respect to the
annual and long-term compensation of the Chief Executive Officer of SDI and each
of the four other most highly compensated executive officers of SDI (the "SDI
Named Executive Officers") for the three years ended December 31, 1995.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------- ALL OTHER
SALARY BONUS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) ($)(2)
- ------------------------------------------------- ---- -------- -------- ------------
<S> <C> <C> <C> <C>
Charles R. Stuckey, Jr........................... 1995 $192,356 $281,078 $5,000
President and Chief Executive Officer 1994 184,865 93,750 5,080
1993 177,800 52,229 4,998
Kenneth P. Weiss(3).............................. 1995 222,994 75,000 5,000
Chairman of the Board and Chief Technical 1994 205,800 0 5,080
Officer 1993 188,377 0 4,998
Robert W. Fine................................... 1995 119,269 153,704 4,789
Vice President, North American Sales 1994 113,750 128,579 4,786
1993 107,804 84,985 4,615
James M. Geary................................... 1995 127,481 60,200 4,837
Vice President, Marketing 1994 122,399 56,961 4,916
1993 116,221 43,368 4,741
Linda E. Saris................................... 1995 112,469 27,250 4,732
Vice President, Operations 1994 107,227 28,220 4,688
1993 101,838 22,253 3,260
</TABLE>
- ---------------
(1) Amounts in this column represent bonuses earned under SDI's executive
compensation program for the respective fiscal years.
(2) Amount shown in this column represent SDI's contributions under its 401(k)
savings plan.
(3) Mr. Weiss resigned as Chairman of the Board and Chief Technical Officer of
SDI effective as of May 21, 1996. See "Management -- SDI -- Directors and
Executive Officers."
Aggregated Option Exercises and Year-End Option Table
The following table summarizes certain information regarding stock options
exercised during the year ended December 31, 1995 and stock options held as of
December 31, 1995 by each of the SDI Named Executive Officers. SDI granted no
stock options or stock appreciation rights to any of the SDI Named Executive
Officers in 1995.
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AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SHARES
UNDERLYING
UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
NUMBER OF SHARES FISCAL YEAR- END AT FISCAL YEAR-END
ACQUIRED ON VALUE (EXERCISABLE/ (EXERCISABLE/
EXERCISE REALIZED UNEXERCISABLE) UNEXERCISABLE)
NAME (#) ($)(1) (#) ($)(2)
- -------------------------------- ---------------- -------- --------------- --------------------
<S> <C> <C> <C> <C>
Charles R. Stuckey, Jr.......... 5,000 $ 47,313 294,900/0 $16,027,560/$0
Kenneth P. Weiss................ 0 0 0/0 0/0
Robert W. Fine.................. 99,900 974,323 0/0 0/0
James M. Geary.................. 13,000 283,940 122,000/0 6,634,360/0
Linda E. Saris.................. 6,000 105,030 75,000/0 4,075,300/0
</TABLE>
- ---------------
(1) Represents the difference between the exercise price and the fair market
value of the SDI Common Stock on the date of exercise.
(2) Value based on the last sales price per share ($54.50) of SDI Common Stock
on December 29, 1995, as reported on the Nasdaq National Market, less the
exercise price.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of SDI's Compensation Committee are Messrs. Earnest,
Middlemas and Sherizen. No executive officer of SDI has served as a director or
member of the compensation committee (or other committee serving an equivalent
function) of any other entity, whose executive officers served as a director of
or member of the Compensation Committee of SDI.
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<PAGE> 107
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of June 3, 1996 with
respect to the beneficial ownership of shares of SDI Common Stock by (i) each
person known to SDI to own beneficially more than 5% of the outstanding shares
of SDI Common Stock, (ii) the directors of SDI, (iii) the SDI Named Executive
Officers, and (iv) the directors and executive officers of SDI as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL
OWNERSHIP(1)
------------------------
NUMBER OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES CLASS
- ----------------------------------------------------------------------- --------- ----------
<S> <C> <C>
5% STOCKHOLDERS
Putnam Investments, Inc................................................ 1,756,400(2) 12.9%
One Post Office Square
Boston, Massachusetts 02109
Kenneth P. Weiss....................................................... 1,294,658 9.5%
59 Sargent Street
Newton, Massachusetts 02158
Pilgrim Baxter & Associates, Ltd....................................... 1,045,300(3) 7.7%
1255 Drummers Lane
Suite 300
Wayne, Pennsylvania 19087
Duncan-Hurst Capital Management, Inc................................... 792,020(4) 5.8%
4365 Executive Drive
Suite 1520
San Diego, California 92121
OTHER DIRECTORS
Charles R. Stuckey, Jr. ............................................... 494,972(5) 3.5%
Richard L. Earnest..................................................... 21,258(6) *
George M. Middlemas.................................................... 404,756(7) 3.0%
Marino R. Polestra..................................................... 8,000(8) *
Sanford M. Sherizen.................................................... 35,750(9) *
OTHER SDI NAMED EXECUTIVE OFFICERS
James M. Geary......................................................... 92,970 *
Linda E. Saris......................................................... 74,294(10) *
Robert W. Fine......................................................... 42,343 *
All directors and executive officers as a group (9 persons)............ 1,204,343(11) 8.6%
</TABLE>
- ---------------
* Less than 1%
(1) The number of shares beneficially owned by each director and executive
officer is determined under rules promulgated by the Commission, and the
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares
as to which the individual has sole or shared voting power or investment
power and also any shares which the individual has the right to acquire
within 60 days after June 3, 1996 through the exercise of any stock option
or other right. The inclusion herein of such shares, however, does not
constitute an admission that the named stockholder is a direct or indirect
beneficial owner of such shares. Unless otherwise indicated, each person or
entity named in the table has sole voting power and investment power (or
shares such power with his or her spouse) with respect to all shares of
capital stock listed as owned by such person or entity.
(2) Putnam Investments, Inc. has shared voting power with respect to 203,250
shares and shared dispositive power with respect to 1,756,400 shares.
Putnam Investment Management, Inc. has shared dispositive power over
1,491,200 shares. The Putnam Advisory Company, Inc. has shared voting power
over 203,250 shares and shared dispositive power over 265,200 shares. The
Putnam New Opportunities Fund has shared dispositive power over 738,300
shares. Putnam Investments, Inc. is the sole stockholder of
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<PAGE> 108
Putnam Investment Management, Inc. and the Putnam Advisory Company, Inc.
This information is derived from a Schedule 13G filed with the Securities
and Exchange Commission on January 15, 1996.
(3) This information is derived from a Schedule 13G filed with the Securities
and Exchange Commission on February 20, 1996.
(4) This information is derived from a Schedule 13G filed with the Securities
and Exchange Commission on January 31, 1996.
(5) Includes 40,000 shares held by the Stuckey Family Charitable Remainder
Unitrust and 40,000 shares held by the Charles R. Stuckey, Jr. Family
Charitable Remainder Annuity Trust. Also includes 294,900 shares which may
be acquired pursuant to stock options exercisable within 60 days after June
3, 1996.
(6) Includes 2,000 shares which may be acquired pursuant to stock options
exercisable within 60 days after June 3, 1996.
(7) Includes 487,987 shares owned of record by Apex Investment Fund II, L.P.
("Apex"). Mr. Middlemas is a director of SDI and a general partner of Apex
Management Partnership, the sole general partner of Apex. Mr. Middlemas
disclaims beneficial ownership of shares owned of record by Apex. Also
includes 8,000 shares which may be acquired pursuant to stock options
exercisable within 60 days after June 3, 1996.
(8) Consists of 8,000 shares which may be acquired pursuant to stock options
exercisable within 60 days after June 3, 1996.
(9) Includes 6,000 shares which may be acquired pursuant to stock options
exercisable within 60 days after June 3, 1996.
(10) Includes 73,500 shares which may be acquired pursuant to stock options
exercisable within 60 days after June 3, 1996.
(11) Includes 422,400 shares which may be acquired pursuant to stock options
exercisable within 60 days after June 3, 1996.
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<PAGE> 109
BUSINESS -- RSA
RSA develops, markets and supports cryptographic and electronic data
security products and provides cryptographic consulting services. RSA's
developer tool kits and other products are used to implement cryptographic
electronic data security applications such as encryption and digital signatures
for products and services targeted at secure electronic commerce, secure
electronic mail, communications privacy, client/server data security, smart
cards and other key information technologies.
RSA licenses its tool kit products to original equipment manufacturers
("OEMs") such as Netscape Communications Corporation ("Netscape"), Microsoft
Corporation ("Microsoft"), International Business Machines Corporation ("IBM")
and Oracle Corporation ("Oracle"). OEMs incorporate RSA's encryption technology
into their products. RSA's encryption technology is embedded in current versions
of Microsoft Windows, Netscape Navigator, Quicken by Intuit, Inc. ("Intuit"),
Lotus Development Corporation ("Lotus") Notes and numerous other products. RSA
technologies are part of existing and proposed standards for the Internet and
World Wide Web, ITU, ISO, ANSI and IEEE as well as various business, financial
and electronic commerce networks.
In recent years, a number of trends have created an attractive environment
for RSA's proprietary technologies. The proliferation of remote computing,
enterprise networks, internetworking and, in particular, the Internet have
generated a substantial demand for cryptographic and electronic data security.
RSA STRATEGY
Critical aspects of RSA's strategy include:
- developing proprietary cryptographic technology and broadly
licensing this technology to hardware manufacturers and software
developers;
- establishing RSA's proprietary technology as a de facto encryption
standard;
- establishing alliances with strategic partners in the software,
hardware and telecommunications industries;
- creating value-added cryptographic and electronic data security tool
kits that rely on RSA's proprietary technology to enable new
markets; and
- developing products based on open protocols to address the
specialized needs of market segments such as electronic mail and
networking where electronic data security is a competitive priority.
RSA TECHNOLOGY
RSA believes that its public key cryptographic technology (or
"cryptosystem") is one of the most secure cryptographic techniques commercially
available to encrypt, and to verify the authenticity and integrity of,
electronic data.
RSA believes that its cryptosystem is a de facto standard for a number of
electronic security applications. It is built into current operating systems
offered by Microsoft, Apple Computer, Inc., Sun Microsystems, Inc. and Novell,
Inc. ("Novell"). In hardware, RSA technology is used in secure telephones, on
Ethernet network cards and on smart cards. In addition, RSA technology is
incorporated into all of the major protocols for secure Internet communications,
including SSL, S-HTTP, S/MIME, PCT, PKCS, SET and PEM. It is also used
internally in many institutions, including branches of the United States
government, major corporations, national laboratories and universities. RSA's
technology has also become widely selected as a standard for various electronic
banking applications.
The advantages of the RSA public key cryptosystem over traditional
cryptography and other public key cryptographic technologies include the fact
that the RSA cryptosystem can be used for both encryption and authentication.
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Encryption
In traditional cryptography, known as secret key or symmetric cryptography,
the sender and receiver of a message know and use the same secret keys. The
sender uses the secret key to encrypt a message by transforming data into a form
unreadable by anyone without a secret decryption key. The receiver uses the same
secret key to decrypt the message by transforming the encrypted data into the
original readable message. A key is a value or series of bits used by the
cryptographic system to convert the original text into an encrypted text or to
decrypt the encrypted text back into the original text. The principal problem
with secret key cryptography is communicating the secret key between the sender
and receiver without anyone else discovering it. If they are in separate
physical locations, they must trust a courier, a phone system or some other
transmission medium to prevent the disclosure of the secret key being
communicated. Anyone who overhears or intercepts the key in transit can later
read, modify and forge messages encrypted or authenticated using that key.
Because all keys in a secret key cryptosystem must remain secret, secret key
cryptography often has difficulty providing secure key management, especially in
open systems like the Internet with a large number of users.
The concept of public key cryptography, introduced in 1976, attempts to
solve the key management problem by giving each person a pair of keys, one
called the public key and the other called the private key. Each person's public
key is published while the private key is kept secret. The sender encrypts a
message using the public key and communicates it via a public mode of
communication. If implemented properly, the message can only be decrypted with a
private key, which is in the sole possession of the intended recipient. All
communications involve only public keys, and no private key is ever transmitted
or shared. With public key cryptography, it is not necessary to trust a
communications channel to be secure against eavesdropping or betrayal. In
general, public key cryptography requires only that public keys be associated
with their users in a trusted manner, for instance, by maintaining the key in a
trusted directory, and that the private key not be disclosed.
The RSA public key cryptosystem was developed in 1977 by Ronald Rivest, Adi
Shamir, and Leonard Adleman, then professors at MIT. This technology has been
licensed by MIT to RSA. See "Business -- RSA -- Legal Proceedings." RSA's tool
kit products built around this technology enable RSA's customers to develop
applications that are designed to provide secure electronic data communication.
The security of the RSA public key cryptosystem is predicated on the assumption
that factoring large numbers is difficult. The RSA public key cryptosystem uses
a pair of large prime numbers to generate private keys and public keys. The size
of the keys determines the degree of security provided.
Authentication
Authentication in a digital context is a process whereby the receiver of a
digital message can be confident of the identity of the sender and/or the
integrity of the message. In public key cryptosystems, authentication is enabled
by the use of digital signatures. Digital signatures play in the digital world a
function similar to that played by handwritten signatures for printed documents.
The signature is an authentic piece of data asserting that a named person wrote
or otherwise agreed to the document to which the signature is attached. The
recipient, as well as a third party, can verify both that the document
originated from the person whose signature is attached and that the document has
not been altered since it was signed. Secure digital signatures may be used to
refute a claim by the signer of a document that it was forged.
PRODUCTS
RSA's products include a line of developer tool kits and end-user products,
including those described below.
Tool Kit Products
BSAFE. BSAFE, RSA'S flagship product, was introduced in 1987 as a
general-purpose cryptography tool kit designed to allow programmers to integrate
encryption and authentication features into their applications. It supports
RSA's patented RSA public key cryptosystem, as well as more than a dozen of the
world's most popular cryptographic techniques. BSAFE is designed to provide the
security tools for a wide
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range of applications, such as digitally signed electronic forms and virtual
private networks. Many of the most important data security industry standards
incorporate BSAFE's technologies, including SSL, S-HTTP, S/MIME, PCT, PKCS, SET
and PEM. The BSAFE 3.0 product offers greater security by supporting public key
operations with up to 2048-bit keys, and better performance by enhancing the
throughput of both the public key and secret key algorithms. BSAFE is written in
portable "C" with assembly language optimizations for performance and is
available on a wide variety of platforms. BSAFE customers include Netscape,
Lotus, Oracle, IBM, Intuit and Microsoft.
S/MIME (TIPEM). Secure Multipurpose Internet Mail Extension (S/MIME),
formerly marketed as TIPEM, is an interoperable, secure electronic mail
development tool kit. S/MIME allows a message sent using one vendor's email
product (such as Lotus' cc:Mail) to be read by another vendor's email product
(such as Novell's Groupwise). S/MIME customers include Netscape, America Online
and IBM/Lotus. RSA's latest version of the S/MIME development tool kit is
scheduled to be released in 1996.
BCERT. The BCERT development tool kit is designed to allow developers to
incorporate public key certificates into their applications. A public key
certificate verifies the identity of a user and his or her public key. The BCERT
tool kit supports the ITU-T X.509 V3 international standard for public key
certificates, is currently in beta testing and is scheduled for commercial
release in 1996.
End-User Products
RSA Secure. RSA Secure, a general purpose file encryption product, is
designed for the enterprise mass-market and end-user business environment,
particularly for notebook computer users, and allows the user to protect
sensitive information on Windows and Macintosh computers.
RSA has derived a substantial majority of its revenue to date from sales of
its BSAFE and S/MIME products, which collectively accounted for 92% of RSA's
total revenues in 1995. Existing and new versions of such products are expected
to continue to represent a high percentage of RSA's revenues for the foreseeable
future. As a result, any factor adversely affecting sales of these products, or
any factor impeding or delaying RSA's ability to diversify its product offering
to lessen its dependency on the BSAFE and S/MIME products, would have a material
adverse effect on the business and financial results of RSA. The RSA/MIT Patent,
the claims of which cover significant elements of these products, will expire on
September 20, 2000, which may enable competitors to thereafter market competing
products which previously would have infringed the RSA/MIT Patent. In addition,
one of the Stanford Patents, the practice of which can be used to substitute for
methods covered by the RSA/MIT Patent, will expire in 1997, and its applications
may become more widespread as a result, which may adversely impact sales of
RSA's products. See "Risk Factors -- Risks Relating to RSA -- Litigation,"
"Business -- RSA -- Competition" and "-- Legal Proceedings."
The market for cryptographic and electronic data security products,
especially in the Internet and intranet markets, is characterized by rapidly
changing technology, emerging and evolving industry standards, new product
introductions, relatively short product life cycles and rapid and constant
changes in customer requirements and preferences. To the extent that a specific
method other than the method employed by RSA is adopted as the standard for
implementing cryptographic and electronic data security, sales of RSA's existing
and planned products in that market segment may be adversely impacted, which
could have a material adverse effect on RSA's financial condition and results of
operations. There can be no assurance that competing products or technologies
developed by others or the emergence of new industry standards will not
adversely affect RSA's competitive position or render its products or
technologies noncompetitive or obsolete. Thus, RSA's future success will depend
in part upon its customers' and end users' demand for electronic security
products and upon RSA's ability, on a timely and cost-effective basis, to
enhance its existing products and to introduce new products with features that
meet changing customer requirements and with competitive prices. There can be no
assurance that RSA will be successful in doing so. Delays in product enhancement
and development or the failure of RSA's new products or enhancements to gain
market acceptance would have a material adverse effect on RSA's business and
results of operations. Despite testing, new products may be affected by quality,
reliability or security failure problems, including software errors, bugs or
viruses, which
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<PAGE> 112
could result in returns, delays in collecting accounts receivable, unexpected
service or warranty expenses, reduced orders and a decline in RSA's competitive
position.
Product Development
RSA plans to increase its competitive position by strengthening its core
cryptography tool kit and developing standards, protocols and applications that
address the needs of specific market segments and build on RSA's proprietary
technology. In the latter case, RSA may choose to partner with other parties to
develop and/or market the products. Research and development expenses were $1.7
million, $1.0 million and $587,000 for 1995, 1994 and 1993, respectively.
RSA is currently developing the following enhanced tool kits based on its
general purpose cryptography engine to enable emerging new applications. Each of
these value-added tool kits will be designed to address the needs of a specific
market segment.
SET Toolkit. RSA is developing tool kits to support the Secure Electronic
Transaction (SET) payment protocol developed by MasterCard and Visa. RSA is
currently developing three SET tool kits that are designed to assist companies
in creating electronic commerce applications for the cardholder, the merchant
and the financial payment gateway. RSA anticipates that these tool kits will
have a common architecture and code base, but will be tailored to the specific
needs of the three different environments.
S/WAN Toolkit. The S/WAN (Secure Wide Area Network) standard is an RSA-led
effort to standardize the networking industry around an interoperable security
protocol. RSA anticipates that the S/WAN tool kit will enable developers to more
quickly create secure networking solutions. Companies in the Internet firewall
and virtual private network industry that have adopted the S/WAN Standard
include Raptor Systems, Inc., Digital Equipment Corporation and CheckPoint
Systems, Inc.
End-User Products
RSA is continuing to develop new features for RSA Secure and to develop
versions of RSA Secure for Windows 95, Windows NT and the Apple Macintosh
operating system.
SALES AND MARKETING
RSA markets, sells and licenses its products primarily through OEMs. RSA
also maintains a sales and marketing staff, which is responsible for managing
and creating OEM relationships, as well as direct sales and marketing efforts.
RSA typically licenses its products on a royalty-bearing basis and generally
requires a prepayment of royalties. In certain circumstances, RSA licenses its
products on a fully paid-up basis, with the payment computed based on
anticipated usage.
To enhance demand for its products, RSA has participated in the development
of various industry-specific protocols that rely on RSA's cryptographic and
electronic data security technologies, including Cellular Digital Packet Data
(CDPD), a protocol for sending data over cellular networks, Secure Socket Layer
(SSL), an Internet protocol designed to secure the communication link between
two parties on the World Wide Web, Secure HyperText Transfer Protocol (S/HTTP),
an interoperable extension of the World-Wide Web's existing HyperText Transfer
Protocol that provides communication and transaction security for World Wide Web
clients and servers, Public Key Cryptography Standards (PKCS), a set of
standards for public key cryptography developed by RSA Laboratories and certain
of RSA's customers, and Secure Electronic Transaction (SET), a proposed standard
application-level protocol to enable secure bank card transactions on the World
Wide Web. RSA also hosts its own annual industry conference and participates in
others to increase demand for its products. Finally, through its RSA
Laboratories division, RSA maintains a leading role in basic cryptographic
research, develops new encryption technologies, and maintains close working
relations with the leading academic centers and customer development teams.
COMPETITION
The market for cryptographic and electronic data security products is
competitive, and competition is expected to increase as remote computing,
enterprise networks and internetworking become more prevalent
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and as the Internet becomes a viable medium for electronic commerce. RSA
believes that the principal competitive factors affecting the market for
cryptographic software products include technical features, ease of use,
quality/reliability, level of security, customer service and support,
distribution channels and price. RSA's competitors include organizations that
provide cryptographic software products based upon approaches similar to and
different from those employed by RSA. There can be no assurance that the market
for computer and network security products will not ultimately be dominated by
approaches other than the approach marketed by RSA.
There have been recent attempts by organizations with limited rights to
RSA's technology to enter into direct competition with RSA. These include
Cylink, Northern Telecom and Terisa. Other companies are trying to compete with
alternate technologies that perform substantially the same operations as RSA's
products.
Many of RSA's current or potential competitors, including Certicom, Cylink,
Microsoft and Northern Telecom, may have significantly greater financial,
marketing, technical or other competitive resources than RSA. Such companies may
be able to establish alternative security standards or adapt more quickly to new
or emerging technologies and changes in customer requirements or to devote
greater resources to the promotion and sale of their products than can RSA.
Competition could increase if new companies enter the market, or if existing
competitors expand their product lines. Although RSA believes it has certain
technological and other advantages over its competitors, maintaining such
advantages will require continued investment by RSA in research and development
and sales and marketing. There can be no assurance that RSA will have sufficient
resources to make such investments or that RSA will be able to make the
technological advances necessary to maintain such competitive advantages. In
addition, current and potential competitors have established, or may in the
future establish, collaborative relationships among themselves or with third
parties, including third parties with whom RSA has strategic relationships, to
increase the ability of their products to address the security needs of RSA's
prospective customers. Accordingly, it is possible that new competitors or
alliances may emerge and rapidly acquire significant market share.
GOVERNMENT REGULATION AND EXPORT CONTROLS
Exports of RSA's encryption products, or third party products bundled with
the encryption technology of RSA, are expected to continue to be restricted by
the United States government. All cryptographic products need export licenses
from the United States State Department, acting under the authority of the ITAR,
which defines cryptographic devices, including software, as munitions. The
United States government generally limits the export of software with encryption
capabilities to mass marketed software with limited key sizes, which
significantly constrains the security effectiveness of RSA products available
for export. There can be no assurance that the United States government will
ease its export restrictions on encryption technology in any significant manner.
As a result, RSA may be at a disadvantage in competing for international sales
compared to companies located outside the United States that are not subject to
such restrictions.
PROPRIETARY RIGHTS
RSA holds a license to the RSA/MIT Patent, which pertains to certain of its
current products and expires on September 20, 2000, and is the exclusive agent
for licensing a cryptography patent held by Dr. Claus P. Schnorr. RSA relies on
a combination of patent, trade secret, copyright and trademark laws and employee
and third-party license and nondisclosure agreements to protect its intellectual
property rights. RSA believes that the ownership of its intellectual property is
a significant factor in its business. RSA has vigorously pursued legal action
against companies and individuals infringing on its intellectual property
rights. RSA's success also depends on the innovative skills, technical
competence and marketing abilities of its personnel. There can be no assurance,
however, that any patent, trademark, copyright or license owned or held by RSA
will not be invalidated, circumvented, challenged or terminated, that any patent
granted under RSA's pending or future patent applications will be within the
scope of claims sought by RSA, if at all, or that the steps taken by RSA to
protect its rights will be adequate to prevent misappropriation of RSA's
technology or to preclude competitors from developing products with features
similar to RSA's products. The inability of RSA to protect
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its intellectual property adequately could have a material adverse effect on its
financial condition or results of operations. See "Business -- RSA -- Legal
Proceedings."
EMPLOYEES
As of April 1, 1996 RSA had 47 full-time employees, including 15 in sales
and marketing, 18 in engineering, 3 in research (RSA Labs) and 11 in finance,
human resources and corporate services. No employees of RSA are covered by
collective bargaining agreements. RSA believes that its relationships with its
employees are good.
FACILITIES
RSA leases approximately 17,000 square feet of office space in Redwood
City, California.
LEGAL PROCEEDINGS
RSA is currently engaged in several litigation matters relating to the
RSA/MIT Patent, the Stanford Patents and RSA rights with respect to the Stanford
Patents.
Background -- Patent Licenses; Formation of PKP. On April 6, 1990 RSA, and
CKC formed a general partnership named Public Key Partners ("PKP") that was
intended to operate as the patent sublicensing arm for the partners in the field
of cryptography. Prior to the formation of PKP, MIT licensed to RSA, on an
exclusive basis, the RSA/MIT Patent, and MIT sublicensed to RSA, on a
non-exclusive basis, the Stanford Patents. Prior to the formation of PKP,
Stanford granted to Cylink exclusive rights to the Stanford Patents (subject to
pre-existing non-exclusive licenses granted to other parties including RSA).
The Arbitration. On April 4, 1994, Cylink/CKC served a Demand for
Arbitration (the "Demand") alleging, inter alia, that Cylink/CKC had or was
entitled to an unrestricted license to the RSA/MIT Patent as a result of the
formation of PKP. In response to the Demand, RSA on May 19, 1994 filed a
counter-demand in the arbitration and filed a lawsuit in state court contesting
certain aspects of the Demand (RSA Data Security, Inc. v. Cylink Corp. and
Caro-Kann Corp. (Santa Clara Superior Court, Case No. CV 74094)). Cylink and CKC
filed a petition to compel arbitration in response, and the state court granted
the petition to compel an arbitration proceeding (the "Arbitration").
The arbitrators issued three principal orders in the Arbitration. An order
issued September 6, 1995 ruled that (i) PKP be immediately dissolved; (ii)
Cylink/CKC had an option to acquire a license to make, use and sell products
incorporating software provided by RSA; and (iii) neither party had prevailed on
its claim that the other party had materially breached any provision of the PKP
agreements.
A second order issued on February 1, 1996 included the following: (i)
confirmation that Cylink/CKC has the above-described option; (ii) determination
of the royalty Cylink/CKC shall pay for use of RSA's software; (iii)
determination that RSA is entitled to indemnification from PKP for expenses
incurred in defense of the RSA/MIT Patent in both the MIT Action and the
Schlafly Action (described below); (iv) clarification that the arbitration panel
had not ruled on any issues of patent validity or infringement; and (v)
determination that RSA did not breach any duties to PKP by providing patent
licenses to third parties outside of PKP. On May 9, 1996, the arbitrators
rendered a Ruling on Terms and Conditions of Cylink's MIT Patent License. The
Ruling specified that Cylink was only entitled to a license that was consistent
with the RSA standard OEM licenses entered into on or about September 6, 1995.
The arbitrators ruled specifically that the license would not be required to
permit Cylink to have sublicensing rights.
During the course of the Arbitration hearing, Cylink/CKC moved for a
mandatory injunction seeking to compel PKP to grant a patent license to the
Society for Worldwide Interbank Finance Telecommunication ("SWIFT"). On May 24,
1995, the Arbitration Panel ordered PKP to grant the SWIFT license, which order
RSA has appealed.
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The MIT Action. On June 30, 1994, Cylink filed an action in federal court
seeking declaratory relief that the RSA/MIT Patent is invalid and/or
unenforceable (Cylink Corp. v. RSA Data Security, Inc. (U.S. District Court for
the Northern District of California, Case No. C 94-023320 JSL)). RSA counter
claimed for infringement of the RSA/MIT Patent, Lanham Act violations and
various business torts. RSA's motion for summary judgment on Cylink's validity
and unenforceability claim, Cylink's motion for summary judgment on RSA's
counter-claims and Cylink's motion to amend its answer are pending. The court
has temporarily stayed the case, pending further rulings by the arbitrators.
The Schlafly Action. On July 27, 1994 RSA was named as co-defendant with
PKP in an action filed in federal court by an individual, Roger Schlafly
(Schlafly v. Public Key Partners and RSA Data Security, Inc. (U.S. District
Court for the Northern District of California Case No. C 94-20512-SW)) (the
"Schlafly Action"). RSA had previously sued Mr. Schlafly for infringing the
RSA/MIT Patent, resulting in a consent judgment being entered against him in
1988. In the Schlafly Action, Mr. Schlafly contests the validity of both the
RSA/MIT Patent and the Stanford Patents: alleges causes of action for
non-infringement, interference with contractual business relationship, unfair
business practices, antitrust, libel and fraud; and seeks injunctive relief and
damages in excess of $2 million. To date the actions for libel, fraud and
interference with contractual business relationship have been resolved in RSA's
favor, either through actions for dismissal or through summary judgment. CKC
intervened in this action in late 1995. No trial date has been set in this
action.
The Stanford Action. Following the September 6, 1995 order in the
Arbitration, Cylink/CKC claimed that (i) RSA did not have sufficient rights to
grant RSA's customers the right to make copies of software incorporating the
Stanford Patented Technology and (ii) the September 6, 1995 Arbitration order
required that RSA's OEM customers obtain an additional license from Cylink/CKC.
On September 15, 1995 RSA filed an action in federal court seeking adjudication
that RSA's OEM customers do not require any additional license (RSA Data
Security, Inc. v. Cylink Corporation et al. (U.S. District Court for the
Northern District of California, Case No. C95-03256 WHO) (the "Stanford
Action"). RSA requested that the court determine that: (a) RSA's license under
the Stanford Patents allows customers to make copies incorporating the Stanford
Patented Technology; (b) one or more of the Stanford Patents are invalid; and/or
(c) RSA's software does not infringe the Stanford Patents.
Cylink/CKC has counter-claimed alleging causes of action against RSA for
contributory infringement and inducing infringement of the Stanford Patents, as
well as various business torts. On November 30, 1995, Cylink/CKC filed a motion
for preliminary injunction seeking to enjoin RSA's OEM licensing practices. Both
sides filed motions for summary judgment based on a number of theories. On March
1, 1996 and April 4, 1996, Judge Williams, who is hearing the Stanford Action
and the Schlafly Action as related cases, denied Cylink/CKC's motions for a
preliminary injunction and for summary judgment, respectively. On May 17, 1996,
Judge Williams issued rulings denying both the RSA and Cylink summary judgment
motions. The court also issued an order allowing Cylink to file a First
Supplemental Counterclaim. This counterclaim contains the additional allegation
that RSA's Stanford Patent License has been canceled. Finally, the court issued
a Scheduling Order setting dates by which discovery must be completed, setting a
pre-hearing conference for August 28, 1996, and setting a claim construction
hearing for September 3, 1996. No trial date has been set in this action.
The Schnorr Action. RSA has entered into an agreement whereby RSA is the
exclusive agent for licensing a cryptographic patent held by Dr. Claus P.
Schnorr. On November 15, 1995, Cylink filed an action in federal court (Cylink
Corporation v. Prof. Dr. Claus P. Schnorr (U.S. District Court for the District
of Columbia, Case No. 1:95CV02121)) seeking a declaratory judgment of patent
non-infringement to the effect that Cylink's product practicing the federal
Digital Signature Standard does not infringe the Schnorr Patent. By agreement
with Dr. Schnorr, RSA is defending this action. No trial date has been set in
this action.
Adverse Impact of Pending Litigation. While RSA is vigorously defending
its interests in each of the above described cases, each of these matters
involves a number of complex issues, and no assurance can be given as to its
likely outcome. Potential unfavorable outcomes of the Litigation could include a
declaration that the RSA/MIT Patent is invalid, issuance of an injunction
against RSA's business activities based on a
105
<PAGE> 116
finding that the development or distribution of RSA products infringe one or
more of the Stanford Patents or a finding that RSA is liable to Cylink for
monetary damages and possibly for the payment of Cylink's substantial legal
expenses. Any such unfavorable outcome of the Litigation would have a material
adverse effect on RSA's financial condition and results of operations. Although
Cylink has not claimed any specific damages in the Litigation, RSA has been
advised that, in a letter to SDI following the announcement of the proposed
Merger, Cylink's general counsel asserted that Cylink's compensatory damages,
conservatively estimated, would exceed $75,000,000 but provided no basis for
such estimate. The Arbitration has previously resulted in substantial costs and
diversion of effort by RSA, and RSA (or, after the Merger, the Surviving
Company) may continue to incur significant legal expenses with respect to all
such pending litigation matters regardless of the outcome of any such matter.
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<PAGE> 117
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS -- RSA
OVERVIEW
RSA was founded in 1982 and is engaged in the development and marketing of
cryptographic and electronic data security products which are designed to ensure
the integrity of publicly transmitted data. RSA licenses software to original
equipment manufacturers and end users. Prior to 1987, RSA was in the development
stage and was engaged primarily in the development of its cryptographic
technology. In 1987, RSA introduced its first product, BSAFE, a general-purpose
cryptographic tool kit. In 1992, RSA subsequently introduced TIPEM, currently
marketed as S/MIME. S/MIME is an interoperable secure electronic mail
development tool kit. A substantial majority of RSA's revenues to date have been
derived from licenses relating to its BSAFE and S/MIME products. These licenses
accounted for approximately 92% of total revenues in 1995. RSA expects that
license revenues from these products will continue to account for a significant
percentage of its total revenues for the foreseeable future.
A decline in demand or failure to maintain broad market acceptance, for the
BSAFE or S/MIME products as a result of competition, technological change or
otherwise, would have a material adverse effect on RSA's operating results and
financial condition. A decline in license revenues from these products could
also have a material adverse effect on sales of other RSA products. RSA's future
financial performance will depend in part on the successful development,
introduction and customer acceptance of its other existing products and products
that it may develop in the future. There can be no assurance that RSA will
continue to be successful in marketing its BSAFE and S/MIME products or any of
its other current or new products.
RSA's quarterly operating results may vary significantly depending on a
number of factors, including the size, timing and execution of individual
contracts, variations in expenses associated with pending litigation involving
RSA, the timing of the introduction or enhancement of products by RSA or its
competitors, market acceptance of new products, changes in RSA's operating
expenses, personnel changes, mix of products sold, changes in product pricing,
development of RSA's direct and indirect distribution channels and general
economic conditions. There can be no assurance that RSA will be able to achieve
and sustain profitability on a quarterly basis. Because RSA's operating expenses
are based on anticipated revenue levels, and a high percentage of RSA's expenses
are fixed, a small variation in the timing of recognition of revenue can cause
significant variations in operating results from quarter to quarter. See "Risk
Factors -- Risks Related to RSA."
If realized, potential unfavorable outcomes of the Litigation would have a
material adverse impact on RSA's financial condition and results of operations.
Specifically, if the RSA/MIT Patent were declared invalid or unenforceable,
other companies could use technology claimed in such patent to enter, or
strengthen their respective positions in, the markets in which RSA does
business, resulting in increased competition for RSA, which in turn could have a
material adverse impact on RSA's financial condition and results of operations.
In addition, if it were found that the development or distribution of RSA
products infringe one or more of the Stanford Patents, RSA could be enjoined
from distributing some or all of its products or RSA could be held liable to
Cylink/CKC for monetary damages (unless RSA obtains a license under the Stanford
Patents, which may not be available on commercially reasonably terms or at all).
Any such injunction or damage award could have a material adverse impact on
RSA's financial condition and results of operations. Moreover, the Litigation
has previously resulted in substantial costs and diversion of effort by RSA and
RSA may continue to incur significant legal expenses with respect to the
Litigation regardless of the outcome thereof.
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<PAGE> 118
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
AS A PERCENTAGE OF TOTAL REVENUES
------------------------------------------------
THREE MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
--------------- --------------------------
1996 1995 1995 1994 1993
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues................................ 100 % 100% 100 % 100% 100 %
Cost of revenues........................ 22 20 11 24 28
--- --- --- --- ---
Gross margin.......................... 78 80 89 76 72
--- --- --- --- ---
Costs and expenses:
Research and development.............. 21 67 14 34 20
Marketing and selling................. 32 97 18 57 34
General and administrative............ 49 146 53 46 25
--- --- --- --- ---
Total costs and expenses...... 102 310 85 137 79
--- --- --- --- ---
Income (loss) from operations........... (24 ) (230) 4 (61) (7 )
--- --- --- --- ---
Other income:
Equity in profits (losses) of
investees.......................... 0 15 0 3 2
Interest income, net.................. 1 0 0 1 1
--- --- --- --- ---
Income (loss) before provision for
income taxes.......................... (23 ) (215) 4 (57) (4 )
--- --- --- --- ---
(Benefit) for income taxes.............. (9 ) 0 (4 ) (1) 0
--- --- --- --- ---
Net income (loss)....................... (14 )% (215)% 8 % (56)% (4 )%
=== === === === ===
</TABLE>
Revenues
RSA's revenues are comprised primarily of software license fees. 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. Ongoing 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.
RSA's revenues increased 2.5% from $3.0 million for 1993 to $3.1 million
for 1994 and by 277% to $11.6 million for 1995. The increase from 1994 to 1995
was due primarily to growth in sales of product related to increased use of the
Internet and increased awareness of security needs by Internet users and
vendors, and to a lesser extent, increased marketing and sales personnel.
Revenues increased 358% from $587,000 for the three months ended March 31, 1995
(the "1995 Quarter") to $2.7 million for the three months ended March 31, 1996
(the "1996 Quarter"). This increase was due primarily to significant increases
in software license revenues, which increased from $339,000 for the 1995 Quarter
to $2.0 million for the 1996 Quarter. Revenues attributable to publications and
conferences also increased from $132,000 for the 1995 Quarter to $502,000 for
the 1996 Quarter due to the increased attendance at RSA's annual conference in
January 1996.
In 1993, one customer accounted for 47% of revenues and two customers
accounted for a combined 35% of revenues during 1995. No individual customer
accounted for more than 10% of revenues in 1994.
Cost of Revenues and Gross Profit
Cost of revenues include software license royalties, installation and
support costs, documentation materials and packaging and expenses relating to
conferences. Cost of revenues decreased 13% from $844,000 for 1993 to $733,000
for 1994 and increased 73% to $1.3 million for 1995. Approximately 43% of the
decrease
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<PAGE> 119
in 1994 was due to a decrease in the amount of software licensing royalties and
an additional 43% of the decrease was due to consulting expenses. Approximately
109% of the increase in 1995 was due to increased software royalty expenses,
offset by a decrease of 9% on conference expenses. Cost of revenues increased
401% from $120,000 for the 1995 Quarter to $602,000 for the 1996 Quarter.
Approximately 63% of this increase was due to costs from increased participation
in RSA's annual conference. Approximately 31% of this increase was due to
increased software licensing royalties from increased revenues.
As a result of the above factors, gross profit increased from $2.2 million
or 72% of revenues for 1993 to $2.3 million, or 76% of revenues for 1994, and
increased to $10.3 million, or 89% of revenues, for 1995. Gross profit also
increased from $467,000, or 80% of revenues, for the 1995 Quarter to $2.1
million, or 78% of revenues, for the 1996 Quarter. In the future, gross profit
may be adversely affected by several factors, including changes in product mix,
price reductions (resulting from volume discounts or otherwise), competition,
increases in the cost of revenue (including any software license fees or
royalties payable by RSA) and other factors.
Costs and Expenses
Research and Development Expenses. Research and development expenses
consist primarily of salaries and other personnel-related expenses, depreciation
for development equipment, supplies and allocated facilities costs. Research and
development expenses increased 76% from $587,000 for 1993 to $1.0 million for
1994 and 62% to $1.7 million for 1995. Approximately 59% of the increase from
1993 to 1994 and 92% of the increase from 1994 to 1995 related to an increase in
costs for personnel and consultants.
Research and development expenses increased 43% from $391,000 for the 1995
Quarter to $557,000 for the 1996 Quarter but decreased as a percentage of
revenues from 67% for the 1995 Quarter to 21% for the 1996 Quarter.
Approximately 52% of the increase in absolute amounts is attributable to an
increased number of research and development personnel hired or retained by RSA.
It is anticipated that research and development expenses will continue to
increase in absolute amounts from continued growth in personnel.
Research and development expenditures are charged to operations as
incurred. Statement of Financial Accounting Standards No. 86, "Accounting for
the Costs of Computer Software to be Sold, Leased or Otherwise Marketed" ("SFAS
86") requires capitalization of certain software development costs subsequent to
the establishment of technological feasibility. Based on RSA's product
development process, technological feasibility is established upon the creation
of a beta version of the product. Costs capitalized under SFAS 86 during 1993,
1994, and 1995 were $10,000, $52,000, and $216,000, respectively, and for the
1995 Quarter and the 1996 Quarter were $89,000 and $48,000, respectively.
Marketing and Selling Expenses. Marketing and selling expenses consist
primarily of salaries, commissions, consulting fees, advertising and trade show
expenses and allocated facilities costs. Marketing and selling expenses
increased 71% from $1.0 million for 1993 to $1.8 million for 1994 and by 21% to
$2.1 million for 1995. Approximately 57% of the increase from 1993 to 1994 was
due to an increase in salaries and related expenses, while approximately 69% of
the increase from 1994 to 1995 was due to increased salaries, including
increased commissions and bonuses resulting from increased sales volume.
Marketing and selling expenses increased 53% from $569,000 for the 1995 Quarter
to $870,000 for the 1996 Quarter. Approximately 70% of this increase was due to
consulting and related expenses. Marketing and selling costs in absolute amounts
are expected to continue to increase as additional sales and marketing staff are
hired.
General and Administrative Expenses. General and administrative expenses
consist primarily of salaries and bonuses for executive and administrative
personnel, allowance for doubtful accounts, fees for professional and legal
services and allocated facilities costs. General and administrative expenses
increased 89% from $758,000 for 1993 to $1.4 million for 1994 and by 330% to
$6.2 million for 1995. As a percentage of revenues, general and administrative
expense increased from 25% of revenues in 1993 to 46% of revenues in 1994 and
increased to 53% of revenues for 1995. 76% of the increase from 1993 to 1994 was
due to increased legal costs incurred in defending the Litigation, and the
increase from 1994 to 1995 was due to further increased legal
109
<PAGE> 120
costs in connection with the Litigation and an increase in employee bonuses. See
"Risk Factors-Risks Relating to RSA" and Note 11 of Notes to RSA's Consolidated
Financial Statements. General and administrative expenses increased 53% from
$859,000 for the 1995 Quarter to $1.3 million for the 1996 Quarter but decreased
as a percentage of revenues from 146% to 49% for the 1996 Quarter. Approximately
29% of this increase was due to increased compensation. Approximately 75% of
this increase was due to increased legal fees. Legal costs are expected to be
significant during 1996 and 1997.
Other Income
Other income consists of interest earned on RSA's cash and investment
balances offset by interest paid by RSA on capitalized lease obligations, and
equity in profits (losses) of investees. Interest income was not significant for
each of the years in the three years ended December 31, 1995 or for the 1995
Quarter and 1996 Quarter. The equity in profits of investees was not significant
for each of the years in the three years ended December 31, 1995. Equity in
profits of investees decreased from $87,000 or 15% of revenues for the 1995
Quarter to less than $10,000 or less than 1% of revenues for the 1996 Quarter.
This decrease was due to the dissolution of the Public Key Partnership (see Note
11 of the Notes to RSA's Consolidated Financial Statements).
Income Taxes
In 1993 and 1994, the Company recorded immaterial tax benefit provisions of
approximately $11,000 and $40,000, respectively, related primarily to net
operating loss carrybacks. In 1995, RSA recorded a benefit for income taxes of
approximately $537,000. This resulted from deferred tax assets which have been
recorded by way of a reduced valuation allowance.
The valuation allowance was reduced to zero in 1995 as a result of the
substantial deferred tax liability recorded relating to the unrealized gain from
marketable securities available for sale in accordance with SFAS 115.
Net Income
As a result of the above factors, net loss increased from $115,000 or (4%)
of revenues for 1993 to $1.7 million or (56%) of revenues for 1994, and RSA had
net income $950,000 or 8% of revenues for 1995. Also, as a result of the above
factors, net loss decreased from $1.3 million or (215%) of revenues for the 1995
Quarter to $383,000 or (14%) of revenues for the 1996 Quarter.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception in 1982, RSA has financed its operations and met its
capital expenditure requirements primarily from proceeds of the private sale of
equity securities and cash generated from operations. At March 31, 1996, RSA had
$3.7 million in cash and cash equivalents. RSA also had $15.0 million in
marketable securities at March 31, 1996, consisting entirely of shares of common
stock of Netscape Communications Corporation and Cybercash, Inc. These
securities are "restricted securities" under Rule 144 promulgated under the
Securities Act, and will become available for sale in August and September 1996,
respectively, subject to certain volume, manner of sale, notice and availability
of public information requirements of such rule.
Operating activities utilized net cash of $220,000 for the year ended
December 31, 1994 and generated net cash of $3.3 million for the year ended
December 31, 1995. Investing activities used net cash of $503,000 for 1995 in
order to fund development activities related to software capitalized as required
by SFAS 86 and to purchase capital assets. Financing activities generated cash
of $1.1 million for 1995 from the proceeds of RSA's issuances of capital stock.
RSA used the cash provided by operations and financing activities principally
for working capital needs and equipment additions necessary to support RSA's
growth. Operating activities used cash of $893,000 in the 1996 Quarter.
Investing activities used cash of $103,000 in the 1996 Quarter in order to fund
development activities related to software capitalization as required by SFAS 86
and to purchase capital assets.
110
<PAGE> 121
RSA's principal commitments as of March 31, 1996 consist of obligations
under operating and capital leases, comprising $1.4 million and $21,000,
respectively.
Capital expenditures have been, and future capital expenditures are
anticipated to be, primarily for equipment to support expansion of RSA's
operations. RSA currently has no material capital commitments and anticipates
that its planned purchases of capital equipment in 1996 will not require a
material amount of additional expenditures.
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<PAGE> 122
MANAGEMENT -- RSA
DIRECTORS, EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL
<TABLE>
The director and executive officers of RSA who will serve as a director and
executive officers of the Surviving Corporation following the Merger and certain
other key RSA personnel, and their ages as of June 28, 1996, are as follows:
<CAPTION>
NAME AGE POSITION
- ----------------------------------- --- --------------------------------------------------
<S> <C> <C>
D. James Bidzos.................... 41 President, Chief Executive Officer and Director
Kathryn Conrow..................... 41 Chief Financial Officer
C. Victor Chang.................... 43 Vice President, Engineering
Burton Kaliski..................... 32 Chief Scientist, RSA Laboratories
Scott Schnell...................... 38 Vice President, Marketing
Paul Livesay....................... 28 Director, Legal Affairs
</TABLE>
Mr. Bidzos joined RSA in 1986 and has served as RSA's President and Chief
Executive Officer and as a director since 1988. Mr. Bidzos also is Chairman and
a founder of VeriSign, a company specializing in providing public-key
certificates and related products and services, and a director and a founder of
Terisa Systems, Inc., a company specializing in security protocols for the World
Wide Web. He also is a director of the Electronic Privacy Information Center. It
is currently anticipated that Mr. Bidzos will become a director of SDI following
the effectiveness of the Merger.
Ms. Conrow has served as RSA's Chief Financial Officer since September 1995
and as a consultant to RSA since March 1994. From November 1993 until September
1995, Ms. Conrow maintained a financial consulting practice concentrating on
high-technology companies. From November 1990 to November 1993, Ms. Conrow was
employed as a consultant by Murdock & Associates, a financial services
consulting group.
Mr. Chang has served as RSA's Vice President, Engineering, since March 1996
and as Director of Engineering since March 1994. From 1987 to February 1994, Mr.
Chang held a number of development management positions at Apple Computer, Inc.
Mr. Schnell has served as RSA's Vice President, Marketing since March 1996.
From November 1995 until February 1996, he performed consulting services for
Autodesk, Inc., a computer aided design company, and Applied Biosystems, a
biotechnology company. From June 1994 to July 1995, Mr. Schnell was Vice
President of Marketing for Photonics Corporation, a provider of wireless local
area networking products for microcomputers. From August 1985 to May 1994, Mr.
Schnell held a number of management positions at Apple Computer, Inc.
Mr. Livesay has served as RSA's Director of Legal Affairs since September
1995. From June 1994 to August 1995, Mr. Livesay was an Associate Attorney with
the law firm of Wilson Sonsini Goodrich & Rosati P.C., and from May 1993 to May
1994, he was an attorney with the law firm of Poms, Smith, Lande & Rose.
Dr. Kaliski has served as Chief Scientist, at RSA Laboratories, since
December 1991 and as a cryptographic systems scientist at RSA since September
1989. Dr. Kaliski is a member of the IEEE Computer Society and the Internet
Privacy and Security Research Group.
Officers are chosen by and serve at the discretion of the RSA Board. There
are no family relationships among any of the directors or executive officers of
RSA.
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<PAGE> 123
COMPENSATION OF EXECUTIVE OFFICERS
<TABLE>
The following table sets forth all compensation awarded to, earned by, or
paid for services rendered to RSA in all capacities during the year ended
December 31, 1995 by RSA's Chief Executive Officer (the "RSA Named Executive
Officer"). No other executive officer of RSA who held office at December 31,
1995 met the definition of "named executive officer" within the meaning of the
Commission's executive compensation disclosure rules.
SUMMARY COMPENSATION TABLE
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
-------------------------------------- ------------
OTHER ANNUAL SECURITIES
NAME AND SALARY BONUS COMPENSATION UNDERLYING ALL OTHER
PRINCIPAL POSITION ($) ($) ($) OPTIONS COMPENSATION
- ----------------------------- -------- ---------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
D. James Bidzos.............. $144,000 $1,254,361(1) $ 12,325(2) 300,000(3) $ 1,565(4)
President and Chief Executive
Officer
<FN>
- ---------------
(1) Mr. Bidzos is eligible for bonuses equal to 5% of RSA's quarterly operating
profit under an employment agreement that terminates upon the effectiveness
of the Merger. For purposes of calculating Mr. Bidzos' 1995 bonus, operating
profit included unrealized gains on marketable securities. The bonus paid in
the year ended December 31, 1995 includes $240,000 paid to Mr. Bidzos to
permit him to purchase 100,000 shares of RSA Common Stock upon the exercise
of stock options.
(2) Represents automobile allowances and a cash-out of one month of accrued
vacation time.
(3) In May 1995, Mr. Bidzos received an immediately exercisable option to
purchase 300,000 shares of RSA Common Stock with an exercise price of $1.50
per share.
(4) Represents RSA's contributions to Mr. Bidzos' 401(k) account and life
insurance premiums paid by RSA.
</TABLE>
On January 1, 1991, Mr. Bidzos entered into an employment agreement (the
"1991 Employment Agreement") with RSA, pursuant to which he agreed to perform,
among other things, the function of Chief Executive Officer for RSA in
consideration of compensation consisting of base cash compensation of $9,000 per
month (which was increased to $10,000 per month in 1992 through 1994 and to
$12,000 per month in 1995), a quarterly bonus of 5% of RSA's quarterly pre-tax
profit and such bonuses as are granted from time to time by the RSA Board in the
form of cash, options to purchase RSA Stock or both. The 1991 Employment
Agreement has a term of one year and automatically renews on January 1 of each
year, unless terminated by either Mr. Bidzos or RSA on no less than 90 days'
notice. The 1991 Employment Agreement will be superseded by the Employment
Agreement executed concurrently with the Merger Agreement (as amended on June 6,
1996, the "1996 Employment Agreement") effective as of the Effective Time of the
Merger. See "The Merger Agreement -- Bidzos Employment Agreement."
Option Grants in Last Fiscal Year
The following table sets forth information regarding option grants pursuant
to the RSA 1987 Stock Option Plan during the year ended December 31, 1995 to the
RSA Named Executive Officer.
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<PAGE> 124
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO OPTION TERM(1)
OPTIONS EMPLOYEES IN EXERCISE OR EXPIRATION ---------------------
NAME GRANTED FISCAL YEAR BASE PRICE DATE 5% 10%
- ---------------------- ---------- ------------- ----------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
D. James Bidzos....... 300,000(2) 62.8% $1.50 5/14/00 $124,326 $274,729
</TABLE>
- ---------------
(1) Disclosure of the 5% and 10% assumed annual rates of compounded stock
appreciation is required by the rules of the Commission. There can be no
assurance that the actual stock price appreciation over the option term will
be at the assumed 5% and 10% levels or at any other defined level. Actual
gains, if any, on stock option exercises are dependent upon the future
financial performance of RSA.
(2) In May 1995, Mr. Bidzos received an immediately exercisable option to
purchase 300,000 shares of RSA Common Stock with an exercise price of $1.50
per share.
Aggregated Option Exercises and Year-End Option Table
The following table summarizes certain information regarding stock options
exercised during the year ended December 31, 1995 and stock options held as of
December 31, 1995 by the RSA Named Executive Officer.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
SHARES
UNDERLYING
UNEXERCISED
OPTIONS AT VALUE OF UNEXERCISED
SHARES FISCAL YEAR-END IN-THE-MONEY OPTIONS
ACQUIRED ON VALUE (EXERCISABLE/ AT FISCAL YEAR-END
NAME EXERCISE(#) REALIZED($) UNEXERCISABLE)(#) (EXERCISABLE/UNEXERCISABLE($)
- -------------------------------- ----------- ----------- ----------------- ------------------------------
<S> <C> <C> <C> <C>
D. James Bidzos................. 100,000 $ 0 300,000/0 $1,200,000/$0
</TABLE>
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<PAGE> 125
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
<TABLE>
The following table sets forth certain information as of June 28, 1996,
with respect to beneficial ownership of shares of RSA Stock by (i) each person
known to RSA to own beneficially more than 5% of the outstanding shares of RSA
Stock, (ii) the directors of RSA, (iii) the RSA Named Executive Officer, and
(iv) the directors and executive officers of RSA as a group.
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL OWNERSHIP(1)
-------------------------------
NAMES AND ADDRESS PERCENT OF
OF BENEFICIAL OWNER NUMBER OF SHARES CLASS
- ------------------------------------------------------------------ ---------------- ----------
<S> <C> <C>
Addison Fischer................................................... 2,224,767(2) 55.3%
c/o Fischer International Systems Corp.
4073 Mercantile Avenue
Naples, FL 33942
D. James Bidzos................................................... 755,000(3) 17.5%
748 Newport Circle
Redwood City, CA 94065
Ronald Rivest..................................................... 378,000(4) 9.3%
c/o MIT Laboratory for Computer Science
545 Technology Square
Cambridge, MA 02139
All directors and executive officers as a group (4 persons)....... 3,333,767(5) 75.6%
<FN>
- ---------------
(1) The number of shares beneficially owned by each director and executive
officer is determined under rules promulgated by the Commission, and the
information is not necessarily indicative of beneficial ownership for any
other purpose. Under such rules, beneficial ownership includes any shares as
to which the individual has sole or shared voting power or investment power
and also any shares which the individual has the right to acquire within 60
days after June 28, 1996 through the exercise of any stock option or other
right. The inclusion herein of such shares, however, does not constitute an
admission that the named stockholder is a direct or indirect beneficial
owner of such shares. Unless otherwise indicated, each person or entity
named in the table has sole voting power and investment power (or shares
such power with his or her spouse) with respect to all shares of capital
stock listed as owned by such person or entity. The number of shares deemed
outstanding includes 4,021,117 shares, which consists of 2,530,833 shares of
RSA Common Stock, 250,000 shares of RSA Series A Preferred Stock, 499,950
shares of RSA Series B Preferred Stock, 360,000 shares of RSA Series C
Preferred Stock and 380,334 shares of RSA Series D Preferred Stock. All
stock information in the preceding table and the footnotes below present all
outstanding shares of preferred stock on an as-converted basis.
(2) Includes 196,494 shares held in a grantor retained annuity trust of which
Mr. Fischer is the trustee and over which he has sole voting and investment
control. Also includes 60,000 shares beneficially owned by Mr. Fischer
through Kairdos L.L.C., a Delaware limited liability company ("Kairdos").
(3) Includes 300,000 shares which may be acquired pursuant to stock options
exercisable within 60 days after June 28, 1996. Also includes 100,000 shares
held by Kairdos over which Mr. Bidzos exercises voting control. Mr. Bidzos
disclaims beneficial interest over these shares except to the extent of his
pecuniary interest therein.
(4) Includes 50,000 shares which may be acquired pursuant to stock options
exercisable within 60 days after June 28, 1996.
(5) Includes the shares described in Notes 3 and 4 above. Also includes an
additional 40,000 shares which may be acquired by an executive officer
pursuant to a stock option exercisable within 60 days after June 28, 1996
and an additional 1,000 shares currently held by such officer. Also includes
an aggregate of 60,000 and 35,000 shares beneficially owned by Messrs.
Fischer and Bidzos, respectively, through Kairdos.
</TABLE>
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CERTAIN TRANSACTIONS -- RSA
From January 1, 1993 to the present, (i) there have been no transactions or
series of transactions involving more than $60,000 in any fiscal year to which
RSA or any subsidiary is a party and in which RSA and the RSA Named Executive
Officer or any member of his immediate family had a direct or indirect material
interest, and (ii) there do not exist, nor have there existed, any relationships
between the RSA Named Executive Officer and an entity of which he is an officer
or holds an equity interest in excess of 10% and which entity's payments to RSA,
or RSA's payments to such entity, exceeded 5% of either entity's consolidated
gross revenues in any year since January 1, 1993, except as follows or as
indicated in "Management -- RSA" above.
On January 1, 1991, Mr. Bidzos entered into the 1991 Employment Agreement
with RSA, pursuant which he agreed to perform, among other things, the function
of Chief Executive Officer for RSA in consideration of compensation consisting
of base cash compensation of $9,000 per month (which was increased to $10,000
per month in 1992 through 1994 and to $12,000 per month in 1995), a quarterly
bonus of 5% of RSA's quarterly pre-tax profit and such bonuses as are granted
from time to time by the RSA Board in the form of cash, options to purchase RSA
Stock or both. The term of the 1991 Employment Agreement is one year and
automatically renews on January 1 of each year, unless terminated by either Mr.
Bidzos or RSA on no less than 90 days' notice. The 1991 Employment Agreement
will be superseded by the 1996 Employment Agreement executed concurrently with
the Merger Agreement effective as of the Effective Time of the Merger. See "The
Merger Agreement -- Related Agreements -- Bidzos Employment Agreement."
As of January 1, 1993, Mr. Bidzos was indebted to RSA in the amount of
$75,000 in outstanding principal plus accrued interest pursuant to a note issued
by Bidzos to RSA (the "Bidzos Note"). In May 1993, the RSA Board granted Mr.
Bidzos a bonus consisting of cancellation of all of Bidzos' outstanding
principal and accrued interest ($2,202.95 as of the date of cancellation) under
the Bidzos Note.
In April 1995, RSA formed VeriSign, an affiliated digital certificate
business, by assigning certain intellectual property, interests in certain
agreements, certain license fees receivable and other assets to VeriSign, in
consideration for a 44.5% interest in VeriSign, consisting of 4,000,000 shares
of VeriSign common stock with a fair market value of $0.12 per share. In
connection with the formation of VeriSign, Mr. Bidzos and Kairdos, which was
formed by Mr. Bidzos and other investors, including two RSA stockholders, and in
which Mr. Bidzos is the general manager and principal member, with an
approximate 35% equity-equivalent interest, purchased 125,000 and 100,000
shares, respectively, of VeriSign common stock for $0.12 per share. In addition,
Mr. Bidzos became a director of VeriSign upon its formation and was granted an
option to purchase 25,000 shares of VeriSign common stock with an exercise price
of $0.12 per share.
In September 1995, RSA granted to Consensus Development Corporation
("Consensus") an exclusive license to market and license RSA's RSAREF encryption
software on a commercial basis. The consideration received by RSA for the
license was Consensus' commitment to a future royalty stream pursuant to which
RSA has as yet received no payment. In February 1996, Kairdos acquired 30,000
shares of Consensus common stock for $120,000. Consensus has proposed an
amendment to the RSA-Consensus license agreement to expand the rights under the
license agreements to certain RSA trade secrets, which RSA is considering.
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DESCRIPTION OF SDI CAPITAL STOCK
As of June 3, 1996, there were outstanding an aggregate of 13,656,760
shares of SDI Common Stock held of record by approximately 187 stockholders.
SDI COMMON STOCK
The SDI Certificate authorizes the issuance of up to 30,000,000 shares of
SDI Common Stock, $.01 par value per share. If the holders of SDI Common Stock
approve the Charter Amendment at the SDI Special Meeting, the number of
authorized shares of SDI Common Stock will increase to 80,000,000 shares.
Holders of SDI Common Stock are entitled to one vote for each share held on all
matters submitted to a vote of stockholders and do not have cumulative voting
rights. Accordingly, holders of a majority of the shares of SDI Common Stock
entitled to vote in any election of directors may elect all of the directors
standing for election. Holders of SDI Common Stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors out
of funds legally available therefor. Upon the liquidation, dissolution or
winding up of SDI, the holders of SDI Common Stock are entitled to receive
ratably the net assets of SDI available after the payment of all debts and other
liabilities. Holders of SDI Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of SDI Common Stock are
fully paid and nonassessable.
REGISTRATION RIGHTS
Certain persons and entities (the "Rightsholders") are entitled to certain
rights with respect to the registration under the Securities Act of a total of
approximately 609,000 shares (the "Registrable Shares") of SDI Common Stock
pursuant to the terms of an agreement among SDI and the Rightsholders (the
"Registration Agreement"). Rightsholders have the right under the Registration
Agreement to require SDI to prepare and file from time to time registration
statements under the Securities Act with respect to their Registrable Shares (a
"Demand Registration"); provided, however, that (i) such demand requests the
registration of Registrable Shares representing at least 20% of the outstanding
Registrable Shares and that the reasonably anticipated aggregate offering price
of such public offering would exceed $3,000,000, (ii) SDI need only effect two
Demand Registrations, and (iii) SDI is not required to file more than one
registration statement in any one-year period. The Registration Agreement also
provides that in the event SDI proposes to file a registration statement under
the Securities Act with respect to an offering by SDI for its own account or the
account of another person, or both, the Rightsholders shall be entitled to
include Registrable Shares in such registration, subject to the right of the
managing underwriter of any such offering to exclude some or all of such
Registrable Shares from such registration if and to the extent that inclusion of
such Shares would adversely affect the marketing of the shares to be sold by
SDI. In such event, the amount of Registrable Shares to be offered for the
accounts of the Rightsholders shall be reduced pro rata among all of the
requesting Rightsholders based upon the number of shares requested to be
included in such registration by all requesting Rightsholders. If a holder of
Registrable Shares having a market value of at least $2,000,000 requests that
SDI file a registration statement on Form S-3, or any successor form thereto,
for a public offering of all or any portion of the Registrable Shares held by
such Rightsholder, and SDI is entitled to use Form S-3, then SDI is required to
use its best efforts to register such Registrable Shares; provided, however,
that SDI is not required to file more than one such registration statement in
any one-year period. SDI is generally required to bear the expenses of all such
registrations, except underwriting discounts and commissions. All of the
obligations of SDI to register the Registrable Shares terminate on August 31,
2001.
SDI has also granted certain registration rights to Messrs. Bidzos, Fischer
and Rivest in connection with the proposed Merger. See "The Merger
Agreement -- Related Agreements -- Stockholder Agreements."
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
SDI is subject to the provisions of Section 203 of the DGCL. Section 203
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless
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the business combination is approved in a prescribed manner. A "business
combination" includes mergers, asset sales and other transactions resulting in a
financial benefit to the interested stockholder. Subject to certain exceptions,
an "interested stockholder" is a person who, together with affiliates and
associates, owns, or within three years did own, 15% or more of the
corporation's voting stock.
The SDI Certificate provides for the division of the Board of Directors
into three classes as nearly equal in size as possible with staggered three-year
terms. See "Management -- SDI." In addition, the SDI Certificate provides that
directors may be removed only for cause by the affirmative vote of the holders
of two-thirds of the shares of capital stock of the corporation entitled to
vote. Under the SDI Certificate, any vacancy on the Board of Directors, however
occurring, including a vacancy resulting from an enlargement of the Board, may
only be filled by vote of a majority of the directors then in office. The
classification of the Board of Directors and the limitations on the removal of
directors and filling of vacancies could have the effect of making it more
difficult for a third party to acquire, or of discouraging a third party from
acquiring, control of SDI.
The SDI Certificate also provides that any action required or permitted to
be taken by the stockholders of SDI at an annual meeting or special meeting of
stockholders may only be taken if it is properly brought before such meeting and
may not be taken by written action in lieu of a meeting. The SDI Certificate
further provides that special meetings of the stockholders may only be called by
the Chairman of the Board of Directors, the Chief Executive Officer or, if none,
the President of SDI or by the Board of Directors. Under SDI's Amended and
Restated By-Laws (the "SDI By-Laws"), in order for any matter to be considered
"properly brought" before a meeting, a stockholder must comply with certain
requirements regarding advance notice to SDI. The foregoing provisions could
have the effect of delaying until the next stockholders meeting stockholder
actions which are favored by the holders of a majority of the outstanding voting
securities of SDI. These provisions may also discourage another person or entity
from making a tender offer for SDI Common Stock, because such person or entity,
even if it acquired a majority of the outstanding voting securities of SDI,
would be able to take action as a stockholder (such as electing new directors or
approving a merger) only at a duly called stockholders meeting, and not by
written consent. See "Risk Factors -- Risks Relating to SDI -- Antitakeover
Provisions."
The DGCL provides generally that the affirmative vote of a majority of the
shares entitled to vote on any matter is required to amend a corporation's
Certificate of Incorporation or By-Laws, unless a corporation's Certificate of
Incorporation or By-Laws, as the case may be, requires a greater percentage. The
SDI Certificate and the SDI By-Laws require the affirmative vote of the holders
of at least 75% of the shares of capital stock of SDI issued and outstanding and
entitled to vote to amend or repeal any of the provisions described in the prior
two paragraphs.
The SDI Certificate contains certain provisions permitted under the DGCL
relating to the liability of directors. The provisions eliminate a director's
liability for monetary damages for a breach of fiduciary duty, except in certain
circumstances involving wrongful acts, such as the breach of a director's duty
of loyalty or acts or omissions which involve intentional misconduct or a
knowing violation of law. Further, the SDI Certificate contains provisions to
indemnify SDI's directors and officers to the fullest extent permitted by the
DGCL. SDI believes that these provisions will assist SDI in attracting and
retaining qualified individuals to serve as directors.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the SDI Common Stock is State Street
Bank and Trust Company.
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COMPARISON OF STOCKHOLDER RIGHTS
The following is a summary of certain material differences between the
rights of holders of RSA Common Stock and RSA Preferred Stock, on the one hand,
and the right of holders of SDI Common Stock, on the other. Because each of RSA
and SDI is organized under the laws of Delaware, these differences arise from
various provisions of the Amended and Restated Certificate of Incorporation (the
"RSA Certificate") and the By-Laws (the "RSA By-Laws") of RSA and the SDI
Certificate and the SDI By-Laws. While this discussion sets forth the material
terms of applicable sections of the RSA Certificate, the RSA By-Laws, the SDI
Certificate and the SDI By-Laws, the following discussion of such documents does
not purport to be complete and is qualified in its entirety by reference to the
DGCL and such other documents. Copies of such documents may be obtained from RSA
and SDI, as the case may be. See "Description of SDI Capital Stock" for a
summary of certain other rights and restrictions relating to the SDI Common
Stock.
AUTHORIZED CAPITAL STOCK
RSA. The authorized capital stock of RSA currently consists of 7,000,000
shares of RSA Common Stock and 2,500,000 shares of RSA Preferred Stock, of which
250,000 shares have been designated as Series A Preferred Stock, 500,000 shares
have been designated as Series B Preferred Stock, 1,050,000 shares have been
designated as Series C Preferred Stock and 700,000 shares have been designated
as Series D Preferred Stock. All shares of RSA Common Stock are identical and
have one vote per share. Holders of RSA Preferred Stock vote together with the
holders of RSA Common Stock as one class on all matters (except where a class
vote is required by Delaware law). Each share of RSA Preferred Stock is entitled
to one vote for each share of RSA Common Stock into which such share of RSA
Preferred Stock is convertible, which is currently equal to one vote per share
of RSA Preferred Stock.
SDI. The authorized capital stock of SDI currently consists of 30,000,000
shares of SDI Common Stock. If the stockholders of SDI approve the Charter
Amendment at the SDI Special Meeting, the authorized capital stock of SDI will
consist of 80,000,000 shares of SDI Common Stock.
PREEMPTIVE RIGHTS
Under the DGCL, security holders of a corporation have only such preemptive
rights as may be provided in the corporation's certificate of incorporation.
Neither the RSA Certificate nor the SDI Certificate grants any preemptive rights
to security holders.
ACTION BY WRITTEN CONSENT OF STOCKHOLDERS
Delaware Law. Under the DGCL, unless otherwise provided in a corporation's
certificate of incorporation, any action that may be taken at any annual or
special meeting of stockholders may be taken without a meeting and without prior
notice, if a consent in writing, setting forth the action so taken, is signed by
the holders of outstanding shares having not less than the minimum number of
votes that would be necessary to authorize or take such action at a meeting at
which all shares entitled to vote thereon were present and voted. All such
consents must, in order to be effective, be signed and delivered to the
corporation within 60 days after the earliest dated consent is delivered to the
corporation.
RSA. The RSA Certificate and RSA By-Laws do not address stockholder action
by written consent.
SDI. The SDI Certificate and SDI By-Laws prohibit stockholder action by
written consent in lieu of a meeting and require the affirmative vote of the
holders of at least 75% of the voting power of all then outstanding shares of
stock, voting together as a single class, to amend this restriction.
SPECIAL MEETINGS OF STOCKHOLDERS
Delaware Law. Under the DGCL, a special meeting of stockholders may be
called by the board of directors or by any other person authorized to do so in
the certificate of incorporation or the by-laws.
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RSA. The RSA By-Laws provide that special meetings of stockholders can be
called at any time by the RSA Board, by the President of RSA or by the holders
of record of shares entitled to cast at least 10% of the votes at the meeting.
SDI. The SDI By-Laws provide that special meetings of stockholders can be
called by the Chairman of the SDI Board, the Chief Executive Officer (or, if no
Chief Executive Officer, the President) or the SDI Board.
VOTING REQUIREMENTS AND QUORUMS FOR STOCKHOLDER MEETINGS
Delaware Law. Under the DGCL, a majority of the issued and outstanding
stock entitled to vote at any meeting of stockholders shall constitute a quorum
for the transaction of business at such meeting, unless the certificate of
incorporation or by-laws specifies a different percentage, but in no event may a
quorum consist of less than one-third of the shares entitled to vote at the
meeting. Under the DGCL, the affirmative vote of the majority of shares present
in person or represented by proxy at a duly held meeting at which a quorum is
present and entitled to vote on the subject matter is deemed to be the act of
the stockholders, unless the DGCL, the certificate of incorporation or the
by-laws specify a different voting requirement.
RSA. The RSA By-Laws provide that, except as otherwise required by
Delaware law, the holders of record of a majority of the issued and outstanding
stock of RSA entitled to vote shall constitute a quorum for the transaction of
business. The RSA By-Laws provide that, when a quorum is present, all elections
of directors shall be by a plurality of votes cast. Under the RSA By-Laws, for
all other matters, the affirmative vote of the holders of a majority of the
votes cast is required for stockholder action, except as otherwise provided in
the DGCL.
SDI. The SDI By-Laws provide that, except as otherwise provided by law or
in the SDI Certificate or SDI By-Laws, the holders of a majority of the issued
and outstanding stock of SDI entitled to vote shall constitute a quorum for the
transaction of business. The SDI By-Laws provide that when a quorum is present,
action on a matter is approved by the affirmative vote of a majority of the
total vote cast, unless the SDI Certificate, SDI By-Laws or Delaware law
requires a higher percentage of affirmative votes.
BUSINESS CONDUCTED AT STOCKHOLDER MEETINGS
RSA. The RSA By-Laws provide that the business to be conducted at an
annual meeting shall consist of the election of directors and the transaction of
such other business as may properly come before the meeting. The RSA By-Laws
provide that special meetings of stockholders may be called for any purpose or
purposes prescribed in the notice of meeting. Neither the RSA Certificate nor
the RSA By-Laws specify any requirements or procedures for bringing business
before an annual or special meeting of stockholders, except that the RSA By-Laws
provide that the Chairman will determine the order and procedure at the meeting.
SDI. The SDI By-Laws provide that at an annual meeting, subject to any
other applicable requirements, only such business may be conducted as has been
either specified in the notice of meeting, proposed at the time of the meeting
by or at the direction of the SDI Board, or proposed at such time by a
stockholder who had given timely prior written notice to the Secretary of SDI of
such stockholder's intention to bring such business before the meeting. In all
cases, to be timely, notice must be received by SDI not less than 60 days nor
more than 90 days prior to the meeting (or if fewer than 70 days' notice or
prior public disclosure of the meeting date is given or made to stockholders,
not later than the 10th day following the day on which the notice of the date of
the meeting was mailed or such public disclosure was made, whichever first
occurs). The notice must contain certain information about such business and the
stockholder who proposes to bring the business before the meeting, including a
brief description of the business the stockholder proposes to bring before the
meeting, the name and address of the stockholder proposing such business, the
reasons for conducting such business at the meeting, the class and number of
shares of stock of SDI beneficially owned by such stockholder, and any material
interest of such stockholder in the business so proposed. If the Chairman of a
meeting of SDI stockholders determines that business was not properly brought
before the meeting in accordance with the foregoing procedures, such business
will not be conducted at the meeting. Nothing in the
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SDI By-Laws precludes discussion by any stockholder of any business properly
brought before the annual meeting in accordance with the above-mentioned
procedures.
NUMBER AND QUALIFICATION OF DIRECTORS
Delaware Law. Under the DGCL, the minimum number of directors is one. The
DGCL permits the board of directors to change the authorized number or the range
of directors by amendment to the by-laws, unless the directors are not
authorized in the certificate of incorporation to amend the by-laws or the
number of directors is fixed in the certificate of incorporation, in which case
a change in the number of directors may be made only upon approval of such
change by the stockholders.
RSA. The RSA By-Laws provide that the number of directors will be fixed
from time to time exclusively by the RSA Board, but shall consist of not more
than 20 directors. The size of the RSA Board is currently fixed at three
members. Neither the RSA Certificate nor the RSA By-Laws set forth specific
qualification requirements for directors.
SDI. The SDI Certificate and SDI By-Laws provide that the number of
directors will be fixed from time to time by the SDI Board, but shall not be
less than three. The size of the SDI Board is currently fixed at six members.
Neither the SDI Certificate nor the SDI By-Laws set forth specific qualification
requirements for directors. Any vacancy on the Board of Directors, however
occurring, including a vacancy resulting from an enlargement of the Board, may
only be filled by vote of a majority of the directors then in office.
NOMINATION AND ELECTION OF DIRECTORS
RSA. The RSA By-Laws provide that, except as otherwise provided by law,
directors are elected by the vote of the holders of a plurality of the shares of
stock cast, in person or by proxy, at the meeting (provided a quorum exists).
Neither the RSA Certificate nor the RSA By-Laws allow cumulative voting for the
election of directors. Neither the RSA Certificate nor the RSA By-Laws set forth
specific procedures with regard to the nomination of candidates for election as
directors.
SDI. The SDI By-Laws provide that, except as otherwise provided by law,
directors are elected by the vote of the holders of a plurality of the shares of
stock present, in person or by proxy, at the meeting and entitled to vote.
Neither the SDI Certificate nor the SDI By-Laws allows cumulative voting for the
election of directors. The SDI By-Laws provide that notice of proposed
stockholder nominations of candidates for election as directors must be received
by the Secretary of SDI not less than 60 days nor more than 90 days prior to the
meeting. In the event that less than 70 days' notice or prior public disclosure
of the date of the meeting is given or made to stockholders, notice from the
stockholder must be mailed or delivered to the Secretary not later than the
tenth day following the day on which such notice of the date of the meeting was
mailed or such public disclosure was made, whichever occurs first. The notice
must contain certain information about the proposed nominee, including age,
business and residence addresses and principal occupation, the number of shares
of stock of SDI beneficially owned and such other information as would be
required to be included in a proxy statement soliciting proxies for the election
of the proposed nominee, and certain information about the stockholder proposing
to nominate that person. SDI may also require any proposed nominee to furnish
other information reasonably required by SDI to determine the proposed nominee's
eligibility to serve as director. If the Chairman of a meeting of SDI
stockholders determines that a person was not nominated in accordance with the
foregoing procedures, such person shall not be eligible for election as a
director.
CLASSIFICATION OF BOARD
Delaware Law. The DGCL permits, but does not require, a classified board
of directors, with staggered terms under which one-half to one-third of the
directors are elected for terms of two or three years, respectively.
RSA. The RSA Certificate does not provide for a classified board of
directors.
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SDI. The SDI Certificate provides that the SDI Board shall be divided into
three classes serving staggered three-year terms.
REMOVAL OF DIRECTORS
Delaware Law. Under the DGCL, a director of a corporation may be removed
with or without cause by the holders of a majority of shares entitled to vote at
an election of directors, except that a director of a corporation with a
classified board of directors may be removed only for cause, unless the
certificate of incorporation otherwise provides.
RSA. The RSA By-Laws provide that removal of a director requires the vote
of at least 75% of the issued shares of voting stock.
SDI. The SDI Certificate states that any director can be removed only for
cause by the affirmative vote of the holders of two-thirds or more of the
outstanding shares of capital stock of SDI entitled to vote at a meeting of the
stockholders called for that purpose.
INDEMNIFICATION OF OFFICERS AND DIRECTORS
Delaware Law. The DGCL provides that a corporation may indemnify a
director, officer, employee or agent of the corporation and certain other
persons serving at the request of the corporation in related capacities against
amounts paid and expenses incurred in connection with an action or proceeding to
which he is or is threatened to be made a party by reason of such position, if
such person shall have acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the corporation, and,
in any criminal proceeding, if such person had no reasonable cause to believe
his conduct was unlawful; provided that, in the case of actions brought by or in
the right of the corporation, no indemnification shall be made with respect to
any matter as to which such person shall have been adjudged to be liable to the
corporation unless and only to the extent that the adjudicating court determines
that such indemnification is proper under the circumstances.
RSA. The RSA Certificate provides that no director shall be personally
liable to the corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach of the
director's duty of loyalty to the corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL or (iv) for any
transaction from which the director derived an improper personal benefit. The
RSA By-Laws provide that RSA shall indemnify any director, officer or employee
of RSA to the fullest extent permitted by the DGCL against all expenses,
liability and loss (including attorneys' fees, judgments, fines, ERISA excise
taxes and penalties and amounts paid or to be paid in settlement) reasonably
incurred in connection with any litigation or other legal proceeding brought
against him by virtue of his position as a director, officer or employee of RSA;
provided that RSA shall indemnify any such person seeking indemnification in
connection with a proceeding initiated by such person only if such proceeding
was authorized by the RSA Board.
SDI. The SDI Certificate provides that no director shall be personally
liable for any monetary damages for any breach of fiduciary duty as a director
to the maximum extent permitted under Delaware law. The SDI Certificate also
provides that SDI shall indemnify any director or officer of SDI (i) against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement incurred in connection with any litigation or other legal proceeding
(other than an action by or in the right of SDI) brought against him by virtue
of his position as a director or officer of SDI if he acted in good faith and in
a manner he reasonably believed to be in, or not opposed to, the best interests
of SDI, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (ii) against all
expenses (including attorneys' fees) and amounts paid in settlement incurred in
connection with any action by or in the right of SDI brought against him by
virtue of his position as a director or officer of SDI if he acted in good faith
and in a manner he reasonably believed to be in, or not opposed to, the best
interests of SDI, except that no indemnification shall be made with respect to
any matter as to which such person shall have been adjudged to be liable to SDI,
unless a court determines that he is entitled to indemnification of such
expenses.
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Notwithstanding the foregoing, to the extent that a director or officer has been
successful, on the merits or otherwise, including, without limitation, the
dismissal of an action without prejudice, he is required to be indemnified by
SDI against all expenses (including attorneys' fees) incurred in connection
therewith. Indemnification is required to be made unless SDI determines that the
applicable standard of conduct required for indemnification has not been met. In
the event of a determination by SDI that the director or officer did not meet
the applicable standard of conduct required for indemnification, or if SDI fails
to make an indemnification payment within 60 days after such payment is claimed
by such person, such person is permitted to petition the court to make an
independent determination as to whether such person is entitled to
indemnification. As a condition precedent to the right of indemnification, the
director or officer must give SDI notice of the action for which indemnity is
sought and SDI has the right to participate in such action or assume the defense
thereof. The SDI Certificate further provides that, in the event that Delaware
law is amended to expand the indemnification permitted to directors or officers,
SDI must indemnify those persons to the fullest extent permitted by such law as
so amended.
AMENDMENT OF CERTIFICATE OF INCORPORATION; AMENDMENT OF BY-LAWS
Delaware Law. Under the DGCL, an amendment to a corporation's certificate
of incorporation requires the approval of the board of directors and the
approval of a majority of the outstanding stock entitled to vote thereon and a
majority of the outstanding stock of each class entitled to vote thereon. Under
the DGCL, the holders of the outstanding shares of a class are entitled to vote
as a separate class on a proposed amendment that would increase or decrease the
aggregate number of authorized shares of such class, increase or decrease the
par value of the shares of such class or alter or change the powers, preferences
or special rights of the shares of such class so as to affect them adversely.
Under the DGCL, a provision in a corporation's certificate of incorporation
requiring a supermajority vote of the board of directors or stockholders may be
amended only by such supermajority vote. Under the DGCL, an amendment to a
corporation's by-laws requires the approval of the stockholders, unless the
certificate of incorporation confers the power to amend the by-laws upon the
board of directors.
RSA. The RSA Certificate provides that any amendment reducing, restricting
or eliminating the rights of the RSA Preferred Stock requires the written
consent of RSA and the holders of not less than a majority of all shares of RSA
Preferred Stock outstanding. All other amendments to and all waivers of the
observance of any terms of the RSA Certificate are to be conducted in accordance
with the DGCL. The RSA By-Laws may be amended or repealed at any meeting of
either the RSA Board or the stockholders of RSA, provided that any amendment,
repeal or modification of the indemnification provisions of the RSA By-Laws
shall be prospective only and shall not adversely affect any right or protection
pursuant to the indemnification provisions existing at the time of such
amendment, repeal or modification.
SDI. The SDI Certificate provides that, notwithstanding the provisions of
the DGCL, the affirmative vote of the holders of at least 75% of the shares of
SDI capital stock issued, outstanding and entitled to vote shall be required for
any amendment to the SDI Certificate with regards to the election, removal and
powers of the SDI Board, actions of the stockholders by written consent and
special meetings of stockholders. In addition, any amendment, repeal or
modification of the indemnification provisions of the SDI Certificate shall be
prospective only. The SDI By-Laws grant the SDI Board the authority to amend or
repeal the SDI By-Laws by the affirmative vote of a majority of the directors
present at any regular or special meeting of SDI Board at which a quorum is
present. The stockholders may amend or repeal the SDI By-Laws by the affirmative
vote of the holders of a majority of the outstanding shares of capital stock of
SDI entitled to vote at a meeting of the stockholders, provided the notice of
such meeting sent to stockholders contained notice of such amendment or repeal.
The affirmative vote of the holders of at least 75% of the outstanding shares of
capital stock of SDI entitled to vote is required to amend or repeal provisions
(or adopt any inconsistent provision) of the SDI By-Laws relating to special
meetings of stockholders, nomination of directors, notice of business at annual
meetings, stockholder action without meetings, organization of stockholder
meetings, amendment of the By-Laws and any provisions relating to the election,
powers, meetings and removal of directors.
123
<PAGE> 134
DIVIDENDS AND OTHER DISTRIBUTIONS
Delaware Law. The DGCL permits a corporation to declare and pay dividends
out of surplus (defined as net assets minus capital) or, if there is no surplus,
out of net profits for the fiscal year in which the dividend is declared and/or
for the preceding fiscal year as long as the amount of capital of the
corporation following the declaration and payment of the dividend is not less
than the aggregate amount of the capital represented by the issued and
outstanding stock of all classes having a preference upon the distribution of
assets. In addition, the DGCL generally provides that a corporation may redeem
or repurchase its shares only if such redemption or repurchase would not impair
the capital of the corporation.
RSA. The RSA Certificate provides that no dividend shall be paid on any
class of stock unless an equal or greater dividend has been paid on all classes
of stock senior to such class, with the RSA Series D Preferred Stock being the
most senior class, followed by the RSA Series B Preferred Stock, the RSA Series
C Preferred Stock, the RSA Series A Preferred Stock and the RSA Common Stock.
The RSA Preferred Stock is entitled to certain payments upon a liquidation of
RSA. Specifically, the RSA Series D Preferred Stock is entitled to receive a
liquidation preference of $3.00 per share plus any declared but unpaid
dividends, followed by the RSA Series B Preferred Stock with a liquidation
preference of $1.00 per share plus any declared but unpaid dividends, the RSA
Series C Preferred Stock with a liquidation preference of $2.00 per share plus
any declared but unpaid dividends, and the RSA Series A Preferred Stock with a
liquidation preference of $0.46 per share plus any declared but unpaid
dividends, with each class receiving all amounts payable prior to any
subordinate class receiving any such payment. In addition, RSA may redeem all or
a pro rata portion of any class of RSA Preferred Stock at any time on or after
the fifth anniversary of the date on which shares of such class were first
issued, provided that RSA shall pay the holders of shares to be redeemed a
redemption price equal to the liquidation preference for such class of RSA
Preferred Stock plus any declared but unpaid dividends on such shares.
SDI. The SDI Certificate does not place any restrictions on the payment of
dividends or provide for any preferences upon liquidation.
AMENDMENT TO SDI'S CERTIFICATE OF INCORPORATION
At the SDI Special Meeting, SDI stockholders will consider and vote upon a
proposal to amend the SDI Certificate to increase the authorized shares of SDI
Common Stock to 80,000,000 shares. SDI currently is authorized to issue
30,000,000 shares of SDI Common Stock. As of the SDI Record Date, there were
13,656,760 shares of SDI Common Stock outstanding and 2,079,005 shares of SDI
Common Stock reserved for issuance under stock plans of SDI. Further, it is
anticipated that up to 4,000,000 shares of SDI Common Stock will be issued to
stockholders of RSA in connection with the Merger and reserved for issuance upon
exercise of outstanding options to be assumed in connection with the Merger. The
actual number of shares of SDI Common Stock to be issued in the Merger will
depend upon the number of shares of RSA Stock issued and outstanding at the
Effective Time.
The additional shares of SDI Common Stock to be authorized would be
available for possible future financing and acquisition transactions, stock
dividends or splits and other corporate purposes. Having such shares available
for issuance in the future would give SDI greater flexibility and allow shares
of SDI Common Stock to be issued without the expense and delay of a special
stockholders' meeting. The additional shares of SDI Common Stock would be
available for issuance without further action by the stockholders unless any
such action is required by applicable law or the rules of any stock exchange on
which SDI securities may be listed. The Nasdaq National Market, on which the
issued shares of SDI Common Stock are, and the shares of SDI Common Stock issued
in connection with the Merger and related transactions will be, listed currently
requires stockholder approval as a prerequisite to listing shares in certain
instances, including in connection with acquisition transactions where the
present or potential issuance of shares could result in an increase in the
number of shares of common stock outstanding by 20% or more.
The stockholders of SDI do not have preemptive rights under the SDI
Certificate, and the stockholders of SDI will not have such rights with respect
to the additional authorized shares of SDI Common Stock.
124
<PAGE> 135
At the present time, there are no plans to issue shares of SDI Common Stock
for which authorization is being sought, other than pursuant to or as
contemplated by the Merger Agreement and under SDI's benefit and stock plans.
The approval of the Charter Amendment is not a condition to the
consummation of the Merger. See "The Merger Agreement -- Conditions."
LEGAL MATTERS
The validity of the shares of SDI Common Stock to be issued in connection
with the Merger and certain tax consequences associated with the Merger will be
passed upon for SDI by Hale and Dorr, Boston, Massachusetts.
Certain tax consequences of the Merger will be passed upon for RSA by
Tomlinson Zisko Morosoli & Maser LLP, Palo Alto, California. Certain partners of
Tomlinson Zisko Morosoli & Maser LLP, along with a spouse of one such partner,
own, in the aggregate, 40,000 shares of RSA Common Stock.
EXPERTS
The consolidated financial statements of SDI as of December 31, 1995 and
1994 and for each of the three years in the period ended December 31, 1995
included in this Joint Proxy Statement and Prospectus have been audited by
Deloitte & Touche LLP, independent auditors, as stated in their report appearing
herein (which report expresses an unqualified opinion and includes an
explanatory paragraph referring to a change in SDI's method of accounting for
income taxes in 1993), and have been so included in reliance upon the report of
such firm given upon their authority as experts in accounting and auditing.
The consolidated financial statements of RSA as of December 31, 1995 and
1994 and for each of the three years in the period ended December 31, 1995
appearing in this Joint Proxy Statement and Prospectus have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein, and are included in reliance upon such report of
such firm given upon their authority as experts in accounting and auditing.
OTHER MATTERS
As of the date of this Joint Proxy Statement and Prospectus, the SDI Board
does not know of any other matters to be presented for action by the
stockholders at the SDI Special Meeting and the RSA Board does not know of any
other matters to be presented for action by the stockholders at the RSA Special
Meeting. If, however, any other matters not now known are properly brought
before the SDI Special Meeting, the SDI proxy holders will vote upon the same
according to their discretion and best judgment, and if any other matters not
now known are properly brought before the RSA Special Meeting, the RSA proxy
holders will vote upon the same according to their discretion and best judgment.
125
<PAGE> 136
<TABLE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets........................................................... F-3
Consolidated Statements of Income..................................................... F-5
Consolidated Statements of Stockholders' Equity (Deficiency).......................... F-6
Consolidated Statements of Cash Flows................................................. F-7
Notes to Consolidated Financial Statements............................................ F-8
RSA DATA SECURITY, INC.
Report of Ernst & Young LLP, Independent Auditors..................................... F-17
Consolidated Balance Sheets........................................................... F-18
Consolidated Statements of Operations................................................. F-19
Consolidated Statements of Stockholders' Equity....................................... F-20
Consolidated Statements of Cash Flows................................................. F-21
Notes to Consolidated Financial Statements............................................ F-22
</TABLE>
F-1
<PAGE> 137
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Security Dynamics Technologies, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Security
Dynamics Technologies, Inc. and subsidiaries (the "Company") as of December 31,
1995 and 1994, and the related consolidated statements of income, 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 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Security Dynamics Technologies,
Inc. and subsidiaries as of December 31, 1995 and 1994 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in 1993
the Company changed its method of accounting for income taxes to conform with
Statement of Financial Accounting Standard No. 109.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
January 22, 1996
F-2
<PAGE> 138
SECURITY DYNAMICS TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
MARCH 31, -------- -------
1996
-----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents (Note 1).......................... $ 17,655 $ 44,583 $17,517
Marketable securities (Note 1)......................... 73,532 44,957 7,966
Accounts receivable (less allowance for doubtful
accounts of $240 in 1996, $375 in 1995, $325 in
1994)............................................... 7,241 6,219 3,550
Inventory (Note 1)..................................... 1,322 1,445 1,136
Prepaid expenses and other............................. 1,626 758 590
Note receivable (Note 9)............................... -- -- 228
Deferred taxes (Notes 1 and 5)......................... 501 476 422
-------- ------- -------
Total current assets........................... 101,877 98,438 31,409
-------- ------- -------
PROPERTY AND EQUIPMENT (Note 1):
Customer support equipment............................. 190 187 187
Office furniture and equipment......................... 3,733 2,802 1,452
Leasehold improvements................................. 330 301 141
-------- ------- -------
Total property and equipment................... 4,253 3,290 1,780
Less accumulated depreciation and amortization......... (1,530) (1,263) (793)
-------- ------- -------
Property and equipment -- net.................. 2,723 2,027 987
-------- ------- -------
OTHER ASSETS:
Investment (Note 2).................................... 686 510 --
Purchased technology and capitalized software
costs -- net (Notes 1 and 9)........................ 174 208 74
Deferred taxes (Notes 1 and 5)......................... 239 229 --
Other.................................................. 150 145 119
-------- ------- -------
Total other assets............................. 1,249 1,092 193
-------- ------- -------
TOTAL.................................................... $ 105,849 $101,557 $32,589
======== ======= =======
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 139
SECURITY DYNAMICS TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1995 1994
MARCH 31, -------- -------
1996
------------
(UNAUDITED)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable (Note 7)................................ $ 2,194 $ 1,347 $ 1,061
Accrued payroll and related benefits..................... 1,615 2,210 1,171
Accrued expenses and other (Note 7)...................... 801 1,176 670
Income taxes payable (Notes 1 and 5)..................... 1,665 190 3
Deferred revenue (Note 1)................................ 1,691 1,614 780
-------- -------- -------
Total current liabilities........................ 7,966 6,537 3,685
-------- -------- -------
DEFERRED TAXES (Notes 1 and 5)............................. -- -- 47
-------- -------- -------
COMMITMENTS (Note 7)
STOCKHOLDERS' EQUITY (Notes 1, 3 and 4):
Common stock, $.01 par value; authorized, 30,000,000
shares; issued, 13,558,018, 13,452,851 and 11,155,744
shares in 1996, 1995 and 1994, respectively;
outstanding, 13,557,870, 13,452,703 and 11,155,596
shares in 1996, 1995 and 1994, respectively........... 136 135 111
Additional paid-in capital............................... 91,321 90,968 30,854
Retained earnings (deficit).............................. 6,494 3,943 (1,869)
Deferred stock compensation.............................. (150) (170) (239)
Treasury stock, common, at cost, 148 shares in 1996, 1995
and 1994.............................................. -- -- --
Cumulative translation adjustment........................ (8) 41 --
Unrealized gain on marketable securities -- net.......... 90 103 --
-------- -------- -------
Total stockholders' equity............................ 97,883 95,020 28,857
-------- -------- -------
TOTAL...................................................... $105,849 $101,557 $32,589
======== ======== =======
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 140
SECURITY DYNAMICS TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
MARCH 31, YEARS ENDED DECEMBER 31,
----------------- ---------------------------
1996 1995 1995 1994 1993
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue (Notes 1 and 8).......................... $12,170 $ 6,243 $33,804 $17,572 $12,110
Cost of revenue (Note 1)......................... 2,912 1,217 7,235 3,873 2,738
------- ------- ------- ------- -------
Gross profit..................................... 9,258 5,026 26,569 13,699 9,372
------- ------- ------- ------- -------
Costs and expenses:
Research and development (Notes 1 and 9)....... 1,488 645 4,048 2,226 1,619
Marketing and selling.......................... 3,570 2,266 11,059 6,382 4,000
General and administrative..................... 1,410 682 3,710 1,636 1,217
------- ------- ------- ------- -------
Total....................................... 6,468 3,593 18,817 10,244 6,836
------- ------- ------- ------- -------
Income from operations........................... 2,790 1,433 7,752 3,455 2,536
Interest income.................................. 1,227 384 1,699 105 37
------- ------- ------- ------- -------
Income before provision for income taxes, and
cumulative effect of change in accounting...... 4,017 1,817 9,451 3,560 2,573
Provision for income taxes (Notes 1 and 5)....... 1,466 700 3,639 1,245 900
------- ------- ------- ------- -------
Income before cumulative effect of change in
accounting..................................... 2,551 1,117 5,812 2,315 1,673
Cumulative effect of change in accounting (Note
1)............................................. -- -- -- -- 564
------- ------- ------- ------- -------
Net income....................................... $ 2,551 $ 1,117 $ 5,812 $ 2,315 $ 2,237
======= ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Income per common and common equivalent share PRO FORMA (NOTE
(Note 1): 1)
-----------------
<S> <C> <C> <C> <C> <C>
Before cumulative effect of accounting
change...................................... $ .18 $ .09 $ .46 $ .25 $ .19
Cumulative effect of accounting change......... -- -- -- -- .06
------- ------- ------- ------- -------
Net income..................................... $ .18 $ .09 $ .46 $ .25 $ .25
======= ======= ======= ======= =======
Weighted average number of common and common
equivalent shares outstanding (Note 1)......... 14,302 12,514 12,682 9,080 9,010
======= ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 141
SECURITY DYNAMICS TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED
------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT)
---------- ------ ---------- --------
<S> <C> <C> <C> <C>
Balance, January 1, 1993....................................................... 2,398,600.. $ 24 $ 33 $(5,492)
Preferred stock purchased and canceled........................................ -- -- -- (46)
Treasury stock issued for services............................................ -- -- 30 --
Exercise of stock options..................................................... 29,250 -- 3 --
Dividends accrued on preferred stock.......................................... -- -- -- (465)
Net income.................................................................... -- -- -- 2,237
---------- ---- ------- -------
Balance, December 31, 1993..................................................... 2,427,850 24 66 (3,766)
Dividends accrued on preferred stock.......................................... -- -- -- (418)
Common stock issued for services.............................................. 26,016 -- 5 --
Treasury stock issued for services............................................ -- -- 16 --
Exercise of stock options..................................................... 57,500 1 7 --
Deferred stock compensation................................................... -- -- 289 --
Amortization of deferred stock compensation................................... -- -- -- --
Issuance of common stock...................................................... 3,000,000 30 21,582 --
Conversion of preferred stock to common stock................................. 5,644,378 56 8,889 --
Net income.................................................................... -- -- -- 2,315
---------- ---- ------- -------
Balance, December 31, 1994..................................................... 11,155,744 111 30,854 (1,869)
Exercise of stock options..................................................... 224,607 3 239 --
Tax benefit arising from exercise of stock options............................ -- -- 225 --
Amortization of deferred stock compensation................................... -- -- -- --
Issuance of common stock...................................................... 2,072,500 21 59,650 --
Translation adjustment........................................................ -- -- -- --
Unrealized gain on marketable securities -- net............................... -- -- -- --
Net income.................................................................... -- -- -- 5,812
---------- ---- ------- -------
Balance, December 31, 1995..................................................... 13,452,851 135 90,968 3,943
Unaudited:
Exercise of stock options................................................. 105,167 1 353 --
Amortization of deferred stock compensation............................... -- -- -- --
Translation adjustment.................................................... -- -- -- --
Unrealized gain on marketable securities -- net........................... -- -- -- --
Net income................................................................ -- -- -- 2,551
---------- ---- ------- -------
Balance, March 31, 1996 (Unaudited)............................................ 13,558,018 $136 $ 91,321 $ 6,494
========== ==== ======= =======
<CAPTION>
DEFERRED TREASURY STOCK CUMULATIVE
STOCK ---------------- TRANSLATION
COMPENSATION SHARES AMOUNT ADJUSTMENT
------------ ------- ------ ----------
<S> <C> <C>
Balance, January 1, 1993....................................................... $ -- 88,898 $ (2) $ --
Preferred stock purchased and canceled........................................ -- -- -- --
Treasury stock issued for services............................................ -- (43,750) 1 --
Exercise of stock options..................................................... -- -- -- --
Dividends accrued on preferred stock.......................................... -- -- -- --
Net income.................................................................... -- -- -- --
----- ------- --- ---
Balance, December 31, 1993..................................................... -- 45,148 (1) --
Dividends accrued on preferred stock.......................................... -- -- -- --
Common stock issued for services.............................................. -- -- -- --
Treasury stock issued for services............................................ -- (45,000) 1 --
Exercise of stock options..................................................... -- -- -- --
Deferred stock compensation................................................... (289) -- -- --
Amortization of deferred stock compensation................................... 50 -- -- --
Issuance of common stock...................................................... -- -- -- --
Conversion of preferred stock to common stock................................. -- -- -- --
Net income.................................................................... -- -- -- --
----- ------- --- ---
Balance, December 31, 1994..................................................... (239) 148 -- --
Exercise of stock options..................................................... -- -- -- --
Tax benefit arising from exercise of stock options............................ -- -- -- --
Amortization of deferred stock compensation................................... 69 -- -- --
Issuance of common stock...................................................... -- -- -- --
Translation adjustment........................................................ -- -- -- 41
Unrealized gain on marketable securities -- net............................... -- -- -- --
Net income.................................................................... -- -- -- --
----- ------- --- ---
Balance, December 31, 1995..................................................... (170) 148 -- 41
Unaudited:
Exercise of stock options................................................. -- -- -- --
Amortization of deferred stock compensation............................... 20 -- -- --
Translation adjustment.................................................... -- -- -- (49)
Unrealized gain on marketable securities -- net........................... -- -- -- --
Net income................................................................ -- -- -- --
----- ------- --- ---
Balance, March 31, 1996 (Unaudited)............................................ $ (150) 148 $ -- $ (8)
===== ======= === ===
<CAPTION>
UNREALIZED
GAIN ON STOCKHOLDERS'
MARKETABLE EQUITY
SECURITIES (DEFICIENCY)
---------- ------------
Balance, January 1, 1993....................................................... $ -- $ (5,437)
Preferred stock purchased and canceled........................................ -- (46)
Treasury stock issued for services............................................ -- 31
Exercise of stock options..................................................... -- 3
Dividends accrued on preferred stock.......................................... -- (465)
Net income.................................................................... -- 2,237
---- -------
Balance, December 31, 1993..................................................... -- (3,677)
Dividends accrued on preferred stock.......................................... -- (418)
Common stock issued for services.............................................. -- 5
Treasury stock issued for services............................................ -- 17
Exercise of stock options..................................................... -- 8
Deferred stock compensation................................................... -- --
Amortization of deferred stock compensation................................... -- 50
Issuance of common stock...................................................... -- 21,612
Conversion of preferred stock to common stock................................. -- 8,945
Net income.................................................................... -- 2,315
---- -------
Balance, December 31, 1994..................................................... -- 28,857
Exercise of stock options..................................................... -- 242
Tax benefit arising from exercise of stock options............................ -- 225
Amortization of deferred stock compensation................................... -- 69
Issuance of common stock...................................................... -- 59,671
Translation adjustment........................................................ -- 41
Unrealized gain on marketable securities -- net............................... 103 103
Net income.................................................................... -- 5,812
---- -------
Balance, December 31, 1995..................................................... 103 95,020
Unaudited:
Exercise of stock options................................................. -- 354
Amortization of deferred stock compensation............................... -- 20
Translation adjustment.................................................... -- (49)
Unrealized gain on marketable securities -- net........................... (13) (13)
Net income................................................................ -- 2,551
---- -------
Balance, March 31, 1996 (Unaudited)............................................ $ 90 $ 97,883
==== =======
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 142
SECURITY DYNAMICS TECHNOLOGIES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
------------------ ----------------------------
1996 1995 1995 1994 1993
-------- ------- -------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................................................. $ 2,551 $ 1,117 $ 5,812 $ 2,315 $ 2,237
Cumulative effect of change in accounting principle......................... -- -- -- -- (564)
Adjustments to reconcile net income to net cash provided by operating
activities:
Deferred taxes............................................................ (35) (19) (394) 12 177
Purchased research and development........................................ -- -- 648 -- --
Amortization of purchased technology...................................... 34 -- 70 -- --
Amortization of capitalized software costs................................ -- 9 140 55 44
Depreciation.............................................................. 267 75 470 289 136
Allowance for notes receivable............................................ -- 100 200 -- --
Amortization of deferred stock compensation............................... 20 17 69 50 --
Noncash compensation...................................................... -- -- -- 22 31
Increase (decrease) in cash from:
Accounts receivable..................................................... (1,050) (1,088) (2,658) (844) (497)
Inventory............................................................... 123 (307) (309) (629) 159
Prepaid expenses and other.............................................. (868) (274) (168) (471) 14
Accounts payable........................................................ 847 (277) 286 559 229
Accrued payroll and related benefits.................................... (595) 189 1,039 372 188
Accrued expenses and other.............................................. (375) (292) 506 138 17
Income taxes payable.................................................... 1,475 120 251 (22) (82)
Deferred revenue........................................................ 77 209 834 255 145
Deferred rent........................................................... -- -- -- -- (7)
-------- ------- ------- ------- -------
Net cash provided by (used for) operating activities.................. 2,471 (421) 6,796 2,101 2,227
-------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities......................................... (37,537) (2,511) (64,730) (7,966) 496
Maturities of marketable securities....................................... 8,949 550 27,842 -- --
Expenditures for property and equipment................................... (963) (103) (1,510) (766) (244)
Notes receivable.......................................................... -- (192) (274) (228) --
Capitalized software costs and purchased research and development......... -- (18) (690) (66) (46)
Investment................................................................ (176) -- (510) -- --
Other assets.............................................................. (5) (8) (26) (5) --
-------- ------- ------- ------- -------
Net cash provided by (used for) investing activities.................. (29,732) (2,282) (39,898) (9,031) 206
-------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuances of common stock................................... 354 3,816 60,138 21,620 3
Redeemable convertible preferred stock purchased and canceled............. -- -- -- -- (1,000)
-------- ------- ------- ------- -------
Net cash provided by (used for) financing activities.................. 354 3,816 60,138 21,620 (997)
-------- ------- ------- ------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS....................... (21) 49 30 -- --
-------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS............................... (26,928) 1,162 27,066 14,690 1,436
CASH AND EQUIVALENTS, BEGINNING OF PERIOD..................................... 44,583 17,517 17,517 2,827 1,391
-------- ------- ------- ------- -------
CASH AND EQUIVALENTS, END OF PERIOD........................................... $ 17,655 $18,679 $ 44,583 $17,517 $ 2,827
======== ======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 143
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE THREE MONTHS ENDED MARCH 31, 1996 AND 1995 IS UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business -- Security Dynamics Technologies, Inc. (the "Company")
designs, develops, markets and supports a family of security products used to
protect and manage access to computer-based information resources.
Principal Products and Markets -- The Company's principal business is
computer security and it derives substantially all of its revenue from the sale
of its ACE/Server computer network security products, which are currently used
with the Company's SecurID token technology. The principal markets for the
Company's products include the United States, Canada, Europe and the Far East,
with the United States and Canada currently being the largest.
Stock Split -- In October 1995, the Board of Directors declared a
two-for-one split of the Company's common stock effected in the form of a stock
dividend. All share and per share data have been adjusted to reflect the
two-for-one split of the Company's common stock.
Interim Results (Unaudited) -- 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 consolidated financial statements
include the accounts of the Company and its subsidiaries. Intercompany balances
and transactions have been eliminated. The Company's investment in VSI (Note 2)
is being accounted for at cost.
Revenue Recognition -- Revenue from software license fees and the sale of
hardware products is recognized upon shipment of the product, provided that no
significant obligations remain and collection of the receivable is considered
probable. Shipments to distributors are based upon receipt of a purchase order
from end users by the distributor. Revenue from charges for maintenance services
is deferred and recognized ratably over the maintenance period, generally twelve
months. No customer accounted for 10% or more of the Company's revenue in any
period reported.
Warranty Policy -- The Company's standard practice is to provide a warranty
on all SecurID tokens for the customer-selected programmed life of the token and
to replace any damaged tokens (other than tokens damaged by a user's negligence
or alteration) free of charge. The Company generally sells each of its other
products to customers with a 90-day warranty. The Company provides a reserve for
warranties based upon historical experience.
Inventory -- Inventory is stated at the lower of cost (first-in, first-out
method) or market. Inventory consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
MARCH 31, ------------------
1996 1995 1994
--------- ------- -------
<S> <C> <C> <C>
Raw materials........................................... $ 243 $ 114 $ 80
Finished products....................................... 1,079 1,331 1,056
------ ------ ------
Total................................................... $ 1,322 $ 1,445 $ 1,136
====== ====== ======
</TABLE>
Property and Equipment -- Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets (two to five years).
F-8
<PAGE> 144
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Research and Development, Capitalized Software and Purchased Technology
Costs -- Research and development costs are expensed as incurred. The Company
capitalizes certain software costs after technological feasibility has been
established. Such costs are amortized over two years. Amortization expense
approximated $140, $55 and $44 for the years ended December 31, 1995, 1994 and
1993, respectively. Amortization expense for the three months ended March 31,
1996 and 1995 was $0 and $8, respectively. Purchased technology comprises
acquired software and is recorded at cost. Amortization is provided over
estimated lives of two years. Accumulated amortization was approximately $104
and $70 at March 31, 1996 and December 31, 1995, respectively.
Cash Equivalents -- The Company considers all highly liquid investments
purchased with a remaining maturity 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.
The Company's marketable securities consisted of the following:
<TABLE>
<CAPTION>
MARCH 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------- ---------------------- ----------------------
AGGREGATE AMORTIZED AGGREGATE AMORTIZED AGGREGATE AMORTIZED
FAIR VALUE COST FAIR VALUE COST FAIR VALUE COST
---------- --------- ---------- --------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government obligations..... $ 72,434 $72,292 $ 43,796 $43,632 $ 7,465 $ 7,465
Tax-exempt securities........... 1,003 1,003 1,013 1,013 -- --
Corporate debt securities....... 95 95 148 145 501 501
------- ------- ------- ------- ------- -------
Total $ 73,532 $73,390 $ 44,957 $44,790 $ 7,966 $ 7,966
======= ======= ======= ======= ======= =======
</TABLE>
At March 31, 1996 and December 31, 1995, substantially all of the Company's
marketable securities had contractual maturities of two years or less. There
were no sales of marketable securities in 1996, 1995 or 1994. Unrealized gross
gains at March 31, 1996, December 31, 1995 and 1994 were $142, $167 and $0,
respectively.
Income Taxes -- Effective January 1, 1993, the Company adopted
prospectively the provisions of Statement of Financial Accounting Standards No.
109 ("SFAS 109"), "Accounting for Income Taxes." SFAS 109 utilizes the liability
method, and deferred taxes are determined based on the estimated future tax
effects of differences between the financial statement and tax bases of assets
and liabilities given the provisions of the enacted tax laws. Prior to the
implementation of SFAS 109, the Company accounted for income taxes using
Accounting Principles Board Opinion No. 11 ("APB 11"). The cumulative effect on
prior years of this change was an increase in 1993 net income of $564 which is
reported separately in the consolidated statements of income.
Foreign Currency -- Prior to 1995, the functional currency of the Company's
foreign branches and subsidiaries was the U.S. dollar. Accordingly, transaction
gains were included in the consolidated statements of income and totaled $19 for
the year ended December 31, 1994. Due to changed circumstances, including the
generation and expenditure of cash in local currencies, effective January 1,
1995, the Company considers the local currencies of the countries in which the
Company's branches and subsidiaries are domiciled to be the functional
currencies. Translation adjustments are accumulated in a separate component of
equity. The effect of this change was to reduce income from operations by $41 in
1995.
Income Per Share -- Income per common share for 1996 and 1995 is computed
using the weighted average number of common and common equivalent shares
outstanding during each period presented. Fully
F-9
<PAGE> 145
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
diluted and primary earnings per share are the same for each period. Common
stock equivalents consist of stock options (using the treasury stock method).
Income per share for periods prior to 1995 are based on the pro forma weighted
average number of common shares outstanding which assumes that all series of
convertible preferred stock had been converted to common stock as of the
original issuance dates. All shares of preferred stock were converted into
common shares on December 21, 1994. Common equivalent shares are not included in
the per share calculations where the effect of their inclusion would be
antidilutive, except in accordance with Securities and Exchange Commission Staff
Accounting Bulletin No. 83 (the "Bulletin"). The Bulletin requires all common
shares issued and options to purchase shares of common stock granted by the
Company during the twelve-month period prior to the filing of an initial public
offering be included in the calculation as if they were outstanding for all
periods.
Historical income per common and common equivalent share, which excludes
the assumed conversions of the convertible preferred stock, was as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-----------------
1994 1993
------ ------
<S> <C> <C>
Net income......................................................... $2,315 $2,237
Preferred dividend................................................. (417) (465)
------ ------
Net income available for common stock.............................. $1,898 $1,772
====== ======
Net income per share............................................... $ .48 $ .51
====== ======
Weighted average number of common and common equivalent shares
outstanding (in thousands)....................................... 3,961 3,456
====== ======
</TABLE>
Financial Instruments -- The carrying values of cash and equivalents,
accounts receivable, and accounts payable approximate fair value due to the
short-term nature of these instruments. Marketable securities are carried at
aggregate fair value in accordance with SFAS 115.
Use of Estimates -- The preparation of the Company's consolidated financial
statements in conformity with generally accepted accounting principles
necessarily requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
Concentration of Credit Risk -- The Company sells its products to various
customers in a diverse industry range. The Company performs ongoing credit
evaluations of its customers and maintains allowances for potential credit
losses. The Company generally requires no collateral from its customers.
Recent Accounting Pronouncements -- The Company has adopted the provisions
of Statement of Financial Accounting Standards ("SFAS") No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
effective January 1, 1996. The adoption of this standard did not have a material
effect upon the consolidated financial statements.
In October 1995, the Financial Accounting Board issued SFAS No. 123
,"Accounting for Stock-Based Compensation," which became effective for the
Company beginning January 1, 1996. SFAS No. 123 requires expanded disclosures of
stock-based compensation arrangements with employees and encourages (but does
not require) compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to continue to
apply APB Opinion No. 25, which recognizes compensation cost based on the
intrinsic value of the equity instrument awarded. The Company will continue to
apply APB
F-10
<PAGE> 146
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Opinion No. 25 to its stock based compensation awards to employees and will
disclose the required pro forma effect on net income and earnings per share in
the annual consolidated financial statements for 1996.
2. INVESTMENT
On April 17, 1995 and February 20, 1996, the Company purchased 425,000
shares of Series A and 72,091 shares of Series B Convertible Preferred Stock of
VeriSign, Inc. ("VSI") of Redwood City, California for an aggregate purchase
price of $686. VSI was organized to provide digital certificates and related
services that use public-key cryptography to ensure essential privacy and
authentication features. The Company's investment in VSI represents a minority
interest of less than 10% of VSI's capitalization.
3. REDEEMABLE CONVERTIBLE PREFERRED STOCK
The following table presents a summary of redeemable convertible preferred
stock activity from January 1, 1993 through March 31, 1996:
<TABLE>
<CAPTION>
SERIES A SERIES B SERIES C
------------------ --------------------- --------------------
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT
--------- ------ ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1993......... 410,000 $ 410 4,548,783 $ 6,521 1,291,670 $ 2,085
Preferred stock purchased and
canceled.................... -- -- (569,674) (893) (36,388) (61)
Dividends accrued on
preferred stock............. -- -- -- 343 -- 122
-------- ----- ---------- ------- ---------- -------
Balance, December 31, 1993....... 410,000 410 3,979,109 5,971 1,255,282 2,146
Dividends accrued on preferred
stock....................... -- -- -- 303 -- 115
Conversion of preferred to
common stock................ (410,000) (410 ) (3,979,109) (6,274) (1,255,282) (2,261)
-------- ----- ---------- ------- ---------- -------
Balance, December 31, 1994, 1995
and March 31, 1996............. -- $ -- -- $ -- -- $ --
======== ===== ========== ======= ========== =======
</TABLE>
In accordance with the Company's Second Restated Certificate of
Incorporation, as in effect immediately prior to the Company's initial public
offering (the "IPO"), all shares of Series A, B and C preferred stock were
converted to 5,644,378 shares of common stock upon the close of the Company's
IPO on December 21, 1994. At December 31, 1994, all shares of preferred stock
had been canceled and retired.
4. STOCK OPTION AND PURCHASE PLANS
1986 Stock Option Plan ("1986 Plan") -- Under the Company's 1986 Plan, both
incentive and nonqualified options to purchase up to a maximum of 1,376,416
shares of common stock may be granted to employees. The exercise price of
incentive stock options may not be less than the fair market value at the date
of grant. In general, options become exercisable in equal annual installments
over four years and expire ten years from the date of grant. At March 31, 1996
and December 31, 1995, 34,760 and 33,560 shares of common stock, respectively,
were available for option grant.
Stock Option Plan ("1994 Plan") -- In October 1994, the Board of Directors
adopted the Company's 1994 Plan. The 1994 Plan authorizes (i) the grant of
options to purchase common stock intended to qualify as incentive stock options
and (ii) the grant of options that do not so qualify (non-statutory options) to
employees, officers, directors and consultants of the Company. Option exercise
prices for incentive stock
F-11
<PAGE> 147
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. STOCK OPTION AND PURCHASE PLANS (CONTINUED)
options granted under the 1994 Plan generally may not be less than 100% of the
fair market value of the shares on the date of grant. On October 18, 1995 the
Board of Directors adopted an amendment increasing from 300,000 to 1,410,000 the
number of shares authorized for issuance under the 1994 Plan. Assuming
stockholder approval of the amendment, at March 31, 1996 and December 31, 1995,
791,200 and 1,094,000 shares, respectively, were available for option grant. At
March 31, 1996, options to purchase 318,800 shares have been granted assuming
stockholder approval. On April 12, 1996 the Board of Directors adopted, subject
to stockholder approval, an amendment increasing the number of shares available
for grant by an additional 1,000,000 shares. On April 1, 1996 and April 24,
1996, options to purchase 100,000 shares and 19,450 shares were granted at
exercise prices of $48.60 and $76.40, respectively, assuming stockholder
approval. On May 22, 1996, the stockholders approved the amendment to the 1994
Plan increasing the number of shares available for grant to 2,410,000 shares.
Director Stock Option Plan ("Director Plan") -- In October 1994, the Board
of Directors adopted the Company's 1994 Director Stock Option Plan . The
Director Plan permits the granting of options to purchase up to a maximum of
150,000 shares of common stock to nonemployee members of the Board of Directors.
The exercise price of the options may not be less than 100% of the fair market
value on the date of the grant. At March 31, 1996 and December 31, 1995, 110,000
shares of common stock were available for option grant.
<TABLE>
A summary of stock option activity under all plans is as follows:
<CAPTION>
PRICE PER
SHARES SHARE
--------- -------------
<S> <C> <C>
Outstanding at January 1, 1993.............................. 827,550 $ .10-$ .50
Granted................................................... 24,000 .70
Exercised................................................. (29,250) .10- .20
---------
Outstanding at December 31, 1993............................ 822,300 .10- .70
Granted................................................... 126,240 .90- 8.44
Exercised................................................. (57,500) .10- .20
---------
Outstanding at December 31, 1994............................ 891,040 .10- 8.44
Granted................................................... 346,000 19.94- 28.63
Exercised................................................. (206,749) .10- 5.10
Cancelled................................................. (3,800) .90- 5.10
---------
Outstanding at December 31, 1995............................ 1,026,491 .10- 28.63
Granted................................................... 302,800 49.53
Exercised................................................. (86,156) .10- 8.44
Cancelled................................................. (1,200) .50
---------
Outstanding at March, 31, 1996.............................. 1,241,935 .10- 49.53
=========
Exercisable at March 31, 1996............................... 514,580 .10- 19.94
=========
</TABLE>
Employee Stock Purchase Plan ("Purchase Plan") -- In October 1994, the
Board of Directors adopted the Company's 1994 Employee Stock Purchase Plan. The
Purchase Plan provides for sales to participating employees of up to 200,000
shares of common stock, at prices of not less than 85% of the closing price on
either the first day or the last day of the offering period, whichever is lower.
At March 31, 1996 and December 31, 1995, 36,869 and 17,858 shares, respectively,
had been purchased under this Plan.
For certain options and stock awards granted in 1994, the Company is
recognizing compensation expense based on the excess of fair market value over
the option exercise or award prices at dates of grant. Compensation is being
recognized ratably over the vesting period and amounted to $69 and $50 for the
years ended December 31, 1995 and 1994, respectively, and $20 for the three
months ended March 31, 1996.
F-12
<PAGE> 148
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. STOCK OPTION AND PURCHASE PLANS (CONTINUED)
Unrecognized compensation expense at March 31, 1996 and December 31, 1995 and
1994 was $150, $170 and $239, respectively.
For options granted prior to April 1, 1996, because approval of the
stockholders was required and considered perfunctory, the Company measured
compensation expense on the date of grant by the Board of Directors or the
Compensation Committee of the Board of Directors. As a result of discussions
with the staff of the Securities and Exchange Commission, the Company changed
its accounting policy on options requiring stockholder approval to measure
compensation expense on the approval date. This change is effective for options
granted on or after April 1, 1996. This change resulted in aggregate
compensation expense of approximately $4,500 relating to the April 1, 1996 and
April 24, 1996 option grants, which the Company will recognize over the
remainder of the four-year vesting period of the options from May 22, 1996. The
Company does not plan to grant options in the future that are subject to
approval by the stockholders.
SFAS No. 123 specifies that grants made subject to stockholder approval are
not deemed to be granted until such approval is obtained unless approval is
essentially a formality. Had the fair value of the options granted on October
18, 1995, January 24, 1996, April 1, 1996 and April 24, 1996 been estimated on
the date of approval by the stockholders (May 22, 1996) under SFAS No. 123, pro
forma compensation cost associated with the options would have been
approximately $24,000, with approximately $6,300 of such amount relating to the
April 1, 1996 and April 24, 1996 option grants. Fair value was estimated using
the Black-Scholes option pricing model with the following assumptions: a
dividend yield of 0.0%; expected volatility of 36%; a risk-free interest rate of
6.4%; and expected lives of approximately 4 years.
5. INCOME TAXES
<TABLE>
The provision for income taxes consisted of the following:
<CAPTION>
1995 1994 1993
------ ------ -----
<S> <C> <C> <C>
Current:
Federal......................................... $3,206 $ 952 $ 512
State........................................... 827 281 211
------ ------ -----
Total........................................ 4,033 1,233 723
------ ------ -----
Deferred:
Federal......................................... (184) 349 356
State........................................... (42) (12) (7)
Change in valuation allowance................... (168) (325) (172)
------ ------ -----
Total........................................ (394) 12 177
------ ------ -----
Total............................................. $3,639 $1,245 $ 900
====== ====== =====
</TABLE>
<TABLE>
Significant components of the Company's deferred tax asset and liabilities
at December 31 are as follows:
<CAPTION>
1995 1994
------ -----
<S> <C> <C>
Deferred tax assets (liabilities) -- current:
Allowance for doubtful accounts........................ $ 150 $ 130
Compensated absences................................... 137 112
Warranty obligation.................................... 42 42
Commissions............................................ 64 30
Inventory reserves..................................... 66 26
Net operating loss carryforwards....................... 81 136
Tax credit carryforwards............................... -- 113
Other.................................................. (64) 1
</TABLE>
F-13
<PAGE> 149
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1995 1994
---- ----
5. INCOME TAXES (CONTINUED)
<S> <C> <C>
---- ----
476 590
Valuation allowance...................................... -- (168)
---- ----
Net deferred tax assets -- current....................... $476 $422
==== ====
Deferred tax assets (liabilities) -- non current:
Acquisition of technology................................ $249 $--
Capitalized software development costs................... -- (29)
Other.................................................... (20) (18)
---- ----
Net deferred tax assets (liabilities) -- non current:.... $229 $(47)
==== ====
</TABLE>
A reconciliation between the statutory and effective income tax rates
follows:
<TABLE>
<CAPTION>
1995 1994 1993
------ ------ -----
<S> <C> <C> <C>
Statutory tax rate................................ 34.0% 34.0% 34.0%
State income taxes net of federal benefit......... 5.5 5.2 5.3
Change in valuation allowance..................... (1.8) (9.1) (6.7)
Foreign expenses without tax benefit.............. -- 4.3 --
Other............................................. 0.8 .6 2.4
----- ----- -----
Effective income tax rate......................... 38.5% 35.0% 35.0%
===== ===== =====
</TABLE>
At December 31, 1995, the Company had a net operating loss carryforward
available for federal income tax purposes of approximately $246 expiring through
2004. The amount of net operating loss carryforward that may be utilized in any
one year will be limited due to the changes in ownership of the Company that
occurred in 1987 and 1993. In accordance with SFAS 109 a valuation allowance has
been provided to reduce the deferred tax asset relating to the carryforward to
an amount that management believes is more likely than not to be realized. For
the year ended December 31, 1995, the valuation allowance was reduced by $168.
The income tax provision for the three months ended March 31, 1996 is based
upon the estimated effective tax rate of 36.5% for the full year.
Cash payments for income taxes amounted to approximately $0, $637, $3,589,
$1,218 and $804 for the three months ended March 31, 1996 and 1995 and for the
years ended December 31, 1995, 1994 and 1993, respectively.
6. RETIREMENT AND SAVINGS PLAN
The Company has a 401(k) retirement and savings plan (the "Plan")
established in 1986 covering substantially all domestic employees. The Plan
allows each participant to defer up to 15% of annual earnings up to an amount
not to exceed an annual statutory maximum. Subject to the approval of the Board
of Directors on an annual basis, the Company may make, at its discretion,
profit-sharing contributions and/or match employee deferrals. At March 31, 1996,
December 31, 1995 and 1994, the Company had accrued (and the Board of Directors
had approved for 1995 and 1994) a profit-sharing contribution approximating $60,
$78 and $52, respectively. The Board of Directors also approved for 1996, 1995
and 1994 matching contributions in an amount equal to one-third of the employee
deferrals up to 6% of annual earnings (or a total of 2%), subject to certain
eligibility requirements. Matching contributions amounted to $29, $12, $71 and
$58 for the three months ended March 31, 1996 and 1995 and for the years ended
December 31, 1995 and 1994, respectively.
F-14
<PAGE> 150
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS
The Company leases office facilities under noncancelable operating leases
expiring through 2006. Future minimum rental payments are as follows for periods
ending December 31:
<TABLE>
<S> <C>
1996........................................................ $ 1,194
1997........................................................ 1,768
1998........................................................ 1,221
1999........................................................ 1,120
2000........................................................ 1,136
Balance thereafter.......................................... 6,580
</TABLE>
Rental expense for the three months ended March 31, 1996 and 1995 was $179
and $99, respectively. Rental expense for the years ended December 31, 1995,
1994 and 1993 was approximately $674, $334 and $253, respectively.
During 1995, the Company entered into a commitment to purchase a minimum
number of SecurID tokens at a total cost of $1,244 over a one-year period. At
March 31, 1996 and December 31, 1995, the Company's remaining commitment was
$217 and $1,121, respectively. In December 1994, the Company entered into an
agreement with Progress Software, a vendor of commercial database software, for
the right to use certain of Progress Software's software to enhance the
functionality of the Company's ACE / Server software. The Company began
incurring royalties under the Progress Software agreement in the fourth quarter
of 1995 as a result of the commercial introduction of ACE / Server v2.0 in
October 1995. At December 31, 1995, the Company had incurred charges of $309 and
in the first quarter of 1996 prepaid $1,191 under this agreement.
8. SEGMENT INFORMATION
The Company operates in only one industry segment. Export sales are
summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
----------------- ----------------------------
1996 1995 1995 1994 1993
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Europe.................................... $1,916 $ 925 $5,116 $2,005 $ 984
Canada.................................... 915 792 2,583 1,230 845
Other..................................... 264 64 402 176 95
------ ------ ------ ------ ------
$3,095 $1,781 $8,101 $3,411 $1,924
====== ====== ====== ====== ======
</TABLE>
9. INFRATEL S.A.R.L.
Between December 1994 and July 1995, the Company loaned an aggregate of
approximately $558 to Infratel S.A.R.L. ("Infratel"), one of its original
equipment manufacturers, for working capital. Infratel is a French company,
domiciled in France, that designs, sells and customizes network management and
computer security products primarily for IBM and UNIX systems. As part of this
transaction, the Company also received an option to acquire a majority interest
in the equity of Infratel.
Recognizing that the Company was the sole provider of outside capital to
Infratel, the Company accounted for an estimate of the impairment of the loans
made using the equity method. Under the equity method, the Company recognized
losses of $100 in each of the first and second quarters of 1995, representing
the Company's estimate of Infratel's losses for those periods.
In August 1995, the Company acquired Infratel's SecurADM technology. The
Company considers the acquisition cost to consist of the cash consideration of
$624 plus $302 of the notes receivable. The Company
F-15
<PAGE> 151
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INFRATEL S.A.R.L. (CONTINUED)
has allocated the acquisition cost to purchased technology ($278) which is being
amortized over two years and to in-process research and development ($648) which
was expensed in the third quarter of 1995.
F-16
<PAGE> 152
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> 153
RSA DATA SECURITY, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1995 1994
MARCH 31, ----------- -----------
1996
-----------
(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> 154
RSA DATA SECURITY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<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> 155
RSA DATA SECURITY, INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<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> 156
RSA DATA SECURITY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<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> 157
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> 158
RSA DATA SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
The following is a summary of available-for-sale securities:
<TABLE>
<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> 159
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> 160
RSA DATA SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
<TABLE>
<CAPTION>
MARCH DECEMBER 31,
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).
Summary information for the partnership as of December 31, 1995 and 1994
and for the years then ended is as follows:
<TABLE>
<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> 161
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.
Future minimum annual payments under noncancelable capital and operating
leases are as follows:
<TABLE>
<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> 162
RSA DATA SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY
Convertible Preferred Stock
Preferred stock has been designated into series and issued as follows:
<TABLE>
<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> 163
RSA DATA SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. STOCKHOLDERS' EQUITY (CONTINUED)
Plan transactions were as follows:
<TABLE>
<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> 164
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.
The benefit for income taxes consists of the following:
<TABLE>
<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>
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:
<TABLE>
<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> 165
RSA DATA SECURITY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. INCOME TAXES (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
are as follows:
<TABLE>
<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> 166
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> 167
ANNEX A
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
AGREEMENT AND PLAN OF MERGER
AMONG
SECURITY DYNAMICS TECHNOLOGIES, INC., CARD-KEY INC.,
AND
RSA DATA SECURITY, INC.
APRIL 14, 1996
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 168
TABLE OF CONTENTS
ARTICLE I -- THE MERGER
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
1.1 The Merger...................................................................... A-1
1.2 The Closing..................................................................... A-1
1.3 Actions at the Closing.......................................................... A-1
1.4 Additional Action............................................................... A-1
1.5 Conversion of Shares............................................................ A-1
1.6 Dissenting Shares............................................................... A-2
1.7 Exchange of Shares.............................................................. A-3
1.8 Dividends....................................................................... A-3
1.9 Fractional Shares............................................................... A-4
1.10 Escrow.......................................................................... A-4
1.11 Options and Warrants............................................................ A-4
1.12 Certificate of Incorporation.................................................... A-5
1.13 By-laws......................................................................... A-5
1.14 Directors and Officers.......................................................... A-5
1.15 No Further Rights............................................................... A-5
1.16 Closing of Transfer Books....................................................... A-5
ARTICLE II -- REPRESENTATIONS AND WARRANTIES
OF THE COMPANY
2.1 Organization, Qualification and Corporate Power................................. A-5
2.2 Capitalization.................................................................. A-6
2.3 Authorization of Transaction.................................................... A-6
2.4 Noncontravention................................................................ A-6
2.5 Subsidiaries.................................................................... A-7
2.6 Financial Statements............................................................ A-7
2.7 Absence of Certain Changes...................................................... A-7
2.8 Undisclosed Liabilities......................................................... A-8
2.9 Tax Matters..................................................................... A-8
2.10 Assets.......................................................................... A-9
2.11 Owned Real Property............................................................. A-9
2.12 Intellectual Property........................................................... A-9
2.13 Real Property Leases............................................................ A-10
2.14 Contracts....................................................................... A-10
2.15 Powers of Attorney.............................................................. A-11
2.16 Insurance....................................................................... A-11
2.17 Litigation...................................................................... A-12
2.18 Employees....................................................................... A-12
2.19 Employee Benefits............................................................... A-12
2.20 Environmental Matters........................................................... A-13
2.21 Legal Compliance................................................................ A-14
2.22 Permits......................................................................... A-14
2.23 Certain Business Relationships With Affiliates.................................. A-14
2.24 Brokers' Fees................................................................... A-15
2.25 Books and Records............................................................... A-15
2.26 Pooling......................................................................... A-15
2.27 Company Action.................................................................. A-15
2.28 Disclosure...................................................................... A-15
ARTICLE III -- REPRESENTATIONS AND WARRANTIES OF
THE BUYER AND THE TRANSITORY SUBSIDIARY
3.1 Organization.................................................................... A-15
3.2 Capitalization.................................................................. A-15
3.3 Authorization of Transaction.................................................... A-15
3.4 Noncontravention................................................................ A-16
3.5 Reports and Financial Statements................................................ A-16
</TABLE>
i
<PAGE> 169
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
3.6 Absence of Material Adverse Changes............................................. A-16
3.7 Pooling......................................................................... A-16
3.8 Brokers' Fees................................................................... A-17
3.9 Disclosure...................................................................... A-17
3.10 Opinion of Financial Advisor.................................................... A-17
ARTICLE IV -- COVENANTS
4.1 Best Efforts.................................................................... A-17
4.2 Notices and Consents............................................................ A-17
4.3 Special Meeting, Prospectus/Proxy Statement and Registration Statement.......... A-17
4.4 Hart-Scott-Rodino Act........................................................... A-18
4.5 Operation of Business........................................................... A-18
4.6 Full Access..................................................................... A-20
4.7 Notice of Breaches.............................................................. A-20
4.8 Exclusivity..................................................................... A-20
4.9 Agreements from Certain Affiliates of the Company............................... A-20
4.10 Listing of Merger Shares........................................................ A-20
ARTICLE V -- CONDITIONS TO CONSUMMATION OF MERGER
5.1 Conditions to Each Party's Obligations.......................................... A-20
5.2 Conditions to Obligations of the Buyer and the Transitory Subsidiary............ A-21
5.3 Conditions to Obligations of the Company........................................ A-22
ARTICLE VI -- INDEMNIFICATION
6.1 Indemnification................................................................. A-23
6.2 Method of Asserting Claims...................................................... A-23
6.3 Survival........................................................................ A-24
6.4 Limitations..................................................................... A-25
ARTICLE VII -- TERMINATION
7.1 Termination of Agreement........................................................ A-25
7.2 Effect of Termination........................................................... A-25
ARTICLE VIII -- DEFINITIONS
ARTICLE IX -- MISCELLANEOUS
9.1 Press Releases and Announcements................................................ A-27
9.2 No Third Party Beneficiaries.................................................... A-27
9.3 Entire Agreement................................................................ A-27
9.4 Succession and Assignment....................................................... A-27
9.5 Counterparts.................................................................... A-27
9.6 Headings........................................................................ A-27
9.7 Notices......................................................................... A-27
9.8 Governing Law................................................................... A-28
9.9 Amendments and Waivers.......................................................... A-28
9.10 Severability.................................................................... A-28
9.11 Expenses........................................................................ A-29
9.12 Specific Performance............................................................ A-29
9.13 Construction.................................................................... A-29
9.14 Incorporation of Exhibits and Schedules......................................... A-29
</TABLE>
Exhibit A -- Escrow Agreement
Exhibit B -- Certificate of Incorporation of Surviving Corporation
Exhibit C -- Affiliate's Agreement
Exhibit D -- Opinion of Counsel to the Company
Exhibit E -- Employment and Non-Competition Agreement
Exhibit F -- Opinion of Counsel to the Buyer
ii
<PAGE> 170
AGREEMENT AND PLAN OF MERGER
Agreement entered into as of April 14, 1996 by and among SECURITY DYNAMICS
TECHNOLOGIES, INC., a Delaware corporation (the "Buyer"), CARD-KEY INC., a
Delaware corporation and a wholly-owned subsidiary of the Buyer (the "Transitory
Subsidiary"), and RSA DATA SECURITY, INC., a Delaware corporation (the
"Company"). The Buyer, the Transitory Subsidiary and the Company are referred to
collectively herein as the "Parties."
This Agreement contemplates a merger of the Transitory Subsidiary into the
Company in a transaction that will qualify under Section 368 of the Code (as
defined below). In such merger, the stockholders of the Company will receive
capital stock of the Buyer in exchange for their capital stock of the Company.
Now, therefore, in consideration of the representations, warranties and
covenants herein contained, the Parties agree as follows.
ARTICLE I
THE MERGER
1.1 The Merger. Upon and subject to the terms and conditions of this
Agreement, the Transitory Subsidiary shall merge with and into the Company (with
such merger referred to herein as the "Merger") at the Effective Time (as
defined below). From and after the Effective Time, the separate corporate
existence of the Transitory Subsidiary shall cease and the Company shall
continue as the surviving corporation in the Merger (the "Surviving
Corporation"). The "Effective Time" shall be the time at which the Company and
the Transitory Subsidiary file the certificate of merger prepared and executed
in accordance with the relevant provisions of the Delaware General Corporation
Law (the "Certificate of Merger") with the Secretary of State of the State of
Delaware. The Merger shall have the effects set forth in Section 259 of the
Delaware General Corporation Law.
1.2 The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Hale and Dorr, 60
State Street in Boston, Massachusetts, commencing at 10:00 a.m. local time on
June 28, 1996, or, if all of the conditions to the obligations of the Parties to
consummate the transactions contemplated hereby have not been satisfied or
waived by such date, on such mutually agreeable later date as soon as
practicable after the satisfaction or waiver of all conditions to the
obligations of the Parties to consummate the transactions contemplated hereby
(the "Closing Date").
1.3 Actions at the Closing. At the Closing, (a) the Company shall deliver
to the Buyer and the Transitory Subsidiary the various certificates, instruments
and documents referred to in Section 5.2, (b) the Buyer and the Transitory
Subsidiary shall deliver to the Company the various certificates, instruments
and documents referred to in Section 5.3, (c) the Company and the Transitory
Subsidiary shall file with the Secretary of State of the State of Delaware the
Certificate of Merger, (d) the Buyer shall deliver certificates for the Initial
Shares (as defined below) to State Street Bank and Trust Company as exchange
agent (the "Exchange Agent") in accordance with Section 1.7 and (e) the Buyer,
the Indemnification Representatives (as defined therein) and the Escrow Agent
(as defined therein) shall execute and deliver the Escrow Agreement in
substantially the form attached hereto as Exhibit A (the "Escrow Agreement") and
the Buyer shall deliver to the Escrow Agent a certificate for the Escrow Shares
(as defined below) being placed in escrow on the Closing Date pursuant to
Section 1.10.
1.4 Additional Action. The Surviving Corporation may, at any time after
the Effective Time, take any action, including executing and delivering any
document, in the name and on behalf of either the Company or the Transitory
Subsidiary, in order to consummate the transactions contemplated by this
Agreement.
1.5 Conversion of Shares. At the Effective Time, by virtue of the Merger
and without any action on the part of any Party or the holder of any of the
following securities:
(a) Each share of common stock, $.01 par value per share, of the Company
("Company Common Stock"), each share of Series A Convertible Preferred Stock,
$.10 par value per share, of the Company ("Series A Preferred"), each share of
Series B Convertible Preferred Stock, $.10 par value per share, of the
A-1
<PAGE> 171
Company ("Series B Preferred"), each share of Series C Convertible Preferred
Stock, par value $.10 per share, of the Company ("Series C Preferred") and each
share of Series D Convertible Preferred Stock, par value $.10 per share of the
Company ("Series D Preferred") (the Series A Preferred, Series B Preferred,
Series C Preferred and Series D Preferred being collectively referred to herein
as "Company Preferred Shares" and the Company Preferred Shares and Company
Common Stock being collectively referred to herein as "Company Shares") issued
and outstanding immediately prior to the Effective Time (other than Company
Shares owned beneficially by the Buyer or the Transitory Subsidiary, Dissenting
Shares (as defined below) and Company Shares held in the Company's treasury)
shall be converted into and represent the right to receive (subject to the
provisions of Section 1.10) such number of shares of common stock, $.01 par
value per share, of the Buyer ("Buyer Common Stock") as is equal to the
Conversion Ratio. The "Conversion Ratio" shall initially be equal to a fraction,
(x) the numerator of which shall be 4,000,000 and (y) the denominator of which
shall be the sum of (i) the number of Company Shares issued and outstanding
immediately prior to the Effective Time (other than Company Shares held in the
Company's treasury) and (ii) the number of Company Shares issuable upon exercise
of the Options (as defined below), whether vested, unvested or subject to
repurchase by the Company following such exercise. The Conversion Ratio shall be
subject to equitable adjustment in the event of any stock split, stock dividend,
reverse stock split or similar event affecting the Buyer Common Stock between
the date of this Agreement and the Effective Time. Stockholders of record of the
Company ("Company Stockholders") shall be entitled to receive immediately 87.5%
of the shares of Buyer Common Stock into which their Company Shares were
converted pursuant to this Section 1.5(a) (the "Initial Shares"); the remaining
12.5% of the shares of Buyer Common Stock into which Company Shares were
converted pursuant to this Section 1.5(a) (the "Escrow Shares") shall be
deposited in escrow pursuant to Section 1.10 and shall be held and disposed of
in accordance with the terms of the Escrow Agreement. The Initial Shares and the
Escrow Shares shall together be referred to herein as the "Merger Shares."
Additional shares of Buyer Common Stock issued upon exercise of Options after
the Effective Time that are deposited into escrow pursuant to the terms of the
Escrow Agreement shall constitute a portion of the Escrow Shares.
(b) Each Company Share held in the Company's treasury immediately prior to
the Effective Time and each Company Share owned beneficially by the Buyer or the
Transitory Subsidiary shall be cancelled and retired without payment of any
consideration therefor.
(c) Each share of common stock, $.01 par value per share, of the Transitory
Subsidiary issued and outstanding immediately prior to the Effective Time shall
be converted into and thereafter evidence one share of common stock, $.01 par
value per share, of the Surviving Corporation.
1.6 Dissenting Shares.
(a) For purposes of this Agreement, "Dissenting Shares" means Company
Shares held as of the Effective Time by a Company Stockholder who has not voted
such Company Shares in favor of the adoption of this Agreement and the Merger
and with respect to which appraisal shall have been duly demanded and perfected
in accordance with Section 262 of the Delaware General Corporation Law and not
effectively withdrawn or forfeited prior to the Effective Time. Notwithstanding
Section 1.5(a) above, Dissenting Shares shall not be converted into or represent
the right to receive Merger Shares, unless such Company Stockholder shall have
forfeited his right to appraisal under the Delaware General Corporation Law or
withdrawn, with the consent of the Company, his demand for appraisal. If such
Company Stockholder has so forfeited or withdrawn his right to appraisal of
Dissenting Shares, then (i) as of the occurrence of such event, such holder's
Dissenting Shares shall cease to be Dissenting Shares and shall be converted
into and represent the right to receive the Merger Shares issuable in respect of
such Company Shares pursuant to Section 1.5(a), and (ii) promptly following the
occurrence of such event, the Buyer shall deliver to the Exchange Agent a
certificate representing 87.5% of the Merger Shares to which such holder is
entitled pursuant to Section 1.5(a) (which shares shall be considered Initial
Shares for all purposes of this Agreement) and shall deliver to the Escrow Agent
a certificate representing the remaining 12.5% of the Merger Shares to which
such holder is entitled pursuant to Section 1.5(a) (which shares shall be
considered Escrow Shares for all purposes of this Agreement).
A-2
<PAGE> 172
(b) The Company shall give the Buyer (i) prompt notice of any written
demands for appraisal of any Company Shares, withdrawals of such demands, and
any other instruments that relate to such demands received by the Company and
(ii) the opportunity to direct all negotiations and proceedings with respect to
demands for appraisal under the Delaware General Corporation Law. The Company
shall not, except with the prior written consent of the Buyer, make any payment
with respect to any demands for appraisal of Company Shares or offer to settle
or settle any such demands.
1.7 Exchange of Shares
(a) Prior to the Effective Time, the Buyer shall appoint the Exchange Agent
to effect the exchange for the Initial Shares of certificates that, immediately
prior to the Effective Time, represented Company Shares converted into Merger
Shares pursuant to Section 1.5 (including any Company Shares referred to in the
last sentence of Section 1.6(a)) ("Certificates"). On the Closing Date, the
Buyer shall deliver to the Exchange Agent, in trust for the benefit of holders
of Certificates, a stock certificate (issued in the name of the Exchange Agent
or its nominee) representing the Initial Shares, as described in Section 1.5(a).
As soon as practicable after the Effective Time, the Buyer shall cause the
Exchange Agent to send a notice and a transmittal form to each holder of a
Certificate advising such holder of the effectiveness of the Merger and the
procedure for surrendering to the Exchange Agent such Certificate in exchange
for the Initial Shares issuable pursuant to Section 1.5(a). Each holder of a
Certificate, upon proper surrender thereof to the Exchange Agent in accordance
with the instructions in such notice, shall be entitled to receive in exchange
therefor (subject to any taxes required to be withheld) the Initial Shares
issuable pursuant to Section 1.5(a). Until properly surrendered, each such
Certificate shall be deemed for all purposes to evidence only the right to
receive the Initial Shares issuable pursuant to Section 1.5(a). Holders of
Certificates shall not be entitled to receive certificates for the Initial
Shares to which they would otherwise be entitled until such Certificates are
properly surrendered.
(b) If any Initial Shares are to be issued in the name of a person other
than the person in whose name the Certificate surrendered in exchange therefor
is registered, it shall be a condition to the issuance of such Initial Shares
that (i) the Certificate so surrendered shall be transferable, and shall be
properly assigned, endorsed or accompanied by appropriate stock powers, (ii)
such transfer shall otherwise be proper and (iii) the person requesting such
transfer shall pay to the Exchange Agent any transfer or other taxes payable by
reason of the foregoing or establish to the satisfaction of the Exchange Agent
that such taxes have been paid or are not required to be paid. Notwithstanding
the foregoing, neither the Exchange Agent nor any Party shall be liable to a
holder of Company Shares for any Initial Shares issuable to such holder pursuant
to Section 1.5(a) that are delivered to a public official pursuant to applicable
abandoned property, escheat or similar laws.
(c) In the event any Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
Certificate to be lost, stolen or destroyed, the Buyer shall issue in exchange
for such lost, stolen or destroyed Certificate the Initial Shares issuable in
exchange therefor pursuant to Section 1.5(a). The Board of Directors of the
Buyer may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed Certificate to
submit to the Buyer an affidavit and to give to the Buyer an indemnity against
any claim that may be made against the Buyer with respect to the Certificate
alleged to have been lost, stolen or destroyed.
(d) Promptly following the date which is six months after the Closing Date,
the Exchange Agent shall return to the Buyer all Initial Shares in its
possession, and the Exchange Agent's duties shall terminate. Thereafter, each
holder of a Certificate may surrender such Certificate to the Buyer and, subject
to applicable abandoned property, escheat and similar laws, receive in exchange
therefor the Initial Shares issuable with respect thereto pursuant to Section
1.5(a).
1.8 Dividends. No dividends or other distributions that are payable to
the holders of record of Buyer Common Stock as of a date on or after the Closing
Date shall be paid to former Company Stockholders entitled by reason of the
Merger to receive Initial Shares until such holders surrender their Certificates
in accordance with Section 1.7. Upon such surrender, the Buyer shall pay or
deliver to the persons in whose name the certificates representing such Initial
Shares are issued any dividends or other distributions that are
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payable to the holders of record of Buyer Common Stock as of a date on or after
the Closing Date and which were paid or delivered between the Effective Time and
the time of such surrender; provided that no such person shall be entitled to
receive any interest on such dividends or other distributions.
1.9 Fractional Shares. No certificates or script representing fractional
Initial Shares shall be issued to former Company Stockholders upon the surrender
for exchange of Certificates, and such former Company Stockholders shall not be
entitled to any voting rights, rights to receive any dividends or distributions
or other rights as a stockholder of the Buyer with respect to any fractional
Initial Shares that would otherwise be issued to such former Company
Stockholders. In lieu of any fractional Initial Shares that would otherwise be
issued, each former Company Stockholder that would have been entitled to receive
a fractional Initial Share shall, upon proper surrender of such person's
Certificates, receive a cash payment equal to the average last sale price per
share of the Buyer Common Stock on the Nasdaq National Market, as reported by
Nasdaq, on the fifteen consecutive trading days immediately preceding the
Closing Date, multiplied by the fraction of a share that such Company
Stockholder would otherwise be entitled to receive.
1.10 Escrow.
(a) On the Closing Date, the Buyer shall deliver to the Escrow Agent a
certificate (issued in the name of the Escrow Agent or its nominee) representing
the Escrow Shares, as described in Section 1.5(a), for the purpose of securing
the indemnification obligations of the Company Stockholders and the holders of
Options set forth in this Agreement. From and after the Closing Date, upon the
exercise of Options the Buyer shall deliver to the Escrow Agent a certificate or
certificates (issued in the name of the Escrow Agent or its nominee)
representing additional Escrow Shares to the extent set forth in the Escrow
Agreement. The Escrow Shares shall be held by the Escrow Agent under the Escrow
Agreement pursuant to the terms thereof. The Escrow Shares shall be held as a
trust fund and shall not be subject to any lien, attachment, trustee process or
any other judicial process of any creditor of any party, and shall be held and
disbursed solely for the purposes and in accordance with the terms of the Escrow
Agreement.
(b) The adoption of this Agreement and the approval of the Merger by the
Company Stockholders shall constitute approval of the Escrow Agreement and of
all of the arrangements relating thereto, including without limitation the
placement of the Escrow Shares in escrow and the appointment of the
Indemnification Representatives.
1.11 Options and Warrants.
(a) As of the Effective Time, all options to purchase Company Shares issued
by the Company pursuant to its 1987 Stock Option Plan ("Options"), whether
vested, unvested or subject to repurchase by the Company following such
exercise, shall be assumed by the Buyer. Immediately after the Effective Time,
each Option outstanding immediately prior to the Effective Time shall be deemed
to constitute an option to acquire, on the same terms and conditions as were
applicable under such Option at the Effective Time, such number of shares of
Buyer Common Stock as is equal to the number of Company Shares subject to the
unexercised portion of such Option multiplied by the Conversion Ratio (with any
fraction resulting from such multiplication to be rounded down to the next
lowest whole number). The exercise price per share of each such assumed Option
shall be equal to the exercise price of such Option immediately prior to the
Effective Time, divided by the Conversion Ratio (with any fraction of a cent
resulting from such division to be rounded up to the next highest whole cent).
The term, exercisability, vesting schedule, repurchase provisions, status as an
"incentive stock option" under Section 422 of the Internal Revenue Code of 1986
(as amended, the "Code"), if applicable, and all of the other terms of the
Options shall otherwise remain unchanged; provided, however, that by virtue of
the Merger each Option shall be amended to the extent set forth in the Escrow
Agreement with respect to the deposit of Escrow Shares upon the exercise
thereof.
(b) As soon as practicable after the Effective Time, the Buyer or the
Surviving Corporation shall deliver to the holders of Options appropriate
notices setting forth such holders' rights pursuant to such Options, as amended
by this Section 1.11, and the agreements evidencing such Options shall continue
in effect on the same terms and conditions (subject to the amendments provided
for in this Section 1.11, the Escrow Agreement and such notice).
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(c) The Buyer shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Buyer Common Stock for delivery upon
exercise of the Options assumed in accordance with this Section 1.11. As soon as
practicable after the Effective Time, the Buyer shall file a Registration
Statement on Form S-8 (or any successor form) under the Securities Act of 1933
(as amended, the "Securities Act") with respect to all shares of Buyer Common
Stock subject to such Options that may be registered on a Form S-8, and shall
use its best efforts to maintain the effectiveness of such Registration
Statement for so long as such Options remain outstanding.
(d) The Company shall cause the termination, as of the Effective Time, of
any warrants or options to purchase Company Shares other than the Options (the
"Warrants") which remain unexercised, all of which are set forth in Section
1.11(d) of the Disclosure Schedule (as defined below).
(e) The Company shall use all reasonable efforts to obtain, prior to the
Closing, the consent from each holder of an Option or a Warrant to the amendment
(in the case of Options) or termination (in the case of Warrants) of such Option
or Warrant pursuant to this Section 1.11. In the case of Options, the Company
shall also obtain an agreement of the holder of the Option to be bound by the
terms of the Escrow Agreement.
1.12 Certificate of Incorporation. The Certificate of Incorporation of
the Surviving Corporation shall be amended as of the Effective Time so as to
read in its entirety in the form attached hereto as Exhibit B.
1.13 By-laws. The By-laws of the Surviving Corporation shall be the same
as the By-laws of the Transitory Subsidiary immediately prior to the Effective
Time, except that the name of the corporation set forth therein shall be changed
to the name of the Company.
1.14 Directors and Officers. The directors of the Transitory Subsidiary
shall become the directors of the Surviving Corporation as of the Effective
Time. The officers of the Company shall remain as officers of the Surviving
Corporation after the Effective Time, retaining their respective positions.
1.15 No Further Rights. From and after the Effective Time, no Company
Shares shall be deemed to be outstanding, and holders of Certificates shall
cease to have any rights with respect thereto, except as provided herein or by
law.
1.16 Closing of Transfer Books. At the Effective Time, the stock transfer
books of the Company shall be closed and no transfer of Company Shares shall
thereafter be made. If, after the Effective Time, Certificates are presented to
the Surviving Corporation or the Exchange Agent, they shall be cancelled and
exchanged for Initial Shares in accordance with Section 1.5(a), subject to
Section 1.10 and to applicable law in the case of Dissenting Shares.
ARTICLE II
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to the Buyer that the statements
contained in this Article II are true and correct, except as set forth in the
disclosure schedule attached hereto (the "Disclosure Schedule"). The Disclosure
Schedule shall be initialed by the Parties and shall be arranged in paragraphs
corresponding to the numbered and lettered sections and paragraphs contained in
this Article II, and the disclosures in any paragraph of the Disclosure Schedule
shall qualify other sections and paragraphs in this Article II only to the
extent it is clear from a reading of the disclosure that such disclosure is
applicable to such other sections and paragraphs.
2.1 Organization, Qualification and Corporate Power. The Company is a
corporation duly organized, validly existing and in corporate and tax good
standing under the laws of the State of Delaware. The Company is duly qualified
to conduct business and is in corporate and tax good standing under the laws of
each jurisdiction in which the nature of its businesses or the ownership or
leasing of its properties requires such qualification. The Company has all
requisite corporate power and authority to carry on the businesses in which it
is engaged and to own and use the properties owned and used by it. The Company
has furnished to the Buyer true and complete copies of its Certificate of
Incorporation and By-laws, each as amended and as in
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effect on the date hereof. The Company is not in default under or in violation
of any provision of its Certificate of Incorporation or By-laws.
2.2 Capitalization. The authorized capital stock of the Company consists
of (i) 7,000,000 shares of Company Common Stock, of which 2,528,633 shares are
issued and outstanding and no shares are held in the treasury of the Company,
(ii) 2,500,000 shares of convertible preferred stock, of which (A) 250,000
shares have been designated as Series A Preferred, all of which are issued and
outstanding, (B) 500,000 have been designated as Series B Preferred, of which
499,950 shares are issued and outstanding, (C) 1,050,000 have been designated as
Series C Preferred, of which 360,000 shares are issued and outstanding, and (D)
700,000 have been designated as Series D Preferred, of which 380,334 shares are
issued and outstanding. Section 2.2 of the Disclosure Schedule sets forth a
complete and accurate list of (i) all stockholders of the Company, indicating
the type and number of Company Shares held by each stockholder, and (ii) all
holders of Options and Warrants, indicating the type and number of Company
Shares subject to each Option and Warrant and the exercise price thereof. Copies
of all Options and Warrants have previously been provided to the Buyer. All of
the issued and outstanding Company Shares are, and all Company Shares that may
be issued upon exercise of Options and Warrants will be, duly authorized,
validly issued, fully paid, nonassessable and free of all preemptive rights.
There are no outstanding or authorized options, warrants, rights, calls,
convertible instruments, agreements or commitments to which the Company is a
party or which are binding upon the Company providing for the issuance,
disposition or acquisition of any of its capital stock, other than the Options
and Warrants listed in Section 2.2 of the Disclosure Schedule. There are no
outstanding or authorized stock appreciation, phantom stock or similar rights
with respect to the Company. There are no agreements, voting trusts, proxies, or
understandings with respect to the voting, or registration under the Securities
Act, of any Company Shares (i) between or among the Company and any of its
stockholders and (ii) to the best of the Company's knowledge, between or among
any of the Company's stockholders. All of the issued and outstanding Company
Shares were issued in compliance with applicable federal and state securities
laws.
2.3 Authorization of Transaction. The Company has all requisite corporate
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder. The execution and delivery of this Agreement and, subject
to the adoption of this Agreement and the approval of the Merger by a majority
of the votes represented by the outstanding Company Shares entitled to vote on
this Agreement and the Merger voting as a single class (the "Requisite
Stockholder Approval"), the performance by the Company of this Agreement and the
consummation by the Company of the transactions contemplated hereby have been
duly and validly authorized by all necessary corporate action on the part of the
Company. This Agreement has been duly and validly executed and delivered by the
Company and, assuming the due authorization, execution and delivery by the Buyer
and the Transitory Subsidiary, constitutes a valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms, except as
enforcement may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally, and except that the
availability of equitable remedies, including specific performance, is subject
to the discretion of the court before which any proceeding therefor may be
brought, and except as indemnification may be limited by public policy.
2.4 Noncontravention. Subject to compliance with the applicable
requirements of the Securities Act and any applicable state securities laws, the
Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the
"Hart-Scott-Rodino Act") and the filing of the Certificate of Merger as required
by the Delaware General Corporation Law, neither the execution and delivery of
this Agreement by the Company, nor the consummation by the Company of the
transactions contemplated hereby, will (a) conflict with or violate any
provision of the Restated Certificate of Incorporation (as amended) or By-laws
of the Company, (b) require on the part of the Company or any corporation with
respect to which the Company, directly or indirectly, has the power to vote or
direct the voting of sufficient securities to elect a majority of the directors
(a "Subsidiary") any filing with, or any permit, authorization, consent or
approval of, any court, arbitrational tribunal, administrative agency or
commission or other governmental or regulatory authority or agency (a
"Governmental Entity"), (c) conflict with, result in a breach of, constitute
(with or without due notice or lapse of time or both) a default under, result in
the acceleration of, create in any party the right to accelerate, terminate,
modify or cancel, or require any notice, consent or waiver under, any contract,
lease, sublease,
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license, sublicense, franchise, permit, indenture, agreement or mortgage for
borrowed money, instrument of indebtedness, Security Interest (as defined below)
or other arrangement to which the Company or any Subsidiary is a party or by
which the Company or any Subsidiary is bound or to which any of their assets is
subject, (d) result in the imposition of any Security Interest upon any assets
of the Company or any Subsidiary or (e) violate any order, writ, injunction,
decree, statute, rule or regulation applicable to the Company, any Subsidiary or
any of their properties or assets. For purposes of this Agreement, "Security
Interest" means any mortgage, pledge, security interest, encumbrance, charge, or
other lien (whether arising by contract or by operation of law), other than (i)
mechanic's, materialmen's, and similar liens, (ii) liens arising under worker's
compensation, unemployment insurance, social security, retirement, and similar
legislation, and (iii) liens on goods in transit incurred pursuant to
documentary letters of credit, in each case arising in the ordinary course of
business consistent with past custom and practice (including with respect to
frequency and amount) ("Ordinary Course of Business") of the Company and not
material to the Company.
2.5 Subsidiaries. Section 2.5 of the Disclosure Schedule sets forth for
each Subsidiary (a) its name and jurisdiction of incorporation, (b) the number
of shares of authorized capital stock of each class of its capital stock, (c)
the number of issued and outstanding shares of each class of its capital stock,
the names of the holders thereof and the number of shares held by each such
holder, (d) the number of shares of its capital stock held in treasury, and (e)
its directors and officers. Each Subsidiary is a corporation duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
incorporation (to the extent recognized in the jurisdiction of incorporation).
Each Subsidiary is duly qualified to conduct business and is in corporate and
tax good standing under the laws of each jurisdiction in which the nature of its
businesses or the ownership or leasing of its properties requires such
qualification. Each Subsidiary has all requisite corporate power and authority
to carry on the businesses in which it is engaged and to own and use the
properties owned and used by it. The Company has delivered to the Buyer correct
and complete copies of the charter and By-laws of each Subsidiary, as amended to
date. No Subsidiary is in default under or in violation of any provision of its
charter or By-laws. All of the issued and outstanding shares of capital stock of
each Subsidiary are duly authorized, validly issued, fully paid, nonassessable
and free of preemptive rights. All shares of each Subsidiary that are held of
record or owned beneficially by either the Company or any Subsidiary are held or
owned free and clear of any restrictions on transfer (other than restrictions
under the Securities Act and state securities laws), claims, Security Interests,
options, warrants, rights, contracts, calls, commitments, equities and demands.
There are no outstanding or authorized options, warrants, rights, agreements or
commitments to which the Company or any Subsidiary is a party or which are
binding on any of them providing for the issuance, disposition or acquisition of
any capital stock of any Subsidiary. There are no outstanding stock
appreciation, phantom stock or similar rights with respect to any Subsidiary.
There are no voting trusts, proxies, or other agreements or understandings with
respect to the voting of any capital stock of any Subsidiary. Except as set
forth in Section 2.5 of the Disclosure Schedule, the Company does not control
directly or indirectly or have any direct or indirect equity participation in
any corporation, partnership, trust, or other business association which is not
a Subsidiary.
2.6 Financial Statements. The Company has provided to the Buyer (i) the
audited consolidated balance sheets and statements of income, changes in
stockholders' equity and cash flows for each of the last three fiscal years for
the Company and the Subsidiaries (or such shorter periods as such Subsidiaries
have been in existence); and (ii) the unaudited consolidated balance sheet and
statement of operations as of and for the quarter ended as of March 31, 1996
(the "Most Recent Fiscal Quarter End"). Such financial statements (collectively,
the "Financial Statements") have been prepared in accordance with United States
generally accepted accounting principles ("GAAP") applied on a consistent basis
throughout the periods covered thereby, fairly present the financial condition,
results of operations and cash flows of the Company and the Subsidiaries as of
the respective dates thereof and for the periods referred to therein and are
consistent with the books and records of the Company and the Subsidiaries,
provided, however, that the Financial Statements referred to in clause (ii)
above are subject to normal recurring year-end adjustments (which will not in
the aggregate be material) and do not include footnotes.
2.7 Absence of Certain Changes. Since March 31, 1996, (a) there has not
been any material adverse change in the assets, business, financial condition or
results of operations of the Company or any Subsidiary,
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nor has there occurred any event or development which could reasonably be
foreseen to result in such a material adverse change in the future, and (b)
neither the Company nor any Subsidiary has taken any of the actions set forth in
paragraphs (a) through (o) of Section 4.5.
2.8 Undisclosed Liabilities. None of the Company and its Subsidiaries has
any liability (whether known or unknown, whether absolute or contingent, whether
liquidated or unliquidated and whether due or to become due), except for (a)
liabilities accrued or reserved against the March 31, 1996 unaudited
consolidated balance sheet of the Company and its Subsidiaries, (b) liabilities
which have arisen since March 31, 1996 in the Ordinary Course of Business and
which are similar in nature and amount to the liabilities which arose during the
comparable period of time in the immediately preceding fiscal period and (c)
contractual or statutory liabilities incurred in the Ordinary Course of Business
which are not required by GAAP to be reflected on a balance sheet.
2.9 Tax Matters.
(a) Each of the Company and the Subsidiaries has filed all Tax Returns (as
defined below) that it was required to file and all such Tax Returns were
correct and complete in all material respects. Each of the Company and the
Subsidiaries has paid or will pay all Taxes (as defined below) due on or before
the Closing Date, whether or not shown on any such Tax Returns, except such as
are being contested in good faith by appropriate proceedings (to the extent any
such proceedings are required) and with respect to which the Company is
maintaining reserves adequate for their payment. The accrued but unpaid Taxes of
the Company and the Subsidiaries for tax periods through the date of the Most
Recent Balance Sheet do not exceed the accruals and reserves for Taxes (other
than deferred Taxes) set forth on the Most Recent Balance Sheet. All Taxes
attributable to the period January 1, 1996 through the Closing Date are
attributable to the conduct by the Company and the Subsidiaries of their
respective operations in the Ordinary Course of Business. Neither the Company
nor any Subsidiary has any actual or potential liability for any Tax obligation
of any taxpayer (including without limitation any affiliated group of
corporations or other entities that included the Company or any Subsidiary
during a prior period) other than the Company and the Subsidiaries. All Taxes
that the Company or any Subsidiary is or was required by law to withhold or
collect have been duly withheld or collected and, to the extent required, have
been paid to the proper Governmental Entity.
(i) For purposes of this Agreement, "Taxes" means all taxes, charges,
fees, levies or other similar assessments or liabilities, including without
limitation income, gross receipts, ad valorem, premium, value-added,
excise, real property, personal property, sales, use, transfer,
withholding, employment, payroll and franchise taxes imposed by the United
States of America or any state, local or foreign government, or any agency
thereof, or other political subdivision of the United States or any such
government, and any interest, fines, penalties, assessments or additions to
tax resulting from, attributable to or incurred in connection with any tax
or any contest or dispute thereof and any amounts of Taxes of another
person that the Company or any Subsidiary is liable to pay by law or
otherwise.
(ii) For purposes of this Agreement, "Tax Returns" means all reports,
returns, declarations, statements or other information required to be
supplied to a taxing authority in connection with Taxes.
(iii) For purposes of determining the amount of Taxes attributable to
a specified period (e.g., the period from the date of the Most Recent
Balance Sheet through the Closing Date) other than a Tax Period, each Tax
shall be computed as if the specified period were a Tax Period. For
purposes of this paragraph (iii), a Tax Period means a period for which a
Tax is required to be computed under applicable statutes and regulations.
(b) The Company has delivered to the Buyer correct and complete copies of
all federal income Tax Returns, examination reports and statements of
deficiencies assessed against or agreed to by any of the Company or any
Subsidiary since December 31, 1992. The federal income Tax Returns of the
Company have been audited by the Internal Revenue Service or are closed by the
applicable statute of limitations for the taxable years from fiscal 1991 through
fiscal 1994. No examination or audit of any Tax Returns of the Company or any
Subsidiary by any Governmental Entity is currently in progress or, to the
knowledge of the Company and the Subsidiaries, threatened or contemplated.
Neither the Company nor any Subsidiary has
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waived any statute of limitations with respect to taxes or agreed to an
extension of time with respect to a tax assessment or deficiency.
(c) Neither the Company nor any Subsidiary is a "consenting corporation"
within the meaning of Section 341(f) of the Code and none of the assets of the
Company or the Subsidiaries are subject to an election under Section 341(f) of
the Code. Neither the Company nor any Subsidiary has been a United States real
property holding corporation within the meaning of Section 897(c)(2) of the Code
during the applicable period specified in Section 897(c)(l)(A)(ii) of the Code.
Neither the Company nor any Subsidiary is a party to any Tax allocation or
sharing agreement other than an agreement to which only the Company and the
Subsidiaries are parties.
(d) Neither the Company nor any Subsidiary is or has ever been a member of
an "affiliated group" of corporations (within the meaning of Section 1504 of the
Code), other than a group of which only the Company and the Subsidiaries are
members.
2.10 Assets. Each of the Company and the Subsidiaries owns or leases all
tangible assets necessary for the conduct of its businesses as presently
conducted and as presently proposed to be conducted. Each such tangible asset is
free from material defects, has been maintained in accordance with normal
industry practice, is in good operating condition and repair (subject to normal
wear and tear) and is suitable for the purposes for which it presently is used.
No asset of the Company (tangible or intangible) is subject to any Security
Interest.
2.11 Owned Real Property. None of the Company or any Subsidiary owns any
real property.
2.12 Intellectual Property.
(a) Each of the Company and the Subsidiaries owns, or is licensed or
otherwise possesses legally enforceable rights to use, all patents, trademarks,
trade names, service marks, copyrights, and any applications for such patents,
trademarks, trade names, service marks and copyrights, and all trade secrets,
schematics, technology, knowhow, computer software programs or applications and
tangible or intangible proprietary information or material (collectively,
"Intellectual Property") that are used to conduct its business as currently
conducted or planned to be conducted. The Company has taken reasonable measures
to protect the proprietary nature of each item of Intellectual Property, and to
maintain in confidence all trade secrets and confidential information that it
owns or uses. Section 2.12 of the Disclosure Schedule lists (i) all patents and
patent applications and all trademarks, registered copyrights, trade names and
service marks owned or licensed by the Company and which are used in the
business of the Company or the Subsidiaries, including the jurisdictions in
which each such Intellectual Property right has been issued or registered or in
which any such application for such issuance or registration has been filed,
(ii) all material written licenses, sublicenses and other agreements to which
the Company or a Subsidiary is a party and pursuant to which any person is
authorized to use any Intellectual Property rights, and (iii) all material
written licenses, sublicenses and other agreements as to which the Company or a
Subsidiary is a party and pursuant to which the Company or a Subsidiary is
authorized to use any third party patents, trademarks, service marks, trade
secrets or copyrights, including software ("Third Party Intellectual Property
Rights") which are used in the business of the Company or any Subsidiary or
which form a part of any product or service of the Company or any Subsidiary.
The Company has made available to the Buyer correct and complete copies of all
such patents, registrations, applications, licenses, sublicenses and agreements
as amended to date. Neither the Company nor any Subsidiary is a party to any
oral license, sublicense or agreement which, if reduced to written form, would
be required to be listed in Section 2.12 of the Disclosure Schedule under the
terms of this Section 2.12(a).
(b) With respect to each item of Intellectual Property that the Company or
any Subsidiary owns: (i) subject to such rights as have been granted by the
Company or any Subsidiary under license agreements entered into by the Company
(copies of which have previously been made available to the Buyer), the Company
or a Subsidiary possesses all right, title and interest in and to such item; and
(ii) such item is not subject to any outstanding judgment, order, decree,
stipulation or injunction. With respect to each item of Third Party Intellectual
Property Rights: (i) the license, sublicense or other agreement covering such
item is legal, valid, binding, enforceable and in full force and effect with
respect to the Company or any Subsidiary
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party thereto, and to the Company's best knowledge is legal, valid, binding,
enforceable and in full force and effect with respect to each other party
thereto; (ii) such license, sublicense or other agreement will continue to be
legal, valid, binding, enforceable and in full force and effect immediately
following the Closing in accordance with the terms thereof as in effect prior to
the Closing; (iii) neither the Company nor any Subsidiary party to such license,
sublicense or other agreement is in breach or default thereunder, and to the
Company's best knowledge no other party to such license, sublicense or other
agreement is in breach or default thereunder, and no event has occurred which
with notice or lapse of time would constitute a breach or default or permit
termination, modification or acceleration thereunder; (iv) the underlying item
of Third Party Intellectual Property is not subject to any outstanding judgment,
order, decree, stipulation or injunction to which the Company or any Subsidiary
is a party or has been specifically named, nor to the Company's best knowledge
subject to any other outstanding judgment, order, decree, stipulation, or
injunction; and (v) no license or other fee is payable upon any transfer or
assignment of such license, sublicense or other agreement.
(c) Except as set forth in Section 2.12 of the Disclosure Schedule, neither
the Company nor any of the Subsidiaries (i) has been named in any suit, action
or proceeding which involves a claim of infringement or misappropriation of any
Intellectual Property right of any third party or (ii) has received any written
notice alleging any such claim of infringement or misappropriation. The Company
has made available to the Buyer correct and complete copies of all such suits,
actions or proceedings or written notices to the extent the Company is not
prohibited from disclosing the same under applicable court orders. The
manufacturing, marketing, licensing or sale of the products or performance of
the service offerings of the Company and the Subsidiaries do not currently
infringe, and have not within the six years prior to the date of this Agreement
infringed, any Intellectual Property right of any third party; and to the
knowledge of the Company and the Subsidiaries, the Intellectual Property rights
of the Company and the Subsidiaries are not being infringed by activities,
products or services of any third party.
2.13 Real Property Leases. Section 2.13 of the Disclosure Schedule lists
all real property leased or subleased to the Company or any Subsidiary. The
Company has delivered to the Buyer correct and complete copies of the leases and
subleases (as amended to date) listed in Section 2.13 of the Disclosure
Schedule. With respect to each lease and sublease listed in Section 2.13 of the
Disclosure Schedule:
(a) the lease or sublease is legal, valid, binding, enforceable and in
full force and effect with respect to the Company or any Subsidiary party
thereto, to the Company's best knowledge is legal, valid, binding,
enforceable and in full force and effect with respect to each other party
thereto, and will continue to be so following the Closing in accordance
with the terms thereof as in effect prior to the Closing;
(b) neither the Company nor any other Subsidiary party to the lease or
sublease is in breach or default thereunder, to the Company's best
knowledge no other party to the lease or sublease is in breach or default,
and no event has occurred which, with notice or lapse of time, would
constitute a breach or default or permit termination, modification, or
acceleration thereunder;
(c) there are no disputes, oral agreements or forbearance programs in
effect as to the lease or sublease; and
(d) neither the Company nor any Subsidiary has assigned, transferred,
conveyed, mortgaged, deeded in trust or encumbered any interest in the
leasehold or subleasehold.
2.14 Contracts. Section 2.14 of the Disclosure Schedule lists the
following written arrangements (including without limitation written agreements)
to which the Company or any Subsidiary is a party:
(a) any written arrangement (or group of related written arrangements)
for the lease of personal property from or to third parties providing for
lease payments in excess of $36,000 per annum;
(b) any written arrangement (or group of related written arrangements)
for the licensing or distribution of software, products or other personal
property or for the furnishing or receipt of services (i) which calls for
performance over a period of more than one year, (ii) which involves more
than the sum of $36,000, or (iii) in which the Company or any Subsidiary
has granted rights to license, sublicense or copy, "most favored nation"
pricing provisions or exclusive marketing or distribution rights relating
to any
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products or territory or has agreed to purchase a minimum quantity of goods
or services or has agreed to purchase goods or services exclusively from a
certain party;
(c) any written arrangement establishing a partnership or joint
venture;
(d) any written arrangement (or group of related written arrangements)
under which it has created, incurred, assumed, or guaranteed (or may
create, incur, assume, or guarantee) indebtedness (including capitalized
lease obligations) involving more than $36,000 or under which it has
imposed (or may impose) a Security Interest on any of its assets, tangible
or intangible;
(e) any written arrangement concerning confidentiality or
noncompetition;
(f) any written arrangement involving any of the Company Stockholders
or their affiliates, as defined in Rule 12b-2 under the Securities Exchange
Act of 1934, as amended (the "Exchange Act") ("Affiliates");
(g) any written arrangement under which the consequences of a default
or termination could have a material adverse effect on the assets,
business, financial condition, results of operations or future prospects of
the Company or any Subsidiary; and
(h) any other written arrangement (or group of related written
arrangements) either involving more than $100,000 or not entered into in
the Ordinary Course of Business.
The Company has delivered to the Buyer a correct and complete copy of
each written arrangement (as amended to date) listed in Section 2.14 of the
Disclosure Schedule. With respect to each written arrangement so listed:
(i) the written arrangement is legal, valid, binding and enforceable and in
full force and effect with respect to the Company or any Subsidiary party
thereto and, to the Company's best knowledge the written arrangement is
legal, valid, binding and is enforceable and in full force and effect with
respect to each other party thereto, except as enforcement may be limited
by bankruptcy, insolvency or other similar laws effecting the enforcement
of creditors' rights generally, and except that the availability of
equitable remedies, including specific performance, is subject to the
discretion of the Court before which any proceedings therefor may be
brought and except as indemnification may be limited by public policy; (ii)
the written arrangement will continue to be legal, valid, binding and
enforceable and in full force and effect immediately following the Closing
in accordance with the terms thereof as in effect prior to the Closing; and
(iii) neither the Company nor any Subsidiary party thereto is in breach or
default, to the Company's best knowledge no other party thereto is in
breach or default, and no event has occurred which with notice or lapse of
time would constitute a breach or default or permit termination,
modification, or acceleration, under the written arrangement. Neither the
Company nor any Subsidiary is a party to any oral contract, agreement or
other arrangement which, if reduced to written form, would be required to
be listed in Section 2.14 of the Disclosure Schedule under the terms of
this Section 2.14.
2.15 Powers of Attorney. There are no outstanding powers of attorney
executed on behalf of the Company or any Subsidiary.
2.16 Insurance. Section 2.16 of the Disclosure Schedule lists each
insurance policy (including fire, theft, casualty, general liability, workers
compensation, business interruption, environmental, product liability and
automobile insurance policies and bond and surety arrangements) to which the
Company or any Subsidiary is a party, a named insured, or otherwise the
beneficiary of coverage at any time within the past year. Each such policy is in
full force and effect and will continue to be in full force and effect following
the Closing.
Neither the Company nor any Subsidiary is in breach or default (including
with respect to the payment of premiums or the giving of notices) under such
policy, and no event has occurred which, with notice or the lapse of time, would
constitute such a breach or default or permit termination, modification or
acceleration, under such policy; and neither the Company nor any Subsidiary has
received any notice from the insurer disclaiming coverage or reserving rights
with respect to a particular claim or such policy in general. Neither the
Company nor any Subsidiary has incurred any loss, damage, expense or liability
covered by any such insurance policy for which it has not properly asserted a
claim under such policy. Each of the Company and
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the Subsidiaries is covered by insurance in scope and amount customary and
reasonable for the businesses in which it is engaged.
2.17 Litigation.
(a) Section 2.17(a) of the Disclosure Schedule identifies each matter
constituting a part of the CL Litigation (as defined below).
(b) Section 2.17(b) of the Disclosure Schedule identifies, and contains a
brief description of, (a) any unsatisfied judgement, order, decree, stipulation
or injunction and (b) any claim, complaint, action, suit, proceeding, hearing or
investigation of or in any Governmental Entity or before any arbitrator to which
the Company or any Subsidiary is a party or, to the knowledge of the Company and
the Subsidiaries, is threatened to be made a party, other than the CL
Litigation. Other than as set forth in Section 2.17(b) of the Disclosure
Schedule, none of the complaints, actions, suits, proceedings, hearings, and
investigations set forth in Section 2.17(b) of the Disclosure Schedule, if
determined adversely to the Company or any Subsidiary, could have a material
adverse effect on the assets, business, financial condition, results of
operations or future prospects of the Company and its Subsidiaries taken as a
whole.
2.18 Employees. Section 2.18 of the Disclosure Schedule contains a list
of all employees of the Company and each Subsidiary, along with the position and
the annual rate of compensation of each such person. Each such employee has
entered into a confidentiality/assignment of inventions agreement with the
Company or a Subsidiary, a copy of which has previously been delivered to the
Buyer. To the knowledge of the Company and its Subsidiaries, no key employee or
group of employees has any plans to terminate employment with the Company or any
Subsidiary. Neither the Company nor any Subsidiary is a party to or bound by any
collective bargaining agreement, nor has any of them experienced any strikes,
grievances, claims of unfair labor practices or other collective bargaining
disputes. The Company and the Subsidiaries have no knowledge of any
organizational effort made or threatened, either currently or within the past
two years, by or on behalf of any labor union with respect to employees of the
Company or any Subsidiary.
2.19 Employee Benefits.
(a) Section 2.19(a) of the Disclosure Schedule contains a complete and
accurate list of all Employee Benefit Plans (as defined below) maintained, or
contributed to, by the Company, any Subsidiary, or any ERISA Affiliate (as
defined below). For purposes of this Agreement, "Employee Benefit Plan" means
any "employee pension benefit plan" (as defined in Section 3(2) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA")), any "employee
welfare benefit plan" (as defined in Section 3(1) of ERISA), and any other
written or oral plan, agreement or arrangement involving direct or indirect
compensation, including without limitation insurance coverage, severance
benefits, disability benefits, deferred compensation, bonuses, stock options,
stock purchase, phantom stock, stock appreciation or other forms of incentive
compensation or post-retirement compensation. For purposes of this Agreement,
"ERISA Affiliate" means any entity which is a member of (i) a controlled group
of corporations (as defined in Section 414(b) of the Code), (ii) a group of
trades or businesses under common control (as defined in Section 414(c) of the
Code), or (iii) an affiliated service group (as defined under Section 414(m) of
the Code or the regulations under Section 414(o) of the Code), any of which
includes the Company or a Subsidiary. Complete and accurate copies of (i) all
Employee Benefit Plans which have been reduced to writing, (ii) written
summaries of all unwritten Employee Benefit Plans, (iii) all related trust
agreements, insurance contracts and summary plan descriptions, and (iv) all
annual reports filed on IRS Form 5500, 5500C or 5500R for the last five plan
years for each Employee Benefit Plan, have been delivered to the Buyer. Each
Employee Benefit Plan has been administered in accordance with its terms and
each of the Company, the Subsidiaries and the ERISA Affiliates has met its
obligations with respect to such Employee Benefit Plan and has made all required
contributions thereto. The Company and all Employee Benefit Plans are in
compliance with the currently applicable provisions of ERISA and the Code and
the regulations thereunder.
(b) There are no investigations by any Governmental Entity, termination
proceedings or other claims (except claims for benefits payable in the normal
operation of the Employee Benefit Plans and proceedings with respect to
qualified domestic relations orders), suits or proceedings against or involving
any Employee
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Benefit Plan or asserting any rights or claims to benefits under any Employee
Benefit Plan that could give rise to any liability.
(c) All the Employee Benefit Plans that are intended to be qualified under
Section 401(a) of the Code have received determination letters from the Internal
Revenue Service to the effect that such Employee Benefit Plans are qualified and
the plans and the trusts related thereto are exempt from federal income taxes
under Sections 401(a) and 501(a), respectively, of the Code, no such
determination letter has been revoked and revocation has not been threatened,
and no such Employee Benefit Plan has been amended since the date of its most
recent determination letter or application therefor in any respect, and no act
or omission has occurred, that would adversely affect its qualification or
increase its cost.
(d) Neither the Company, any Subsidiary, nor any ERISA Affiliate has ever
maintained an Employee Benefit Plan subject to Section 412 of the Code or Title
IV of ERISA.
(e) At no time has the Company, any Subsidiary or any ERISA Affiliate been
obligated to contribute to any "multi-employer plan" (as defined in Section
4001(a)(3) of ERISA).
(f) There are no unfunded obligations under any Employee Benefit Plan
providing benefits after termination of employment to any employee of the
Company or any Subsidiary (or to any beneficiary of any such employee),
including but not limited to retiree health coverage and deferred compensation,
but excluding continuation of health coverage required to be continued under
Section 4980B of the Code and insurance conversion privileges under state law.
(g) No act or omission has occurred and no condition exists with respect to
any Employee Benefit Plan maintained by the Company, any Subsidiary or any ERISA
Affiliate that would subject the Company, any Subsidiary or any ERISA Affiliate
to any fine, penalty, tax or liability of any kind imposed under ERISA or the
Code.
(h) No Employee Benefit Plan is funded by, associated with, or related to a
"voluntary employee's beneficiary association" within the meaning of Section
501(c)(9) of the Code.
(i) No Employee Benefit Plan, plan documentation or agreement, summary plan
description or other written communication distributed generally to employees by
its terms prohibits the Company from amending or terminating any such Employee
Benefit Plan.
(j) Section 2.19(j) of the Disclosure Schedule discloses each: (i)
agreement with any director, executive officer or other key employee of the
Company or any Subsidiary (A) the benefits of which are contingent, or the terms
of which are altered, upon the occurrence of a transaction involving the Company
or any Subsidiary of the nature of any of the transactions contemplated by this
Agreement, (B) providing any term of employment or compensation guarantee or (C)
providing severance benefits or other benefits after the termination of
employment of such director, executive officer or key employee; (ii) agreement,
plan or arrangement under which any person may receive payments from the Company
or any Subsidiary that may be subject to the tax imposed by Section 4999 of the
Code or included in the determination of such person's "parachute payment" under
Section 280G of the Code; and (iii) agreement or plan binding the Company or any
Subsidiary, including without limitation any stock option plan, stock
appreciation right plan, restricted stock plan, stock purchase plan, severance
benefit plan, or any Employee Benefit Plan, any of the benefits of which will be
increased, or the vesting of the benefits of which will be accelerated, by the
occurrence of any of the transactions contemplated by this Agreement or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement.
2.20 Environmental Matters.
(a) Each of the Company and the Subsidiaries has complied with all
applicable Environmental Laws (as defined below). There is no pending or, to the
knowledge of the Company and the Subsidiaries, threatened civil or criminal
litigation, written notice of violation, formal administrative proceeding, or
investigation, inquiry or information request by any Governmental Entity,
relating to any Environmental Law involving the Company or any Subsidiary. For
purposes of this Agreement, "Environmental Law" means any federal, state
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or local law, statute, rule or regulation or the common law relating to the
environment or occupational health and safety, including without limitation any
statute, regulation or order pertaining to (i) treatment, storage, disposal,
generation and transportation of industrial, toxic or hazardous substances or
solid or hazardous waste; (ii) air, water and noise pollution; (iii) groundwater
and soil contamination; (iv) the release or threatened release into the
environment of industrial, toxic or hazardous substances, or solid or hazardous
waste, including without limitation emissions, discharges, injections, spills,
escapes or dumping of pollutants, contaminants or chemicals; (v) the protection
of wild life, marine sanctuaries and wetlands, including without limitation all
endangered and threatened species; (vi) storage tanks, vessels and containers;
(vii) underground and other storage tanks or vessels, abandoned, disposed or
discarded barrels, containers and other closed receptacles; (viii) health and
safety of employees and other persons; and (ix) manufacture, processing, use,
distribution, treatment, storage, disposal, transportation or handling of
pollutants, contaminants, chemicals or industrial, toxic or hazardous substances
or oil or petroleum products or solid or hazardous waste. As used above, the
terms "release" and "environment" shall have the meaning set forth in the
federal Comprehensive Environmental Compensation, Liability and Response Act of
1980 ("CERCLA").
(b) There have been no releases of any Materials of Environmental Concern
(as defined below) into the environment at any parcel of real property or any
facility when owned, operated or controlled by the Company or a Subsidiary.
Neither the Company nor any Subsidiary is aware of any other releases of
Materials of Environmental Concern that could reasonably be expected to have an
impact on the real property or facilities owned, operated or controlled by the
Company or a Subsidiary. For purposes of this Agreement, "Materials of
Environmental Concern" means any chemicals, pollutants or contaminants,
hazardous substances (as such term is defined under CERCLA), solid wastes and
hazardous wastes (as such terms are defined under the federal Resources
Conservation and Recovery Act), toxic materials, oil or petroleum and petroleum
products, or any other material subject to regulation under any Environmental
Law.
(c) Set forth in Section 2.20(c) of the Disclosure Schedule is a list of
all environmental reports, investigations and audits relating to premises
currently or previously owned or operated by the Company or a Subsidiary
(whether conducted by or on behalf of the Company or a Subsidiary or a third
party, and whether done at the initiative of the Company or a Subsidiary or
directed by a Governmental Entity or other third party) which were issued or
conducted during the past five years and which the Company has possession of or
access to. Complete and accurate copies of each such report, or the results of
each such investigation or audit, have been provided to the Buyer.
2.21 Legal Compliance. Each of the Company and the Subsidiaries, and the
conduct and operations of their respective businesses, are in compliance with
each law (including rules and regulations thereunder) of any federal, state,
local or foreign government, or any Governmental Entity, which (a) affects or
relates to this Agreement or the transactions contemplated hereby or (b) is
applicable to the Company or such Subsidiary or business, except for any
violation of or default under a law referred to in clause (b) above which
reasonably may be expected not to have a material adverse effect on the assets,
business, financial condition, results of operations or future prospects of the
Company or such Subsidiary.
2.22 Permits. Section 2.22 of the Disclosure Schedule sets forth a list
of all permits, licenses, registrations, certificates, orders or approvals from
any Governmental Entity (including without limitation those issued or required
under applicable export laws or regulations) ("Permits") issued to or held by
the Company or any Subsidiary. Such listed Permits are the only Permits that are
required for the Company and the Subsidiaries to conduct their respective
businesses as presently conducted or as proposed to be conducted, except for
those the absence of which would not have any material adverse effect on the
assets, business, financial condition, results of operations or future prospects
of the Company and the Subsidiaries. Each such Permit is in full force and
effect and, to the best of the knowledge of the Company or any Subsidiary, no
suspension or cancellation of such Permit is threatened and there is no basis
for believing that such Permit will not be renewable upon expiration. Each such
Permit will continue in full force and effect following the Closing.
2.23 Certain Business Relationships With Affiliates. No Affiliate of the
Company or of any Subsidiary (a) owns any property or right, tangible or
intangible, which is used in the business of the Company or any
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Subsidiary, (b) has any claim or cause of action against the Company or any
Subsidiary, or (c) owes any money to the Company or any Subsidiary. Section 2.23
of the Disclosure Schedule describes any transactions or relationships between
the Company and any Affiliate thereof which are reflected in the statements of
operations of the Company included in the Financial Statements.
2.24 Brokers' Fees. Except as disclosed in Section 2.24 of the Disclosure
Schedule, neither the Company nor any Subsidiary has any liability or obligation
to pay any fees or commissions to any broker, finder or agent with respect to
the transactions contemplated by this Agreement.
2.25 Books and Records. The minute books and other similar records of the
Company and each Subsidiary contain true and complete records of all actions
taken at any meetings of the Company's or such Subsidiary's stockholders, Board
of Directors or any committee thereof and of all written consents executed in
lieu of the holding of any such meeting. The books and records of the Company
and each Subsidiary accurately reflect in all material respects the assets,
liabilities, business, financial condition and results of operations of the
Company or such Subsidiary and have been maintained in accordance with good
business and bookkeeping practices.
2.26 Pooling. To the best knowledge of the Company, neither the Company
nor any of its Affiliates has through the date of this Agreement taken or agreed
to take any action that would prevent the Company and the Buyer from accounting
for the business combination to be effected by the Merger as a "pooling of
interests" in conformity with GAAP.
2.27 Company Action. The Board of Directors of the Company, at a meeting
duly called and held, has by the unanimous vote of all directors (i) determined
that the Merger is fair and in the best interests of the Company and its
stockholders, (ii) adopted this Agreement in accordance with the provisions of
the Delaware General Corporation Law, and (iii) directed that this Agreement and
the Merger be submitted to the Company Stockholders for their adoption and
approval and resolved to recommend that Company Stockholders vote in favor of
the adoption of this Agreement and the approval of the Merger.
2.28 Disclosure. No representation or warranty by the Company contained
in this Agreement, and no statement contained in the Disclosure Schedule or any
other document, certificate or other instrument delivered to or to be delivered
by or on behalf of the Company pursuant to this Agreement, contains or will
contain any untrue statement of a material fact or omits or will omit to state
any material fact necessary, in light of the circumstances under which it was or
will be made, in order to make the statements herein or therein not misleading.
The Company has disclosed to the Buyer all material adverse information relating
to the business of the Company or any Subsidiary or the transactions
contemplated by this Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE BUYER
AND THE TRANSITORY SUBSIDIARY
Each of the Buyer and the Transitory Subsidiary represents and warrants to
the Company as follows:
3.1 Organization. Each of the Buyer and the Transitory Subsidiary is a
corporation duly organized, validly existing and in good standing under the laws
of the state of its incorporation.
3.2 Capitalization. The authorized capital stock of the Buyer consists of
30,000,000 shares of Buyer Common Stock, of which 13,550,680 shares were issued
and outstanding and 148 shares were held in the treasury of the Buyer as of
March 20, 1996. All of the issued and outstanding shares of Buyer Common Stock
are duly authorized, validly issued, fully paid, nonassessable and free of all
preemptive rights. All of the Merger Shares will be, when issued in accordance
with this Agreement, duly authorized, validly issued, fully paid, nonassessable
and free of all preemptive rights.
3.3 Authorization of Transaction. Each of the Buyer and the Transitory
Subsidiary has all corporate requisite power and authority to execute and
deliver this Agreement and (in the case of the Buyer) the Escrow Agreement and
to perform its obligations hereunder and thereunder. The execution and delivery
of this Agreement and (in the case of the Buyer) the Escrow Agreement by the
Buyer and the Transitory Subsidiary
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and the performance of this Agreement and (in the case of the Buyer) the Escrow
Agreement the consummation of the transactions contemplated hereby and thereby
by the Buyer and the Transitory Subsidiary have been duly and validly authorized
by all necessary corporate action on the part of the Buyer and Transitory
Subsidiary. This Agreement has been duly and validly executed and delivered by
the Buyer and the Transitory Subsidiary and, assuming the due authorization,
execution and delivery by the Company, constitutes a valid and binding
obligation of the Buyer and the Transitory Subsidiary, enforceable against them
in accordance with its terms, except as enforcement may be limited by
bankruptcy, insolvency or other similar laws affecting the enforcement of
creditors' rights generally, and except that the availability of equitable
remedies, including specific performance, is subject to the discretion of the
court before which any proceeding therefor may be brought, and except as
indemnification may be limited by public policy. .
3.4 Noncontravention. Subject to compliance with the applicable
requirements of the Securities Act and any applicable state securities laws, the
Exchange Act, the Hart-Scott-Rodino Act and the filing of the Certificate of
Merger as required by the Delaware General Corporation Law, neither the
execution and delivery of this Agreement or (in the case of the Buyer) the
Escrow Agreement by the Buyer or the Transitory Subsidiary, nor the consummation
by the Buyer or the Transitory Subsidiary of the transactions contemplated
hereby or thereby, will (a) conflict or violate any provision of the charter or
By-laws of the Buyer or the Transitory Subsidiary, (b) require on the part of
the Buyer or the Transitory Subsidiary any filing with, or permit,
authorization, consent or approval of, any Governmental Entity, (c) conflict
with, result in breach of, constitute (with or without due notice or lapse of
time or both) a default under, result in the acceleration of, create in any
party any right to accelerate, terminate, modify or cancel, or require any
notice, consent or waiver under, any contract, lease, sublease, license,
sublicense, franchise, permit, indenture, agreement or mortgage for borrowed
money, instrument of indebtedness, Security Interest or other arrangement to
which the Buyer or Transitory Subsidiary is a party or by which either is bound
or to which any of their assets are subject, or (d) violate any order, writ,
injunction, decree, statute, rule or regulation applicable to the Buyer or the
Transitory Subsidiary or any of their properties or assets.
3.5 Reports and Financial Statements. The Buyer has previously furnished
to the Company complete and accurate copies, as amended or supplemented, of its
(a) Annual Report on Form 10-K for the fiscal year ended December 31, 1995, as
filed with the Securities and Exchange Commission (the "SEC"), and (b) all other
reports filed by the Buyer under Section 13 of the Exchange Act with the SEC
since December 31, 1995 (such reports are collectively referred to herein as the
"Buyer Reports"). The Buyer Reports constitute all of the documents required to
be filed by the Buyer under Section 13 of the Exchange Act with the SEC since
December 31, 1995. As of their respective dates, the Buyer Reports did not
contain any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading. The
audited financial statements and unaudited interim financial statements of the
Buyer included in the Buyer Reports (i) comply as to form in all material
respects with applicable accounting requirements and the published rules and
regulations of the SEC with respect thereto, (ii) have been prepared in
accordance with GAAP applied on a consistent basis throughout the periods
covered thereby (except as may be indicated therein or in the notes thereto, and
in the case of quarterly financial statements, as permitted by Form 10-Q under
the Exchange Act), (iii) fairly present the consolidated financial condition,
results of operations and cash flows of the Buyer as of the respective dates
thereof and for the periods referred to therein, and (iv) are consistent with
the books and records of the Buyer.
3.6 Absence of Material Adverse Changes. Since December 31, 1995, there
has not been any material adverse change in the assets, business, financial
condition or results of operations of the Buyer, nor has there occurred any
event or development which could reasonably be foreseen to result in such a
material adverse change in the future.
3.7 Pooling. To the best knowledge of the Buyer, neither the Buyer nor
any of its Affiliates has through the date of this Agreement taken or agreed to
take any action that would prevent the Company and the Buyer from accounting for
the business combination to be effected by the Merger as a "pooling of
interests" in conformity with GAAP.
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3.8 Brokers' Fees. Neither the Buyer nor the Transitory Subsidiary has
any liability or obligation to pay any fees or commissions to any broker, finder
or agent with respect to the transactions contemplated by this Agreement except
to Robertson, Stephens & Company LLC and Alex. Brown & Sons Incorporated.
3.9 Disclosure. No representation or warranty by the Buyer contained in
this Agreement, and no statement contained in any document, certificate or other
instrument delivered to or to be delivered by or on behalf of the Buyer pursuant
to this Agreement, contains or will contain any untrue statement of a material
fact or omits or will omit to state any material fact necessary, in light of the
circumstances under which it was or will be made, in order to make the
statements herein or therein not misleading.
3.10 Opinion of Financial Advisor. The Buyer has received an opinion of
Robertson, Stephens & Company LLC, the financial advisor to the Buyer, to the
effect that the consideration payable in the Merger is fair, from a financial
point of view, to the stockholders of the Buyer.
ARTICLE IV
COVENANTS
4.1 Best Efforts. Each of the Parties shall use its best efforts, to the
extent commercially reasonable, to take all actions and to do all things
necessary, proper or advisable to consummate the transactions contemplated by
this Agreement; provided, however, that notwithstanding anything in this
Agreement to the contrary, the Buyer shall not be required to sell or dispose of
or hold separately (through a trust or otherwise) any assets or businesses of
the Buyer or its Affiliates.
4.2 Notices and Consents. Each of the Buyer, the Transitory Subsidiary
and the Company shall use its respective best efforts to obtain, at its expense,
all such waivers, permits, consents, approvals or other authorizations from
third parties and Governmental Entities, and to effect all such registrations,
filings and notices with or to third parties and Governmental Entities, as may
be required by or with respect to the Buyer, the Transitory Subsidiary or the
Company, respectively, in connection with the transactions contemplated by this
Agreement (including without limitation, with respect to the Company, those
listed in Section 2.4 or Section 2.22 of the Disclosure Schedule).
4.3 Special Meetings, Prospectus/Proxy Statement and Registration
Statement.
(a) The Buyer and the Company shall jointly prepare, and the Buyer shall
file with the SEC under the Exchange Act, preliminary proxy materials for the
purpose of soliciting proxies from (i) Company Stockholders to vote in favor of
the adoption of this Agreement (including without limitation the matters
referred to in Section 1.10 and Article VI) and the approval of the Merger at a
special meeting of Company Stockholders to be called and held for such purpose
(the "Company Special Meeting") and (ii) holders of Buyer Common Stock to vote
in favor of the issuance of Merger Shares to Company Stockholders in the Merger
at a special meeting of Buyer stockholders to be called and held for such
purpose (the "Buyer Special Meeting"). Such proxy materials shall be in the form
of a joint proxy statement/prospectus to be used for the purpose of offering the
Merger Shares to Company Stockholders and soliciting such proxies from Company
Stockholders and Buyer stockholders (such joint proxy statement/prospectus,
together with any accompanying letters to stockholders, notices of meeting and
forms of proxy, shall be referred to herein as the "Prospectus/Proxy
Statement"). The Buyer, with the assistance of the Company, shall promptly
respond to any SEC comments on the Prospectus/Proxy Statement and shall
otherwise use its best efforts to resolve as promptly as practicable all SEC
comments to the satisfaction of the SEC.
(b) Promptly following the resolution to the satisfaction of the SEC of all
SEC comments on the Prospectus/Proxy Statement (or the expiration of the ten-day
period under Rule 14a-6(a) under the Exchange Act, if no SEC comments are
received by such date), each of the Company and the Buyer shall distribute the
Prospectus/Proxy Statement to its respective stockholders and, pursuant thereto,
shall respectively call the Company Special Meeting and Buyer Special Meeting in
accordance with the Delaware General Corporation Law and shall solicit proxies
from its respective stockholders to vote in favor of the
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adoption of this Agreement and the approval of the Merger at the Company Special
Meeting and to vote in favor of the issuance of the Merger Shares at the Buyer
Special Meeting.
(c) Promptly following the resolution to the satisfaction of the SEC of all
SEC comments on the Prospectus/Proxy Statement (or the expiration of the ten-day
period under Rule 14a-6(a) under the Exchange Act, if no SEC comments are
received by such date), the Buyer shall file with the SEC under the Securities
Act a Registration Statement on Form S-4 (the "Registration Statement"), which
shall include the Prospectus/Proxy Statement as a part thereof. The Buyer, with
the assistance of the Company, shall promptly respond to any SEC comments on the
Registration Statement and shall otherwise use its best efforts to cause the
Registration Statement to be declared effective as promptly as practicable. The
Buyer shall also take any and all such actions as may be necessary or as it may
deem advisable for the purpose of complying with all applicable state securities
laws in connection with the offering and issuance of the Merger Shares.
(d) The Company shall comply with all applicable provisions of the Delaware
General Corporation Law in the preparation, filing and distribution of the
Prospectus/Proxy Statement, the solicitation of proxies thereunder, and the
calling and holding of the Company Special Meeting. Without limiting the
foregoing, the Company shall ensure that the Prospectus/Proxy Statement does
not, as of the date on which it is distributed to Company Stockholders, and as
of the date of the Company Special Meeting, contain any untrue statement of a
material fact or omit to state a material fact necessary in order to make the
statements made, in light of the circumstances under which they were made, not
misleading (provided that the Company shall only be responsible for the accuracy
and completeness of information relating to the Company or furnished by the
Company in writing for inclusion in the Prospectus/Proxy Statement).
(e) The Buyer shall comply with all applicable provisions of and rules
under the Securities Act and the Exchange Act and state securities laws in the
preparation and filing of the Registration Statement, the offering and issuance
of the Merger Shares, the filing and distribution of the Prospectus/Proxy
Statement, the solicitation of proxies thereunder, and the calling and holding
of the Buyer Special Meeting. Without limiting the foregoing, the Buyer shall
ensure that (i) the Registration Statement does not, as of its effective date,
contain an untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading and (ii) the Prospectus/Proxy Statement does not, as of the date on
which it is distributed to stockholders of the Buyer, and as of the date of the
Buyer Special Meeting, contain any untrue statement of a material fact, or omit
to state a material fact necessary in order to make the statements made, in
light of the circumstances under which they were made, not misleading (provided
that the Buyer shall not be responsible for the accuracy and completeness of
information relating to the Company or any other information furnished by the
Company in writing for inclusion in the Registration Statement or the
Prospectus/Proxy Statement).
(f) The Company, acting through its Board of Directors, shall include in
the Prospectus/Proxy Statement the recommendation of its Board of Directors that
the Company Stockholders vote in favor of the adoption of this Agreement and the
approval of the Merger, and shall otherwise use its best efforts to obtain the
Requisite Stockholder Approval. The Buyer, acting through its Board of
Directors, shall include in the Prospectus/Proxy Statement the recommendation of
its Board of Directors that the stockholders of the Buyer vote in favor of the
issuance of the Merger Shares, and shall otherwise use its best efforts to
obtain such approval.
4.4 Hart-Scott-Rodino Act. Each of the Parties shall promptly file any
Notification and Report Forms and related material that it may be required to
file with the Federal Trade Commission and the Antitrust Division of the United
States Department of Justice under the Hart-Scott-Rodino Act, shall use its best
efforts to obtain an early termination of the applicable waiting period, and
shall make any further filings or information submissions pursuant thereto that
may be necessary, proper or advisable.
4.5 Operation of Business. Except as contemplated by this Agreement,
during the period from the date of this Agreement to the Effective Time, the
Company shall (and shall cause each Subsidiary to) conduct its operations in the
Ordinary Course of Business and in compliance with all applicable laws and
regulations and, to the extent consistent therewith, use all reasonable efforts
to preserve intact its current business organization, keep its physical assets
in good working condition, keep available the services of its
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current officers and employees and preserve its relationships with customers,
suppliers and others having business dealings with it to the end that its
goodwill and ongoing business shall not be impaired in any material respect.
Without limiting the generality of the foregoing, prior to the Effective Time,
neither the Company nor any Subsidiary shall, without the written consent of the
Buyer:
(a) issue, sell, deliver or agree or commit to issue, sell or deliver
(whether through the issuance or granting of options, warrants,
commitments, subscriptions, rights to purchase or otherwise) or authorize
the issuance, sale or delivery of, or redeem or repurchase, any stock of
any class or any other securities or any rights, warrants or options to
acquire any such stock or other securities (except pursuant to the
conversion or exercise of convertible securities, Options or Warrants
outstanding on the date hereof), or amend any of the terms of any such
convertible securities, Options or Warrants;
(b) split, combine or reclassify any shares of its capital stock;
declare, set aside or pay any dividend or other distribution (whether in
cash, stock or property or any combination thereof) in respect of its
capital stock;
(c) create, incur or assume any debt not currently outstanding
(including obligations in respect of capital leases); assume, guarantee,
endorse or otherwise become liable or responsible (whether directly,
contingently or otherwise) for the obligations of any other person or
entity; or make any loans, advances or capital contributions to, or
investments in, any other person or entity, except in the Ordinary Course
of Business;
(d) enter into, adopt or amend any Employee Benefit Plan or any
employment or severance agreement or arrangement of the type described in
Section 2.19(j) or (except for normal increases in the Ordinary Course of
Business) increase in any manner the compensation or fringe benefits of, or
materially modify the employment terms of, its directors, officers or
employees, generally or individually, or pay any benefit not required by
the terms in effect on the date hereof of any existing Employee Benefit
Plan;
(e) acquire, sell, lease, encumber or dispose of any assets or
property (including without limitation any shares or other equity interests
in or securities of any Subsidiary or any corporation, partnership,
association or other business organization or division thereof), other than
purchases and sales of assets in the Ordinary Course of Business;
(f) amend its charter or By-laws;
(g) change in any material respect its accounting methods, principles
or practices, except insofar as may be required by a generally applicable
change in GAAP;
(h) discharge or satisfy any Security Interest or pay any obligation
or liability other than in the Ordinary Course of Business;
(i) mortgage or pledge any of its property or assets or subject any
such assets to any Security Interest;
(j) sell, assign, transfer or license any Intellectual Property, other
than in the Ordinary Course of Business;
(k) enter into, amend, terminate, take or omit to take any action that
would constitute a violation of or default under, or waive any rights
under, any material contract or agreement;
(l) make or commit to make any capital expenditure in excess of
$50,000 per item;
(m) take any action or fail to take any action permitted by this
Agreement with the knowledge that such action or failure to take action
would result in (i) any of the representations and warranties of the
Company set forth in this Agreement becoming untrue or (ii) any of the
conditions to the Merger set forth in Article V not being satisfied;
(n) take any action that would jeopardize the treatment of the Merger
as a "pooling of interests" for accounting purposes; or
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(o) agree in writing or otherwise to take any of the foregoing
actions.
4.6 Full Access. The Company shall (and shall cause each Subsidiary to)
permit representatives of the Buyer to have full access (at all reasonable
times, and in a manner so as not to interfere with the normal business
operations of the Company and the Subsidiaries) to all premises, properties,
financial and accounting records, contracts, other records and documents, and
personnel, of or pertaining to the Company and each Subsidiary, subject to
compliance with applicable confidentiality obligations of the Company.
4.7 Notice of Breaches. The Company shall promptly deliver to the Buyer
written notice of any event or development that would (a) render any statement,
representation or warranty of the Company in this Agreement (including the
Disclosure Schedule) inaccurate or incomplete in any material respect, or (b)
constitute or result in a breach by the Company of, or a failure by the Company
to comply with, any agreement or covenant in this Agreement applicable to such
party. The Buyer or the Transitory Subsidiary shall promptly deliver to the
Company written notice of any event or development that would (i) render any
statement, representation or warranty of the Buyer or the Transitory Subsidiary
in this Agreement inaccurate or incomplete in any material respect, or (ii)
constitute or result in a breach by the Buyer or the Transitory Subsidiary of,
or a failure by the Buyer or the Transitory Subsidiary to comply with, any
agreement or covenant in this Agreement applicable to such party. No such
disclosure shall be deemed to avoid or cure any such misrepresentation or
breach.
4.8 Exclusivity. The Company shall not, and the Company shall use its
best efforts to cause its Affiliates and each of its officers, directors,
employees, representatives and agents not to, directly or indirectly, (a)
solicit, initiate, engage or participate in or knowingly encourage discussions
or negotiations with any person or entity (other than the Buyer) concerning any
merger, consolidation, sale of material assets, tender
offer, recapitalization, accumulation of Company Shares, proxy solicitation or
other business combination involving the Company, any Subsidiary or any division
of the Company or any Subsidiary or (b) provide any non-public information
concerning the business, properties or assets of the Company or any Subsidiary
to any person or entity (other than the Buyer). The Company shall immediately
notify the Buyer of, and shall disclose to the Buyer all details of, any
inquiries, discussions or negotiations of the nature described in the first
sentence of this Section 4.8.
4.9 Agreements From Certain Affiliates of the Company. Concurrently with
the execution of this Agreement, the Company shall deliver to the Buyer a list
of all persons or entities who are at such time Affiliates of the Company (the
"Company Affiliates"). In order to help ensure that the Merger will be accounted
for as a "pooling of interests", that the issuance of Merger Shares will comply
with the Securities Act and that the Merger will be treated as a tax-free
reorganization, the Company shall cause each Company Affiliate to execute and
deliver to the Buyer, prior to the distribution of the Prospectus/Proxy
Statement in accordance with Section 4.3(b), a written agreement substantially
in the form attached hereto as Exhibit C (the "Affiliate Agreement").
4.10 Listing of Merger Shares.
The Buyer shall use its best efforts to list the Merger Shares on the
Nasdaq National Market and shall use its best efforts to cause such listing to
be approved prior to the Effective Time.
ARTICLE V
CONDITIONS TO CONSUMMATION OF MERGER
5.1 Conditions to Each Party's Obligations. The respective obligations of
each Party to consummate the Merger are subject to the satisfaction of the
following conditions:
(a) (i) this Agreement and the Merger shall have received the
Requisite Stockholder Approval by the Company Stockholders and (ii) the
issuance of the Merger Shares shall have received the approval of the
stockholders of the Buyer;
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(b) all applicable waiting periods (and any extensions thereof) under
the Hart-Scott-Rodino Act shall have expired or otherwise been terminated;
(c) the Registration Statement shall have become effective in
accordance with the provisions of the Securities Act, and no stop order
suspending the effectiveness of the Registration Statement shall have been
issued by the SEC and remain in effect;
(d) no temporary restraining order, preliminary or permanent
injunction or other order issued by any court of competent jurisdiction or
other legal or regulatory restraint or prohibition preventing the
consummation of the Merger or limiting or restricting the Buyer's conduct
or operation of the business of the Buyer or the Surviving Corporation
after the Merger shall have been issued, nor shall any proceeding brought
by any Governmental Entity, seeking any of the foregoing be pending; nor
shall there be any action taken, or any statute, rule, regulation or order
enacted, entered, enforced or deemed applicable to the Merger which makes
the consummation of the Merger illegal;
(e) the Buyer shall have received all permits and other authorizations
required under applicable state securities laws for the issuance of the
Merger Shares;
(f) the Buyer and the Company shall each have received the written
opinion of their respective counsel to the effect that the Merger will be
treated for federal income tax purposes as a reorganization within the
meaning of Section 368(a) of the Code (in rendering such opinions counsel
may rely upon representations and certificates of the Buyer, the Transitory
Subsidiary and the Company); and
(g) the Merger Shares shall have been authorized for listing on the
Nasdaq National Market upon official notice of issuance.
5.2 Conditions to Obligations of the Buyer and the Transitory
Subsidiary. The obligation of each of the Buyer and the Transitory Subsidiary
to consummate the Merger is subject to the satisfaction of the following
additional conditions:
(a) the number of Dissenting Shares shall not exceed 5% of the number
of outstanding Company Shares as of the Effective Time;
(b) the Company and the Subsidiaries shall have obtained all of the
waivers, permits, consents, approvals or other authorizations, and effected
all of the registrations, filings and notices, referred to in Section 4.2,
except for any which if not obtained or effected would not have a material
adverse effect on the assets, business, financial condition, results of
operations or future prospects of the Company or any Subsidiary or on the
ability of the Parties to consummate the transactions contemplated by this
Agreement;
(c) the representations and warranties of the Company set forth in
Article II shall be true and correct when made on the date hereof and shall
be true and correct in all material respects as of the Effective Time as if
made as of the Effective Time, except for representations and warranties
made as of a specific date, which shall be true and correct as of such
date;
(d) the Company shall have performed or complied with in all material
respects its agreements and covenants required to be performed or complied
with under this Agreement as of or prior to the Effective Time;
(e) the Company shall have delivered to the Buyer and the Transitory
Subsidiary a certificate (without qualification as to knowledge or
materiality or otherwise) to the effect that each of the conditions
specified in clauses (a)(i), (b) and (d)(to the extent the Company is a
party or is named therein) of Section 5.1 and clauses (a) through (d) of
this Section 5.2 is satisfied in all respects;
(f) the Buyer and the Transitory Subsidiary shall have received from
Fenwick & West, counsel to the Company, an opinion in the form set forth as
Exhibit D attached hereto, addressed to the Buyer and the Transitory
Subsidiary and dated as of the Closing Date;
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(g) the Buyer shall have received a "cold comfort" letter dated as of
a date not more than two days prior to the date that the Registration
Statement is declared effective and shall have received a subsequent
similar letter dated as of a date not more than two days prior to the
Effective Time, from Ernst & Young LLP, auditors for the Company, addressed
to the Buyer in a customary form reasonably satisfactory to the Buyer;
(h) the Buyer shall have received a letter from each of Ernst & Young
LLP and Deloitte & Touche, L.L.P., auditors for the Company and the Buyer,
respectively, in a form reasonably satisfactory to the Buyer, to the effect
that the Company and, in the case of the letter from Deloitte & Touche,
L.L.P., the Buyer may treat the Merger as a "pooling of interests" for
accounting purposes;
(i) the Buyer and the Transitory Subsidiary shall have received the
resignations, effective as of the Effective Time, of each director of the
Company and the Subsidiaries;
(j) D. James Bidzos is available for continued employment pursuant to
the employment agreement of even date herewith and the Buyer shall have
received executed employment and non-competition agreements from each of
the individuals set forth in Section 5.2(j) of the Disclosure Schedule in
substantially the form of Exhibit E attached hereto (subject to the
parties' mutual agreement as to salary and option levels);
(k) the Buyer, the Company, the Escrow Agent and the Indemnification
Representatives shall have entered into the Escrow Agreement; and
(l) all actions to be taken by the Company in connection with the
consummation of the transactions contemplated hereby and all certificates,
opinions, instruments and other documents required to effect the
transactions contemplated hereby shall be reasonably satisfactory in form
and substance to the Buyer and the Transitory Subsidiary.
5.3 Conditions to Obligations of the Company. The obligation of the
Company to consummate the Merger is subject to the satisfaction of the following
additional conditions:
(a) the representations and warranties of the Buyer and the Transitory
Subsidiary set forth in Article III shall be true and correct when made on
the date hereof and shall be true and correct in all material respects as
of the Effective Time as if made as of the Effective Time, except for
representations and warranties made as of a specific date, which shall be
true and correct as of such date;
(b) each of the Buyer and the Transitory Subsidiary shall have
performed or complied with in all material respects its agreements and
covenants required to be performed or complied with under this Agreement as
of or prior to the Effective Time;
(c) each of the Buyer and the Transitory Subsidiary shall have
delivered to the Company a certificate (without qualification as to
knowledge or materiality or otherwise) to the effect that each of the
conditions specified in clauses (a)(ii), (b), (c), (d) (to the extent the
Buyer or Transitory Subsidiary is a party or is named therein) and (g) of
Section 5.1 and clauses (a) and (b) of this Section 5.3 is satisfied in all
respects;
(d) the Company Stockholders shall have received from Hale and Dorr,
counsel to the Buyer and the Transitory Subsidiary, an opinion in the form
set forth as Exhibit F attached hereto, addressed to the Company and dated
as of the Closing Date; and
(e) all actions to be taken by the Buyer and the Transitory Subsidiary
in connection with the consummation of the transactions contemplated hereby
and all certificates, opinions, instruments and other documents required to
effect the transactions contemplated hereby shall be reasonably
satisfactory in form and substance to the Company.
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ARTICLE VI
INDEMNIFICATION
6.1 Indemnification. The Company Stockholders and holders of Options
shall indemnify the Surviving Corporation and the Buyer (the "Indemnified
Persons") in respect of, and hold the Indemnified Persons harmless against, any
and all debts, obligations and other liabilities (whether absolute, accrued,
contingent, fixed or otherwise, or whether known or unknown, or due or to become
due or otherwise), monetary damages, fines, fees, penalties, interest
obligations, deficiencies, losses and expenses (including without limitation
amounts paid in settlement, interest, court costs, costs of investigators, fees
and expenses of attorneys, accountants, financial advisors and other experts,
and other expenses of litigation) incurred or suffered by the Indemnified
Persons or any Affiliate thereof ("Damages"):
(a) resulting from, relating to or constituting any misrepresentation,
breach of warranty or failure to perform any covenant or agreement of the
Company contained in this Agreement or in the Certificate delivered
pursuant to Section 5.2(e);
(b) resulting from, relating to or arising out of the subject matter
of, or the suits, proceedings or actions set forth in, Section 6.1(b) of
the Disclosure Schedule, (the "CL Litigation"), including attorneys' fees,
amounts paid to investigate, defend or settle such claims and any awards of
damages, costs or penalties related thereto; or
(c) resulting from any claim by a stockholder or former stockholder of
the Company, or any other person, firm, corporation or entity, seeking to
assert, or based upon: (i) ownership or rights to ownership of any shares
of stock of the Company; (ii) any rights of a stockholder (other than the
right to receive the Merger Shares pursuant to this Agreement or appraisal
rights under the applicable provisions of the Delaware General Corporation
Law), including any option, preemptive rights or rights to notice or to
vote; (iii) any rights under the Certificate of Incorporation or By-laws of
the Company; or (iv) any claim that his, her or its shares were wrongfully
repurchased by the Company.
6.2 Method of Asserting Claims.
(a) All claims for indemnification by an Indemnified Person pursuant to
this Article VI shall be made in accordance with the provisions of the Escrow
Agreement.
(b) If a third party asserts that an Indemnified Person is liable to such
third party for a monetary or other obligation which may constitute or result in
Damages for which such Indemnified Person may be entitled to indemnification
pursuant to Section 6.1(a) or 6.1(c), and such Indemnified Person reasonably
determines that it has a valid business reason to fulfill such obligation, then
(i) such Indemnified Person shall be entitled to satisfy such obligation,
without prior notice to or consent from the Indemnification Representatives,
(ii) such Indemnified Person may make a claim for indemnification pursuant to
this Article VI in accordance with the provisions of the Escrow Agreement, and
(iii) such Indemnified Person shall be reimbursed, in accordance with the
provisions of the Escrow Agreement, for any such Damages for which it is
entitled to indemnification pursuant to this Article VI (subject to the right of
the Indemnification Representatives to dispute the Indemnified Person's
entitlement to indemnification under the terms of this Article VI).
(c) The Indemnified Person shall give prompt written notification to the
Indemnification Representatives of the commencement of any action, suit or
proceeding relating to a third party claim for which indemnification pursuant to
Section 6.1(a) or 6.1(c) may be sought; provided, however, that no delay on the
part of the Indemnified Person in notifying the Indemnification Representatives
shall relieve the Company Stockholders and holders of Options of any liability
or obligation hereunder except to the extent of any damage or liability caused
by or arising out of such failure. Within 20 days after delivery of such
notification, the Indemnification Representatives may, upon written notice
thereof to the Indemnified Person, assume control of the defense of such action,
suit or proceeding with counsel reasonably satisfactory to the Indemnified
Person, provided the Indemnification Representatives acknowledge in writing to
the Indemnified Person that any damages, fines, costs or other liabilities that
may be assessed against the Indemnified Person
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in connection with such action, suit or proceeding constitute Damages for which
the Indemnified Person shall be entitled to indemnification pursuant to this
Article VI. If the Indemnification Representatives do not so assume control of
such defense, the Indemnified Person shall control such defense. The party not
controlling such defense may participate therein at its own expense; provided
that if the Indemnification Representatives assume control of such defense and
the Indemnified Person reasonably concludes that the indemnifying parties and
the Indemnified Person have conflicting interests or different defenses
available with respect to such action, suit or proceeding, the reasonable fees
and expenses of counsel to the Indemnified Person shall be considered "Damages"
for purposes of this Agreement. The party controlling such defense shall keep
the other party advised of the status of such action, suit or proceeding and the
defense thereof and shall consider in good faith recommendations made by the
other party with respect thereto. The Indemnified Person shall not agree to any
settlement of such action, suit or proceeding without the prior written consent
of the Indemnification Representatives, which shall not be unreasonably
withheld. The Indemnification Representatives shall not agree to any settlement
of such action, suit or proceeding without the prior written consent of the
Indemnified Person, which shall not be unreasonably withheld.
(d) Upon the Closing Date, the Indemnification Representatives shall assume
the control and defense of the CL Litigation with counsel reasonably
satisfactory to the Buyer. The Buyer may participate in such defense at its own
expense. The Indemnification Representatives shall keep the Buyer advised of the
status of the CL Litigation and shall consider in good faith the recommendations
made by the Buyer with respect thereto. The Indemnification Representatives
shall not agree to any settlement of all or any portion of the CL Litigation
without the prior written consent of the Buyer, which shall not be unreasonably
withheld. Notwithstanding the foregoing:
(i) With respect to any portion of the CL Litigation in which any
third party seeks an injunction that, if granted, would prohibit or
substantially impair the ability of the Company to conduct its business (or
any substantial portion thereof) as presently conducted or as presently
proposed to be conducted, the Buyer at its option may assume control and
defense of any such portion;
(ii) At any time when the aggregate ad damnum (together with costs or
other amounts sought) in the CL Litigation exceeds the amounts then
remaining in escrow under the Escrow Agreement that would be available to
satisfy the indemnification obligations in Section 6.1(b), the Buyer at its
option may assume control and defense of the CL Litigation jointly with the
Indemnification Representatives at which point counsel chosen by the Buyer
shall become co-counsel of record and be entitled to participate in all
matters equally with counsel chosen by the Indemnification Representatives;
and
(iii) With respect to all or any portion of the CL Litigation, at any
time the Buyer may elect to assume control and defense thereof by releasing
the Company Stockholders from any further indemnification obligations under
Section 6.1(b) with respect to such portions as to which the Buyer has
elected to assume control and defend (other than payment of amounts
incurred prior to such time by or on behalf of the Indemnification
Representatives in investigation or defending such matters).
The Indemnification Representatives shall be entitled to seek reimbursement of
costs incurred by them associated with the control and defense (whether sole or
joint) of the CL Litigation pursuant to Section 13 of the Escrow Agreement. The
Buyer shall bear the costs incurred by it associated with the participation in,
or control and defense (whether sole or joint) of the CL Litigation.
6.3 Survival. (a) The representations and warranties of the Company set
forth in this Agreement and the indemnification obligations set forth in
Sections 6.1(a) and 6.1(c) hereof shall survive the Closing and the consummation
of the transactions contemplated hereby and continue until the earlier of (i)
the first anniversary of the Closing Date or (ii) the issuance of the Buyer's
audited financial statements for the year ending December 31, 1996 and shall not
be affected by any examination made for or on behalf of the Buyer or the
knowledge of any of the Buyer's officers, directors, stockholders, employees or
agents. If a notice is given in accordance with the Escrow Agreement before
expiration of such period, then (notwithstanding the expiration of such time
period) the representation or warranty applicable to such claim and the related
indemnification obligation in Section 6.1(a) and (c) shall survive until, but
only for purposes of, the resolution of such claim.
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(b) The indemnification obligations set forth in Section 6.1(b) hereof
shall survive the Closing and continue until the CL Litigation is fully resolved
(except to the extent such indemnification obligations are specifically released
pursuant to Section 6.2(d)(iii)).
6.4 Limitations. Notwithstanding anything to the contrary herein, (a) the
aggregate liability of the Company Stockholders for Damages under this Article
VI shall not exceed the fair market value of the Escrow Shares, as determined in
accordance with the Escrow Agreement, and shall be satisfied only from the
Escrow Shares, (b) the aggregate liability of the Company Stockholders for
Damages pursuant to Section 6.1(a) and (c) shall be subject to the limitations
set forth in Section 4(c) of the Escrow Agreement, (c) the aggregate liability
of the Company Stockholders for Damages pursuant to Section 6.1(b) shall be
subject to the limitation set forth in Section 4(c) of the Escrow Agreement, and
(d) the Company Stockholders shall be liable under Sections 6.1(a) and 6.1(c)
for only that portion of the aggregate Damages which exceeds $500,000. Except
with respect to claims based on actual (but not constructive) fraud, the rights
of the Indemnified Persons under this Article VI shall be the exclusive remedy
of the Indemnified Persons with respect to claims resulting from or relating to
any misrepresentation, breach of warranty or failure to perform any covenant or
agreement of the Company contained in this Agreement. With respect to claims
based on fraud (but not for any other purpose), to the extent the Company has
delivered to the Buyer an updated Disclosure Schedule, such updated Disclosure
Schedule shall be deemed to have been delivered as of the date of this
Agreement. No Company Stockholder shall have any right of contribution against
the Company with respect to any breach by the Company of any of its
representations, warranties, covenants or agreements.
ARTICLE VII
TERMINATION
7.1 Termination of Agreement. The Parties may terminate this Agreement
prior to the Effective Time (whether before or after Requisite Stockholder
Approval) as provided below:
(a) the Parties may terminate this Agreement by mutual written
consent;
(b) the Buyer may terminate this Agreement by giving written notice to
the Company in the event the Company is in breach, and the Company may
terminate this Agreement by giving written notice to the Buyer and the
Transitory Subsidiary in the event the Buyer or the Transitory Subsidiary
is in breach, of any material representation, warranty or covenant
contained in this Agreement, and such breach is not remedied within 10 days
of delivery of written notice thereof;
(c) any Party may terminate this Agreement by giving written notice to
the other Parties at any time after the Company Stockholders have voted on
whether to approve this Agreement and the Merger in the event this
Agreement and the Merger failed to receive the Requisite Stockholder
Approval or after the Buyer stockholders have voted on whether to approve
the issuance of the Merger Shares and such issuance shall not have been
approved;
(d) the Buyer may terminate this Agreement by giving written notice to
the Company if the Closing shall not have occurred on or before August 31,
1996 by reason of the failure of any condition precedent under Section 5.1
or 5.2 hereof (unless the failure results primarily from a breach by the
Buyer or the Transitory Subsidiary of any representation, warranty or
covenant contained in this Agreement);
(e) the Company may terminate this Agreement by giving written notice
to the Buyer and the Transitory Subsidiary if the Closing shall not have
occurred on or before August 31, 1996 by reason of the failure of any
condition precedent under Section 5.1 or 5.3 hereof (unless the failure
results primarily from a breach by the Company of any representation,
warranty or covenant contained in this Agreement); or
7.2 Effect of Termination. If any Party terminates this Agreement
pursuant to Section 7.1, all obligations of the Parties hereunder shall
terminate without any liability of any Party to any other Party (except for any
liability of any Party for breaches of this Agreement).
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ARTICLE VIII
DEFINITIONS
For purposes of this Agreement, each of the following defined terms is
defined in the Section of this Agreement indicated below.
<TABLE>
<CAPTION>
DEFINED TERM SECTION
---------------------------------------------------------------------- -------------
<S> <C>
Affiliate............................................................. 2.14(f)
Affiliate Agreement................................................... 4.9
Buyer................................................................. Introduction
Buyer Common Stock.................................................... 1.5(a)
Buyer Reports......................................................... 3.5
Buyer Special Meeting................................................. 4.3(a)
CERCLA................................................................ 2.20(a)
Certificate of Merger................................................. 1.1
Certificates.......................................................... 1.7(a)
CL Litigation......................................................... 6.1(b)
Closing............................................................... 1.2
Closing Date.......................................................... 1.2
Code.................................................................. 1.11(a)
Company............................................................... Introduction
Company Affiliate..................................................... 4.9
Company Common Stock.................................................. 1.5(a)
Company Preferred Shares.............................................. 1.5(a)
Company Shares........................................................ 1.5(a)
Company Special Meeting............................................... 4.3(a)
Company Stockholder................................................... 1.5(a)
Conversion Ratio...................................................... 1.5(a)
Damages............................................................... 6.1
Disclosure Schedule................................................... Article II
Dissenting Shares..................................................... 1.6(a)
Effective Time........................................................ 1.1
Employee Benefit Plan................................................. 2.19(a)
Environmental Law..................................................... 2.20(a)
ERISA................................................................. 2.19(a)
ERISA Affiliate....................................................... 2.19(a)
Escrow Agreement...................................................... 1.3
Escrow Shares......................................................... 1.5(a)
Exchange Act.......................................................... 2.14(f)
Exchange Agent........................................................ 1.3
Financial Statements.................................................. 2.6
GAAP.................................................................. 2.6
Governmental Entity................................................... 2.4
Hart-Scott-Rodino Act................................................. 2.4
Indemnification Representatives....................................... 1.3
Indemnified Persons................................................... 6.1
Initial Shares........................................................ 1.5(a)
Intellectual Property................................................. 2.12(a)
Materials of Environmental Concern.................................... 2.20(b)
Merger................................................................ 1.1
Merger Shares......................................................... 1.5(a)
Most Recent Fiscal Quarter End........................................ 2.7
Options............................................................... 1.11(a)
</TABLE>
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<PAGE> 196
<TABLE>
<CAPTION>
DEFINED TERM SECTION
---------------------------------------------------------------------- -------------
<S> <C>
Ordinary Course of Business........................................... 2.4
Party................................................................. Introduction
Permit................................................................ 2.22
Prospectus/Proxy Statement............................................ 4.3(a)
Registration Statement................................................ 4.3(c)
Requisite Stockholder Approval........................................ 2.3
SEC................................................................... 3.5
Securities Act........................................................ 1.11(c)
Security Interest..................................................... 2.4
Series A Preferred Stock.............................................. 1.5(a)
Series B Preferred Stock.............................................. 1.5(b)
Series C Preferred Stock.............................................. 1.5(c)
Series D Preferred Stock.............................................. 1.5(c)
Subsidiary............................................................ 2.4
Surviving Corporation................................................. 1.1
Taxes................................................................. 2.9(a)
Tax Returns........................................................... 2.9(a)
Third Party Intellectual Property Rights.............................. 2.12(a)
Transitory Subsidiary................................................. Introduction
Warrants.............................................................. 1.11(d)
</TABLE>
ARTICLE IX
MISCELLANEOUS
9.1 Press Releases and Announcements. No Party shall issue any press
release or public disclosure relating to the subject matter of this Agreement
without the prior written approval of the other Parties; provided, however, that
any Party may make any public disclosure it believes in good faith is required
by law or regulation (in which case the disclosing Party shall advise the other
Parties and provide them with a copy of the proposed disclosure prior to making
the disclosure).
9.2 No Third Party Beneficiaries. This Agreement shall not confer any
rights or remedies upon any person other than the Parties and their respective
successors and permitted assigns; provided, however, that (a) the provisions in
Article I concerning issuance of the Merger Shares are intended for the benefit
of the Company Stockholders.
9.3 Entire Agreement. This Agreement (including the documents referred to
herein) constitutes the entire agreement among the Parties and supersedes any
prior understandings, agreements, or representations by or among the Parties,
written or oral, with respect to the subject matter hereof.
9.4 Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Parties; provided that the Transitory Subsidiary may assign its
rights, interests and obligations hereunder to an Affiliate of the Buyer.
9.5 Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
9.6 Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
9.7 Notices. All notices, requests, demands, claims, and other
communications hereunder shall be in writing. Any notice, request, demand,
claim, or other communication hereunder shall be deemed duly delivered two
business days after it is sent by registered or certified mail, return receipt
requested, postage
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<PAGE> 197
prepaid, or one business day after it is sent via a reputable nationwide
overnight courier service, in each case to the intended recipient as set forth
below:
If to the Company:
RSA Data Security, Inc.
100 Marine Parkway
Suite 500
Redwood City, CA 94065-1031
Copies to:
Fenwick & West
Two Palo Alto Square
Palo Alto, CA 94306
Attn: Joel D. Kellman, Esq.
Tomlinson Zisko Morosoli & Maser LLP
200 Page Mill Road
Second Floor
Palo Alto, CA 94306
Attn: Timothy Tomlinson, Esq.
If to the Buyer:
Security Dynamics Technologies, Inc.
One Alewife Center
Cambridge, MA 02140-2312
Copy to:
Hale and Dorr
60 State Street
Boston, MA 02109
Attn: Jay E. Bothwick, Esq.
and Hal J. Leibowitz, Esq.
If to the Transitory Subsidiary:
Security Dynamics Technologies, Inc.
One Alewife Center
Cambridge, MA 02140-2312
Copy to:
Hale and Dorr
60 State Street
Boston, MA 02109
Attn: Jay E. Bothwick, Esq.
and Hal J. Leibowitz, Esq.
Any Party may give any notice, request, demand, claim, or other communication
hereunder using any other means (including personal delivery, expedited courier,
messenger service, telecopy, telex, ordinary mail, or electronic mail), but no
such notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the party for
whom it is intended. Any Party may change the address to which notices,
requests, demands, claims, and other communications hereunder are to be
delivered by giving the other Parties notice in the manner herein set forth.
9.8 Governing Law. This Agreement shall be governed by and construed in
accordance with the internal laws (and not the law of conflicts) of the State of
Delaware.
9.9 Amendments and Waivers. The Parties may mutually amend any provision
of this Agreement at any time prior to the Effective Time; provided, however,
that any amendment effected subsequent to the Requisite Stockholder Approval
shall be subject to the restrictions contained in the Delaware General
Corporation Law. No amendment of any provision of this Agreement shall be valid
unless the same shall be in writing and signed by all of the Parties. No waiver
by any Party of any default, misrepresentation, or breach of warranty or
covenant hereunder, whether intentional or not, shall be deemed to extend to any
prior or subsequent default, misrepresentation, or breach of warranty or
covenant hereunder or affect in any way any rights arising by virtue of any
prior or subsequent such occurrence.
9.10 Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction. If the final judgment of a court of
competent jurisdiction declares that any term or provision hereof is invalid or
unenforceable, the Parties agree that the court making the determination of
invalidity or unenforceability shall have the power to reduce the scope,
duration, or area of the term or provision, to delete specific words or phrases,
or to replace any invalid or unenforceable term or provision with a term or
provision
A-28
<PAGE> 198
that is valid and enforceable and that comes closest to expressing the intention
of the invalid or unenforceable term or provision, and this Agreement shall be
enforceable as so modified after the expiration of the time within which the
judgment may be appealed.
9.11 Expenses. Except as set forth in the Escrow Agreement, each of the
Parties shall bear its own costs and expenses (including legal fees and
expenses) incurred in connection with this Agreement and the transactions
contemplated hereby; provided, however, that if the Merger is consummated, the
Company and the Subsidiaries shall not incur legal and accounting fees and
expenses in connection with the Merger in excess of the amounts set forth in
Section 9.11 of the Disclosure Schedule, and any fees and expenses incurred by
the Company or its Subsidiaries in excess of such amount shall be recovered by
the Buyer pursuant to the Escrow Agreement without regard to the provisions of
the first sentence of Section 6.4.
9.12 Specific Performance. Each of the Parties acknowledges and agrees
that one or more of the other Parties would be damaged irreparably in the event
any of the provisions of this Agreement are not performed in accordance with
their specific terms or otherwise are breached. Accordingly, each of the Parties
agrees that the other Parties shall be entitled to an injunction or injunctions
to prevent breaches of the provisions of this Agreement and to enforce
specifically this Agreement and the terms and provisions hereof in any action
instituted in any court of the United States or any state thereof having
jurisdiction over the Parties and the matter, in addition to any other remedy to
which it may be entitled, at law or in equity.
9.13 Construction. The language used in this Agreement shall be deemed to
be the language chosen by the Parties hereto to express their mutual intent, and
no rule of strict construction shall be applied against any Party. Any reference
to any federal, state, local, or foreign statute or law shall be deemed also to
refer to all rules and regulations promulgated thereunder, unless the context
requires otherwise.
9.14 Incorporation of Exhibits and Schedules. The Exhibits and Schedules
identified in this Agreement are incorporated herein by reference and made a
part hereof.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement as of
the date first above written.
SECURITY DYNAMICS TECHNOLOGIES, INC.
By: /s/ Charles R. Stuckey, Jr.
---------------------------------
Title: President and Chief
Executive Officer
CARD-KEY INC.
By: /s/ Arthur W. Coviello, Jr.
---------------------------------
Title: President
RSA DATA SECURITY, INC.
By: /s/ D. James Bidzos
---------------------------------
Title: President
A-29
<PAGE> 199
The undersigned, being the duly elected Secretary of the Transitory
Subsidiary, hereby certifies that this Agreement has been adopted by a majority
of the votes represented by the outstanding shares of capital stock of the
Transitory Subsidiary entitled to vote on this Agreement.
....................................
Secretary
The undersigned, being the duly elected Secretary or Assistant Secretary of
the Company, hereby certifies that this Agreement has been adopted by a majority
of the votes represented by the outstanding Company Shares entitled to vote on
this Agreement.
....................................
Secretary or Assistant Secretary
A-30
<PAGE> 200
EXHIBIT A
ESCROW AGREEMENT
This Escrow Agreement (the "Agreement") is entered into as of ,
1996, by and among Security Dynamics Technologies, Inc., a Delaware corporation
(the "Buyer"), and (the "Indemnification
Representatives"), those persons or entities set forth in Schedule I hereto and
State Street Bank and Trust Company (the "Escrow Agent").
WHEREAS, the Buyer and RSA Data Security, Inc. (the "Company") have entered
into an Agreement and Plan of Merger dated April 14, 1996 (the "Merger
Agreement") by and among the Company, the Buyer and a subsidiary of the Buyer,
pursuant to which such subsidiary will be merged into the Company which, as the
surviving corporation (the "Surviving Corporation"), will become a wholly-owned
subsidiary of the Buyer.
WHEREAS, the Merger Agreement provides that an escrow account will be
established to secure the indemnification obligations to the Buyer in Article VI
of the Merger Agreement on the terms and conditions set forth herein.
WHEREAS, the parties hereto desire to establish the terms and conditions
pursuant to which such escrow account will be established and maintained.
NOW, THEREFORE, the parties hereto hereby agree as follows:
1. Defined Terms. Capitalized terms used in this Agreement and not
otherwise defined shall have the meanings given them in the Merger Agreement.
2. Consent of Company Stockholders and Holders of Options. By virtue of
the Company Stockholders' approval of the Merger Agreement, and/or by the
execution of an Affiliate Agreement and/or Optionee Consent Agreements, the
Company Stockholders and all holders of Options (the "Indemnifying
Stockholders") have consented to: (a) the indemnification of the Buyer, the
Company and the Subsidiaries as set forth in Article VI of the Merger Agreement;
and (b) their agreement to be bound by the terms of this Escrow Agreement and to
be a party hereto with the same force and effect as if they were a signatory
hereto, including without limitation (i) the establishment of this escrow to
secure the indemnification obligations to the Buyer under Article VI of the
Merger Agreement in the manner set forth herein, (ii) the appointment of the
Indemnification Representatives as their representatives for purposes of this
Agreement and as attorneys-in-fact and agents for and on behalf of each
Indemnifying Stockholder, and the taking by the Indemnification Representatives
of any and all actions and the making of any decisions required or permitted to
be taken or made by them under this Agreement, and (iii) all of the other terms,
conditions and limitations in this Agreement.
3. Escrow and Indemnification.
(a) Escrow of Shares. On the Closing Date, the Buyer shall deposit with
the Escrow Agent a certificate for the number of Escrow Shares specified in
Section 1.5(a) of the Merger Agreement, registered in the name of the Escrow
Agent or its nominee. The Buyer may from time to time deposit additional Escrow
Shares with the Escrow Agent, as provided the final sentence of Section 1.6(a)
of the Merger Agreement and upon the exercise of Options as provided herein. To
the extent any Company Stockholder holds Company Shares subject to repurchase
rights in favor of the Company, (i) such repurchase rights shall be unaffected
by the Merger and the Buyer Common Stock issued in respect thereof shall be
subject to the same repurchase rights in favor of the Surviving Corporation and
(ii) the Escrow Shares shall be comprised both of shares of Buyer Common Stock
issued in exchange for Company Shares subject to and not subject to such
repurchase rights (determined on a pro rata basis, with future lapses of such
repurchase rights being applied to the Escrow Shares and other Company Shares
initially held by such Company Stockholder on a pro rata basis). The Escrow
Shares shall be held as a trust fund and shall not be subject to any lien,
attachment, trustee process or any other judicial process of any creditor of any
party hereto. The Escrow Agent agrees to accept delivery of
Exhibit A-1
<PAGE> 201
the Escrow Shares and to hold the Escrow Shares in an escrow account (the
"Escrow Account"), subject to the terms and conditions of this Agreement.
(b) Indemnification. The Indemnifying Stockholders and the holders of
Options have agreed in Article VI of the Merger Agreement to indemnify and hold
harmless the Buyer and the Surviving Corporation from and against specified
Damages. The Escrow Shares shall be security for such indemnity obligation,
subject to the limitations, and in the manner provided, in this Agreement.
(c) Dividends, Etc. Any securities, cash dividends or other property
distributable in respect of or in exchange for any of the Escrow Shares, whether
by way of stock dividends, stock splits or otherwise, shall be delivered to the
Escrow Agent, who shall hold such securities, cash dividends or other property
in the Escrow Account. Such securities shall be issued in the name of the Escrow
Agent or its nominee and all such securities, cash dividends or other property
shall be considered part of the Escrow Account for purposes hereof.
(d) Voting of Shares. The Indemnification Representatives shall have the
right, in their sole discretion, on behalf of the Indemnifying Stockholders, to
direct the Escrow Agent in writing as to the exercise of any voting rights
pertaining to the Escrow Shares, and the Escrow Agent shall comply with any such
written instructions. In the absence of such instructions, the Escrow Agent
shall not vote any of the Escrow Shares. The Indemnification Representatives
shall have no obligation to solicit consents or proxies from the Indemnifying
Stockholders for purposes of any such vote.
(e) Transferability. The respective interests of the Indemnifying
Stockholders in the Escrow Account shall not be assignable or transferable,
other than by operation of law. Notice of any such assignment or transfer by
operation of law shall be given to the Escrow Agent and the Buyer, and no such
assignment or transfer shall be valid until such notice is given.
4. Administration of Escrow Account. The Escrow Agent shall administer
the Escrow Account as follows:
(a) If an Indemnified Person has incurred or suffered Damages for
which it is entitled to indemnification under Article VI of the Merger
Agreement, it shall, prior to the General Fund Termination Date (as defined
below) in the case of indemnification claimed under Sections 6.1(a) and
6.1(c) of the Merger Agreement, or prior to the Litigation Fund Termination
Date (as defined below) in the case of indemnification claimed under
Section 6.1(b) of the Merger Agreement, give written notice of such claim
(a "Claim Notice") to the Indemnification Representatives and the Escrow
Agent. Each Claim Notice shall state the amount of claimed Damages (the
"Claimed Amount"), the basis for such claim and whether such claim is
pursuant to Sections 6.1(a) and/or 6.1(c) of the Merger Agreement or is
pursuant to Section 6.1(b) of the Merger Agreement. The date on which the
representations, warranties, covenants and agreements of the Company and
the related indemnification obligations in Sections 6.1(a) and 6.1(c) of
the Merger Agreement expire in accordance with Section 6.3 of the Merger
Agreement shall be referred to herein as the "General Fund Termination
Date." The date on which all indemnification obligations in Section 6.1(b)
of the Merger Agreement expire in accordance with Section 6.3 of the Merger
Agreement shall be referred to herein as the "Litigation Fund Termination
Date." Article VI of the Merger Agreement is attached hereto as Annex I.
(b) Claims for indemnification involving a claim or legal proceeding
by a third party shall be made in accordance with the procedures set forth
in Article VI of the Merger Agreement. For indemnification claims not
involving any claim or legal proceeding by a third party, the procedures
herein shall apply. Within 30 days after delivery of a Claim Notice the
Indemnification Representatives shall provide to the Indemnified Person,
with a copy to the Escrow Agent, a written response (the "Response Notice")
in which the Indemnification Representatives shall: (i) agree that some or
all of the Escrow Account having a Fair Market Value (as computed pursuant
to Section 7) equal to the full Claimed Amount may be released to the
Indemnified Person, (ii) agree that some of the Escrow Account having a
Fair Market Value equal to part, but not all, of the Claimed Amount (the
"Agreed Amount") may be released to the Indemnified Person, or (iii)
contest that any of the Escrow Account may be released to the Indemnified
Exhibit A-2
<PAGE> 202
Person. The Indemnification Representatives may contest the release of
amounts in the Escrow Account having a Fair Market Value equal to all or a
portion of the Claimed Amount only based upon a good faith belief that all
or such portion of the Claimed Amount does not constitute Damages for which
the Indemnified Person is entitled to indemnification under Article VI of
the Merger Agreement. If no Response Notice is delivered by the
Indemnification Representatives within such 30-day period, the
Indemnification Representatives shall be deemed to have agreed that some or
all of the Escrow Account having a Fair Market Value equal to all of the
Claimed Amount may be released to the Indemnified Person.
(c) Notwithstanding any other provision herein, indemnification for
Damages pursuant to Sections 6.1(a) and (c) of the Merger Agreement may not
exceed, in the aggregate, 40% of the initial Escrow Shares (plus any
securities, cash dividends or other property distributed in respect thereof
or in exchange therefor) and indemnification for Damages pursuant to
Sections 6.1(b) of the Merger Agreement may not exceed, in the aggregate,
80% of the initial Escrow Shares (plus any securities, cash dividends or
other property distributed in respect thereof or in exchange therefor).
(d) If the Indemnification Representatives in the Response Notice
agree (or are deemed to have agreed) that some or all of the Escrow Account
having a Fair Market Value equal to all of the Claimed Amount may be
released to the Indemnified Person from the Escrow Account, the Escrow
Agent shall, according to the written directions of the Buyer, promptly
following the earlier of the required delivery date for the Response Notice
or the delivery of the Response Notice, transfer, deliver and assign to the
Indemnified Person such amount of Escrow Shares or other property held in
the Escrow Account which has a Fair Market Value equal to the Claimed
Amount (or such lesser amount of Escrow Shares or other property as is then
held in the Escrow Account or is available for distribution pursuant to the
limitations set forth in Section 4(c) above).
(e) If the Indemnification Representatives in the Response Notice
agree that Escrow Shares or other property having a Fair Market Value equal
to part, but not all, of the Claimed Amount may be released to the
Indemnified Person from the Escrow Account, the Escrow Agent shall promptly
following the delivery of the Response Notice transfer, deliver and assign
to the Indemnified Person such amount of Escrow Shares or other property
held in the Escrow Account which has a Fair Market Value equal to the
Agreed Amount (or such lesser amount of Escrow Shares or other property as
is then held in the Escrow Account or is available for distribution
pursuant to the limitations set forth in Section 4(c) above).
(f) If the Indemnification Representatives in the Response Notice
contest the release of Escrow Shares or other property having a Fair Market
Value equal to all or part of the Claimed Amount (the "Contested Amount"),
the Indemnification Representatives and the Buyer shall attempt promptly
and in good faith to agree upon the rights of the parties with respect to
the Contested Amount. If the Indemnification Representatives and the Buyer
should so agree, a memorandum (the "Memorandum") setting forth such
agreement shall be prepared and signed by both parties and, if such
Memorandum provides that all or a portion of the Contested Amount is to be
paid to the Buyer, the Escrow Agent shall transfer, assign and deliver to
the Indemnified Person from the Escrow Account an amount of Escrow Shares
or other property which has a Fair Market Value equal to the amount so
agreed (subject to the limitations set forth in Section 4(c) above). If no
such agreement can be reached between the Buyer and the Indemnification
Representatives after good faith negotiation over a period of 30 days (or
such longer period as the Buyer and the Indemnification Representatives may
mutually agree), the unresolved indemnification claims of the Buyer shall
be settled by binding arbitration between the Buyer and the Indemnification
Representatives (to which the Escrow Agent shall not be a party) in San
Francisco, California. All claims shall be settled by a single arbitrator
mutually agreeable to the Buyer and the Indemnification Representatives, or
if they cannot agree to a single arbitrator in 30 days, by three
arbitrators, in accordance with the Commercial Arbitration Rules then in
effect of the American Arbitration Association (the "AAA Rules"). If a
single arbitrator has not been mutually agreed upon, the Indemnification
Representatives and the Buyer shall each designate one arbitrator within 45
days of the delivery of the Indemnification Representatives' Response
Notice contesting the Claimed Amount. The Indemnification Representatives
and the Buyer shall cause such designated arbitrators mutually to
Exhibit A-3
<PAGE> 203
agree upon and designate a third arbitrator; provided, however, that (i)
failing such agreement within 75 days of delivery of the Indemnification
Representatives' Response Notice, the third arbitrator shall be appointed
in accordance with the AAA Rules, and (ii) if either the Indemnification
Representatives or the Buyer fail to timely designate an arbitrator, the
dispute shall be resolved by the one arbitrator timely designated. The
Indemnifying Stockholders and the Buyer shall pay the fees and expenses of
their respectively designated arbitrators and shall bear equally the fees
and expenses of the third arbitrator (or of the sole arbitrator, in the
event a single arbitrator decides the matter). The Indemnification
Representatives and the Buyer shall cause the arbitrators to decide the
matter to be arbitrated pursuant hereto within 60 days after the
appointment of the last arbitrator. The arbitrators' decision shall relate
solely to whether the Indemnified Person is entitled to receive the
Contested Amount (or a portion thereof) pursuant to the applicable terms of
the Merger Agreement and this Agreement. The final decision of the
arbitrator, or the majority of the arbitrators in the case of three
arbitrators, shall be furnished to the Indemnification Representatives, the
Indemnified Person and the Escrow Agent in writing and shall constitute a
conclusive determination of the issue in question, binding upon the
Indemnification Representatives, the Indemnifying Stockholders, the
Indemnified Person and the Escrow Agent, and shall not be contested by any
of them. Such decision may be used in a court of law only for the purpose
of seeking enforcement of the arbitrators' award. The Escrow Agent shall
promptly follow any directions contained in the written decision of the
arbitrator or arbitrators.
(g) After delivery of a Response Notice that the Claimed Amount is
contested by the Indemnification Representatives, the Escrow Agent shall
continue to hold in the Escrow Account an amount of Escrow Shares and other
property having a Fair Market Value sufficient to cover the Contested
Amount (up to the amount of Escrow Shares and other property then available
in the Escrow Account or that is available for distribution pursuant to the
limitations set forth in Section 4(c) above), notwithstanding the
occurrence of the General Fund Termination Date or Litigation Fund
Termination Date (as the case may be), until (i) delivery of a copy of a
settlement agreement executed by the Buyer and the Indemnification
Representatives setting forth instructions to the Escrow Agent as to the
release of Escrow Shares and other property, if any, that shall be made
with respect to the Contested Amount, or (ii) delivery of a copy of the
final award of the arbitrator, or a majority of the arbitrators in the case
of three arbitrators, setting forth instructions to the Escrow Agent as to
the release of Escrow Shares and other property, if any, that shall be made
with respect to the Contested Amount. The Escrow Agent shall thereupon
release Escrow Shares and other property from the Escrow Account (to the
extent Escrow Shares and other property is then held in the Escrow Account
or is available for distribution pursuant to the limitations set forth in
Section 4(c) above) in accordance with such agreement or instructions.
(h) If, as a result of any third party claim or legal proceeding
subject to the indemnification procedures set forth in the Merger
Agreement, any settlement has been entered into, or any judgment entered in
favor of any third party (which is not subject to further appeal), the
Indemnified Person may give notice of the resulting Damages to the Escrow
Agent and the Escrow Agent shall, promptly following the receipt of such
notice, transfer, deliver and assign to the Indemnified Person such amount
of Escrow Shares and other property held in the Escrow Account which has a
Fair Market Value equal to such Damages (or such lesser amount of Escrow
Shares and other property as is then held in the Escrow Account or is
available for distribution pursuant to the limitations set forth in Section
4(c) above).
(i) In the event that, at the time that the Escrow Agent is to release
any amounts to the Indemnified Person hereunder, holders of Options would
be required to forfeit options to acquire shares of Buyer Common Stock
pursuant to the terms of Section 5 hereof, the amounts of the Escrow Shares
and other property to be distributed to the Indemnified Person hereunder
shall be appropriately reduced, in accordance with the joint written
instructions of the Buyer and the Indemnification Representatives, to
reflect such forfeitures.
(j) In the event that the Surviving Corporation receives reimbursement
from third parties other than the Indemnifying Stockholders for Damages
incurred in connection with the CL Litigation for which Indemnified Persons
have received indemnification hereunder ("Reimbursed Damages"), the Buyer
shall pay to the Indemnification Representatives on behalf of Indemnifying
Stockholders an
Exhibit A-4
<PAGE> 204
amount equal to the Reimbursed Damages (which amounts shall be distributed
by the Indemnification Representatives to the Indemnifying Stockholders
consistent with the provisions of Section 6(d) below).
5. Contribution By Holders of Options.
(a) Pursuant to Section 1.11 of the Merger Agreement, Options shall be
amended so that, upon exercise thereof, holders thereof shall receive shares of
Buyer Common Stock. Such Options, as amended pursuant to Section 1.11 of the
Merger Agreement, are referred to herein as "New Options."
(b) The difference between the aggregate exercise price of each New Option
and the aggregate Fair Market Value of the Buyer Common Stock issuable upon
exercise thereof is referred to herein as the "Merger Value" of such New Option.
Prior to the General Fund Termination Date, each holder of a New Option shall be
at risk to forfeit that portion of the unexercised portion of such New Option
having a value (as determined below) of 5% of the Merger Value with respect to
indemnity claims made pursuant to Sections 6.1(a) or (c) of the Merger
Agreement. Prior to the Litigation Fund Termination Date, each holder of a New
Option shall be at risk to forfeit that portion of the unexercised portion of
such New Option having a value (as determined below) of 10% of the Merger Value
with respect to indemnity claims made pursuant to Section 6.1(b) of the Merger
Agreement. Notwithstanding the foregoing, in no event will the holder of a New
Option be required to forfeit a portion of the unexercised portion of such New
Option in excess of 12.5% of the Merger Value with respect to all such claims.
For purposes hereof, the value of the unexercised portion of the New Option
shall be determined based upon the difference between the per share exercise
price and the Fair Market Value of the Buyer Common Stock, multiplied by the
number of shares of Buyer Common Stock which may yet be acquired upon exercise
of the New Option (assuming the full vesting thereof).
(c) Upon any determination that an Indemnified Person is entitled to
receive some or all of the Escrow Account pursuant to Section 4 hereof, each
holder of a New Option shall forfeit that amount of the unexercised portion of
such New Option equal in value to such holder's "pro rata share" of the Damages.
Such holder's pro rata share of the Damages shall be determined by dividing (x)
the Merger Value of such holder's New Option by (y) the Fair Market Value of the
Merger Shares. Any forfeitures hereunder shall be applied against the New Option
on a pro rata basis against the vested and unvested portion of the New Option
but such forfeiture shall not otherwise reduce the number of shares which may
otherwise be repurchased by the Buyer or the Company following exercise of the
New Option. If at the time of such determination the Escrow Shares in the Escrow
Account include shares deposited by the Buyer pursuant to subsection (d) below
that shall not have been previously utilized or allocated to fund a prior claim,
such holder's pro rata share of the Damages shall be appropriately adjusted.
(d) Upon any exercise of a New Option, (i) 12.5% of the shares of Buyer
Common Stock issued upon such exercise prior to the occurrence of either the
General Fund and Litigation Fund Termination Dates, (ii) 10% of the shares of
Buyer Common Stock issued upon such exercise at any time after the occurrence of
the General Fund Termination Date but prior to the occurrence of the Litigation
Fund Termination Date, and (iii) 5% of the shares of Buyer Common Stock issued
upon such exercise after the occurrence of the Litigation Fund Termination Date
but prior to occurrence of the General Fund Termination Date, shall be deemed
Escrow Shares and deposited with the Escrow Agent. The undersigned hereby
authorizes the Buyer to make such deposit upon any exercise of the New Option.
Upon such deposit such holder of a New Option shall be considered an
Indemnifying Stockholder hereunder.
6. Release of Escrow Property.
(a) Promptly after the General Fund Termination Date, if prior to the
Litigation Fund Termination Date, the Escrow Agent, in accordance with the joint
written instructions of the Buyer and the Indemnification Representatives, shall
distribute to the Indemnifying Stockholders the difference between (x) 20% of
the initial Escrow Shares (plus any securities, cash dividends or other property
distributed in respect thereof or in exchange therefor) and (y) any Escrow
Shares (or securities, cash dividends or other property distributed in respect
thereof or in exchange therefor) previously distributed to the Indemnified
Persons pursuant to Section 4 hereof in respect of claims made pursuant to
Sections 6.1(a) and/or 6.1(c) of the Merger Agreement. Notwithstanding the
foregoing, if an Indemnified Person has previously given a Claim Notice pursuant
to
Exhibit A-5
<PAGE> 205
Sections 6.1(a) or 6.1(c) of the Merger Agreement which has not then been
resolved in accordance with Section 4 or Section 6.2 of the Merger Agreement (as
applicable), the Escrow Agent shall retain in the Escrow Account an amount of
Escrow Shares and other property having a Fair Market Value equal to the Claimed
Amount covered by any Claim Notice which has not then been resolved (subject to
the limitations set forth in Section 4(c) above). Any Escrow Shares and other
property so retained in escrow shall be disbursed in accordance with the terms
of the resolution of such claims.
(b) Promptly after the Litigation Fund Termination Date, if prior to the
General Fund Termination Date, the Escrow Agent shall distribute to the
Indemnifying Stockholders the difference between (x) 60% of the initial Escrow
Shares (plus any securities, cash dividends or other property distributed in
respect thereof or in exchange therefor) and (y) any Escrow Shares (or
securities, cash dividends or other property distributed in respect thereof or
in exchange therefor) previously distributed to the Indemnified Persons pursuant
to Section 4 hereof in respect of claims made pursuant to Section 6.1(b) of the
Merger Agreement. Notwithstanding the foregoing, if an Indemnified Person has
previously given a Claim Notice pursuant to Section 6.1(b) of the Merger
Agreement which has not been resolved in accordance with Section 4 or Section
6.2 of the Merger Agreement (as applicable), the Escrow Agent shall retain in
the Escrow Account after the Litigation Fund Termination Date an amount of
Escrow Shares and other property having a Fair Market Value equal to the Claimed
Amount covered by any Claim Notice which has not then been resolved (subject to
the limitations set forth in Section 4(c) above). Any Escrow Shares and other
property so retained in escrow shall be disbursed in accordance with the terms
of the resolution of such claims.
(c) Promptly after the later of the General Fund or Litigation Fund
Termination Dates, the Escrow Agent shall distribute to the Indemnifying
Stockholders all of the Escrow Shares and other property then held in the Escrow
Account. Notwithstanding the foregoing, if an Indemnified Person has previously
given a Claim Notice which has not then been resolved in accordance with Section
4 or Section 6.2 of the Merger Agreement (as applicable), the Escrow Agent shall
retain in the Escrow Account an amount of Escrow Shares and other property
having a Fair Market Value equal to the Claimed Amount covered by any Claim
Notice which has not then been resolved (subject to the limitations set forth in
Section 4(c) above). Any Escrow Shares and other property so retained in escrow
shall be disbursed in accordance with the terms of the resolution of such
claims.
(d) Any distribution of all or a portion of the Escrow Shares and other
property to the Indemnifying Stockholders shall be made in accordance with the
percentage interests set forth opposite such holders' respective names on
Schedule I attached hereto; provided, however, (i) that the Escrow Agent shall
withhold the distribution of the portion of the Escrow Shares and other property
otherwise distributable to Indemnifying Stockholders who have not, according to
written notice provided by the Buyer to the Escrow Agent, prior to such
distribution, surrendered their respective Certificates pursuant to the terms
and conditions of the Merger Agreement; and (ii) that such Schedule I shall be
appropriately revised in the event the Buyer deposits additional Escrow Shares
with the Escrow Agent pursuant to Section 1.6(a) of the Merger Agreement or
pursuant to Section 5 hereof following the date of this Agreement. Any property
withheld pursuant to clause (i) above shall be delivered to the Buyer promptly
after the later of the General Fund and Litigation Fund Termination Dates, and
shall be delivered by the Buyer to the Indemnifying Stockholders to whom such
property would have otherwise been distributed upon surrender of their
respective Certificates. Distributions to the Indemnifying Stockholders shall be
made by mailing stock certificates and/or cash or other property to such holders
at their respective addresses shown on Schedule I (or such other address as may
be provided in writing to the Escrow Agent by any such holder). No fractional
Escrow Shares shall be distributed to Indemnifying Stockholders pursuant to this
Agreement. Instead, the Buyer shall redeem such Escrow Shares for an amount
equal to their Fair Market Value and the Escrow Agent shall distribute cash in
lieu thereof. The Buyer will cooperate with the Escrow Agent and will make
available certificates for Buyer Common Stock in such denominations and in such
names as may be required to effectuate any distributions hereunder.
7. Valuation of Escrow Shares. For purposes of this Agreement, the Fair
Market Value of Buyer Common Stock shall be [$ ] per share (based
upon average closing sale prices for fifteen trading days prior to Closing
Date). The Fair Market Value of all other property shall be determined by the
mutual agreement of the Buyer and the Indemnification Representatives.
Exhibit A-6
<PAGE> 206
8. Fees and Expenses of Escrow Agent. The Buyer agrees to pay or
reimburse the Escrow Agent for any legal fees and expenses incurred in
connection with the preparation of this Agreement and to pay the Escrow Agent's
reasonable compensation for its normal services hereunder in accordance with the
attached Schedule II, which may be subject to change on an annual basis. The
Escrow Agent shall be entitled to reimbursement on demand for all expenses
incurred in connection with the administration of the escrow created hereby
which are in excess of its compensation for normal services hereunder, including
without limitation, payment of any legal fees and expenses incurred by the
Escrow Agent in connection with the resolution of any claim by any party
hereunder.
9. Responsibility of the Escrow Agent.
(a) The Escrow Agent may rely on and shall be protected in acting or
refraining from acting upon any instrument or other writing believed by it in
good faith to be genuine and to have been signed or presented by the proper
person and shall have no responsibility for determining the accuracy thereof.
Neither the Escrow Agent nor any of its directors, officers or employees shall
be liable to any party hereto for any action taken or omitted to be taken by it
or any of its directors, officers or employees in connection with the
performance of its duties hereunder, except for its own gross negligence, bad
faith or willful misconduct. The Escrow Agent's duties shall be determined only
with reference to this Agreement and applicable laws and the Escrow Agent is not
charged with knowledge of, or any duties or responsibilities in connection with,
any other document or agreement, including the Merger Agreement (other than
Article IV thereof, attached hereto as Annex A). If in doubt as to its duties
and responsibilities hereunder, the Escrow Agent may consult with counsel of its
choice and shall be protected in any action reasonably taken or omitted in
connection with the advice or opinion of such counsel. The Escrow Agent shall
not be obligated to take any legal or other action hereunder which might in its
judgment involve any expense or liability unless it shall have been furnished
with acceptable indemnification.
(b) If any party to this Agreement disagrees on anything connected with
this escrow, (i) the Escrow Agent will not have to settle the matter, (ii) the
Escrow Agent may wait for a settlement by appropriate legal proceedings or other
means it may require, and in such event it will not be liable for damages, (iii)
if the Escrow Agent intervenes in or is made a party to any legal proceedings,
it will be entitled to such reasonable compensation for services, costs and
attorney's fees as the court may award, and (iv) the Escrow Agent is entitled to
hold assets deposited in escrow hereunder pending settlement of the disagreement
by any of the above means.
(c) The Escrow Agent is to act as a depository agent only and is hereby
relieved of any liability in connection with any representations made by the
other parties hereto or any of their agents. The Escrow Agent shall not be
responsible for and shall not be under a duty to examine any other agreement,
including the Merger Agreement (other than Article VI thereof, attached hereto
as Annex A).
(d) It is understood and agreed that should any dispute arise with respect
to the delivery, ownership, right of possession, and/or disposition of the
Escrow Account that is not resolved in accordance with Section 4 hereof or
Section 6.2 of the Merger Agreement, or should any claim be made directly upon
such Account by a third party, the Escrow Agent upon receipt of written notice
of such dispute or claim by the parties hereto or by a third party, is
authorized and directed to retain in its possession without liability to anyone,
all or any of said Account until such dispute shall have been settled either by
the mutual agreement of the parties involved or by a final order, decree or
judgment of a Court in the United States of America, the time for perfection of
an appeal of such order, decree or judgment having expired. The Escrow Agent
may, but shall be under no duty whatsoever to, institute or defend any legal
proceedings which relate to the Escrow Account.
(e) The Escrow Agent shall have no more or less responsibility or liability
on account of any action or omission of any book-entry depository or subescrow
agent employed by the Escrow Agent than any such book-entry depository or
subescrow agent has to the Escrow Agent, except to the extent that such action
or omission of any book-entry depository or subescrow agent was caused by the
Escrow Agent's own gross negligence, bad faith or willful misconduct.
Exhibit A-7
<PAGE> 207
10. Indemnification of Escrow Agent.
(a) Neither the Escrow Agent nor any of its directors, officers or
employees shall be liable to anyone for any action taken or omitted to be taken
by it or any of its directors, officers or employees hereunder except in the
case of gross negligence, bad faith or willful misconduct. The Buyer and
Indemnifying Stockholders, jointly and severally, covenant and agree to
indemnify the Escrow Agent and hold it harmless without limitation from and
against any loss, liability or expense of any nature incurred by the Escrow
Agent arising out of or in connection with this Agreement or with the
administration of its duties hereunder, including, but not limited to, legal
fees and expenses and other costs and expenses of defending or preparing to
defend against any claim of liability in the premises, unless such loss,
liability or expense shall be caused by the Escrow Agent's gross negligence, bad
faith or willful misconduct. In no event shall the Escrow Agent be liable for
indirect, punitive, special or consequential damages.
(b) The Buyer and Indemnifying Stockholders, jointly and severally, agree
to assume any and all obligations imposed now or hereafter by any applicable tax
law with respect to the payment of amounts in the Escrow Account under this
Agreement, and to indemnify and hold the Escrow Agent harmless from and against
any taxes, additions for late payment, interest, penalties and other expenses,
that may be assessed against the Escrow Agent in any such payment or other
activities under this Agreement. The Buyer and Indemnification Representatives
undertake to instruct the Escrow Agent in writing with respect to the Escrow
Agent's responsibility for withholding and other taxes, assessment or other
governmental charges, certifications and governmental reporting in connection
with its acting as Escrow Agent under this Agreement. The Buyer and Indemnifying
Stockholders, jointly and severally, agree to indemnify and hold the Escrow
Agent harmless from any liability on account of taxes, assessments or other
governmental charges, including without limitation the withholding or deduction
or the failure to withhold or deduct the same, and any liability for failure to
obtain proper certifications or to properly report to governmental authorities,
to which the Escrow Agent may be or become subject in connection with or which
arises out of this Agreement, including costs and expenses (including reasonable
legal fees and expenses), interest and penalties. Notwithstanding the foregoing,
no distributions will be made unless the Escrow Agent is supplied with an
original, signed W-9 form or its equivalent prior to distribution.
11. Resignation of the Escrow Agent. The Escrow Agent may resign and be
discharged from its duties hereunder at any time by giving not less than 30
days' prior written notice of such resignation to the Buyer and the
Indemnification Representatives, which notice shall specify the date when such
resignation shall take effect. Upon such notice, the Buyer and the
Indemnification Representatives shall jointly appoint a successor to the Escrow
Agent and will issue to the Escrow Agent written instructions authorizing
redelivery of the Escrow Account to a bank or trust company. Such bank or trust
company shall have a principal office in Boston, Massachusetts, and shall have
capital, surplus and undivided profits in excess of $50,000,000. If the Buyer
and the Indemnification Representatives are unable to agree upon a successor to
the Escrow Agent within 20 days after such notice, the Escrow Agent may apply to
a court of competent jurisdiction for such appointment. The provisions of
Section 10 hereof shall survive the resignation or removal of the Escrow Agent
or the termination of this Escrow Agreement.
12. Liability and Authority of Indemnification Representatives; Successors
and Assignees.
(a) The Indemnification Representatives shall incur no liability to the
Indemnifying Stockholders with respect to any action taken or suffered by them
in reliance upon any note, direction, instruction, consent, statement or other
documents believed by them to be genuinely and duly authorized, nor for other
action or inaction except their own willful misconduct or gross negligence. The
Indemnification Representatives may, in all questions arising under the Escrow
Agreement, rely on the advice of counsel and for anything done, omitted or
suffered in good faith by the Indemnification Representatives based on such
advice, the Indemnification Representatives shall not be liable to the
Indemnifying Stockholders.
(b) In the event of the death or permanent disability of either
Indemnification Representative, or his resignation as an Indemnification
Representative, a successor Indemnification Representative shall be appointed by
the other Indemnification Representative or, absent such appointment, a
successor Indemnifica-
Exhibit A-8
<PAGE> 208
tion Representative shall be elected by a majority vote of the Indemnifying
Stockholders, with each such Indemnifying Stockholder (or his or her successors
or assigns) to be given a vote equal to the number of votes represented by the
Company Shares held by such Indemnifying Stockholder immediately prior to the
Effective Time. Each successor Indemnification Representative shall have all of
the power, authority, rights and privileges conferred by this Agreement upon the
original Indemnification Representatives, and the term "Indemnification
Representatives" as used herein shall be deemed to include any and all successor
Indemnification Representatives.
(c) The Indemnification Representatives, acting jointly but not singly,
shall have full power and authority to represent the Indemnifying Stockholders,
and their successors, with respect to all matters arising under this Agreement
and all actions taken by any Indemnification Representative hereunder shall be
binding upon the Indemnifying Stockholders, and their successors, as if
expressly confirmed and ratified in writing by each of them. Without limiting
the generality of the foregoing, the Indemnification Representatives, acting
jointly but not singly, shall have full power and authority to interpret all of
the terms and provisions of this Agreement, to compromise any claims asserted
hereunder and to authorize payments to be made with respect thereto, on behalf
of the Indemnifying Stockholders and their successors. All actions to be taken
by the Indemnification Representatives hereunder shall be evidenced by, and
taken upon, the written direction of both of them.
13. Amounts Payable by Indemnifying Stockholders. The fees and
out-of-pocket expenses incurred by the Indemnifying Stockholders in resolving
Claim Notices under this Agreement and in defending third party claims in
connection with Article VI of the Merger Agreement shall be payable solely as
follows. The Indemnification Representatives shall notify the Escrow Agent of
any such fees and expenses incurred by the Indemnifying Stockholders prior to
making payment thereof, with a copy of such notice to the Buyer. On the eleventh
business day after the delivery of such notice, the Buyer will redeem the Escrow
Shares (based upon the Fair Market Value of Buyer Common Stock set forth in
Section 7 above), as is necessary to raise an amount necessary to pay such fees
and expenses, and shall disburse such amounts to the party to whom such amount
is owed in accordance with the instructions of the Indemnification
Representatives; provided that if the Buyer delivers to the Escrow Agent (with a
copy to the Indemnification Representatives), within five business days after
delivery of such notice by the Indemnification Representatives, a written notice
contesting the legitimacy or reasonableness of such fees and expenses, then the
Escrow Agent shall not make such disbursement and such dispute shall be resolved
by the Buyer and the Indemnification Representatives in accordance with the
procedures set forth in Section 4(f).
14. Termination. This Agreement shall terminate upon the latest of (i)
the General Fund Termination Date, (ii) the Litigation Fund Termination Date, or
(iii) the distribution by the Escrow Agent of all of the Escrow Account in
accordance with this Agreement. The provisions of Section 10 hereof shall
survive the termination of this Agreement.
Exhibit A-9
<PAGE> 209
15. Notices. All notices, instructions and other communications given
hereunder or in connection herewith shall be in writing. Any such notice,
instruction or communication shall be sent either (i) by registered or certified
mail, return receipt requested, postage prepaid, or (ii) via a reputable
nationwide overnight courier service, in each case to the address set forth
below. Any such notice, instruction or communication shall be deemed to have
been delivered two business days after it is sent by registered or certified
mail, return receipt requested, postage prepaid, or one business day after it is
sent via a reputable nationwide overnight courier service.
If to the Buyer:
Security Dynamics Technologies, Inc.
One Alewife Center
Cambridge, MA 02140-2312
with a copy to:
Hale and Dorr
60 State Street
Boston, MA 02109
Attention: Jay Bothwick, Esq.
If to the Indemnification Representatives:
with a copy to:
Tomlinson Zisko Morosoli & Maser, LLP
200 Page Mill Road
Second Floor
Palo Alto, CA 94306
Attn: Timothy Tomlinson, Esq.
If to the Escrow Agent:
State Street Bank and Trust Company
Two International Place
Boston, MA 02110
Attn: Corporate Trust Department, 4th Floor
Fax: (617) 664-5371
Any party may give any notice, instruction or communication in connection
with this Agreement using any other means (including personal delivery, telecopy
or ordinary mail), but no such notice, instruction or communication shall be
deemed to have been delivered unless and until it is actually received by the
party to whom it was sent. Any party may change the address to which notices,
instructions or communications are to be delivered by giving the other parties
to this Agreement notice thereof in the manner set forth in this Section 15.
16. General.
(a) Governing Law, Assigns. This Agreement shall be governed by and
construed in accordance with the internal laws of the Commonwealth of
Massachusetts without regard to conflict-of-law principles and shall be binding
upon, and inure to the benefit of, the parties hereto and their respective
heirs, executors, successors and assigns.
(b) Consent to Jurisdiction and Service. The Buyer and the Indemnification
Representatives hereby absolutely and irrevocably consent and submit to the
jurisdiction of the courts in the Commonwealth of Massachusetts and of any
Federal court located in said Commonwealth in connection with any actions or
Exhibit A-10
<PAGE> 210
proceedings brought against the Buyer and the Indemnification Representatives by
the Escrow Agent arising out of or relating to this Escrow Agreement. In any
such action or proceeding, the Buyer and the Indemnification Representatives
hereby absolutely and irrevocably waive personal service of any summons,
complaint, declaration or other process and hereby absolutely and irrevocably
agree that the service thereof may be made by certified or registered
first-class mail directed to the Buyer and the Indemnification Representatives,
as the case may be, at their respective addresses in accordance with Section 15
hereof.
(c) Counterparts. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
(d) Entire Agreement. Except for those provisions of the Merger Agreement
referenced herein, this Agreement constitutes the entire understanding and
agreement of the parties with respect to the subject matter of this Agreement
and supersedes all prior agreements or understandings, written or oral, between
the parties with respect to the subject matter hereof.
(e) Waivers. No waiver by any party hereto of any condition or of any
breach of any provision of this Escrow Agreement shall be effective unless in
writing. No waiver by any party of any such condition or breach, in any one
instance, shall be deemed to be a further or continuing waiver of any such
condition or breach or a waiver of any other condition or breach of any other
provision contained herein.
(f) Amendment. This Agreement may be amended only with the written consent
of the Buyer, the Escrow Agent and the Indemnification Representatives.
(g) Force Majeure. Neither the Buyer, nor the Indemnification
Representatives, nor the Escrow Agent shall be responsible for delays or
failures in performance resulting from acts beyond their control. Such acts
shall include but not be limited to acts of God, strikes, lockouts, riots, acts
of war, epidemics, governmental regulations superimposed after the fact, fire,
communication line failures, computer viruses, power failures, earthquakes or
other disaster.
(h) Reproduction of Documents. This Agreement and all documents relating
thereto, including, without limitation, (a) consents, waivers and modifications
which may hereafter be executed, and (b) certificates and other information
previously or hereafter furnished, may be reproduced by any photographic,
photostatic, microfilm, optical disk, micro-card, miniature photographic or
other similar process. The parties hereto agree that any such reproduction shall
be admissible in evidence as the original itself in any judicial or
administrative proceeding, whether or not the original is in existence and
whether or not such reproduction was made by a party in the regular course of
business, and that any enlargement, facsimile or further reproduction shall
likewise be admissible in evidence.
Exhibit A-11
<PAGE> 211
IN WITNESS WHEREOF, the parties have duly executed this Agreement as of the
day and year first above written.
SECURITY DYNAMICS TECHNOLOGIES, INC.
By:.................................
....................................
[INDEMNIFICATION REPRESENTATIVE]
....................................
[INDEMNIFICATION REPRESENTATIVE]
EACH INDEMNIFYING STOCKHOLDER AS SET
FORTH IN SCHEDULE I AND EACH HOLDER
OF AN OPTION
By: ................................
[ ]
ATTORNEY-IN-FACT
STATE STREET BANK AND TRUST COMPANY
By:.................................
Exhibit A-12
<PAGE> 212
SCHEDULE I
<TABLE>
<CAPTION>
INDEMNIFYING STOCKHOLDER PERCENTAGE
- --------------------------------------------- ---------------------------------------------
<S> <C>
</TABLE>
Exhibit A-13
<PAGE> 213
EXHIBIT A
SCHEDULE II
Escrow Agent Fees:
Exhibit A-14
<PAGE> 214
EXHIBIT B
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
RSA DATA SECURITY, INC.
RSA Data Security, Inc., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), hereby certifies as follows:
1. The name of the Corporation is RSA Data Security, Inc. The date of
filing of its original Certificate of Incorporation with the Secretary of
State of Delaware was August 19, 1982.
2. This Amended and Restated Certificate of Incorporation was duly
adopted by the Board of Directors at a meeting held on , 1996
and by the stockholders of the Corporation at a special meeting of
stockholders held on , 1996, in accordance with the applicable
provisions of Sections 242 and 245 of the General Corporation Law of
Delaware.
3. This Amended and Restated Certificate of Incorporation restates,
integrates and amends the original Certificate of Incorporation filed March
23, 1995, as subsequently amended on June 29, 1984, August 23, 1985, August
23, 1985, September 10, 1987, February 12, 1988 and December 1, 1994, and
the text of the Certificate of Incorporation is hereby amended and restated
to read as herein set forth in full:
FIRST. The name of the Corporation is: RSA Data Security, Inc.
SECOND. The address of its registered office in the State of Delaware is
Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County
of New Castle. The name of its registered agent at such address is The
Corporation Trust Company.
THIRD. The nature of the business or purposes to be conducted or promoted
by the Corporation is as follows:
To engage in any lawful act or activity for which corporations may be
organized under the General Corporation Law of Delaware.
FOURTH. The total number of shares of stock which the Corporation shall
have authority to issue is 100 shares of Common Stock, $0.01 par value per
share.
The number of authorized shares of Common Stock may be increased or
decreased (but not below the number of shares thereof then outstanding) by the
affirmative vote of the holders of a majority of the stock of the Corporation
entitled to vote, irrespective of the provisions of Section 242(b)(2) of the
General Corporation Law of Delaware.
FIFTH. In furtherance of and not in limitation of powers conferred by
statute, it is further provided:
1. Election of directors need not be by written ballot.
2. The Board of Directors is expressly authorized to adopt, amend or
repeal the By-Laws of the Corporation.
SIXTH. Whenever a compromise or arrangement is proposed between this
corporation and its creditors or any class of them and/or between this
corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this corporation or of any creditor or stockholder thereof, or on the
application of any receiver or receivers appointed for this corporation under
the provisions of section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this corporation under the provisions of section 279 of Title 8 of the
Delaware Code order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this corporation, as the case may
be, to be summoned in such manner as the said court directs. If a majority in
number representing three-fourths in value of the
Exhibit B-1
<PAGE> 215
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this corporation as consequence of such
compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this corporation, as the case
may be, and also on this corporation.
SEVENTH. Except to the extent that the General Corporation Law of Delaware
prohibits the elimination or limitation of liability of directors for breaches
of fiduciary duty, no director of the Corporation shall be personally liable to
the Corporation or its stockholders for monetary damages for any breach of
fiduciary duty as a director, notwithstanding any provision of law imposing such
liability. No amendment to or repeal of this
provision shall apply to or have any effect on the liability or alleged
liability of any director of the Corporation for or with respect to any acts or
omissions of such director occurring prior to such amendment.
EIGHTH. The Corporation shall, to the fullest extent permitted by Section
145 of the General Corporation Law of Delaware, as amended from time to time,
indemnify each 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, by reason of the fact that he
is or was, or has agreed to become, a director or officer of the Corporation, or
is or was serving, or has agreed to serve, at the request of the Corporation, as
a director, officer or trustee of, or in a similar capacity with, another
corporation, partnership, joint venture, trust or other enterprise (including
any employee benefit plan) (all such persons being referred to hereafter as an
"Indemnitee"), or by reason of any action alleged to have been taken or omitted
in such capacity, against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement actually and reasonably incurred by or on
behalf of an Indemnitee in connection with such action, suit or proceeding and
any appeal therefrom.
As a condition precedent to his right to be indemnified, the Indemnitee
must notify the Corporation in writing as soon as practicable of any action,
suit, proceeding or investigation involving him for which indemnity will or
could be sought. With respect to any action, suit, proceeding or investigation
of which the Corporation is so notified, the Corporation will be entitled to
participate therein at its own expense and/or to assume the defense thereof at
its own expense, with legal counsel reasonably acceptable to the Indemnitee.
In the event that the Corporation does not assume the defense of any
action, suit, proceeding or investigation of which the Corporation receives
notice under this Article, the Corporation shall pay in advance of the final
disposition of such matter any expenses (including attorneys' fees) incurred by
an Indemnitee in defending a civil or criminal action, suit, proceeding or
investigation or any appeal therefrom; provided, however, that the payment of
such expenses incurred by an Indemnitee in advance of the final disposition of
such matter shall be made only upon receipt of an undertaking by or on behalf of
the Indemnitee to repay all amounts so advanced in the event that it shall
ultimately be determined that the Indemnitee is not entitled to be indemnified
by the Corporation as authorized in this Article, which undertaking shall be
accepted without reference to the financial ability of the Indemnitee to make
such repayment; and further provided that no such advancement of expenses shall
be made if it is determined that the Indemnitee did not act in good faith and in
a manner he reasonably believed to be in, or not opposed to, the best interests
of the Corporation, and, with respect to any criminal action or proceeding, had
no reasonable cause to believe his conduct was unlawful.
The Corporation shall not indemnify an Indemnitee seeking indemnification
in connection with a proceeding (or part thereof) initiated by such Indemnitee
unless the initiation thereof was approved by the Board of Directors of the
Corporation. In addition, the Corporation shall not indemnify an Indemnitee to
the extent such Indemnitee is reimbursed from the proceeds of insurance, and in
the event the Corporation makes any indemnification payments to an Indemnitee
and such Indemnitee is subsequently reimbursed from the proceeds of insurance,
such Indemnitee shall promptly refund such indemnification payments to the
Corporation to the extent of such insurance reimbursement.
All determinations hereunder as to the entitlement of an Indemnitee to
indemnification or advancement of expenses shall be made in each instance by (a)
a majority vote of the directors of the Corporation consisting of persons who
are not at that time parties to the action, suit or proceeding in question
("disinterested
Exhibit B-2
<PAGE> 216
directors"), whether or not a quorum, (b) a majority vote of a quorum of the
outstanding shares of stock of all classes entitled to vote for directors,
voting as a single class, which quorum shall consist of stockholders who are not
at that time parties to the action, suit or proceeding in question, (c)
independent legal counsel (who may, to the extent permitted by law, be regular
legal counsel to the Corporation), or (d) a court of competent jurisdiction.
The indemnification rights provided in this Article (i) shall not be deemed
exclusive of any other rights to which an Indemnitee may be entitled under any
law, agreement or vote of stockholders or disinterested directors or otherwise,
and (ii) shall inure to the benefit of the heirs, executors and administrators
of the Indemnitees. The Corporation may, to the extent authorized from time to
time by its Board of Directors, grant indemnification rights to other employees
or agents of the Corporation or other persons serving the Corporation and such
rights may be equivalent to, or greater or less than, those set forth in this
Article.
TENTH. The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute and this Certificate of Incorporation, and
all rights conferred upon stockholders herein are granted subject to this
reservation.
IN WITNESS WHEREOF, pursuant to Section 103 of the general Corporation Law
of Delaware, RSA Data Security, Inc. has caused its corporate seal to be
hereunto affixed and this Amended and Restated Certificate to be signed by its
President this day of , 1996.
RSA DATA SECURITY, INC.
....................................
Name:
Title: President
Exhibit B-3
<PAGE> 217
EXHIBIT C
AFFILIATE'S AGREEMENT
, 1996
Security Dynamics Technologies, Inc.
One Alewife Center
Cambridge, MA 02140-2312
Dear Sirs:
An Agreement and Plan of Merger dated as of April 14, 1996 (the
"Agreement") has been entered into by and among Security Dynamics Technologies,
Inc. (the "Buyer"), Card-Key Inc. (the "Transitory Subsidiary") and RSA Data
Security, Inc. (the "Company"). The Agreement provides for the merger of the
Transitory Subsidiary with and into the Company (the "Merger"). In accordance
with the Agreement, the Company Shares (as defined in this Agreement) owned by
the undersigned at the Effective Time (as defined in the Agreement) shall be
converted into shares of common stock, $.01 par value per share, of the Buyer
(the "Buyer Common Stock"), as described in the Agreement.
In consideration of the mutual agreements, provisions and covenants set
forth in the Agreement and hereinafter in this agreement, the undersigned
represents and agrees as follows:
1. Pooling Requirements.
(a) The undersigned will not sell, transfer or otherwise dispose of, or
reduce his or its interest in or risk relating to, any Buyer Common Stock issued
to the undersigned pursuant to the Merger, or any Buyer Common Stock issued to
the undersigned upon exercise of any employee stock options or warrants, until
after such time as the Buyer has published (within the meaning of Accounting
Series Release No. 130, as amended, of the Securities and Exchange Commission)
financial results covering at least 30 days of combined operations of the
Company and the Buyer.
(b) For a period commencing 30 days prior to the Effective Time of the
Merger and ending on the earlier of the Effective Time of the Merger or the
termination of the Agreement, the undersigned will not sell, transfer or
otherwise dispose of, or reduce his or its interest in or risk relating to, any
shares of Company Shares presently owned or subsequently acquired by the
undersigned.
2. Rule 145. The undersigned will not offer, sell, pledge, transfer or
otherwise dispose of any of the shares of Buyer Common Stock issued to the
undersigned in the Merger unless at such time either: (i) such transaction shall
be permitted pursuant to the provisions of Rule 145 under the Securities Act of
1933 (the "Securities Act"), (ii) the undersigned shall have furnished to the
Buyer an opinion of counsel, satisfactory to theBuyer, to the effect that no
registration under the Securities Act would be required in connection with the
proposed offer, sale, pledge, transfer or other disposition; or (iii) a
registration statement under the Securities Act covering the proposed offer,
sale, pledge, transfer or other disposition shall be effective under the
Securities Act.
3. Legend. The undersigned understands that all certificates representing
the Buyer Common Stock deliverable to the undersigned pursuant to the Merger
shall, until the occurrence of one of the events referred to in Section 2 above,
bear a legend substantially as follows:
"The shares represented by this certificate may not be offered, sold,
pledged, transferred or otherwise disposed of except in accordance with
the requirements of the Securities Act of 1933, as amended, and the
other conditions specified in the Affiliates Agreement dated as of
, 1996 between the holder of this certificate and
Security Dynamics Technologies, Inc., a copy of which Agreement may be
inspected by the holder of the certificate at One Alewife Center,
Cambridge, Massachusetts or furnished by Security Dynamics Technologies,
Inc. to the holder of this certificate upon written request and without
charge."
Exhibit C-1
<PAGE> 218
The Buyer, in its discretion, may cause stop transfer orders to be placed
with its transfer agent with respect to the certificates for the shares of Buyer
Common Stock which are required to bear the foregoing legend.
4. Tax Matters. The undersigned has, and as of the Effective Time of the
Merger will have, no present plan or intent to engage in a sale, exchange,
transfer, pledge, disposition or any other transaction (including a distribution
by a partnership to its partners or by a corporation to its shareholders) that
results in a reduction in the risk of ownership (collectively, a "Sale") with
respect to more than 50% of the shares of Buyer Common Stock to be acquired by
the undersigned upon consummation of the Merger. The undersigned is not aware
of, or participating in, any present plan or intention (a "Plan") on the part of
Company stockholders to engage in Sales of shares of Buyer Common Stock to be
issued in the Merger such that the aggregate fair market value, as of the
Effective Time of the Merger, of the shares subject to such Sales would exceed
fifty percent (50%) of the aggregate fair market value of all outstanding
Company Shares immediately prior to the Merger. For purposes of the preceding
sentence, Company Shares (i) which are exchanged for cash in lieu of fractional
shares of Buyer Common Stock or (ii) with respect to which a pre-Merger Sale
occurs in a Related Transaction (as defined below), shall be considered to be
Company Shares that are exchanged for Buyer Common Stock in the Merger and then
disposed of pursuant to a Plan. A Sale of Buyer Common Stock shall be considered
to have occurred pursuant to a Plan if, among other things, such Sale occurs in
a Related Transaction. For purposes of this Section, a "Related Transaction"
shall mean a transaction that is in contemplation of, or related or pursuant to,
the Merger or the Agreement. If any of the undersigned's representations in this
section cease to be true at any time prior to the Effective Time of the Merger,
the undersigned will deliver to each of the Buyer and the Company, prior to the
Effective Time of the Merger, a written statement to that effect, signed by the
undersigned.
5. Escrow Agreement. The undersigned confirms that by approval of the
Merger and the execution of this Agreement, the undersigned, without any further
act, consents to the establishment of the escrow pursuant to Article VI of the
Agreement and the Escrow Agreement and the appointment of the Indemnification
Representatives as his or its attorneys-in-fact and agents with respect to such
escrow and the indemnification obligations set forth in Article VI of the
Agreement.
5. Miscellaneous.
(a) This agreement shall be governed by and construed in accordance with
the laws of the State of Delaware.
(b) This agreement shall be binding on the undersigned's successors and
assigns, including his heirs, executors and administrators.
Exhibit C-2
<PAGE> 219
The undersigned has carefully read this agreement and discussed its
requirements, to the extent the undersigned believed necessary, with its counsel
or counsel for the Buyer.
Very truly yours,
....................................
Signature
....................................
Print Name
ACCEPTED:
SECURITY DYNAMICS TECHNOLOGIES, INC.
By:.................................
Title:..............................
Dated:..............................
Exhibit C-3
<PAGE> 220
EXHIBIT D TO ANNEX A
EXHIBIT D
[LETTERHEAD OF FENWICK & WEST]
, 1996
Security Dynamics Technologies, Inc.
Card-Key Inc.
[Address]
[Address]
Ladies and Gentlemen:
We have acted as counsel to RSA Data Security, Inc., a Delaware corporation
(the "Company") in connection with the Agreement and Plan of Merger dated as of
April 14, 1996 (the "Merger Agreement"), between Security Dynamics Technologies,
Inc., a Delaware corporation (the "Buyer"), Card-Key Inc., a Delaware
corporation and a wholly owned subsidiary of the Buyer (the "Transitory
Subsidiary"), and the Company pursuant to which the Transitory Subsidiary will
be merged with and into the Company, with the Company to survive the merger as a
wholly owned Subsidiary of the Buyer. This opinion is furnished to you pursuant
to Section 5.2(f) of the Merger Agreement. Capitalized terms used herein and not
otherwise defined shall have the respective meanings ascribed to them in the
Merger Agreement.
In order to render this opinion, we have examined the following documents:
(1) The Merger Agreement, the Certificate of Merger and the Escrow
Agreement (such agreements are collectively referred to as the
"Closing Agreements").
(2) The Amended and Restated Certificate of Incorporation of the
Company, as amended and restated to date (the "Restated
Certificate").
(3) A copy of the Company's Bylaws, as amended (the "Bylaws").
(4) The minutes of meetings and actions by written consent of the
Company's stockholders and Board of Directors that are contained
in the Company's minute books in our possession.
(5) The stock record books of the Company provided to us by the
Company.
(6) The certificates and documents delivered by or on behalf of the
Company and the Buyer at the Closing (the "Closing Documents").
(7) A Management Certificate addressed to us and dated of even date
herewith executed by the Company and certain of its officers (the
"Management Certificate"), a copy of which accompanies this
opinion.
(8) A Certificate of Status regarding the Company issued by the
California Secretary of State, dated , indicating
the Company is in good standing and is qualified to do business as
a foreign corporation in that state.
(9) A letter from the California Franchise Tax Board dated
to the effect that the Company is in good standing
with respect to its California franchise tax filings and has no
known unpaid franchise tax liability.
(10) A Certificate of Good Standing from the Delaware Secretary of
State, dated , indicating that the Company is in
good standing in the State of Delaware.
(11) Certificates from the Indemnification Representatives, Company
Stockholders and holders of Options dated ,
respectively.
(12) Each contract, lease, sublease, license, sublicense, franchise,
permit, indenture, agreement or mortgage for borrowed money,
instrument of indebtedness, Security Interest or other agree-
Exhibit D-1
<PAGE> 221
ment or instrument set forth in Sections 2.12, 2.13, 2.14, 2.16 or
2.22 of the Disclosure Schedule (the "COMPANY AGREEMENTS").
(13) The Prospectus/Proxy Statement and the Registration Statement.
In connection with this opinion, we have not examined any documents other
than those expressly referred to above or made any other independent factual
investigation.
In our examination of documents for purposes of this opinion, we have
assumed, and express no opinion as to, the genuineness of all signatures on
original documents (other than the signatures of the Company on the Closing
Agreements executed by the Company), the authenticity of all documents submitted
to us as originals, the conformity to originals of all documents submitted to us
as copies, the lack of any undisclosed terminations, modifications, waivers or
amendments to any agreements reviewed by us, the legal capacity of all natural
persons executing and/or delivering such documents, and (except with respect to
due execution and delivery of the Closing Agreements by the Company) the due
execution and delivery of all documents where due execution and delivery are
prerequisites to the effectiveness thereof.
As to matters of fact relevant to this opinion, we have relied solely upon:
(A) our examination of the documents expressly referred to above, and we have
assumed the current accuracy and completeness of the information obtained from
public officials and records included in the documents referred to above; (B)
our actual knowledge; (C) the representations and warranties of the Company, the
Buyer, the Transitory Subsidiary, Indemnification Representatives, Company
Stockholders and holders of Options set forth in the Closing Agreements and the
Closing Documents; and (D) the representations and warranties made by
representatives of the Company and Indemnification Representatives, Company
Stockholders and holders of Options to us, including without limitation, those
set forth in the Management Certificate, copies of all of which representations
and warranties have been identified and made available to counsel to the Buyer.
We have made no independent investigations or other attempts to verify the
accuracy of any such information, representations or warranties or to determine
the existence or non-existence of any other factual matters; however, we are not
aware of any facts that would lead us to believe that any of the opinions
expressed herein are not accurate.
As used in this opinion, the phrases "to our knowledge" or "known to us"
refer only to the current actual knowledge of those attorneys currently in this
firm who have rendered substantive attention to this transaction and mean that,
while such attorneys do not have any conscious awareness that the matters stated
are factually incorrect, we have made no independent investigation of such
matters other than our examination of the documents referred to in the second
paragraph of this letter. No inference as to our knowledge of any matters
bearing on the accuracy of any such statement should be drawn from the fact of
our representation of the Company.
Where statements in our opinion refer to the term "material," those
statements involve judgments and opinions as to the materiality or lack of
materiality of any matter to the Company or its business, prospects, assets or
financial condition, which are entirely those of the Company and its officers,
after having been advised by us as to the legal effect and consequences of such
matters; however, such opinions and judgments are not known to us to be
incorrect.
For the purposes of this opinion, we have also assumed that: (A) the Buyer
has all requisite power and authority, and has taken any and all corporate or
other action necessary, for the due authorization by the Buyer of the execution,
delivery and performance by the Buyer of each of the Closing Agreements and the
Closing Documents to which the Buyer is a party and the performance by the Buyer
of all of the Buyer's obligations thereunder and that the Closing Agreements are
binding obligations of the Buyer enforceable against the Buyer in accordance
with their terms; (B) the Transitory Subsidiary has all requisite power and
authority, and has taken any and all corporate or other action necessary, for
the due authorization by the Transitory Subsidiary of the execution, delivery
and performance by the Transitory Subsidiary of each of the Closing Agreements
and the Closing Documents to which it is a party and the performance by the
Transitory Subsidiary of all of the Transitory Subsidiary's obligations
thereunder and that the Closing Agreements are binding obligations of the
Transitory Subsidiary enforceable against the Transitory Subsidiary in
accordance
Exhibit D-2
<PAGE> 222
with their terms; (C) the Company Stockholders who are not natural persons have
all requisite power and authority, and have taken any and all corporate or other
action necessary, for the due authorization by such Company Stockholders of the
execution, delivery and performance by such Company Stockholders of each of the
Closing Agreements and the Closing Documents to which such Company Stockholders
are a party and the performance by such Company Stockholders of all of their
obligations thereunder and that the Closing Agreements are binding obligations
of such Company Stockholders are enforceable against such Company Stockholders
in accordance with their terms; and (D) each of the Buyer, Transitory
Subsidiary, Indemnification Representatives, Company Stockholders and holders of
Options has fully performed all the obligations that it is to perform at or
before the Closing.
This opinion is qualified by and is subject to, and we render no opinion
with respect to, the limitations and exceptions to the enforceability of
contracts and obligations generally, including, without limitation: (A) the
effect of bankruptcy, insolvency, reorganization, arrangement, moratorium,
fraudulent conveyance and other similar laws relating to or affecting the rights
of creditors generally; (B) the effect of general principles of equity and
similar principles, including, without limitation, concepts of materiality,
reasonableness, unconscionability, good faith and fair dealing, and the possible
unavailability of specific performance, injunctive relief or other equitable
remedies, regardless of whether considered in a proceeding in equity or at law,
and the effect of public policy; (C) the effect of Section 1670.5 of the
California Civil Code and of California court decisions, invoking statutes or
principles of equity, which have held that certain covenants and provisions of
agreements are unenforceable where (i) the breach of such covenants or
provisions imposes restrictions or burdens upon the other party and it cannot be
demonstrated that the enforcement of such restrictions or burdens is reasonably
necessary for the protection of the party seeking to enforce such provisions or
(ii) the enforcement of such covenants or provisions under the circumstances
would violate the implied covenant of good faith and fair dealing; (D)
compliance or noncompliance with antifraud provisions of applicable state and
federal statutes, rules and regulations concerning the issuance and sale of
securities; and (E) the effect of any public policy limitations on the right to
indemnification or the enforceability of the indemnification provisions of
Article VI of the Merger Agreement and Section 3(b) of the Escrow Agreement.
Except as otherwise indicated, all opinions herein are rendered as of the
time immediately preceding the Closing.
In rendering the opinion expressed in paragraph 1 below with respect to the
good standing of the Company, we have relied solely upon the certificates of
good standing from the offices of the Delaware Secretary of State identified in
numbered paragraph 10 on page 2 of this Opinion.
With respect to our opinion in paragraph 2 below, we have relied solely
upon the Certificate of Status and Good Standing Certificates identified in
numbered paragraphs 8 and 9 on pages 1 and 2 of this Opinion and representations
made to us in the Management Certificate that the Company owns or leases
property, maintains offices or inventories, has employees or otherwise transacts
intrastate business only in the State of California; we have made no independent
examination of the laws of any jurisdiction other than the State of California.
In connection with the opinion expressed in paragraph 3 below, the Company
has represented to us, and we have assumed, that the Restated Certificate, the
Bylaws and the stock records of the Company in our possession (including the
stock register maintained by us in the ordinary course of our representation of
the Company, the Company's stock certificate books and the Company's minute
books in our possession) constitute all of the Company's documents relating to
the issuance of shares of its capital stock. In rendering the opinion in the
third sentence of paragraph 3 below, we have relied upon and assumed the
accuracy of the Company's representation to us that the factual information set
forth in such sentence of paragraph 3 is true and complete. Although we have no
knowledge that the information provided by Company and reflected in the third
sentence of paragraph 3 is incorrect, we are not in a position to verify its
accuracy and completeness. In rendering any opinion in paragraph 3 that any
shares are "fully paid," we have relied solely on the Company's representations
to us as to the nature and amount of the consideration received by the Company
for such shares.
Exhibit D-3
<PAGE> 223
Our opinion in paragraph 4 assumes, without rendering an opinion thereon,
that the internal laws of the State of California as applied to contracts made
between California residents present in California (without regard to laws
regarding choice of law or conflict of laws) would be applied in evaluating the
enforceability of the Merger Agreement and that all consideration paid for the
issued and outstanding stock of the Company in connection with the Merger has
been received by the stockholders of the Company.
Our opinion in paragraph 9 assumes, without rendering an opinion thereon,
that the internal laws of the State of California as applied to contracts made
between California residents present in California (without regard to laws
regarding choice of law or conflict of laws) would be applied in evaluating the
enforceability of the Escrow Agreement.
We are admitted to practice law in the State of California, and we express
no opinion herein with respect to the application or effect of the laws of any
jurisdiction other than the existing internal laws of the State of California
(without regard to the choice of law or conflict of laws provisions thereof as
set forth in standard statutory compilations), the Delaware General Corporation
Law (without regard to the choice of law or conflict of laws provisions thereof
as set forth in standard statutory compilations) and the existing federal laws
of the United States of America. The opinion regarding Delaware law is based
solely upon our examination of the text of such law, and the rules and
regulations thereunder, as is published by Commerce Clearing House, Inc. Special
rulings of such authority or opinions of other counsel have not been sought or
obtained.
We express no opinion herein as to any Subsidiary of the Company.
We also call your attention to the fact that under various reports
published by committees of the State Bar of California, certain assumptions,
qualifications and exceptions are implicit in opinions of lawyers. Although we
have expressly set forth some assumptions, qualifications and exceptions herein,
we are not limiting or omitting any others set forth in the various reports or
otherwise deemed standard for practice for lawyers in California.
We express no opinion herein as to whether the Merger will qualify for
"pooling treatment" in accordance with applicable accounting rules and
principles or as to the tax consequences of the Merger under applicable federal,
state and local income tax laws and regulations.
Based upon the foregoing, and subject to the assumptions and qualifications
referred to herein, it is our opinion that:
1. The Company is a corporation duly organized, validly existing and in
good standing under the laws of the state of Delaware.
2. The Company is duly qualified to transact business in each of the
jurisdictions listed on Schedule A attached hereto. The Company has all
requisite corporate power and authority to carry on the businesses in which it
is currently engaged (as described in the Registration Statement) and to own and
use the properties owned and used by it (as described in the Registration
Statement).
3. The authorized capital stock of the Company consists of (A) 7,000,000
shares of Company Common Stock, of which [2,528,633]- shares are issued and
outstanding and 31,705 shares are held in the treasury of the Company, and (B)
2,500,000 shares of Preferred Stock, of which (i) 250,000 shares have been
designated as Series A Preferred Stock, all of which are issued and outstanding,
(ii) 500,000 shares have been designated as Series B Preferred Stock, of which
499,950 shares are issued and outstanding, (iii) 1,050,000 shares have been
designated as Series C Preferred Stock, of which 360,000 shares are issued and
outstanding, and (iv) 700,000 shares have been designated as Series D Preferred
Stock, of which 380,334 shares are issued and outstanding. All of the issued and
outstanding shares of capital stock of the Company are duly authorized, validly
issued, fully paid, nonassessable and free of all statutory preemptive rights.
Except as set forth on the Disclosure Schedule, to our knowledge, there are no
outstanding or authorized (A) options, warrants, rights, contracts, calls, puts,
rights to subscribe, conversion rights or other agreements or commitments to
which the Company is a party or which are binding upon the Company providing for
issuance, disposition or acquisition of any of its capital stock, (B) stock
appreciation, phantom stock or similar rights with respect to the Company, or
(C) agreements, voting trusts, proxies, or understandings with respect to the
voting or
Exhibit D-4
<PAGE> 224
registration under the Securities Act of any shares of capital stock of the
Company. Except as set forth in Section 2.2 of the Disclosure Schedule, all of
the issued and outstanding shares of capital stock of the Company were issued in
compliance with the registration and prospectus delivery requirements of
applicable federal securities laws.
4. The Company has all requisite corporate power and authority to
execute and deliver the Merger Agreement and to perform its obligations
thereunder. The execution and delivery of the Merger Agreement and the
performance of the Merger Agreement and the consummation of the transactions
contemplated thereby have been duly and validly authorized by all necessary
corporate action (including the Requisite Stockholder approval) on the part of
the Company. The Merger Agreement has been duly and validly executed and
delivered by the Company and constitutes the valid and binding obligation of the
Company, enforceable against the Company in accordance with its terms.
5. Except as set forth in the Disclosure Schedule, neither the execution
and delivery by the Company of the Merger Agreement, nor the consummation by the
Company of the transactions contemplated thereby, (A) conflicts with or violates
any provision of the Restated Certificate or the Company Bylaws, (B) requires on
the part of the Company any filing with, or permit, authorization, consent or
approval of, any Governmental Entity which has not been filed or obtained, (C)
conflicts with, results in a breach of, constitutes (with or without due notice
or lapse of time or both) a default under, results in the acceleration of,
creates in any party the right to accelerate, terminate, modify or cancel or
requires any notice, consent or waiver (which has not been obtained) under, any
of the Company Agreements, (D) to our knowledge, results in the imposition of
any Security Interest upon any assets of the Company, or (E) violates any
statute, rule or regulation, or any order, writ, injunction or decree known to
us that is specifically applicable to the Company or any of its properties or
assets; except to the extent that the events described in this paragraph 5 above
would not have a material adverse effect on the Company or its business.
6. Except as set forth in the Disclosure Schedule, to our knowledge, the
Company (A) is not subject to any unsatisfied judgment, order, decree,
stipulation or injunction or (B) is not a party or has been threatened in
writing to be made a party to any complaint, action, suit, proceeding, hearing
or investigation of or in any court or administrative agency of any federal,
state, local or foreign jurisdiction or before any arbitrator.
7. All authorizations, consents and approvals of all federal and state
governmental agencies and authorities required in order to permit consummation
by the Company and, to our knowledge, the Company Stockholders, of the
transactions contemplated by the Merger Agreement have been obtained.
8. The information with respect to the Company contained in the
Prospectus/Proxy Statement and the Registration Statement complied as to form in
all material respects with all applicable requirements of the Securities Act and
the Exchange Act (except that we express no such opinion with respect to the
financial statements, schedules and other financial and statistical data
included therein).
9. The Escrow Agreement has been duly authorized, executed and delivered
by the Indemnification Representatives and constitutes the legal, valid and
binding obligations of the Indemnification Representatives, the Company
Stockholders and the holders of Options, enforceable against the Indemnification
Representatives, the Company Stockholders and the holders of Options in
accordance with its terms.
10. To our knowledge, there are no affiliates (as defined under Rule 144
promulgated under the Securities Act) of the Company not listed on Schedule B
hereto.
11. Upon the filing of the Certificate of Merger with the Secretary of
State of Delaware, the Merger will be effective under Delaware law.
Exhibit D-5
<PAGE> 225
This opinion is intended solely for the use of the Buyer for the purpose of
Section 5.2(f) of the Merger Agreement, and is not to be made available or
relied upon by any other persons or entities for any other purpose without our
prior written consent. We assume no obligation to advise you of any facts,
circumstances, events or changes in the law that may hereafter be brought to our
attention, whether or not they would affect or modify the opinions expressed
herein.
Very truly yours,
FENWICK & WEST LLP
Exhibit D-6
<PAGE> 226
SCHEDULE A
JURISDICTION OF QUALIFICATION
<TABLE>
<CAPTION>
DATE OF CERTIFICATE
CORPORATION JURISDICTION OF PUBLIC OFFICIAL
- ------------------------ ----------- --------------------
<S> <C> <C>
RSA Data Security, Inc. California
RSA Data Security, Inc. Delaware
</TABLE>
Exhibit D-7
<PAGE> 227
SCHEDULE B
AFFILIATES OF THE COMPANY
D. James Bidzos
Addison Fischer
Ronald L. Rivest
Kathryn Conrow
Exhibit D-8
<PAGE> 228
EXHIBIT E
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement"), made this day of ,
1996, is entered into by and between RSA Data Security, Inc., a Delaware
corporation with its principal place of business at 100 Marine Parkway, Suite
500, Redwood City, California 94065-1031 (the "Company"), and ,
residing at (the "Employee").
On April 14, 1996, the Company, Security Dynamics Technologies, Inc., a
Delaware corporation (the "Parent Corporation"), and Card-Key Inc. ("Acquisition
Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement"),
pursuant to which, among other things, Acquisition Sub will merger with and into
the Company and the Company will become a wholly-owned subsidiary of the Parent
Corporation. In connection with the consummation of the transactions
contemplated by the Merger Agreement, the Parent Corporation desires that the
Company and the Employee enter into this Agreement. The Company desires to
employ the Employee, and the Employee desires to be employed by the Company. In
consideration of the mutual covenants and promises contained herein, and other
good and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties hereto, the parties agree as follows:
1. Term of Employment. The Company hereby agrees to employ the Employee,
and the Employee hereby accepts employment with the Company, upon the terms set
forth in this Agreement, for the period commencing on the Closing Date, as such
term is defined in the Merger Agreement (the "Commencement Date"), and ending on
the day immediately prior to the third anniversary of the Commencement Date,
unless sooner terminated in accordance with the provisions of Section 4 (such
period, as it may be extended, the "Employment Period").
2. Title; Capacity. The Employee shall serve as or in such
other position as the Company or its Board of Directors (the "Board") may from
time to time determine. The Employee shall be subject to the supervision of, and
shall have such authority as is delegated to him by, the Board or such officer
or officers of the Parent Corporation or the Company designated by the Parent
Corporation or the Board.
The Employee hereby accepts such employment and agrees to undertake the
duties and responsibilities inherent in such position and such other duties and
responsibilities as the Board or its designee shall from time to time reasonably
assign to him. The Employee agrees to devote his entire business time, attention
and energies to the business and interests of the Company during the Employment
Period. The Employee agrees to abide by the rules, regulations, instructions,
personnel practices and policies of the Company and any changes therein which
may be adopted from time to time by the Company. The Employee acknowledges
receipt of copies of all such rules and policies committed to writing as of the
date of this Agreement.
3. Compensation and Benefits.
3.1 Salary. The Company shall pay the Employee, at such times as the
Company pays its employees in general, an annual base salary of $ for
the one-year period commencing on the Commencement Date. Such base salary shall
be subject to adjustment thereafter as determined by the Board; provided,
however, that the Board shall not decrease the base salary during the Employment
Period without the prior written consent of the Employee.
3.2 Fringe Benefits. The Employee shall be entitled to participate in
all benefit programs that the Company establishes and makes available to its
employees, if any, to the extent that Employee's position, tenure, salary, age,
health and other qualifications make him eligible to participate.
3.3 Reimbursement of Expenses. The Company shall reimburse the
Employee for all reasonable travel, entertainment and other expenses incurred or
paid by the Employee in connection with, or related to, the performance of his
duties, responsibilities or services under this Agreement, upon presentation by
the Employee of documentation, expense statements, vouchers and/or such other
supporting information as the Company may request; provided, however, that the
amount available for such travel, entertainment and other expenses may be fixed
in advance by the Board.
Exhibit E-1
<PAGE> 229
3.4 Stock Option.
(a) Option Grant. Subject to compliance with applicable securities
laws and approval by the Compensation Committee of the Board of Directors of the
Parent Corporation (the "Compensation Committee"), the Parent Corporation shall
grant to the Employee as of the date hereof an option (the "Stock Option") to
purchase shares of the Parent Corporation's Common Stock, $.01 par
value per share (the "Common Stock"), at a per share price equal to the lesser
of (x) the last reported sale price of the Common Stock on the Nasdaq National
Market on the date hereof, or (y) the average of the last reported sale prices
of the Common Stock on the Nasdaq National Market for the five trading days
prior to the date hereof.
(b) Option Terms. The Stock Option shall have a term of ten years
and shall become exercisable in four equal annual installments, on the first
through fourth anniversary dates of the Commencement Date, so long as the
Employee shall remain in the employment of the Company on such dates. The Stock
Option shall contain such other terms as are customary in options awarded by the
Parent Corporation to employees of the Parent Corporation and its subsidiaries
under the Parent Corporation's 1994 Stock Option Plan, as amended.
(c) Best Efforts. The Parent Corporation agrees to use its best
efforts to cause the Compensation Committee to grant the Stock Option to the
Employee in accordance with the provisions of this Section 3.4.
4. Employment Termination. The employment of the Employee by the Company
pursuant to this Agreement shall terminate upon the occurrence of any of the
following:
4.1 Expiration of the Employment Period in accordance with Section 1;
4.2 At the election of the Company, for cause, immediately upon written
notice by the Company to the Employee. For the purposes of this Section 4.2,
cause for termination shall be deemed to exist upon (a) a good faith finding by
the Company of failure of the Employee to perform his assigned duties for the
Company, dishonesty, gross negligence or misconduct; (b) the conviction of the
Employee of, or the entry of a pleading of guilty or nolo contendere by the
Employee to, any crime involving moral turpitude or any felony; (c) Employee's
habitual drunkenness, use of illegal substances or drugs or the use, possession,
distribution or being under the influence of alcohol or illegal substances or
drugs in the workplace (the only exception is that the Employee may consume
alcohol reasonably and responsibly, if he so chooses, at legitimate business
events and functions where alcohol is legally available); or (d) the breach by
the Employee of any terms of this Agreement, which breach continues for 30 days
subsequent to written notice from the Company to the Employee of the breach
(unless such breach is not susceptible to cure, in which case termination shall
be deemed to be immediate);
4.3 Upon the death or disability of the Employee. As used in this
Agreement, the term "disability" shall mean the inability of the Employee, due
to a physical or mental disability, for a period of 90 days, whether or not
consecutive, during any 360-day period to perform the services contemplated
under this Agreement. A determination of disability shall be made by a physician
satisfactory to both the Employee and the Company; provided that if the Employee
and the Company do not agree on a physician, the Employee and the Company shall
each select a physician and these two together shall select a third physician,
whose determination as to disability shall be binding on all parties; or
4.4 At the election of the Company, upon not less than 30 days' prior
written notice of termination.
5. Effect of Termination.
5.1 Termination for Cause or Voluntary Termination. In the event the
Employee's employment is terminated for cause pursuant to Section 4.2, the
Company shall pay to the Employee the compensation and benefits which would
otherwise be payable to him through the last day of his actual employment by the
Company.
Exhibit E-2
<PAGE> 230
5.2 Termination for Death or Disability. If the Employee's employment
is terminated by death or because of disability pursuant to Section 4.3, the
Company shall pay to the estate of the Employee or to the Employee, as the case
may be, the compensation and benefits which would otherwise be payable to the
Employee through the date of his termination of employment because of death or
disability.
5.3 Termination Without Cause. If the Employee's employment is
terminated at the election of the Company pursuant to Section 4.4, and in
consideration of the post-termination non-compete and non-solicitation agreement
set forth in Section 6, the Company shall pay to the Employee the compensation
and benefits payable to him under Section 3, at the times provided in Section 3,
through the day immediately prior to the third anniversary of the Commencement
Date.
5.4 Survival. The provisions of Sections 5 and 6 shall survive the
termination of this Agreement.
6. Non-Compete and Non-Solicitation.
(a) The Employee recognizes that his willingness to enter into the
restrictive covenants contained in this Section 6 was a critical condition
precedent to the willingness of the Parent Corporation to acquire the Company
and of the Parent Corporation and the Company to enter into and perform under
this Agreement. The Employee also acknowledges that the restrictions contained
in this Section 6 will not materially or unreasonably interfere with the
Employee's ability to earn a living.
(b) During the Employment Period and for a period extending through the
later of (x) the fourth anniversary of the Commencement Date or (y) the first
anniversary of the date on which the Employee ceases to be employed by the
Company, the Employee will not directly or indirectly:
(i) as an individual proprietor, partner, stockholder, officer,
employee, director, joint venturer, investor, agent, distributor, dealer,
representative, lender, or in any other capacity whatsoever (other than as
the holder of not more than one percent (1%) of the total outstanding stock
of a publicly held company), engage in the business of developing,
producing, marketing or selling products of the kind or type developed or
being developed, produced, marketed or sold by the Company while the
Employee was employed by the Company; or
(ii) recruit, solicit or induce, or attempt to induce, any
employee or employees of the Company to terminate their employment with, or
otherwise cease their relationship with, the Company; or
(iii) solicit, divert or take away, or attempt to divert or to
take away, the business or patronage of any of the clients, customers,
dealers, distributors, representatives or accounts, or prospective clients,
customers, dealers, distributors, representatives or accounts, of the
Company which were contacted, solicited or served by employees of the
Company while the Employee was employed by the Company.
(c) In the event that any court of competent jurisdiction determines
that the duration or the geographic scope, or both, of the non-competition and
non-solicitation provisions set forth in this Section 6 are unreasonable and
that such provisions are to that extent unenforceable, the parties hereto agree
that the provisions shall remain in full force and effect for the greatest time
period and in the greatest area that would not render them unenforceable. The
parties intend that these non-competition and non-solicitation provisions shall
be deemed to be a series of separate covenants, one for each and every county of
each and every state of the United States of America and each and every
political subdivision of each and every country outside the United States of
America where this provision is intended to be effective.
(d) The restrictions contained in this Section 6 are necessary for the
protection of the business and goodwill of the Company and are considered by the
Employee to be reasonable for such purpose. The Employee agrees that any breach
of this Section 6 will cause the Company substantial and irrevocable damage and
therefore, in the event of any such breach, in addition to such other remedies
which may be available, the Company shall have the right to seek specific
performance and injunctive relief.
(e) For purposes of this Section 6, the "Company" refers to the Company,
the Parent Corporation and any of their respective affiliates.
Exhibit E-3
<PAGE> 231
7. Proprietary Information and Developments. Concurrently with the
execution of this Agreement, the Employee shall enter into the Parent
Corporation's standard Employee Nondisclosure and Developments Agreement, a copy
of which is attached hereto as EXHIBIT A (the "Nondisclosure Agreement").
8. Notices. All notices required or permitted under this Agreement shall
be in writing and shall be deemed effective upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail,
postage prepaid, addressed to the other party at the address shown above, or at
such other address or addresses as either party shall designate to the other in
accordance with this Section 8.
9. Pronouns. Whenever the context may require, any pronouns used in this
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular forms of nouns and pronouns shall include the plural, and vice
versa.
10. Entire Agreement. This Agreement, together with the Nondisclosure
Agreement, constitutes the entire agreement between the parties and supersedes
all prior agreements and understandings, whether written or oral, relating to
the subject matter of this Agreement.
11. Amendment. This Agreement may be amended or modified only by a
written instrument executed by all of the parties hereto.
12. Governing Law. This Agreement shall be construed, interpreted and
enforced in accordance with the internal laws (and not the law of conflicts) of
the Commonwealth of Massachusetts.
13. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of all of the parties hereto and their respective
successors and assigns, including any corporation with which or into which the
Company or the Parent Corporation may be merged or which may succeed to its
respective assets or business; provided, however, that the obligations of the
Employee are personal and shall not be assigned by him.
14. Miscellaneous.
14.1 No delay or omission by the Company or the Parent Corporation in
exercising any right under this Agreement shall operate as a waiver of that or
any other right. A waiver or consent given by the Company or the Parent
Corporation on any one occasion shall be effective only in that instance and
shall not be construed as a bar or waiver of any right on any other occasion.
14.2 The captions of the sections of this Agreement are for convenience
of reference only and in no way define, limit or affect the scope or substance
of any section of this Agreement.
14.3 In case any provision of this Agreement shall be invalid, illegal
or otherwise unenforceable, the validity, legality and enforceability of the
remaining provisions shall in no way be affected or impaired thereby.
14.4 This Agreement shall become effective upon the Closing Date (as
such term is defined in the Merger Agreement) and shall be of no force and
effect if the Merger Agreement is terminated in accordance with its terms.
Exhibit E-4
<PAGE> 232
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day and year set forth above.
RSA DATA SECURITY, INC.
By: ................................
Name:
Title:
EMPLOYEE
...
The undersigned has executed this Agreement only for purposes of becoming
bound by Section 3.4 hereof.
SECURITY DYNAMICS TECHNOLOGIES, INC.
By: ................................
Name:
Title:
Exhibit E-5
<PAGE> 233
EXHIBIT A
[Form of Employee Nondisclosure and Developments Agreement]
Exhibit E-6
<PAGE> 234
EXHIBIT F
[LETTERHEAD OF HALE AND DORR]
, 1996
RSA DATA SECURITY, INC.
100 Marine Parkway
Suite 500
Redwood City, CA 94065-1031
Ladies and Gentlemen:
This opinion is furnished to you pursuant to Section 5.3(d) of the
Agreement and Plan of Merger dated as of April 14, 1996 (the "Merger
Agreement"), between Security Dynamics Technologies, Inc., a Delaware
corporation (the "Buyer"), Card-Key Inc., a Delaware corporation and a
wholly-owned subsidiary of the Buyer (the "Transitory Subsidiary"), and RSA Data
Security, Inc., a Delaware corporation (the "Company"). Capitalized terms used
herein and not otherwise defined shall have the respective meanings ascribed to
them in the Merger Agreement.
We have acted as counsel to the Buyer and the Transitory Subsidiary in
connection with the Merger and the preparation of the related Certificate of
Merger to be filed with the Secretary of State of Delaware. As such counsel, we
have assisted in the preparation of the Merger Agreement and the Escrow
Agreement (together, the "Documents") and in the preparation and filing with the
Securities and Exchange Commission (the "Commission") of a Registration
Statement on Form S-4 (File No. 333- ), as amended by [description of
amendments to be provided], and including as a part thereof the Proxy
Statement/Prospectus, dated , 1996, in the form contained in
[Pre/Post-Effective] Amendment No. (the "Proxy Statement/Prospectus"). Such
Registration Statement, as amended by all pre-effective and post-effective
amendments, is referred to herein as the "Registration Statement."
In connection with this opinion, we have also examined and are familiar
with and have relied upon the following documents:
(a) The Third Restated Certificate of Incorporation of the Buyer (the
"Buyer Charter");
(b) The Amended and Restated By-laws of the Buyer (the "Buyer
By-laws");
(c) The Certificate of Incorporation of the Transitory Subsidiary (the
"Transitory Subsidiary Charter");
(d) The By-laws of the Transitory Subsidiary (the "Transitory
Subsidiary By-laws");
(e) A Certificate of the Secretary of State of Delaware, dated as of a
recent date, certifying as to the legal existence and good standing of the
Buyer in Delaware (the "Buyer Good Standing Certificate");
(f) A Certificate of the Secretary of State of Delaware, dated as of a
recent date, certifying as to the legal existence and good standing of the
Transitory Subsidiary in Delaware (the "Transitory Subsidiary Good Standing
Certificate");
(g) A certificate of the Secretary of the Buyer attesting to the
incumbency of the Buyer's officers and the authenticity of the resolutions
authorizing the transactions contemplated by the Merger Agreement;
(h) A certificate of the Secretary of the Transitory Subsidiary
attesting to the incumbency of the Transitory Subsidiary's officers and the
authenticity of the resolutions authorizing the transactions contemplated
by the Merger Agreement;
(i) Resolutions of the Board of Directors and stockholders of the
Buyer approving the Merger and authorizing, among other things, the
execution, delivery and performance by the Buyer of the Merger Agreement
and related documents;
Exhibit F-1
<PAGE> 235
(j) Resolutions of the Board of Directors and sole stockholder of the
Transitory Subsidiary approving the Merger and authorizing, among other
things, the execution, delivery and performance by the Transitory
Subsidiary of the Merger Agreement and related documents;
(k) The Merger Agreement;
(l) The Certificate of Merger;
(m) The Escrow Agreement;
(n) The Prospectus/Proxy Statement;
(o) The Registration Statement;
(p) The closing certificate of the Buyer and the Transitory Subsidiary
described in Section 5.3(c) of the Merger Agreement; and
(q) Such other documents, opinions, instruments and certificates
(including, but not limited to, certificates of public officials and
officers of the Buyer and the Transitory Subsidiary) as we have considered
necessary for purposes of this opinion, which have been identified and made
available to counsel to the Company.
In our examination of the documents described above, we have assumed the
genuineness of all signatures, the legal capacity of each signatory to such
documents, the authenticity of all documents submitted to us as originals, the
conformity to original documents of documents submitted to us as certified,
facsimile or photostatic copies, and the authenticity of the originals of such
latter documents. We have assumed that the Documents accurately describe and
contain the mutual understanding of the parties as to all matters contained
therein, and that no other agreements or understandings exist between the
parties with respect to the Documents.
Insofar as this opinion relates to factual matters, information with
respect to which is in the possession of the Buyer and the Transitory
Subsidiary, we have relied upon certificates of officers of the Buyer and the
Transitory Subsidiary, copies of which have previously been provided to your
counsel. We have not attempted to verify independently such facts, although we
know of no facts which lead us to question the accuracy of such certificates.
Any reference herein to "the best of our knowledge," "our knowledge" or to
any matter "known to us," "of which we are aware" or "coming to our attention"
or any variation of any of the foregoing shall mean the conscious awareness of
the attorneys in this firm who have rendered substantive attention to this
transaction (including, without limitation, the preparation of the Documents,
the Prospectus/Proxy Statement and the Registration Statement and the
transactions contemplated thereby) of the existence or absence of any facts
which would contradict our opinions set forth below. We have not undertaken any
independent investigation to determine the existence or absence of such facts,
and no inference as to our knowledge of the existence or absence of such facts
should be drawn from the fact of our representation of the Buyer or the
Transitory Subsidiary.
For purposes of this opinion, we have assumed that the Documents have been
duly authorized, executed and delivered by each of the signatories thereto other
than the Buyer and the Transitory Subsidiary, as the case may be, that the
signatories thereto other than the Buyer and the Transitory Subsidiary, as the
case may be, have the legal capacity and all requisite power and authority to
effect the transactions contemplated by the Documents and that the Documents are
the valid, binding and enforceable obligations of each of the signatories
thereto other than the Buyer and the Transitory Subsidiary, as the case may be,
enforceable against them in accordance with their respective terms. We are
expressing no opinion herein as to the application of or compliance with any
federal, state or local law or regulation relating to the power, authority or
competence of any party to the Documents other than the Buyer and the Transitory
Subsidiary.
Our opinions expressed in paragraph 1 below, insofar as they relate to the
due organization, legal existence and good standing of the Buyer and the
Transitory Subsidiary, are based solely on the Buyer Good
Exhibit F-2
<PAGE> 236
Standing Certificate and the Transitory Subsidiary Good Standing Certificate,
are rendered as of the respective dates thereof, and are limited accordingly.
Our opinion in paragraph 2 below as to the number of shares of capital
stock of the Buyer outstanding and held in treasury as of , 1996
and the full payment therefor is based solely upon a certificate of the Buyer
certified by the Buyer's transfer agent for the Merger Shares, a copy of which
is attached hereto as Exhibit A.
The opinions hereinafter expressed are qualified to the extent that they
may be subject to or affected by (i) applicable bankruptcy, insolvency,
reorganization, moratorium, usury, fraudulent transfer or other laws affecting
the rights and remedies of creditors generally, (ii) statutory or decisional law
concerning recourse by creditors to security in the absence of notice or
hearing, and (iii) duties and standards imposed on creditors and parties to
contracts, including without limitation requirements of good faith,
reasonableness and fair dealing. We express no opinion as to the availability of
any equitable or specific remedy or defense upon any breach of any of the
covenants, warranties or other provisions contained in the Documents or any of
the other agreements, instruments or documents referred to herein or therein, or
of any rights granted pursuant to any of such agreements, instruments or
documents, in so much as the availability of such remedies or defenses may be
subject to the discretion of a court.
We express no opinion as to the laws of any state or jurisdiction other
than the state laws of the Commonwealth of Massachusetts, the General
Corporation Law statute of the State of Delaware and the federal laws of the
United States. Accordingly, to the extent that any other laws govern any of the
matters as to which we express an opinion below, we have assumed with your
permission, without independent investigation, that the laws of such
jurisdiction are identical to the state laws of the Commonwealth of
Massachusetts, and we express no opinion as to whether such assumption is
reasonable or correct.
We are expressing no opinion as to compliance by the Buyer with the
so-called "Blue Sky" or state securities laws other than those of the
Commonwealth of Massachusetts, or with any state or federal antifraud laws, in
connection with the issuance of the Merger Shares in the Merger.
We express no opinion herein as to whether the Merger will qualify for
"pooling treatment" in accordance with applicable accounting rules and
principles or as to the tax consequences of the Merger under applicable federal,
state and local income tax laws and regulations.
In connection with our opinion in paragraph 6 below, we were advised by
[name of SEC examiner] of the Commission by telephone on , 1996 that the
Commission had declared [Pre/Post-Effective] Amendment No. to the Registration
Statement effective as of : p.m. on , 1996, but we have not
yet received written confirmation from the Commission of the effectiveness of
the Registration Statement [or of Post-Effective Amendment No. thereto].
On the basis of and subject to the foregoing, we are of the opinion that:
1. Each of the Buyer and the Transitory Subsidiary is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware. The Buyer has all requisite corporate power and authority to carry on
the business in which it is engaged (as described in the Registration Statement)
and to own and use the properties owned and used by it (as described in the
Registration Statement).
2. The authorized capital stock of the Buyer consists of 30,000,000 shares
of Buyer Common Stock, of which shares were issued and outstanding
and shares were held in the treasury of the Buyer as of
, 1996. All of the issued and outstanding shares of capital stock
of the Buyer are duly authorized, validly issued, fully paid and nonassessable.
All of the Merger Shares will be, when issued in accordance with the Merger
Agreement, duly authorized, validly issued, fully paid and nonassessable.
3. Each of the Buyer and the Transitory Subsidiary has all requisite
corporate power and authority to execute and deliver the Merger Agreement and
(in the case of the Buyer) the Escrow Agreement and to perform its obligations
thereunder. The execution and delivery of the Merger Agreement and (in the case
of the Buyer) the Escrow Agreement and the performance of the Merger Agreement
and (in the case of the Buyer) the Escrow Agreement and the consummation of the
transactions contemplated thereby have been
Exhibit F-3
<PAGE> 237
duly and validly authorized by all necessary corporate action on the part of the
Buyer and the Transitory Subsidiary. The Merger Agreement and (in the case of
the Buyer) the Escrow Agreement have been duly and validly executed and
delivered by the Buyer and the Transitory Subsidiary and constitute valid and
binding obligations of the Buyer and the Transitory Subsidiary, enforceable
against the Buyer and the Transitory Subsidiary in accordance with their
respective terms.
4. Except as set forth in the Merger Agreement, neither the execution and
delivery by the Buyer or the Transitory Subsidiary of the Merger Agreement, nor
the consummation by the Buyer or the Transitory Subsidiary of the transactions
contemplated thereby, (i) conflicts with or violates any provision of the Buyer
Charter, the Buyer By-laws, the Transitory Subsidiary Charter or the Transitory
Subsidiary By-laws, (ii) requires on the part of the Buyer or the Transitory
Subsidiary any filing with, or permit, authorization, consent or approval of,
any Governmental Entity which has not been filed or obtained, (iii) conflicts
with, results in a breach of, constitutes (with or without due notice or lapse
of time or both) a default under, results in the acceleration of, creates in any
party the right to accelerate, terminate, modify or cancel or requires any
notice, consent or waiver (which has not been obtained) under, any contract,
lease, sublease, license, sublicense, franchise, permit, indenture, agreement or
mortgage for borrowed money, instrument of indebtedness, Security Interest or
other agreement or instrument filed as an Exhibit to the Buyer Reports to which
the Buyer is a party, or (iv) violates any statute, rule or regulation, or any
order, writ, injunction or decree known to us that is specifically applicable to
the Buyer or the Transitory Subsidiary or any of their respective properties or
assets.
5. All authorizations, consents and approvals of all Federal and state
governmental agencies and authorities required in order to permit consummation
by the Buyer and the Transitory Subsidiary of the transactions contemplated by
the Merger Agreement have been obtained.
6. The Merger Shares to be issued to the Company Stockholders pursuant to
the Merger Agreement have been registered under the Securities Act pursuant to
the Registration Statement.
7. The information with respect to the Buyer and the Transitory Subsidiary
contained in the Prospectus/Proxy Statement and the Registration Statement
complied as to form in all material respects with all applicable requirements of
the Securities Act and the Exchange Act (except that we express no such opinion
with respect to the financial statements, schedules and other financial and
statistical data included therein).
8. Upon the filing of the Certificate of Merger with the Secretary of
State of Delaware, the Merger will be effective under Delaware law.
This opinion is based upon currently existing statutes, rules, regulations
and judicial decisions and upon facts known to us on the date hereof, and we
disclaim any obligation to advise you of any change in any of these sources of
law or subsequent legal or factual developments which might affect any matters
or opinions set forth herein.
Please note that we are opining only as to the matters expressly set forth
herein, and no opinion should be inferred as to any other matters.
This opinion is furnished to you pursuant to Section 5.3(d) of the Merger
Agreement and may not be relied upon by any other person or entity or for any
other purpose without our express prior written consent.
Very truly yours,
HALE AND DORR
Exhibit F-4
<PAGE> 238
EXHIBIT A -- CERTIFICATE OF THE BUYER
Exhibit F-5
<PAGE> 239
ANNEX B
ROBERTSON
STEPHENS &
COMPANY
April 14, 1996
Board of Directors
Security Dynamics Technologies, Inc.
One Alewife Center
Cambridge, MA 02140-2312
You have asked our opinion with respect to the fairness to Security
Dynamics Technologies, Inc. ("Security Dynamics"), from a financial point of
view and as of the date hereof, of the Consideration (as defined below) to be
paid in the proposed merger of RSA Data Security, Inc. ("RSA") and a
wholly-owned subsidiary of Security Dynamics, pursuant to the Agreement and Plan
of Merger, dated as of April 14, 1996 (the "Agreement"). Under the terms of the
Agreement, a wholly-owned subsidiary of Security Dynamics will merge with and
into RSA (the "Merger"), and upon consummation of the Merger, RSA will become a
wholly-owned subsidiary of Security Dynamics. In the Merger, Security Dynamics
will issue 4,000,000 shares of Security Dynamics common stock consisting of
directly issued shares and options to acquire Security Dynamics common stock
(the "Consideration") in exchange for all outstanding RSA preferred stock,
common stock and options. Twelve and one-half percent (12.5%) of the aggregate
shares of Security Dynamics common stock to be issued in the Merger at closing
will be placed in escrow to secure certain obligations of RSA under the
Agreement. The Merger is intended to qualify as a tax-free reorganization within
the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended,
and to be accounted for as a "pooling of interests." The terms and conditions of
the Merger are set out more fully in the Agreement.
For purposes of this opinion we have: (i) reviewed financial information of
Security Dynamics and RSA furnished to us by both companies, including certain
internal financial analyses and forecasts prepared by the management of Security
Dynamics and RSA; (ii) reviewed publicly available information; (iii) held
discussions with the management of Security Dynamics and RSA concerning the
businesses, past and current business operations, financial condition and future
prospects of both companies, independently and combined; (iv) reviewed the
Agreement; (v) reviewed the stock price and trading history of Security
Dynamics; (vi) reviewed the contribution by each company to pro forma combined
revenue, gross profit, operating income, pre-tax income and net income; (vii)
reviewed the valuations of publicly traded companies which we deemed comparable
to Security Dynamics and RSA; (viii) compared the financial terms of the Merger
with other transactions which we deemed relevant; (ix) analyzed the pro forma
earnings per share of the combined company; (x) prepared a discounted cash flow
analysis of RSA; and (xi) made such other studies and inquiries, and reviewed
such other data, as we deemed relevant.
In connection with our opinion, we have not however independently verified
any of the foregoing information and have relied on all such information being
complete and accurate in all material respects. Furthermore, we did not obtain
any independent appraisal of the properties or assets and liabilities of
Security Dynamics or RSA. With respect to the financial and operating forecasts
(and the assumptions and bases therefor) of Security Dynamics and RSA which we
have reviewed, we have assumed that such forecasts have been reasonably prepared
in good faith on the basis of reasonable assumptions, reflect the best available
estimates and judgments of such respective managements and that such projections
and forecasts will be realized in the amounts and in the time periods currently
estimated by the managements of Security Dynamics and RSA. In addition, we have
relied upon estimates and judgments of Security Dynamics and RSA managements as
to the future financial performance of both companies. We have also assumed that
the Merger will be accounted for as a "pooling of interests" under GAAP. While
we believe that our review, as
B-1
<PAGE> 240
described within, is an adequate basis for the opinion that we express, this
opinion is necessarily based upon market, economic and other conditions that
exist and can be evaluated as of the date of this letter, and on information
available to us as of the date hereof.
Robertson, Stephens & Company has provided certain investment banking
services to Security Dynamics from time to time, including acting as an
underwriter for each of the two public offerings of shares of the common stock
of Security Dynamics. In addition, Robertson, Stephens & Company maintains a
market in shares of the common stock of Security Dynamics. Furthermore,
Robertson, Stephens & Company has acted as financial advisor to Security
Dynamics in connection with the Merger for which a portion of our fees is due
and payable upon delivery of this opinion and the remaining portion of our fees
is due and payable contingent upon the closing of the Merger.
Based upon and subject to the foregoing considerations, it is our opinion,
as investment bankers, that, as of the date hereof, the Consideration to be paid
is fair to Security Dynamics from a financial point of view.
This opinion speaks only as of the date hereof. It is understood that this
opinion is for the information of the Board of Directors of Security Dynamics in
connection with its consideration of the Merger, and does not constitute a
recommendation to any Security Dynamics stockholder as to how such stockholder
should vote on the Merger. This opinion may not be published or referred to, in
whole or in part, without our prior written permission, which shall not be
unreasonably withheld. Robertson, Stephens & Company hereby consents to
references to and the inclusion of this opinion in its entirety in the joint
proxy statement and prospectus to be disseminated to the stockholders of
Security Dynamics and RSA in connection with the transaction.
Very truly yours,
ROBERTSON, STEPHENS & COMPANY LLC
BY: Robertson, Stephens & Company
Group, L.L.C.
/s/ Edwin David Hertz
Authorized Signatory
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ANNEX C
RSA DATA SECURITY, INC.
STOCKHOLDER AGREEMENT
THIS STOCKHOLDER AGREEMENT (the "Agreement") is made and entered into as of
April 14, 1996, by and among SECURITY DYNAMICS TECHNOLOGIES, INC., a Delaware
corporation (the "Buyer"), RSA DATA SECURITY, INC., a Delaware corporation (the
"Company") and the undersigned stockholder (the "Stockholder") of the Company.
Capitalized terms used herein but not otherwise defined herein shall have the
meanings ascribed to them in the Merger Agreement (as defined below).
RECITALS
A. Concurrently with the execution of this Agreement, the Buyer, Card-Key
Inc., a Delaware corporation and wholly-owned subsidiary of the Buyer (the
"Sub"), and the Company have entered into an Agreement and Plan of Merger (the
"Merger Agreement"), which provides for the merger (the "Merger") of Sub with
and into the Company. Pursuant to the Merger, all outstanding capital stock of
the Company will be converted into the right to receive common stock of the
Buyer, as set forth in the Merger Agreement.
B. The Stockholder is the beneficial owner (as defined in Rule 13d-3 under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of such
number of shares of the outstanding capital stock of the Company and shares
subject to outstanding options and warrants as is indicated on the signature
page of this Agreement (the "Shares").
C. In consideration of the execution of the Merger Agreement by the Buyer,
the Stockholder agrees to restrict the transfer or disposition of any of the
Shares, or any other shares of capital stock of the Company acquired by the
Stockholder hereafter and prior to the Expiration Date (as defined in Section
1.1 below), agrees to vote the Shares and any other such shares of capital stock
of the Company so as to facilitate consummation of the Merger and agrees to vote
all shares of common stock of the Buyer held by the Stockholder after the Merger
in accordance with the terms hereof.
NOW, THEREFORE, the parties agree as follows:
1. Agreement to Retain Shares.
1.1 Transfer and Encumbrance. The Stockholder agrees, during the
period beginning the date thirty (30) days prior to the Closing Date and
ending on the Expiration Date, not to transfer, sell, exchange, pledge or
otherwise dispose of or encumber (collectively, "Transfer") any of the
Shares or any New Shares (as defined in Section 1.2 below). The Stockholder
further agrees that from the date hereof until the date thirty (30) days
prior to the Closing Date, in the event that the Stockholder proposes to
Transfer any of the Shares or any New Shares, the Stockholder shall cause
any such proposed transferee of such shares, and each such transferee shall
cause any subsequent transferee of such shares, to take such shares subject
to the provisions of Sections 1, 2, 3, 5 and 8 hereof (collectively, the
"Covenants") and subject to the Proxy (as defined herein) attached hereto
as Exhibit A, and it shall be a condition to any such proposed Transfer
that the proposed transferee agree in writing to be bound by the Covenants
and the Proxy as if this Agreement and the Proxy had been executed by such
proposed transferee. If necessary to effectuate the intent of the foregoing
sentence, any such proposed transferee shall be required, as a condition to
the Transfer, to execute this Agreement and a Proxy. The Stockholder, each
transferee and each subsequent transferee acknowledges that the intent of
the foregoing sentences is to ensure that the Buyer enjoys the benefit of
the Covenants and retains the right under the Proxy to vote the Shares and
any New Shares in accordance with the terms of the Proxy, notwithstanding
any subsequent Transfer of such shares by the Stockholder, any transferee
or any subsequent transferee, and the Stockholder, each transferee and each
subsequent transferee agree not to Transfer any of the Shares or any New
Shares unless the Buyer enjoys the benefit of the Covenants and retains its
right to vote any such shares in accordance with the Proxy. As used herein,
the term "Expiration Date" shall mean the
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earlier to occur of (i) such date and time as the Merger shall become
effective in accordance with the terms and provisions of the Merger
Agreement or (ii) the termination of the Merger Agreement in accordance
with its terms.
1.2 New Shares. The Stockholder agrees that any shares of capital stock
of the Company that the Stockholder purchases or with respect to which the
Stockholder otherwise acquires beneficial ownership after the date of this
Agreement and prior to the Expiration Date ("New Shares") shall be subject to
the terms and conditions of this Agreement to the same extent as if they
constituted Shares.
2. Agreement to Vote Shares. At every meeting of the Stockholders of the
Company called with respect to any of the following, and at every adjournment
thereof, and on every action or approval by written consent of the Company
Stockholders with respect to any of the following, the Stockholder shall vote
the Shares and any New Shares: (i) in favor of approval of the Merger Agreement
and the Merger; and (ii) against approval of any proposal made in opposition to
or in competition with consummation of the Merger and the Merger Agreement,
against any merger, consolidation, sale of assets, reorganization or
recapitalization with any party other than the Buyer or any designee thereof and
against any liquidation or winding up of the Company (each of the foregoing is
referred to as an "Opposing Proposal").
3. Irrevocable Proxy. Concurrently with the execution of this Agreement,
the Stockholder agrees to deliver to the Buyer a proxy in the form attached as
Exhibit A (the "Proxy"), which shall be irrevocable to the extent provided in
Section 212 of the General Corporation Law of the State of Delaware, covering
the total number of Shares and New Shares of capital stock of the Company
beneficially owned (as such term is defined in Rule 13d-3 under the Exchange
Act) by the Stockholder set forth therein.
4. Representations, Warranties and Covenants of Stockholder. The
Stockholder represents, warrants and covenants to the Buyer as follows: the
Stockholder: (i) is the beneficial owner of the Shares, which at the date of
this Agreement and at all times up until the Expiration Date will be free and
clear of any liens, claims, options, charges or other encumbrances, (ii) does
not beneficially own any shares of capital stock of the Company other than the
Shares (excluding shares as to which Stockholder currently disclaims beneficial
ownership in accordance with applicable law), and (iii) has full power and
authority to make, enter into and carry out the terms of this Agreement and the
Proxy.
5. Registration Rights.
5.1 Certain Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
(a) "Commission" means the Securities and Exchange Commission, or any
other Federal agency at the time administering the Securities Act.
(b) "Common Stock" means the Common Stock, $.01 par value per share,
of the Buyer.
(c) "Exchange Act" means the Securities Exchange Act of 1934, as
amended, or any similar Federal statute, and the rules and regulations of
the Commission issued under such Act, as they each may, from time to time,
be in effect.
(d) "Registrable Shares" means (i) the Merger Shares issued to the
Stockholder pursuant to the Merger Agreement in respect of the Shares and
any New Shares and (ii) any other shares of Common Stock issued in respect
of such shares (because of stock splits, stock dividends,
reclassifications, recapitalizations, or similar events); provided,
however, that shares of Common Stock which are Registrable Shares shall
cease to be Registrable Shares upon any transfer, sale or disposition
thereof, whether pursuant to a Registration Statement, Rule 144 under the
Securities Act or otherwise, other than a transfer by will or the laws of
descent or distribution or pursuant to a marital settlement agreement or
divorce decree if such transfer is made in accordance with the provisions
of Section 10.2 of this Agreement.
(e) "Registration Expenses" means the expenses described in Section
5.5.
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(f) "Registration Rights Commencement Date" means the date that is 90 days
following the date on which the Buyer has published (within the meaning of
Accounting Series Release No. 130, as amended, of the Commission) financial
results covering at least 30 days of combined operations of the Company and the
Buyer.
(g) "Registration Statement" means a registration statement filed by the
Buyer with the Commission for a public offering and sale of Common Stock (other
than a registration statement on Form S-8 or Form S-4, or their successors, or
any other form for a similar limited purpose, or any registration statement
covering only securities proposed to be issued in exchange for securities or
assets of another corporation).
(h) "Securities Act" means the Securities Act of 1933, as amended, or any
similar Federal statute, and the rules and regulations of the Commission issued
under such Act, as they each may, from time to time, be in effect.
5.2 Required Registrations.
(a) At any time after the Registration Rights Commencement Date, the
Stockholder may request the Buyer, in writing, to effect the registration on
Form S-3 (or any successor form relating to secondary offerings) of Registrable
Shares having an aggregate offering price of at least $1,000,000 (based on the
then current public market price). Thereupon, the Buyer shall, as expeditiously
as possible, use its best efforts to effect the registration on Form S-3 (or
such successor form) of all Registrable Shares which the Buyer has been
requested to so register.
(b) The Buyer shall not be required to effect more than one registration
initiated at the request of the Stockholder pursuant to Section 5.2(a) above.
(c) If at the time of any request to register Registrable Shares pursuant
to this Section 5.2, the Buyer is engaged or has fixed plans to engage within 60
days of the time of the request in a registered public offering as to which the
Stockholder may include Registrable Shares pursuant to Section 5.3 or is engaged
in any other activity which, in the good faith determination of the Buyer's
Board of Directors, would be adversely affected by the requested registration to
the material detriment of the Buyer, then the Buyer may at its option direct
that such request be delayed for a period not in excess of 120 days from the
effective date of such offering or the date of commencement of such other
material activity, as the case may be, such right to delay a request to be
exercised by the Buyer for not more than an aggregate of 150 days during any
consecutive 12-month period.
(d) Anything contained herein to the contrary notwithstanding, with respect
to a registration requested pursuant to this Section 5.2, the Buyer may include
in such registration any issued and outstanding shares of Common Stock by
others; provided, however, that the inclusion of such issued and outstanding
shares of Common Stock by others in such registration shall not prevent the
Stockholder from registering the entire number of Registrable Shares requested
by it.
5.3 Incidental Registration.
(a) Whenever the Buyer proposes to file a Registration Statement (other
than pursuant to Section 5.2) at any time and from time to time after the
Registration Rights Commencement Date, it will, prior to such filing, give
written notice to the Stockholder of its intention to do so and, upon the
written request of the Stockholder given within 20 days after the Buyer provides
such notice (which request shall state the intended method of disposition of
such Registrable Shares), the Buyer shall use its best efforts to cause all
Registrable Shares which the Buyer has been requested by the Stockholder to
register to be registered under the Securities Act to the extent necessary to
permit their sale or other disposition in accordance with the intended methods
of distribution specified in the request of the Stockholder; provided that the
Buyer shall have the right to postpone or withdraw any registration effected
pursuant to this Section 5.3 without obligation to the Stockholder.
(b) In connection with any registration under this Section 5.3 involving an
underwriting, the Buyer shall not be required to include any Registrable Shares
in such registration unless the Stockholder accepts the terms of the
underwriting as agreed upon between the Buyer and the underwriters selected by
it. If in the opinion of
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the managing underwriter it is appropriate because of marketing factors to limit
the number of Registrable Shares to be included in the offering, then the Buyer
shall be required to include in the registration only that number of Registrable
Shares, if any, which the managing underwriter believes should be included
therein; provided that no persons or entities other than the Buyer and holders
of securities of the Buyer who have registration rights ("Registration Rights
Holders") shall be permitted to include securities in the offering if the
underwriters determine to limit the numbers of Registrable Shares to be included
therein. If the number of shares of Common Stock to be included in the offering
in accordance with the foregoing limitation is less than the total number of
shares which the Registration Rights Holders have requested to be included, then
the Registration Rights Holders who have requested registration (including the
Stockholder) shall participate in the registration pro rata based upon their
total ownership of shares of Common Stock. If any Registration Rights Holder
would thus be entitled to include more securities than such Registration Rights
Holder requested to be registered, the excess shall be allocated among other
requesting holders pro rata in the manner described in the preceding sentence.
5.4 Registration Procedures. If and whenever the Buyer is required by the
provisions of this Agreement to use its best efforts to effect the registration
of any of the Registrable Shares under the Securities Act, the Buyer shall:
(a) file with the Commission a Registration Statement with respect to
such Registrable Shares and use its best efforts to cause that Registration
Statement to become effective;
(b) as expeditiously as possible prepare and file with the Commission
any amendments and supplements to the Registration Statement and the
prospectus included in the Registration Statement as may be necessary to
keep the Registration Statement effective, in the case of a firm commitment
underwritten public offering, until each underwriter has completed the
distribution of all securities purchased by it and, in the case of any
other offering, until the earlier of the sale of all Registrable Shares
covered thereby or 120 days after the effective date thereof (excluding any
days in which the Buyer requires the Stockholder to cease sales of shares
as provided below); provided, however, that the Buyer may by written notice
require that the Stockholder immediately cease sales of shares pursuant to
such Registration Statement at any time that (i) the Buyer becomes engaged
in a business activity or negotiation which is not disclosed in the
Registration Statement (or the prospectus included therein) which the Buyer
reasonably believes must be disclosed therein under applicable law and
which the Buyer desires to keep confidential for business purposes, (ii)
the Buyer determines that a particular disclosure so determined to be
required to be disclosed therein would be premature or would adversely
affect the Buyer or its business or prospects, or (iii) the Registration
Statement can no longer be used under the existing rules and regulations
promulgated under the Securities Act. The Buyer shall not be required to
disclose to the Stockholder which of the reasons specified in clauses (i),
(ii) or (iii) above are the basis for requiring a suspension of sales
hereunder;
(c) as expeditiously as possible furnish to the Stockholder such
reasonable numbers of copies of the prospectus, including a preliminary
prospectus, in conformity with the requirements of the Securities Act, and
such other documents as the Stockholder may reasonably request in order to
facilitate the public sale or other disposition of the Registrable Shares
owned by the Stockholder; and
(d) as expeditiously as possible use its best efforts to register or
qualify the Registrable Shares covered by the Registration Statement under
the securities or Blue Sky laws of such states as the Stockholder shall
reasonably request, and do any and all other acts and things that may be
necessary or desirable to enable the Stockholder to consummate the public
sale or other disposition in such states of the Registrable Shares owned by
the Stockholder; provided, however, that the Buyer shall not be required in
connection with this paragraph (d) to qualify as a foreign corporation or
execute a general consent to service of process in any jurisdiction.
If the Buyer has delivered preliminary or final prospectuses to the
Stockholder and after having done so the prospectus is amended to comply with
the requirements of the Securities Act, the Buyer shall promptly notify the
Stockholder and, if requested, the Stockholder shall immediately cease making
offers of Registrable Shares and return all prospectuses to the Buyer. The Buyer
shall promptly provide the Stockholder with
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revised prospectuses and, following receipt of the revised prospectuses, the
Stockholder shall be free to resume making offers of the Registrable Shares.
5.5 Allocation of Expenses. The Buyer will pay all Registration Expenses
of all registrations under this Section 5; provided, however, that if a
registration under Section 5.2 is withdrawn at the request of the Stockholder
(other than as a result of information concerning the business or financial
condition of the Buyer which is made known to the Stockholder after the date on
which such registration was requested) and if the Stockholder elects not to have
such registration counted as a registration requested under Section 5.2, the
Stockholder shall pay the Registration Expenses of such registration pro rata in
accordance with the number of its Registrable Shares included in such
registration. For purposes of this Section 5.5, the term "Registration Expenses"
shall mean all expenses incurred by the Buyer in complying with this Section 5,
including without limitation all registration and filing fees, exchange listing
fees, printing expenses and fees and expenses of counsel for the Buyer, state
Blue Sky fees and expenses, and the expense of any special audits incident to or
required by any such registration, and the reasonable fees and disbursements of
one counsel for all registration rights holders participating in the
registration (with such counsel being selected by the participating registration
rights holders), but excluding underwriting discounts and selling commissions.
5.6. Indemnification and Contribution.
(a) In the event of any registration of any of the Registrable Shares under
the Securities Act pursuant to this Section 5, the Buyer will indemnify and hold
harmless the Stockholder, each underwriter of such Registrable Shares, and each
other person, if any, who controls the Stockholder or underwriter within the
meaning of the Securities Act or the Exchange Act against any losses, claims,
damages or liabilities, joint or several, to which the Stockholder, underwriter
or controlling person may become subject under the Securities Act, the Exchange
Act, state securities or Blue Sky laws or otherwise, insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon any untrue statement or alleged untrue statement of any material
fact contained in any Registration Statement under which such Registrable Shares
were registered under the Securities Act, any preliminary prospectus or final
prospectus contained in the Registration Statement, or any amendment or
supplement to such Registration Statement, or arise out of or are based upon the
omission or alleged omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading; and the
Buyer will reimburse the Stockholder, underwriter and each such controlling
person for any legal or any other expenses reasonably incurred by the
Stockholder, underwriter or controlling person in connection with investigating
or defending any such loss, claim, damage, liability or action; provided,
however, that the Buyer will not be liable in any such case to the extent that
any such loss, claim, damage or liability arises out of or is based upon any
untrue statement or omission made in such Registration Statement, preliminary
prospectus or final prospectus, or any such amendment or supplement, in reliance
upon and in conformity with information furnished to the Buyer, in writing, by
or on behalf of the Stockholder, underwriter or controlling person specifically
for use in the preparation thereof.
(b) In the event of any registration of any of the Registrable Shares under
the Securities Act pursuant to this Section 5, the Stockholder will indemnify
and hold harmless the Buyer, each of its directors and officers and each
underwriter (if any) and each person, if any, who controls the Buyer or any such
underwriter within the meaning of the Securities Act or the Exchange Act,
against any losses, claims, damages or liabilities, joint or several, to which
the Buyer, such directors and officers, underwriter or controlling person may
become subject under the Securities Act, the Exchange Act, state securities or
Blue Sky laws or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in any
Registration Statement under which such Registrable Shares were registered under
the Securities Act, any preliminary prospectus or final prospectus contained in
the Registration Statement, or any amendment or supplement to the Registration
Statement, or arise out of or are based upon any omission or alleged omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, if the statement or omission was made in
reliance upon and in conformity with information relating to the Stockholder
furnished in writing to the Buyer by or on behalf of the Stockholder
specifically for use in connection with the preparation of such
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Registration Statement, prospectus, amendment or supplement; provided, however,
that the obligations of the Stockholder hereunder shall be limited to an amount
equal to the proceeds to the Stockholder of Registrable Shares sold in
connection with such registration.
(c) Each party entitled to indemnification under this Section 5.6 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided, that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld); and, provided, further, that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section 5.6, except to the extent the Indemnifying Party
is prejudiced thereby. The Indemnified Party may participate in such defense at
such party's expense; provided, however, that the Indemnifying Party shall pay
such expense if representation of such Indemnified Party by the counsel retained
by the Indemnifying Party would be inappropriate due to actual or potential
differing interests between the Indemnified Party and any other party
represented by such counsel in such proceeding. No Indemnifying Party, in the
defense of any such claim or litigation shall, except with the consent of each
Indemnified Party, consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such Indemnified Party of a release from all liability
in respect of such claim or litigation, and no Indemnified Party shall consent
to entry of any judgment or settle such claim or litigation without the prior
written consent of the Indemnifying Party.
(d) In order to provide for just and equitable contribution to joint
liability under the Securities Act in any case in which either (i) the
Stockholder, or any controlling person of the Stockholder, makes a claim for
indemnification pursuant to this Section 5.6 but it is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that this Section 5.6 provides for indemnification in such case, or (ii)
contribution under the Securities Act may be required on the part of the
Stockholder or any such controlling person in circumstances for which
indemnification is provided under this Section 5.6; then, in each such case, the
Buyer and the Stockholder will contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (after contribution from
others) in such proportions so that such holder is responsible for the portion
represented by the percentage that the public offering price of its Registrable
Shares offered by the Registration Statement bears to the public offering price
of all securities offered by such Registration Statement, and the Buyer is
responsible for the remaining portion; provided, however, that, in any such
case, (A) the Stockholder will not be required to contribute any amount in
excess of the proceeds to it of all Registrable Shares sold by it pursuant to
such Registration Statement, and (B) no person or entity guilty of fraudulent
misrepresentation, within the meaning of Section 11(f) of the Securities Act,
shall be entitled to contribution from any person or entity who is not guilty of
such fraudulent misrepresentation.
5.7 Information By Holder. The Stockholder shall furnish to the Buyer
such information regarding the Stockholder and the distribution proposed by the
Stockholder as the Buyer may request in writing and as shall be required in
connection with any registration, qualification or compliance referred to in
this Section 5.
5.8 Rule 144 Requirements. The Buyer agrees to:
(a) comply with the requirements of Rule 144(c) under the Securities
Act with respect to current public information about the Buyer;
(b) use its best efforts to file with the Commission in a timely
manner all reports and other documents required of the Buyer under the
Securities Act and the Exchange Act (at any time after it has become
subject to such reporting requirements); and
(c) furnish to the Stockholder upon written request (i) a written
statement by the Buyer as to its compliance with the requirements of said
Rule 144(c) and the reporting requirements of the Securities Act and the
Exchange Act, (ii) a copy of the most recent annual or quarterly report of
the Buyer, and
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(iii) such other reports and documents of the Buyer as such holder may
reasonably request to avail itself of any similar rule or regulation of the
Commission allowing it to sell any such securities without registration.
6. Additional Documents. The Stockholder and the Company hereby covenant
and agree to execute and deliver any additional documents reasonably necessary
or desirable to carry out the purpose and intent of this Agreement.
7. Consent and Waiver. The Stockholder hereby gives any consents or
waivers that are reasonably required for the consummation of the Merger under
the terms of any agreement to which the Stockholder is a party or pursuant to
any rights the Stockholder may have.
8. Termination. The provisions of Sections 1, 2, 3 and 4 of this
Agreement and the Proxy delivered in connection herewith shall terminate and
shall have no further force or effect as of the Expiration Date. The remaining
provisions of this Agreement shall terminate on the earliest of (i) the
termination of the Merger Agreement in accordance with its terms, (ii) the first
date following the Merger on which all of the Registrable Shares then held by
the Stockholder are eligible for sale pursuant to Rule 144 under the Securities
Act within a three-month period, and (iii) the fifth anniversary of the
Effective Time.
9. Legending of Shares. If so requested the Buyer, the Stockholder agrees
that the Shares and any New Shares shall bear a legend stating that they are
subject to this Agreement and to an irrevocable proxy. The Stockholder agrees
that he shall not Transfer the Shares or any New Shares without first having the
aforementioned legend affixed to the certificates representing the Shares or any
New Shares.
10. Miscellaneous.
10.1 Severability. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction to be invalid, void
or unenforceable, then the remainder of the terms, provisions, covenants and
restrictions of this Agreement shall remain in full force and effect and shall
in no way be affected, impaired or invalidated.
10.2 Binding Effect and Assignment. This Agreement and all of the
provisions hereof shall be binding upon and inure to the benefit of the parties
hereto and their respective successors and permitted assigns, but, except as
otherwise specifically provided herein, neither this Agreement nor any of the
rights, interests or obligations of the parties hereto may be assigned by any of
the parties without the prior written consent of the other parties. The parties
agree that Registrable Shares held by the Stockholder, and the registration
rights relating thereto set forth in Section 5 of this Agreement, may be
transferred by the Stockholder by will or the laws of descent or distribution or
pursuant to a marital settlement agreement or divorce decree; provided, that (i)
the Buyer is provided with written notice of such transfer, (ii) the transferee
agrees in writing to be bound by the terms hereof, and (iii) from and after the
effective date of such transfer any and all actions, consents, approvals and
waivers by the Stockholder pursuant to Section 5 shall be effected only by the
affirmative vote of the holders of a majority of the Registrable Shares then
held by the Stockholder and all such permitted transferees.
10.3 Amendments and Modification. This Agreement may not be modified,
amended, altered or supplemented except by the execution and delivery of a
written agreement executed by the parties hereto.
10.4 Specific Performance; Injunctive Relief. The parties acknowledge
that the Buyer will be irreparably harmed and that there will be no adequate
remedy at law for a violation of any of the covenants or agreements of the
Stockholder set forth herein. Therefore, it is agreed that, in addition to any
other remedies that may be available to the Buyer upon any such violation, the
Buyer shall have the right to enforce such covenants and agreements by specific
performance, injunctive relief or by any other means available to the Buyer at
law or in equity.
10.5 Notices. All notices and other communications pursuant to this
Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally recognized overnight courier or mailed by
registered or certified mail
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(return receipt requested), postage prepaid, to the parties at the following
address (or at such other address for a party as shall be specified by like
notice):
If to the Buyer: Security Dynamics
Technologies, Inc.
One Alewife Center
Cambridge, MA 02140-2312
With a copy to: Hale and Dorr
60 State Street
Boston, MA 02109
Attn: Jay E. Bothwick, Esq.
If to Stockholder: To the address for notice set forth on the last
page hereof.
With a copy to: RSA Data Security, Inc.
100 Marine Parkway
Suite 500
Redwood City, CA 94065-1031
With copies to: Fenwick & West
Two Palo Alto Square
Palo Alto, CA 94306
Attn: Joel D. Kellman, Esq.
Tomlinson Zisko Morosoli Maser LLP
200 Page Mill Road
Second Floor
Palo Alto, CA 94306
Attn: Timothy Tomlinson, Esq.
10.6 Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the internal laws of the State of Delaware, without
giving effect to any choice or conflict of law provision or rule (whether of the
State of Delaware or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Delaware.
10.7 Entire Agreement. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof, and
supersede all prior negotiations and understandings between the parties with
respect to such subject matter.
10.8 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
10.9 Effect of Headings. The section headings herein are for convenience
only and shall not affect the construction or interpretation of this Agreement.
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<PAGE> 249
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
<TABLE>
<S> <C>
SECURITY DYNAMICS TECHNOLOGIES, INC. STOCKHOLDER
............................................ Name:.......................................
By:......................................... By:.........................................
Title:...................................... Title:......................................
............................................ Stockholder's Address for Notice:
............................................ ............................................
RSA DATA SECURITY, INC. ............................................
............................................ ............................................
By:.........................................
Title:......................................
............................................
</TABLE>
Shares beneficially owned:
______ shares of Company Common
Stock
______ shares of Company Series A
Preferred Stock
______ shares of Company Series B
Preferred Stock
______ shares of Company Series C
Preferred Stock
______ shares of Company Series D
Preferred Stock
______ shares of Company Common
Stock issuable upon exercise of
outstanding options and warrants
C-9
<PAGE> 250
IRREVOCABLE PROXY
TO VOTE
RSA DATA SECURITY, INC. STOCK
The undersigned stockholder of RSA Data Security, Inc., a Delaware
corporation (the "Company"), hereby irrevocably (to the full extent permitted by
Section 212 of the General Corporation Law of the State of Delaware) appoints
the directors on the Board of Directors of Security Dynamics Technologies, Inc.,
a Delaware Corporation (the "Buyer"), and each of them, as the sole and
exclusive attorneys and proxies of the undersigned, with full power of
substitution and resubstitution, to vote and exercise all voting and related
rights (to the full extent that the undersigned is entitled to do so) with
respect to all of the shares of capital stock of the Company that now are or
hereafter may be beneficially owned by the undersigned, and any and all other
shares or securities of the Company issued or issuable in respect thereof on or
after the date hereof (collectively, the "Shares") in accordance with the terms
of this Proxy. The Shares beneficially owned by the undersigned stockholder of
the Company as of the date of this Proxy are listed on the final page of this
Proxy, along with the number of the share certificates which represent such
Shares. Upon the undersigned's execution of this Proxy, any and all prior
proxies given by each undersigned with respect to any Shares are hereby revoked
and the undersigned agrees not to grant any subsequent proxies with respect to
the Shares until after the Expiration Date (as defined below).
This Proxy is irrevocable (to the extent provided in Section 212 of the
General Corporation Law of the State of Delaware), is granted pursuant to that
certain Stockholder Agreement dated as of April 14, 1996, and is granted in
consideration of the Buyer's entering into that certain Agreement and Plan of
Merger dated as of April 14, 1996 (the "Merger Agreement"), among the Buyer,
Card-Key Inc., a Delaware corporation and wholly-owned subsidiary of the Buyer
("Sub") and the Company. The Merger Agreement provides for the merger of Sub
into the Company in accordance with its terms (the "Merger") and the Stockholder
is receiving a portion of the proceeds of the Merger. As used herein, the term
"Expiration Date" shall mean the earlier to occur of (i) such date and time as
the Merger shall become effective in accordance with the terms and provisions of
the Reorganization Agreement or (ii) the termination of the Merger Agreement in
accordance with its terms.
The attorneys and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time prior to the Expiration
Date; to act as the undersigned's attorney and proxy to vote the Shares, and to
exercise all voting, consent and similar rights of the undersigned with respect
to the Shares (including, without limitation, the power to execute and deliver
written consents pursuant to Section 228(a) of the General Corporation Law of
the State of Delaware) at every annual, special or adjourned meeting of the
stockholders of the Company and in every written consent in lieu of such
meeting: (a) in favor of approval of the Merger and the Merger Agreement; and
(b) against approval of any proposal made in opposition to or in competition
with the consummation of the Merger and the Merger Agreement, against any
merger, consolidation, sale of assets, reorganization or recapitalization of the
Company with any party other than the Buyer and its affiliates and against any
liquidation or winding up of the Company. The attorneys and proxies named above
may not exercise this Irrevocable Proxy on any other matter except as provided
in clauses (a) and (b) above. The undersigned Stockholder may vote the Shares on
all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
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<PAGE> 251
This Proxy is irrevocable (to the fullest extent permitted by Section 212
of the General Corporation Law of the State of Delaware). This Proxy shall
terminate, and be of no further force and effect, automatically upon the
Expiration Date.
Dated: April 14, 1996
........................................
Signature of Stockholder
........................................
Print Name of Stockholder
Shares beneficially owned:
shares of Company Common Stock
shares of Company Series A
Preferred Stock
shares of Company Series B
Preferred Stock
shares of Company Series C
Preferred Stock
shares of Company Series D
Preferred Stock
shares of Company Common Stock
issuable upon exercise of outstanding
options and warrants
C-11
<PAGE> 252
ANNEX D
Section 262 of the Delaware General Corporation Law
262 Appraisal Rights. (a) Any stockholder of a corporation of this State
who holds shares of stock on the date of the making of a demand pursuant to
subsection (d) of this section with respect to such shares, who continuously
holds such shares through the effective date of the merger or consolidation, who
has otherwise complied with subsection (d) of this section and who has neither
voted in favor of the merger or consolidation nor consented thereto in writing
pursuant to sec. 228 of this title shall be entitled to an appraisal by the
Court of Chancery of the fair value of his shares of stock under the
circumstances described in subsections (b) and (c) of this section. As used in
this section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock corporation; the
words "stock" and "share" mean and include what is ordinarily meant by those
words and also membership or membership interest of a member of a nonstock
corporation; and the words "depository receipt" mean a receipt or other
instrument issued by a depository representing an interest in one or more
shares, or fractions thereof, solely of stock of a corporation, which stock is
deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to sec.sec. 251, 252, 254, 257, 258, 263 or 264 of this title:
(1) Provided, however, that no appraisal rights under this section shall
be available for the shares of any class or series of stock, which stock, or
depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the holders of the surviving corporation as
provided in subsections (f) or (g) of sec. 251 of this title.
(2) Notwithstanding paragraph (l) of this subsection, appraisal rights
under this section shall be available for the shares of any class or series of
stock of a constituent corporation if the holders thereof are required by the
terms of an agreement of merger or consolidation pursuant to sec.sec. 251, 252,
254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting from
such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository receipts
in respect thereof, which shares of stock or depository receipts at the
effective date of the merger or consolidation will be either listed on a
national securities exchange or designated as a national market system security
on an interdealer quotation system by the National Association of Securities
Dealers, Inc. or held of record by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this paragraph;
or
d. Any combination of the shares of stock, depository receipts and
cash in lieu of fractional shares or fractional depository receipts described in
the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware corporation
party to a merger effected under sec. 253 of this title is not owned by the
parent corporation immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a
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<PAGE> 253
provision, the procedures of this section, including those set forth in
subsections (d) and (e) of this section, shall apply as nearly as is
practicable.
(d) Appraisal rights shall be perfected as follows:
(l) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of his
shares shall deliver to the corporation, before the taking of the vote on the
merger or consolidation, a written demand for appraisal of his shares. Such
demand will be sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends thereby to demand
the appraisal of his shares. A proxy or vote against the merger or consolidation
shall not constitute such a demand. A stockholder electing to take such action
must do so by a separate written demand as herein provided. Within 10 days after
the effective date of such merger or consolidation, the surviving or resulting
corporation shall notify each stockholder of each constituent corporation who
has complied with this subsection and has not voted in favor of or consented to
the merger or consolidation of the date that the merger or consolidation has
become effective; or
(2) If the merger or consolidation was approved pursuant to sec. 228 or
253 of this title, the surviving or resulting corporation, either before the
effective date of the merger or consolidation or within 10 days thereafter,
shall notify each of the stockholders entitled to appraisal rights of the
effective date of the merger or consolidation and that appraisal rights are
available for any or all of the shares of the constituent corporation, and shall
include in such notice a copy of this section. The notice shall be sent by
certified or registered mail, return receipt requested, addressed to the
stockholder at his address as it appears on the records of the corporation. Any
stockholder entitled to appraisal rights may, within 20 days after the date of
mailing of the notice, demand in writing from the surviving or resulting
corporation the appraisal of his shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the stockholder and that
the stockholder intends thereby to demand the appraisal of his shares.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw his demand for appraisal and to accept the terms offered upon the
merger or consolidation. Within 120 days after the effective date of the merger
or consolidation, any stockholder who has complied with the requirements of
subsections (a) and (d) hereof, upon written request, shall be entitled to
receive from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares not voted
in favor of the merger or consolidation and with respect to which demands for
appraisal have been received and the aggregate number of holders of such shares.
Such written statement shall be mailed to the stockholder within 10 days after
his written request for such a statement is received by the surviving or
resulting corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof, whichever is
later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1
D-2
<PAGE> 254
week before the day of the hearing, in a newspaper of general circulation
published in the City of Wilmington, Delaware or such publication as the Court
deems advisable. The forms of the notices by mail and by publication shall be
approved by the Court, and the costs thereof shall be borne by the surviving or
resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account all relevant factors. In determining the fair rate
of interest, the Court may consider all relevant factors, including the rate of
interest which the surviving or resulting corporation would have had to pay to
borrow money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to participate
in the appraisal proceeding, the Court may, in its discretion, permit discovery
or other pretrial proceedings and may proceed to trial upon the appraisal prior
to the final determination of the stockholder entitled to an appraisal. Any
stockholder whose name appears on the list filed by the surviving or resulting
corporation pursuant to subsection (f) of this section and who has submitted his
certificates of stock to the Register in Chancery, if such is required, may
participate fully in all proceedings until it is finally determined that he is
not entitled to appraisal rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded his appraisal rights as provided in subsection (d)
of this section shall be entitled to vote such stock for any purpose or to
receive payment of dividends or other distributions on the stock (except
dividends or other distributions payable to stockholders of record at a date
which is prior to the effective date of the merger or consolidation); provided,
however, that if no petition for an appraisal shall be filed within the time
provided in subsection (e) of this section, or if such stockholder shall deliver
to the surviving or resulting corporation a written withdrawal of his demand for
an appraisal and an acceptance of the merger or consolidation, either within 60
days after the effective date of the merger or consolidation as provided in
subsection (e) of this section or thereafter with the written approval of the
corporation, then the right of such stockholder to an appraisal shall cease.
Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery
shall be dismissed as to any stockholder without the approval of the Court, and
such approval may be conditioned upon such terms as the Court deems just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
D-3
<PAGE> 255
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article EIGHTH of the Registrant's Third Restated Certificate of
Incorporation (the "Restated Certificate of Incorporation") provides that no
director of the Registrant shall be personally liable for any monetary damages
for any breach of fiduciary duty as a director, except to the extent that the
Delaware General Corporation Law prohibits the elimination or limitation of
liability of directors for breach of fiduciary duty.
Article NINTH of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement incurred in connection with any litigation
or other legal proceeding (other than an action by or in the right of the
Registrant) brought against him by virtue of his position as a director or
officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
Registrant, unless a court determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a Director or
officer at his request, provided that he undertakes to repay the amount advanced
if it is ultimately determined that he is not entitled to indemnification for
such expenses.
Indemnification is required to be made unless the Registrant determines
that the applicable standard of conduct required for indemnification has not
been met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
indemnification, or if the Registrant fails to make an indemnification payment
within 60 days after such payment is claimed by such person, such person is
permitted to petition the court to make an independent determination as to
whether such person is entitled to indemnification. As a condition precedent to
the right of indemnification, the director or officer must give the Registrant
notice of the action for which indemnity is sought and the Registrant has the
right to participate in such action or assume the defense thereof.
Article NINTH of the Registrant's Restated Certificate of Incorporation
further provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is amended
to expand the indemnification permitted to directors or officers the Registrant
must indemnify those persons to the fullest extent permitted by such law as so
amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
II-1
<PAGE> 256
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- --------------------------------------------------------------------------------
<C> <S>
2 Agreement and Plan of Merger dated as of April 14, 1996 among the Registrant,
Card-Key Inc. and RSA Data Security, Inc. ("RSA")(1)
3.1 Third Restated Certificate of Incorporation of the Registrant(2)
3.2 Amended and Restated By-Laws of the Registrant(3)
4 Specimen Certificate for shares of Common Stock, $.01 par value, of the
Registrant(3)
5 Opinion of Hale and Dorr with respect to the validity of the securities being
offered
8.1 Opinion of Hale and Dorr as to certain tax matters
8.2 Opinion of Tomlinson Zisko Morosoli & Maser LLP as to certain tax matters
10.1 1986 Stock Option Plan, as amended(3)
10.2 1994 Stock Option Plan, as amended
10.3 1994 Director Stock Option Plan(3)
10.4 1994 Employee Stock Purchase Plan(3)
10.5 Employment Agreement between the Registrant and Charles R. Stuckey, Jr., dated
as of July 9, 1993(3)
10.6 Employment Agreement between the Registrant and Kenneth P. Weiss, dated as of
July 1, 1993(3)
10.7 Letter Agreement between the Registrant and Linda E. Saris, dated as of May 1,
1989(3)
10.8 Amended and Restated Registration Rights Agreement, dated as of September 7,
1988, as amended, among the Registrant and certain stockholders of the
Registrant(3)
10.9 One Alewife Center Office Lease, dated as of August 12, 1988, as amended,
between the Registrant and David L. Wightman and David R. Vickery, as Trustees
of One Alewife Center Realty Trust(3)
10.10 Stock Restriction Agreement between the Registrant and Richard L. Earnest, dated
October 25, 1994(3)
10.11 Stock Restriction Agreement between the Registrant and Sheldon M. Wool, dated
October 25, 1994(3)
+10.12 Terms and Conditions of Purchase, dated January 1, 1994, between the Registrant
and Gould Electronics(3)
+10.13 Letter, dated October 12, 1994, from Sanyo Electric Co., LTD. to the
Registrant(3)
+10.14 Agreement between the Registrant and Progress Software Corporation, dated
December 1994(3)
10.15 Letter Agreement between the Registrant and Arthur W. Coviello, Jr., dated as of
August 21, 1995(4)
10.16 Amendment to Amended and Restated Registration Rights Agreement, dated as of
October 31, 1995, among the Registrant and certain stockholders of the
Registrant(5)
10.17 Indenture of Lease, dated as of March 11, 1996, between the Registrant and
Beacon Properties, L.P.
10.18 Employment Agreement, dated as of April 14, 1996, as amended, among the
Registrant, RSA and D. James Bidzos
10.19 Stockholder Agreement, dated as of April 14, 1996, among the Registrant, RSA and
Addison Fischer
</TABLE>
II-2
<PAGE> 257
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- --------------------------------------------------------------------------------
<C> <S>
10.20 Stockholder Agreement, dated as of April 14, 1996, among the Registrant, RSA and
D. James Bidzos
10.21 Stockholder Agreement, dated as of April 14, 1996, among the Registrant, RSA and
Ronald Rivest
11 Computation of Income (Loss) Per Common Share
21 Subsidiaries of the Registrant(5)
23.1 Consent of Hale and Dorr (included in Exhibits 5 and 8.1)
23.2 Consent of Tomlinson Zisko Morosoli & Maser LLP (included in Exhibit 8.2)
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of Ernst & Young LLP
24 Powers of Attorney (included in the signature pages to this Registration
Statement)
27 Financial Data Schedule
99.1 Opinion of Robertson, Stephens & Company LLC(1)
99.2 Form of Proxy Card for the Registrant's Special Meeting of Stockholders
99.3 Form of Proxy Card for RSA's Special Meeting of Stockholders
99.4 Form of Escrow Agreement among the Registrant, State Street Bank and Trust
Company and certain stockholders of RSA(1)
</TABLE>
- ---------------
(1) Incorporated herein by reference to an Annex of the Joint Proxy Statement
and Prospectus constituting part of this Registration Statement.
(2) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-8 (File No. 33-87916).
(3) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1 (File No. 33-85606).
(4) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q for the Quarter Ended September 30, 1995.
(5) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1 (File No. 33-98818).
+ Confidential treatment granted previously as to certain portions, which
portions are omitted and filed separately with the Commission.
(b) Financial Statement Schedules
Schedule VIII -- Valuation & Qualifying Accounts.
All other schedules have been omitted because they are not required or
because the required information is given in the Consolidated Financial
Statements or Notes thereto.
(c) Item 4(B) Information
The Opinion of Robertson, Stephens & Company LLC is included as Annex B to
the Joint Proxy Statement and Prospectus included in Part I of this Registration
Statement.
ITEM 22. UNDERTAKINGS
(a) (1) The undersigned Registrant hereby undertakes as follows: that prior
to any public reoffering of the securities registered hereunder through use of a
prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
issuer undertakes that such reoffering prospectus will contain the information
called for by the applicable registration
II-3
<PAGE> 258
form with respect to reofferings by persons who may be deemed underwriters, in
addition to the information called for by the other items of the applicable
form.
(2) The Registrant undertakes that every prospectus: (i) that is filed
pursuant to paragraph (1) immediately preceding or (ii) that purports to meet
the requirements of Section 10(a)(3) of the Securities Act of 1933 and is used
in connection with an offering of securities subject to Rule 415, will be filed
as a part of an amendment to the Registration Statement and will not be used
until such amendment is effective, and that, for purposes of determining any
liability under the Securities Act of 1933, each such post-effective amendment
shall be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(b) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
(c) The undersigned Registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
(d) The undersigned Registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the Registration Statement when it became effective.
(e) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this Registration Statement;
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the Registration Statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the Registration Statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20 percent change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective Registration Statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the Registration Statement
or any material change to such information in the Registration
Statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities
II-4
<PAGE> 259
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
II-5
<PAGE> 260
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Cambridge,
Commonwealth of Massachusetts, on this 28th day of June, 1996.
SECURITY DYNAMICS TECHNOLOGIES, INC.
By: /s/ Charles R. Stuckey, Jr.
------------------------------------
Charles R. Stuckey, Jr.
President and Chief
Executive Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Security Dynamics
Technologies, Inc., hereby severally constitute and appoint Charles R. Stuckey,
Jr., Arthur W. Coviello, Jr., and Hal J. Leibowitz, and each of them singly, our
true and lawful attorneys with full power to them, and each of them singly, to
sign for us and in our names in the capacities indicated below, the Registration
Statement on Form S-4 filed herewith and any and all pre-effective and
post-effective amendments to said Registration Statement, and generally to do
all such things in our names and on our behalf in our capacities as officers and
directors to enable Security Dynamics Technologies, Inc. to comply with the
provisions of the Securities Act of 1933, as amended, and all requirements of
the Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorneys, or any of them, to said
Registration Statement and any and all amendments thereto.
<TABLE>
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ----------------------------------- --------------
<S> <C> <C>
/s/ CHARLES R. STUCKEY, JR. President, Chief Executive Officer June 28, 1996
- ------------------------------------------ and Director (Principal Executive
Charles R. Stuckey, Jr. Officer)
/s/ ARTHUR W. COVIELLO, JR. Executive Vice President, Treasurer June 28, 1996
- ------------------------------------------ and Chief Financial Officer
Arthur W. Coviello, Jr. (Principal Financial and Accounting
Officer)
/s/ RICHARD L. EARNEST Director June 28, 1996
- ------------------------------------------
Richard L. Earnest
/s/ GEORGE M. MIDDLEMAS Director June 28, 1996
- ------------------------------------------
George M. Middlemas
/s/ MARINO R. POLESTRA Director June 28, 1996
- ------------------------------------------
Marino R. Polestra
/s/ SANFORD M. SHERIZEN Director June 28, 1996
- ------------------------------------------
Sanford M. Sherizen
</TABLE>
II-6
<PAGE> 261
SCHEDULE VIII
SECURITY DYNAMICS TECHNOLOGIES, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE
BEGINNING COSTS AND AT END
OF PERIOD EXPENSES DEDUCTIONS OF PERIOD
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
For the year ended December 31, 1994......... $ 225,000 $100,000 $ -- $ 325,000
For the year ended December 31, 1995......... $ 325,000 $ 94,000 $ 44,000 $ 375,000
For the three months ended March 31, 1996.... $ 375,000 $ 25,000 $153,000 $ 247,000
ACCRUED WARRANTY COSTS:
For the year ended December 31, 1994......... $ 105,000 $ 37,000 $ 37,000 $ 105,000
For the year ended December 31, 1995......... $ 105,000 $ 64,000 $ 64,000 $ 105,000
For the three months ended March 31, 1996.... $ 105,000 $ 62,000 $ 62,000 $ 105,000
</TABLE>
S-1
<PAGE> 262
<TABLE>
EXHIBIT INDEX
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
2 Agreement and Plan of Merger dated as of April 14, 1996 among the
Registrant, Card-Key Inc. and RSA Data Security, Inc. ("RSA")(1)
3.1 Third Restated Certificate of Incorporation of the Registrant(2)
3.2 Amended and Restated By-Laws of the Registrant(3)
4 Specimen Certificate for shares of Common Stock, $.01 par value, of the
Registrant(3)
5 Opinion of Hale and Dorr with respect to the validity of the securities
being offered
8.1 Opinion of Hale and Dorr as to certain tax matters
8.2 Opinion of Tomlinson Zisko Morosoli & Maser LLP as to certain tax matters
10.1 1986 Stock Option Plan, as amended(3)
10.2 1994 Stock Option Plan, as amended
10.3 1994 Director Stock Option Plan(3)
10.4 1994 Employee Stock Purchase Plan(3)
10.5 Employment Agreement between the Registrant and Charles R. Stuckey, Jr.,
dated as of July 9, 1993(3)
10.6 Employment Agreement between the Registrant and Kenneth P. Weiss, dated as
of July 1, 1993(3)
10.7 Letter Agreement between the Registrant and Linda E. Saris, dated as of
May 1, 1989(3)
10.8 Amended and Restated Registration Rights Agreement, dated as of September
7, 1988, as amended, among the Registrant and certain stockholders of the
Registrant(3)
10.9 One Alewife Center Office Lease, dated as of August 12, 1988, as amended,
between the Registrant and David L. Wightman and David R. Vickery, as
Trustees of One Alewife Center Realty Trust(3)
10.10 Stock Restriction Agreement between the Registrant and Richard L. Earnest,
dated October 25, 1994(3)
10.11 Stock Restriction Agreement between the Registrant and Sheldon M. Wool,
dated October 25, 1994(3)
+10.12 Terms and Conditions of Purchase, dated January 1, 1994, between the
Registrant and Gould Electronics(3)
+10.13 Letter, dated October 12, 1994, from Sanyo Electric Co., LTD. to the
Registrant(3)
+10.14 Agreement between the Registrant and Progress Software Corporation, dated
December 1994(3)
10.15 Letter Agreement between the Registrant and Arthur W. Coviello, Jr., dated
as of August 21, 1995(4)
10.16 Amendment to Amended and Restated Registration Rights Agreement, dated as
of October 31, 1995, among the Registrant and certain stockholders of the
Registrant(5)
10.17 Indenture of Lease, dated as of March 11, 1996, between the Registrant and
Beacon Properties, L.P.
10.18 Employment Agreement, dated as of April 14, 1996, as amended, among the
Registrant, RSA and D. James Bidzos
10.19 Stockholder Agreement, dated as of April 14, 1996, among the Registrant,
RSA and Addison Fischer
10.20 Stockholder Agreement, dated as of April 14, 1996, among the Registrant,
RSA and D. James Bidzos
</TABLE>
<PAGE> 263
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION PAGE
------- ----------- ----
<C> <S> <C>
10.21 Stockholder Agreement, dated as of April 14, 1996, among the Registrant,
RSA and Ronald Rivest
11 Computation of Income (Loss) Per Common Share
21 Subsidiaries of the Registrant(5)
23.1 Consent of Hale and Dorr (included in Exhibits 5 and 8.1)
23.2 Consent of Tomlinson Zisko Morosoli & Maser LLP (included in Exhibit 8.2)
23.3 Consent of Deloitte & Touche LLP
23.4 Consent of Ernst & Young LLP
24 Powers of Attorney (included in the signature pages to this Registration
Statement)
27 Financial Data Schedule
99.1 Opinion of Robertson, Stephens & Company LLC(1)
99.2 Form of Proxy Card for the Registrant's Special Meeting of Stockholders
99.3 Form of Proxy Card for RSA's Special Meeting of Stockholders
99.4 Form of Escrow Agreement among the Registrant, State Street Bank and Trust
Company and certain stockholders of RSA(1)
<FN>
- ---------------
(1) Incorporated herein by reference to an Annex of the Joint Proxy Statement
and Prospectus constituting part of this Registration Statement.
(2) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-8 (File No. 33-87916).
(3) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1 (File No. 33-85606).
(4) Incorporated herein by reference to the Registrant's Quarterly Report on
Form 10-Q for the Quarter Ended September 30, 1995.
(5) Incorporated herein by reference to the Registrant's Registration Statement
on Form S-1 (File No. 33-98818).
+ Confidential treatment granted previously as to certain portions, which
portions are omitted and filed separately with the Commission.
</TABLE>
<PAGE> 1
Exhibit 5
HALE AND DORR
Counsellors at Law
60 State Street
Boston, Massachusetts 02109
June 28, 1996
Security Dynamics Technologies, Inc.
One Alewife Center
Cambridge, MA 02140
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration
Statement on Form S-4 (the "Registration Statement"), filed with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended, for the registration of up to an aggregate of 4,000,000 shares of
Common Stock (the "Common Stock"), $.01 par value per share, of Security
Dynamics Technologies, Inc., a Delaware corporation (the "Company").
We have acted as counsel for the Company in connection with the
issuance of the shares of Common Stock pursuant to an Agreement and Plan of
Merger (the "Merger Agreement") dated as of April 14, 1996, among the Company,
Card-Key Inc. and RSA Data Security, Inc. We have examined signed copies of the
Registration Statement and all exhibits thereto (including but not limited to
the Merger Agreement), all as filed with the Commission. We have also examined
and relied upon the original or copies of minutes of meetings of the
stockholders and Board of Directors of the Company, stock record books of the
Company, a copy of the Amended and Restated By-Laws of the Company, a copy of
the Third Restated Certificate of Incorporation of the Company and such other
documents as we have deemed material to our opinion set forth below.
Based upon the foregoing, we are of the opinion that the shares of
Common Stock to be issued pursuant to the Merger Agreement are duly authorized
and, when issued in accordance with the terms of the Merger Agreement, will be
validly issued, fully paid and nonassessable.
<PAGE> 2
Security Dynamics Technologies, Inc.
June 28, 1996
Page 2
We hereby consent to the filing of this opinion as part of the
Registration Statement and to the use of our name therein and in the related
Prospectus under the captions "The Merger Agreement -- Conditions" and "Legal
Matters."
This opinion is to be used only in connection with the issuance of
Common Stock while the Registration Statement is in effect.
Very truly yours,
/s/ Hale and Dorr
-----------------
HALE AND DORR
<PAGE> 1
Exhibit 8.1
[Hale and Dorr Letterhead]
June 28, 1996
Security Dynamics Technologies, Inc.
One Alewife Center
Cambridge, Massachusetts 02140
Re: Merger among Security Dynamics Technologies,
Inc., Card-Key Inc., and RSA Data Security, Inc.
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the filing of
a registration statement (the "Registration Statement") on Form S-4, which
includes the Joint Proxy Statement and Prospectus relating to the Agreement and
Plan of Merger dated as of April 14, 1996 (the "Merger Agreement"), by and
among Security Dynamics Technologies, Inc., a Delaware corporation ("SDI"),
Card-Key Inc., a Delaware corporation and wholly owned subsidiary of SDI
("Sub"), and RSA Data Security, Inc., a Delaware corporation ("RSA"). Pursuant
to the Merger Agreement, Sub will merge with and into RSA (the "Merger").
Except as otherwise provided, capitalized terms not defined herein have the
meanings set forth in the Merger Agreement and the exhibits thereto or in the
letters and continuity-of-interest certificates delivered to Hale and Dorr and
Tomlinson, Zisko, Morosoli & Maser LLP by SDI, RSA and certain RSA shareholders
containing certain representations of SDI, RSA and certain RSA shareholders
relevant to this opinion (the "Certificates of Representations"). All section
references, unless otherwise indicated, are to the United States Internal
Revenue Code of 1986, as amended (the "Code").
In our capacity as counsel to SDI in the Merger, and for purposes of
rendering this opinion, we have examined and relied upon the Registration
Statement, the Merger Agreement and the exhibits thereto, the Escrow Agreement,
the Certificates of
<PAGE> 2
Security Dynamics Technologies, Inc.
June 28, 1996
Page 2
Representations, and such other documents as we considered relevant to our
analysis. In our examination of documents, we have assumed the authenticity of
original documents, the accuracy of copies, the genuineness of signatures, and
the legal capacity of signatories.
We have assumed that all parties to the Merger Agreement and to any
other documents examined by us have acted, and will act, in accordance with the
terms of such Merger Agreement or documents and that the Merger will be
consummated at the Effective Time pursuant to the terms and conditions set forth
in the Merger Agreement without the waiver or modification of any such terms and
conditions. Furthermore, we have assumed that all representations contained in
the Merger Agreement, as well as those representations contained in the
Certificates of Representations are, and at the Effective Time will be, true and
complete in all material respects, and that any representation made in any of
the documents referred to herein "to the best of the knowledge and belief" (or
similar qualification) of any person or party is correct without such
qualification. We have not attempted to verify independently such
representations, but in the course of our representation, nothing has come to
our attention that would cause us to question the accuracy thereof.
We have also assumed that there is no plan or intention on the part of
RSA's shareholders to engage in a sale, exchange, or other disposition of shares
of SDI stock to be received in the Merger that would reduce the RSA
shareholders' ownership of SDI stock to a number of shares having an aggregate
fair market value, as of the Effective Time, of less than fifty percent (50%) of
the value of all of the stock of RSA outstanding immediately prior to the
Merger. For purposes of this assumption, shares of RSA stock with respect to
which dissenters' rights are exercised in the Merger, with respect to which cash
is received in lieu of fractional shares, or which are sold, redeemed, or
disposed of in a transaction that is in contemplation of or related to the
Merger, will be considered shares of RSA stock held by shareholders of RSA
immediately before the Merger which are exchanged in the Merger for shares of
SDI stock which, in turn, are disposed of pursuant to a plan.
The conclusions expressed herein represent our judgment as to the
proper treatment of certain aspects of the Merger under the income tax laws of
the United States based upon the Code,
<PAGE> 3
Security Dynamics Technologies, Inc.
June 28, 1996
Page 3
Treasury Regulations, case law, and rulings and other pronouncements of the
Internal Revenue Service (the "IRS") as in effect on the date of this opinion.
No assurances can be given that such laws will not be amended or otherwise
changed prior to the Effective Time, or at any other time, or that such changes
will not affect the conclusions expressed herein. Nevertheless, we undertake no
responsibility to advise you of any developments after the Effective Time in the
application or interpretation of the income tax laws of the United States.
Our opinion represents our best judgment of how a court would decide if
presented with the issues addressed herein and is not binding upon either the
IRS or any court. Thus, no assurances can be given that a position taken in
reliance on our opinion will not be challenged by the IRS or rejected by a
court.
This opinion addresses only the specific United States federal income
tax consequences of the Merger set forth below, and does not address any other
federal, state, local, or foreign income, estate, gift, transfer, sales, or
other tax consequences that may result from the Merger or any other transaction
(including any transaction undertaken in connection with the Merger). We
express no opinion regarding the tax consequences of the Merger to shareholders
of RSA and/or holders of options or warrants for RSA stock with respect to whom
special circumstances exist. In particular, but not by way of limitation, we
express no opinion regarding any special tax treatment in the Merger of dealers
in securities, tax-exempt organizations, life insurance companies, financial
institutions, regulated investment companies, foreign taxpayers, or holders of
RSA stock acquired upon exercise of stock options or in other compensatory
transactions. Moreover, we express no opinion regarding the tax consequences of
SDI's assumption of any outstanding options for RSA stock in the Merger.
On the basis of, and subject to the foregoing, and in reliance upon the
representations and assumptions described above, we are of the following opinion
(subject to the qualifications set forth immediately following the numbered
paragraphs):
<PAGE> 4
Security Dynamics Technologies, Inc.
June 28, 1996
Page 4
1. The Merger will constitute a reorganization within the meaning
of Section 368(a);
2. No gain or loss will be recognized by SDI, Sub, or RSA solely
as a result of the Merger;
3. No gain or loss will be recognized by the shareholders of RSA
upon the exchange of RSA stock solely for shares of SDI stock as a result of
the Merger;
4. Cash received by the shareholders of RSA in lieu of fractional
shares of SDI stock will be treated as received as a distribution in redemption
of such fractional shares, subject to the provisions of Section 302, as if such
fractional shares had been issued in the Merger and then redeemed by SDI;
5. The tax basis of the shares of SDI stock received by the
shareholders of RSA in the Merger will be equal to the tax basis of the shares
of RSA stock exchanged therefor in the Merger, reduced by any basis allocable
to a fractional share of SDI stock treated as sold or exchanged under Section
302; and
6. The holding period for the shares of SDI stock received by the
shareholders of RSA will include the holding period for the shares of RSA stock
exchanged therefor in the Merger, provided that the shares of RSA stock are
held as capital assets at the Effective Time.
Notwithstanding the foregoing, you should be aware that the Escrow
Account established pursuant to the Merger Agreement does not comply in all
respects with certain IRS guidelines for the issuance of advance letter rulings
regarding the tax consequences of transactions intended to qualify as
reorganizations under Section 368(a). Although the IRS has specifically
indicated that such guidelines are only applicable for purposes of obtaining
advance letter rulings and do not necessarily constitute substantive rules of
law, there can be no assurances that the IRS will not attempt to assert the
guidelines as substantive legal requirements. If the IRS were to make such an
attempt, it is our opinion that it should fail. Nevertheless, because of the
lack of clear authority regarding the tax consequences of provisions in escrow
arrangements such as those contained in the Escrow Agreement, no assurances can
be given that any such IRS attempt would not be successful. If such an attempt
were successful,
<PAGE> 5
Security Dynamics Technologies, Inc.
June 28, 1996
Page 5
some (or, in certain cases, all) of the conclusions set forth in the foregoing
numbered paragraphs would be inapplicable.
No opinion is expressed as to any federal income tax consequence of the
Merger except as specifically set forth herein, and this opinion may not be
relied upon except with respect to the consequences specifically discussed
herein. This opinion is intended solely for the purpose of inclusion as an
exhibit to the Registration Statement. It may not be relied upon for any other
purpose or by any other person or entity, and may not be made available to any
other person or entity without our prior written consent. We hereby consent to
the filing of this opinion as an exhibit to the Registration Statement and
further consent to the use of our name in the Registration Statement in
connection with references to this opinion and the tax consequences of the
Merger. In giving this consent, however, we do not hereby admit that we are in
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended.
Very truly yours,
/s/ Hale and Dorr
-----------------
HALE AND DORR
<PAGE> 1
Exhibit 8.2
[Tomlinson, Zisko, Morosoli & Maser LLP letterhead]
June 28, 1996
RSA Data Security, Inc.
100 Marine Parkway, Suite 500
Redwood City, California 94065
Re: Merger among Security Dynamics Technologies,
Inc., Card-Key Inc., and RSA Data Security, Inc.
------------------------------------------------
Ladies and Gentlemen:
This opinion is being delivered to you in connection with the filing of
a registration statement (the "Registration Statement") on Form S-4, which
includes the Joint Proxy Statement and Prospectus relating to the Agreement and
Plan of Merger dated as of April 14, 1996 (the "Merger Agreement"), by and among
Security Dynamics Technologies, Inc., a Delaware corporation ("SDI"), Card-Key
Inc., a Delaware corporation and wholly owned subsidiary of SDI ("Sub"), and RSA
Data Security, Inc., a Delaware corporation ("RSA"). Pursuant to the Merger
Agreement, Sub will merge with and into RSA (the "Merger"). Except as otherwise
provided, capitalized terms not defined herein have the meanings set forth in
the Merger Agreement and the exhibits thereto or in the letters and
continuity-of-interest certificates delivered to Hale and Dorr and Tomlinson,
Zisko, Morosoli & Maser LLP by SDI, RSA, and certain RSA stockholders containing
certain representations of SDI, RSA, and certain RSA stockholders relevant to
this opinion (the "Certificates of Representations"). All section references,
unless otherwise indicated, are to the United States Internal Revenue Code of
1986, as amended (the "Code").
In our capacity as counsel to RSA in the Merger, and for purposes of
rendering this opinion, we have examined and relied upon the Registration
Statement, the Merger Agreement and the exhibits thereto, the Escrow Agreement,
the Certificates of Representations, and such other documents as we considered
relevant to our analysis. In our examination of documents, we have assumed the
authenticity of original documents, the accuracy of copies, the genuineness of
signatures, and the legal capacity of signatories.
We have assumed that all parties to the Merger Agreement and to any
other documents examined by us have acted, and will act, in
<PAGE> 2
RSA Data Security, Inc.
June 28, 1996
Page 2
accordance with the terms of such Merger Agreement or documents and that the
Merger will be consummated at the Effective Time pursuant to the terms and
conditions set forth in the Merger Agreement without the waiver or modification
of any such terms and conditions. Furthermore, we have assumed that all
representations contained in the Merger Agreement, as well as those
representations contained in the Certificates of Representations are, and at the
Effective Time will be, true and complete in all material respects, and that any
representation made in any of the documents referred to herein "to the best of
the knowledge and belief" (or similar qualification) of any person or party is
correct without such qualification. We have not attempted to verify
independently such representations, but in the course of our representation,
nothing has come to our attention that would cause us to question the accuracy
thereof.
We have also assumed that there is no plan or intention on the part of
RSA's stockholders to engage in a sale, exchange, or other disposition of shares
of SDI stock to be received in the Merger that would reduce the RSA
stockholders' ownership of SDI stock to a number of shares having an aggregate
fair market value, as of the Effective Time, of less than fifty percent (50%) of
the value of all of the stock of RSA outstanding immediately prior to the
Merger. For purposes of this assumption, shares of RSA stock with respect to
which dissenters' rights are exercised in the Merger, with respect to which cash
is received in lieu of fractional shares, or which are sold, redeemed, or
disposed of in a transaction that is in contemplation of or related to the
Merger, will be considered shares of RSA stock held by stockholders of RSA
immediately before the Merger which are exchanged in the Merger for shares of
SDI stock which, in turn, are disposed of pursuant to a plan.
The conclusions expressed herein represent our judgment as to the
proper treatment of certain aspects of the Merger under the income tax laws of
the United States based upon the Code, Treasury Regulations, case law, and
rulings and other pronouncements of the Internal Revenue Service (the "IRS") as
in effect on the date of this opinion. No assurances can be given that such laws
will not be amended or otherwise changed prior to the Effective Time, or at any
other time, or that such changes will not affect the conclusions expressed
herein. Nevertheless, we undertake no responsibility to advise you of any
developments after the Effective Time in the application or interpretation of
the income tax laws of the United States.
Our opinion represents our best judgment of how a court would decide if
presented with the issues addressed herein and is not binding upon either the
IRS or any court. Thus, no assurances can
<PAGE> 3
RSA Data Security, Inc.
June 28, 1996
Page 3
be given that a position taken in reliance on our opinion will not be challenged
by the IRS or rejected by a court.
This opinion addresses only the specific United States federal income
tax consequences of the Merger set forth below, and does not address any other
federal, state, local, or foreign income, estate, gift, transfer, sales, or
other tax consequences that may result from the Merger or any other transaction
(including any transaction undertaken in connection with the Merger). We express
no opinion regarding the tax consequences of the Merger to stockholders of RSA
and/or holders of options or warrants for RSA stock with respect to whom special
circumstances exist. In particular, but not by way of limitation, we express no
opinion regarding any special tax treatment in the Merger of dealers in
securities, tax-exempt organizations, life insurance companies, financial
institutions, regulated investment companies, foreign taxpayers, or holders of
RSA stock acquired upon exercise of stock options or in other compensatory
transactions. Moreover, we express no opinion regarding the tax consequences of
SDI's assumption of any outstanding options for RSA stock in the Merger.
On the basis of, and subject to the foregoing, and in reliance upon the
representations and assumptions described above, we are of the following opinion
(subject to the qualifications set forth immediately following the numbered
paragraphs):
1. The Merger will constitute a reorganization within the meaning of
Section 368(a);
2. No gain or loss will be recognized by SDI, Sub, or RSA solely as a
result of the Merger;
3. No gain or loss will be recognized by the shareholders of RSA upon
the exchange of RSA stock solely for shares of SDI stock as a result of the
Merger;
4. Cash received by the stockholders of RSA in lieu of fractional
shares of SDI stock will be treated as received as a distribution in redemption
of such fractional shares, subject to the provisions of Section 302, as if such
fractional shares had been issued in the Merger and then redeemed by SDI;
5. The tax basis of the shares of SDI stock received by the
shareholders of RSA in the Merger will be equal to the tax basis of the shares
of RSA stock exchanged therefor in the Merger, reduced by any basis allocable to
a fractional share of SDI stock treated as sold or exchanged under Section 302;
and
<PAGE> 4
RSA Data Security, Inc.
June 28, 1996
Page 4
6. The holding period for the shares of SDI stock received by the
stockholders of RSA will include the holding period for the shares of RSA stock
exchanged therefor in the Merger, provided that the shares of RSA stock are held
as capital assets at the Effective Time.
Notwithstanding the foregoing, you should be aware that the Escrow
Account established pursuant to the Merger Agreement does not comply in all
respects with certain IRS guidelines for the issuance of advance letter rulings
regarding the tax consequences of transactions intended to qualify as
reorganizations under Section 368(a). Although the IRS has specifically
indicated that such guidelines are only applicable for purposes of obtaining
advance letter rulings and do not necessarily constitute substantive rules of
law, there can be no assurances that the IRS will not attempt to assert the
guidelines as substantive legal requirements. If the IRS were to make such an
attempt, it is our opinion that it should fail. Nevertheless, because of the
lack of clear authority regarding the tax consequences of provisions in escrow
arrangements such as those contained in the Escrow Agreement, no assurances can
be given that any such IRS attempt would not be successful. If such an attempt
were successful, some (or, in certain cases, all) of the conclusions set forth
in the foregoing numbered paragraphs would be inapplicable.
No opinion is expressed as to any federal income tax consequence of the
Merger except as specifically set forth herein, and this opinion may not be
relied upon except with respect to the consequences specifically discussed
herein. This opinion is intended solely for the purpose of inclusion as an
exhibit to the Registration Statement. It may not be relied upon for any other
purpose or by any other person or entity, and may not be made available to any
other person or entity without our prior written consent. We hereby consent to
the filing of this opinion as an exhibit to the Registration Statement and
further consent to the use of our name in the Registration Statement in
connection with references to this opinion and the tax consequences of the
Merger. In giving this consent, however, we do not hereby admit that we are in
the category of persons whose consent is required under Section 7 of the
Securities Act of 1933, as amended.
Very truly yours,
/s/ Tomlinson, Zisko, Morosoli &
--------------------------------
Maser LLP
---------
TOMLINSON, ZISKO, MOROSOLI & MASER
LLP
<PAGE> 1
EXHIBIT 10.2
SECURITY DYNAMICS TECHNOLOGIES, INC.
1994 STOCK OPTION PLAN
1. Purpose.
--------
The purpose of this plan (the "Plan") is to secure for Security
Dynamics Technologies, Inc. (the "Company") and its stockholders the benefits
arising from capital stock ownership by employees, officers and directors of,
and consultants or advisors to, the Company and its subsidiary corporations who
are expected to contribute to the Company's future growth and success. Except
where the context otherwise requires, the term "Company" shall include all
present and future subsidiaries of the Company as defined in Sections 424(e) and
424(f) of the Internal Revenue Code of 1986, as amended or replaced from time to
time (the "Code"). Those provisions of the Plan which make express reference to
Section 422 shall apply only to Incentive Stock Options (as that term is defined
in the Plan).
2. Type of Options and Administration.
-----------------------------------
(a) Types of Options. Options granted pursuant to the Plan may be
either incentive stock options ("Incentive Stock Options") meeting the
requirements of Section 422 of the Code or Non- Statutory Options which are not
intended to meet the requirements of Section 422 of the Code ("Non-Statutory
Options").
(b) Administration.
---------------
(i) The Plan will be administered by the Board of
Directors of the Company, whose construction and interpretation of the terms and
provisions of the Plan shall be final and conclusive. The Board of Directors may
in its sole discretion grant options to purchase shares of the Company's Common
Stock ("Common Stock") and issue shares upon exercise of such options as
provided in the Plan. The Board shall have authority, subject to the express
provisions of the Plan, to construe the respective option agreements and the
Plan, to prescribe, amend and rescind rules and regulations relating to the
Plan, to determine the terms and provisions of the respective option agreements,
which need not be identical, and to make all other determinations which are, in
the judgment of the Board of Directors, necessary or desirable for the
administration of the Plan. The Board of Directors may correct any defect,
supply any omission or reconcile any inconsistency in the Plan or in any
option agreement in the manner and
<PAGE> 2
to the extent it shall deem expedient to carry the Plan into effect and it shall
be the sole and final judge of such expediency. No director or person acting
pursuant to authority delegated by the Board of Directors shall be liable for
any action or determination under the Plan made in good faith.
(ii) The Board of Directors may, to the full extent
permitted by or consistent with applicable laws or regulations and Section 3(b)
of this Plan delegate any or all of its powers under the Plan to a committee
(the "Committee") appointed by the Board of Directors, and if the Committee is
so appointed all references to the Board of Directors in the Plan shall mean and
relate to such Committee.
(c) Applicability of Rule 16b-3. Those provisions of the Plan
which make express reference to Rule 16b-3 promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or any successor rule
("Rule 16b-3"), or which are required in order for certain option transactions
to qualify for exemption under Rule 16b-3, shall apply only to such persons as
are required to file reports under Section 16(a) of the Exchange Act (a
"Reporting Person").
3. Eligibility.
------------
(a) General. Options may be granted to persons who are, at the
time of grant, employees, officers or directors of, or consultants or advisors
to, the Company; provided, that the class of employees to whom Incentive Stock
Options may be granted shall be limited to all employees of the Company. A
person who has been granted an option may, if he or she is otherwise eligible,
be granted additional options if the Board of Directors shall so determine.
Subject to adjustment as provided in Section 15 below, the maximum number of
shares with respect to which options may be granted to any employee under the
Plan shall not exceed 100,000 shares (after giving effect to the Company's
one-for-two reverse stock split effective as of October 24, 1994) of Common
Stock during any calendar year during the term of the Plan. For the purpose of
calculating such maximum number, (a) an option shall continue to be treated as
outstanding notwithstanding its repricing, cancellation or expiration and (b)
the repricing of an outstanding option or the issuance of a new option in
substitution for a cancelled option shall be deemed to constitute the grant of a
new additional option separate from the original grant of the option that is
repriced or cancelled.
(b) Grant of Options to Directors and Officers. From and after the
registration of the Common Stock of the Company under the Exchange Act, the
selection of a director or an officer (as the terms "director" and "officer" are
defined for purposes of
-2-
<PAGE> 3
Rule 16b-3) as a recipient of an option, the timing of the option grant, the
exercise price of the option and the number of shares subject to the option
shall be determined either (i) by the Board of Directors, of which all members
shall be "disinterested persons" (as hereinafter defined), or (ii) by two or
more directors having full authority to act in the matter, each of whom shall be
a "disinterested person." For the purposes of the Plan, a director shall be
deemed to be a "disinterested person" only if such person qualifies as a
"disinterested person" within the meaning of Rule 16b-3, as such term is
interpreted from time to time.
4. Stock Subject to Plan.
Subject to adjustment as provided in Section 15 below, the maximum
number of shares of Common Stock which may be issued and sold under the Plan is
150,000 shares (after giving effect to the Company's one-for-two reverse stock
split effective as of October 24, 1994). If an option granted under the Plan
shall expire or terminate for any reason without having been exercised in full,
the unpurchased shares subject to such option shall again be available for
subsequent option grants under the Plan. If shares issued upon exercise of an
option under the Plan are tendered to the Company in payment of the exercise
price of an option granted under the Plan, such tendered shares shall again be
available for subsequent option grants under the Plan; provided, that in no
event shall such shares be made available for issuance to Reporting Persons or
pursuant to exercise of Incentive Stock Options.
5. Forms of Option Agreements.
As a condition to the grant of an option under the Plan, each recipient
of an option shall execute an option agreement in such form not inconsistent
with the Plan as may be approved by the Board of Directors. Such option
agreements may differ among recipients.
6. Purchase Price.
(a) General. Subject to Section 3(b), the purchase price per share
of stock deliverable upon the exercise of an option shall be determined by the
Board of Directors, provided, however, that in the case of an Incentive Stock
Option, the exercise price shall not be less than 100% of the fair market value
of such stock, as determined by the Board of Directors, at the time of grant of
such option, or less than 110% of such fair market value in the case of options
described in Section 11(b).
-3-
<PAGE> 4
(b) Payment of Purchase Price. Options granted under the Plan may
provide for the payment of the exercise price by delivery of cash or a check to
the order of the Company in an amount equal to the exercise price of such
options, or, to the extent provided in the applicable option agreement, (i) by
delivery to the Company of shares of Common Stock of the Company already owned
by the optionee having a fair market value equal in amount to the exercise price
of the options being exercised or (ii) by any other means (including, without
limitation, by delivery of a promissory note of the optionee payable on such
terms as are specified by the Board of Directors) which the Board of Directors
determines are consistent with the purpose of the Plan and with applicable laws
and regulations (including, without limitation, the provisions of Regulation T
promulgated by the Federal Reserve Board). The fair market value of any shares
of the Company's Common Stock or other non-cash consideration which may be
delivered upon exercise of an option shall be determined by the Board of
Directors.
7. Option Period.
Each option and all rights thereunder shall expire on such date as
shall be set forth in the applicable option agreement, except that, in the case
of an Incentive Stock Option, such date shall not be later than ten years after
the date on which the option is granted and, in all cases, options shall be
subject to earlier termination as provided in the Plan.
8. Exercise of Options.
Each option granted under the Plan shall be exercisable either in full
or in installments at such time or times and during such period as shall be set
forth in the agreement evidencing such option, subject to the provisions of the
Plan.
9. Nontransferability of Options.
Options shall not be assignable or transferable by the person to whom
they are granted, either voluntarily or by operation of law, except by will or
the laws of descent and distribution, and, during the life of the optionee,
shall be exercisable only by the optionee; provided, however, that Non-Statutory
Options may be transferred pursuant to a qualified domestic relations order (as
defined in Rule 16b-3).
10. Effect of Termination of Employment or Other Relationship.
Except as provided in Section 11(d) with respect to Incentive Stock
Options, and subject to the provisions of the Plan, the Board of Directors shall
determine the period of time during which an optionee may exercise an option
following (i) the termination
-4-
<PAGE> 5
of the optionee's employment or other relationship with the Company or (ii) the
death or disability of the optionee. Such periods shall be set forth in the
agreement evidencing such option.
11. Incentive Stock Options.
Options granted under the Plan which are intended to be Incentive Stock
Options shall be subject to the following additional terms and conditions:
(a) Express Designation. All Incentive Stock Options granted under
the Plan shall, at the time of grant, be specifically designated as such in the
option agreement covering such Incentive Stock Options.
(b) 10% Stockholder. If any employee to whom an Incentive Stock
Option is to be granted under the Plan is, at the time of the grant of such
option, the owner of stock possessing more than 10% of the total combined voting
power of all classes of stock of the Company (after taking into account the
attribution of stock ownership rules of Section 424(d) of the Code), then the
following special provisions shall be applicable to the Incentive Stock Option
granted to such individual:
(i) The purchase price per share of the Common Stock
subject to such Incentive Stock Option shall not be less than 110% of
the fair market value of one share of Common Stock at the time of
grant; and
(ii) the option exercise period shall not exceed five
years from the date of grant.
(c) Dollar Limitation. For so long as the Code shall so provide,
options granted to any employee under the Plan (and any other incentive stock
option plans of the Company) which are intended to constitute Incentive Stock
Options shall not constitute Incentive Stock Options to the extent that such
options, in the aggregate, become exercisable for the first time in any one
calendar year for shares of Common Stock with an aggregate fair market value
(determined as of the respective date or dates of grant) of more than $100,000.
(d) Termination of Employment, Death or Disability. No Incentive
Stock Option may be exercised unless, at the time of such exercise, the optionee
is, and has been continuously since the date of grant of his or her option,
employed by the Company, except that:
-5-
<PAGE> 6
(i) an Incentive Stock Option may be exercised within the
period of three months after the date the optionee ceases to be an
employee of the Company (or within such lesser period as may be
specified in the applicable option agreement), provided, that the
agreement with respect to such option may designate a longer exercise
period and that the exercise after such three-month period shall be
treated as the exercise of a non-statutory option under the Plan;
(ii) if the optionee dies while in the employ of the
Company, or within three months after the optionee ceases to be such an
employee, the Incentive Stock Option may be exercised by the person to
whom it is transferred by will or the laws of descent and distribution
within the period of one year after the date of death (or within such
lesser period as may be specified in the applicable option agreement);
and
(iii) if the optionee becomes disabled (within the meaning
of Section 22(e)(3) of the Code or any successor provision thereto)
while in the employ of the Company, the Incentive Stock Option may be
exercised within the period of one year after the date the optionee
ceases to be such an employee because of such disability (or within
such lesser period as may be specified in the applicable option
agreement).
For all purposes of the Plan and any option granted hereunder, "employment"
shall be defined in accordance with the provisions of Section 1.421-7(h) of the
Income Tax Regulations (or any successor regulations). Notwithstanding the
foregoing provisions, no Incentive Stock Option may be exercised after its
expiration date.
12. Additional Provisions.
(a) Additional Option Provisions. The Board of Directors may, in
its sole discretion, include additional provisions in option agreements covering
options granted under the Plan, including without limitation restrictions on
transfer, repurchase rights, commitments to pay cash bonuses, to make, arrange
for or guaranty loans or to transfer other property to optionees upon exercise
of options, or such other provisions as shall be determined by the Board of
Directors; provided that such additional provisions shall not be inconsistent
with any other term or condition of the Plan and such additional provisions
shall not cause any Incentive Stock Option granted under the Plan to fail to
qualify as an Incentive Stock Option within the meaning of Section 422 of the
Code.
-6-
<PAGE> 7
(b) Acceleration, Extension, Etc. The Board of Directors may, in
its sole discretion, (i) accelerate the date or dates on which all or any
particular option or options granted under the Plan may be exercised or (ii)
extend the dates during which all, or any particular, option or options granted
under the Plan may be exercised.
13. General Restrictions.
---------------------
(a) Investment Representations. The Company may require any person
to whom an option is granted, as a condition of exercising such option, to give
written assurances in substance and form satisfactory to the Company to the
effect that such person is acquiring the Common Stock subject to the option for
his or her own account for investment and not with any present intention of
selling or otherwise distributing the same, and to such other effects as the
Company deems necessary or appropriate in order to comply with federal and
applicable state securities laws, or with covenants or representations made by
the Company in connection with any public offering of its Common Stock.
(b) Compliance With Securities Laws. Each option shall be subject
to the requirement that if, at any time, counsel to the Company shall determine
that the listing, registration or qualification of the shares subject to such
option upon any securities exchange or under any state or federal law, or the
consent or approval of any governmental or regulatory body, or that the
disclosure of non-public information or the satisfaction of any other condition
is necessary as a condition of, or in connection with, the issuance or purchase
of shares thereunder, such option may not be exercised, in whole or in part,
unless such listing, registration, qualification, consent or approval, or
satisfaction of such condition shall have been effected or obtained on condi-
tions acceptable to the Board of Directors. Nothing herein shall be deemed to
require the Company to apply for or to obtain such listing, registration or
qualification, or to satisfy such condition.
14. Rights as a Stockholder.
------------------------
The holder of an option shall have no rights as a stockholder with
respect to any shares covered by the option (including, without limitation, any
rights to receive dividends or non-cash distributions with respect to such
shares) until the date of issue of a stock certificate to him or her for such
shares. No adjustment shall be made for dividends or other rights for which
the record date is prior to the date such stock certificate is issued.
-7-
<PAGE> 8
15. Adjustment Provisions for Recapitalizations and Related Transactions.
(a) General. If, through or as a result of any merger,
consolidation, sale of all or substantially all of the assets of the Company,
reorganization, recapitalization, reclassification, stock dividend, stock split,
reverse stock split (other than the Company's one-for-two reverse stock split
effective as of October 24, 1994) or other similar transaction, (i) the
outstanding shares of Common Stock are increased, decreased or exchanged for a
different number or kind of shares or other securities of the Company, or (ii)
additional shares or new or different shares or other securities of the Company
or other non-cash assets are distributed with respect to such shares of Common
Stock or other securities, an appropriate and proportionate adjustment may be
made in (x) the maximum number and kind of shares reserved for issuance under
the Plan, (y) the number and kind of shares or other securities subject to any
then outstanding options under the Plan, and (z) the price for each share
subject to any then outstanding options under the Plan, without changing the
aggregate purchase price as to which such options remain exercisable.
Notwithstanding the foregoing, no adjustment shall be made pursuant to this
Section 15 if such adjustment would cause the Plan to fail to comply with
Section 422 of the Code.
(b) Board Authority to Make Adjustments. Any adjustments under
this Section 15 will be made by the Board of Directors, whose determination as
to what adjustments, if any, will be made and the extent thereof will be final,
binding and conclusive. No fractional shares will be issued under the Plan on
account of any such adjustments.
16. Merger, Consolidation, Asset Sale, Liquidation, etc.
(a) General. In the event of a consolidation or merger or sale of
all or substantially all of the assets of the Company in which outstanding
shares of Common Stock are exchanged for securities, cash or other property of
any other corporation or business entity or in the event of a liquidation of the
Company, the Board of Directors of the Company, or the board of directors of any
corporation assuming the obligations of the Company, may, in its discretion,
take any one or more of the following actions, as to outstanding options: (i)
provide that such options shall be assumed, or equivalent options shall be
substituted, by the acquiring or succeeding corporation (or an affiliate
thereof), provided that any such options substituted for Incentive Stock Options
shall meet the requirements of Section 424(a) of the Code, (ii) upon written
notice to the optionees, provide that all unexercised options will terminate
immediately prior to the consummation of such transaction unless exercised by
the optionee
-8-
<PAGE> 9
within a specified period following the date of such notice, (iii) in the event
of a merger under the terms of which holders of the Common Stock of the Company
will receive upon consummation thereof a cash payment for each share surrendered
in the merger (the "Merger Price"), make or provide for a cash payment to the
optionees equal to the difference between (A) the Merger Price times the number
of shares of Common Stock subject to such outstanding options (to the extent
then exercisable at prices not in excess of the Merger Price) and (B) the
aggregate exercise price of all such outstanding options in exchange for the
termination of such options, and (iv) provide that all or any outstanding
options shall become exercisable in full immediately prior to such event.
(b) Substitute Options. The Company may grant options under the
Plan in substitution for options held by employees of another corporation who
become employees of the Company, or a subsidiary of the Company, as the result
of a merger or consolidation of the employing corporation with the Company or a
subsidiary of the Company, or as a result of the acquisition by the Company, or
one of its subsidiaries, of property or stock of the employing corporation. The
Company may direct that substitute options be granted on such terms and
conditions as the Board of Directors considers appropriate in the circumstances.
17. No Special Employment Rights.
-----------------------------
Nothing contained in the Plan or in any option shall confer upon any
optionee any right with respect to the continuation of his or her employment by
the Company or interfere in any way with the right of the Company at any time to
terminate such employment or to increase or decrease the compensation of the
optionee.
18. Other Employee Benefits.
------------------------
Except as to plans which by their terms include such amounts as
compensation, the amount of any compensation deemed to be received by an
employee as a result of the exercise of an option or the sale of shares received
upon such exercise will not constitute compensation with respect to which any
other employee benefits of such employee are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing, life insurance or
salary continuation plan, except as otherwise specifically determined by the
Board of Directors.
19. Amendment of the Plan.
----------------------
(a) The Board of Directors may at any time, and from time to time,
modify or amend the Plan in any respect, except that if at any time the approval
of the stockholders of the Company is required under Section 422 of the Code or
any successor provision
-9-
<PAGE> 10
with respect to Incentive Stock Options, or under Rule 16b-3, the Board of
Directors may not effect such modification or amendment without such approval.
(b) The termination or any modification or amendment of the Plan
shall not, without the consent of an optionee, affect his or her rights under an
option previously granted to him or her. With the consent of the optionee
affected, the Board of Directors may amend outstanding option agreements in a
manner not inconsistent with the Plan. The Board of Directors shall have the
right to amend or modify (i) the terms and provisions of the Plan and of any
outstanding Incentive Stock Options granted under the Plan to the extent
necessary to qualify any or all such options for such favorable federal income
tax treatment (including deferral of taxation upon exercise) as may be afforded
incentive stock options under Section 422 of the Code and (ii) the terms and
provisions of the Plan and of any outstanding option to the extent necessary to
ensure the qualification of the Plan under Rule 16b-3.
20. Withholding.
(a) The Company shall have the right to deduct from payments of
any kind otherwise due to the optionee any federal, state or local taxes of any
kind required by law to be withheld with respect to any shares issued upon
exercise of options under the Plan. Subject to the prior approval of the
Company, which may be withheld by the Company in its sole discretion, the
optionee may elect to satisfy such obligations, in whole or in part, (i) by
causing the Company to withhold shares of Common Stock otherwise issuable
pursuant to the exercise of an option or (ii) by delivering to the Company
shares of Common Stock already owned by the optionee. The shares so delivered or
withheld shall have a fair market value equal to such withholding obligation.
The fair market value of the shares used to satisfy such withholding obligation
shall be determined by the Company as of the date that the amount of tax to be
withheld is to be determined. An optionee who has made an election pursuant to
this Section 20(a) may only satisfy his or her withholding obligation with
shares of Common Stock which are not subject to any repurchase, forfeiture,
unfulfilled vesting or other similar requirements.
(b) Notwithstanding the foregoing, in the case of a Reporting
Person, no election to use shares for the payment of withholding taxes shall be
effective unless made in compliance with any applicable requirements of Rule
16b-3 (unless it is intended that the transaction not qualify for exemption
under Rule 16b-3).
-10-
<PAGE> 11
21. Cancellation and New Grant of Options, Etc.
The Board of Directors shall have the authority to effect, at any time
and from time to time, with the consent of the affected optionees, (i) the
cancellation of any or all outstanding options under the Plan and the grant in
substitution therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock and having an option exercise price
per share which may be lower or higher than the exercise price per share of the
cancelled options or (ii) the amendment of the terms of any and all outstanding
options under the Plan to provide an option exercise price per share which is
higher or lower than the then-current exercise price per share of such
outstanding options.
22. Effective Date and Duration of the Plan.
(a) Effective Date. The Plan shall become effective when adopted
by the Board of Directors, but no option granted under the Plan shall become
exercisable unless and until the Plan shall have been approved by the Company's
stockholders. If such stockholder approval is not obtained within twelve months
after the date of the Board's adoption of the Plan, options previously granted
under the Plan shall not vest and shall terminate and no options shall be
granted thereafter. Amendments to the Plan not requiring stockholder approval
shall become effective when adopted by the Board of Directors; amendments
requiring stockholder approval (as provided in Section 19) shall become
effective when adopted by the Board of Directors, but no option granted after
the date of such amendment shall become exercisable (to the extent that such
amendment to the Plan was required to enable the Company to grant such option to
a particular person) unless and until such amendment shall have been approved by
the Company's stockholders. If such stockholder approval is not obtained within
twelve months of the Board's adoption of such amendment, any options granted on
or after the date of such amendment shall terminate to the extent that such
amendment was required to enable the Company to grant such option to a
particular optionee. Subject to this limitation, options may be granted under
the Plan at any time after the effective date and before the date fixed for
termination of the Plan.
(b) Termination. Unless sooner terminated in accordance with
Section 16, the Plan shall terminate, with respect to Incentive Stock Options,
upon the earlier of (i) the close of business on the day next preceding the
tenth anniversary of the date of its adoption by the Board of Directors, or (ii)
the date on which all shares available for issuance under the Plan shall have
been issued pursuant to the exercise or cancellation of options or the final
vesting of awards granted under the Plan. Unless sooner terminated in accordance
with Section 16, the Plan
-11-
<PAGE> 12
shall terminate with respect to options which are not Incentive Stock Options
and awards on the date specified in (ii) above. If the date of termination is
determined under (i) above, then options outstanding on such date shall continue
to have force and effect in accordance with the provisions of the instruments
evidencing such options.
23. Provision for Foreign Participants.
The Board of Directors may, without amending the Plan, modify awards or
options granted to participants who are foreign nationals or employed outside
the United States to recognize differences in laws, rules, regulations or
customs of such foreign jurisdictions with respect to tax, securities, currency,
employee benefit or other matters.
Adopted by the Board of Directors on
October 4, 1994
Approved by the stockholders on
October 24, 1994
-12-
<PAGE> 13
AMENDMENT NO. 1
TO
1994 STOCK OPTION PLAN
1. Section 3(a) of the 1994 Stock Option Plan be and hereby is
deleted in its entirety and replaced by the following:
"(a) General. Options may be granted to persons who are,
at the time of grant, employees, officers or directors of, or
consultants or advisors to, the Company; provided, that the class of
employees to whom Incentive Stock Options may be granted shall be
limited to all employees of the Company. A person who has been granted
an option may, if he or she is otherwise eligible, be granted
additional options if the Board of Directors shall so determine.
Subject to adjustment as provided in Section 15 below, the maximum
number of shares with respect to which options may be granted to any
employee under the Plan shall not exceed 300,000 shares of Common Stock
during any calendar year during the term of the Plan. For the purpose
of calculating such maximum number, (a) an option shall continue to be
treated as outstanding notwithstanding its repricing, cancellation or
expiration and (b) the repricing of an outstanding option or the
issuance of a new option in substitution for a cancelled option shall
be deemed to constitute the grant of a new additional option separate
from the original grant of the option that is repriced or cancelled."
2. Section 4 of the 1994 Stock Option Plan be and hereby is
deleted in its entirety and replaced by the following:
"4. Stock Subject to Plan.
Subject to adjustment as provided in Section 15 below, the
maximum number of shares of Common Stock which may be issued and sold
under the Plan is 2,410,000 shares. If an option granted under the Plan
shall expire or terminate for any reason without having been exercised
in full, the unpurchased shares subject to such option shall again be
available for subsequent option grants under the Plan. If shares issued
upon exercise of an option under the Plan are tendered to the Company
in payment of the exercise price of an option granted under the Plan,
such tendered shares shall again be available for subsequent option
grants under the Plan; provided, that in no event shall such shares be
made available for issuance to Reporting Persons or pursuant to
exercise of Incentive Stock Options."
Adopted by the Board of Directors on
October 18, 1995 and April 12, 1996
Approved by the stockholders on
May 22, 1996
<PAGE> 1
EXHIBIT 10.17
CLERK'S CERTIFICATE
I, M. Lawrence Oliverio do hereby certify that I am the duly elected and
qualified Secretary/Clerk of Security Dynamics Technologies, Inc. a Delaware
corporation whose principal place of business is in Massachusetts; and that a
special meeting of its Board of Directors duly called and held, the following
was duly voted:
"Voted:
That /s/ Arthur Coviello
---------------------------------------------
(Name of officer or officers)
Executive Vice President of:
----------------------------------------------
(Office held)
Security Dynamics Technologies, Inc.
(Name of Tenant)
be and he hereby is, in the name of and on behalf of
Security Dynamics Technologies, Inc.
(Name of Tenant)
authorized and directed to execute under seal and deliver
an Indenture of Lease with
Beacon Properties, L.P.
(Landlord)
all on the terms, provisions and conditions set forth in said Indenture of
Lease presented to the meeting"; and the execution thereby said
Executive Vice President shall be conclusive
(Title of Officer)
evidence of the fact that the instrument signed by him was the one
presented at the "meeting".
I further certify that the foregoing vote is in full force and effect.
Attest: /s/ M. Lawrence Oliverio
-----------------------------------
Secretary/Clerk
(SEAL)
-1-
<PAGE> 2
NOTICE OF LEASE
March 11, 1996
Pursuant to Section 4 of Chapter 183 of the General Laws of
Massachusetts, notice is hereby given of the following described Lease:
DATE OF LEASE: March 11, 1996
LANDLORD: Beacon Properties, L.P., a Delaware limited partnership
TENANT: Security Dynamic Technologies, Inc.
(a Delaware corporation)
PREMISES: 20 Crosby Drive, Bedford, Middlesex County,
Massachusetts (Building One in Crosby Corporate
Center (the "Park"))
TERM: A term commencing on the Term Commencement Date, as
defined in the Lease, and terminating on the date which
is ten (10) years after the Rent Commencement Date,
as defined in the Lease. The parties presently estimate
that the Term Commencement Date will occur on or about
April 1, 1996 and that the term will terminate on or
about August 1, 2006.
RIGHTS OF
RENEWAL
OR EXTENSION: Tenant has the right to extend the term of the Lease
for one (1) additional term of five (5) years, subject
to and in accordance with the terms and conditions
set forth in the Lease.
EXPANSION
RIGHTS: Subject to the rights of other tenants in the Park and
subject to the provisions of the Lease, Tenant has the
right to lease any separately demised area in Building
2, 3, 4 or 5 of the Park or on any other land and
improvements in the Park owned by Landlord and located
within a one (1) mile radius of the Park when such
area becomes available for lease to Tenant, during the
initial term of the Lease.
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Nothing contained in this Notice of Lease shall be intended to amend or
revise the Lease.
EXECUTED under seal as of the date first above-written.
LANDLORD: TENANT:
BEACON PROPERTIES, L.P. SECURITY DYNAMICS
TECHNOLOGIES, INC.
By: Beacon Properties Corporation,
General Partner By: /s/ A.W. Coviello Jr.
--------------------------------
Name: A.W. Coviello Jr.
Title: Exec. V.P.
By: /s/ Lionel P. Fortin Duly Authorized
--------------------------------
Lionel P. Fortin,
Senior Vice President
Dated Signed: 4/10/96 Date Signed: 3/19/96
---------- ---------
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COMMONWEALTH OF MASSACHUSETTS
County of Suffolk, ss. 4/10, 1996
Personally appeared before me the above-named Lionel Fortin, who being
by me duly sworn, did say that he is President of Beacon Properties
Corporation, which is General Partner of Beacon Properties, L.P., as aforesaid,
signer and sealer of the foregoing instrument, and acknowledged the same to be
his free act and deed and the free act and deed of Beacon Properties, L.P.
/s/ Kathleen M. McCarthy
-----------------------------------
Notary Public
My Commission Expires: 6/15/01
COMMONWEALTH OF MASSACHUSETTS
County of Middlesex, ss.
On this 19th day of March, 1996, personally appeared before me A.W.
Coviello, Jr. to me personally known, who being by me duly sworn, did say that
he/she is the [Vice] President of Security Dynamics and such officer
acknowledged the foregoing to be his/her free act and deed and the free act and
deed of Security Dynamics Technologies, Inc.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year last above written.
/s/ Liesl M. Hoffman
--------------------------------------
Notary Public
My Commission Expires: January 20, 2000
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COMMONWEALTH OF MASSACHUSETTS
County of Middlesex, ss.
On this 19th day of March, 1996, personally appeared before me
_______________ to me personally known, who, being by me duly sworn, did
say that he/she is the [Assistant] Treasurer of ___________, and such officer
acknowledged the foregoing to be his/her free act and deed and the free act
and deed of Security Dynamics Technologies, Inc.
IN WITNESS WHEREOF, I have hereunto set my hand and affixed my official
seal the day and year last above written.
/s/ Liesl M. Hoffman
---------------------------------------
Notary Public
My Commission Expires: January 20, 2000
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CONTENTS
<TABLE>
<S> <C>
1. REFERENCE DATA........................................................................................ 1
2. DESCRIPTION OF PREMISES............................................................................... 1
2.1 Demised Premises............................................................................. 1
2.2 Park......................................................................................... 1
2.3 Appurtenant Rights........................................................................... 1
2.4 Exclusions and Reservations.................................................................. 2
3. TERM OF LEASE......................................................................................... 2
3.1 Definitions.................................................................................. 2
3.2 Habendum..................................................................................... 2
3.3 Declaration Fixing Term Commencement Date.................................................... 2
4. READINESS FOR OCCUPANCY - ENTRY BY TENANT
PRIOR TO TERM COMMENCEMENT DATE....................................................................... 3
4.1 Completion Date - Delays..................................................................... 3
4.2 When Base Building Work Deemed Substantially Complete........................................ 4
4.3 Base Building Work and Condition of Premises................................................. 4
4.4 Plans and Specifications and Tenant Work..................................................... 5
4.5 Quality and Cost of Materials................................................................ 6
4.6 Tenant's Delay - Additional Costs............................................................ 6
4.7 Entry by Tenant Prior to Term Commencement Date.............................................. 6
4.8 Conclusiveness of Landlord's Performance..................................................... 6
4.9 Tenant Payments of Construction Cost......................................................... 7
5. USE OF PREMISES....................................................................................... 7
5.1 Permitted Use................................................................................ 7
5.2 Prohibited Uses.............................................................................. 7
5.3 Licenses and Permits......................................................................... 8
5.4 Vacancy by Tenant............................................................................ 8
6. RENT.................................................................................................. 8
7. HAZARDOUS MATERIAL.................................................................................... 9
8. SERVICES FURNISHED BY LANDLORD........................................................................ 11
8.1 Electric Current............................................................................. 11
8.2 Water........................................................................................ 13
8.3 Elevators, Heat, Cleaning.................................................................... 13
8.4 Air Conditioning............................................................................. 14
8.5 Additional Heat, Cleaning and
Air Conditioning Services.................................................................... 14
</TABLE>
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<TABLE>
<S> <C>
8.6 Repairs...................................................................................... 15
8.7 Interruption or Curtailment of Services...................................................... 15
8.8 Energy Conservation.......................................................................... 16
8.9 Miscellaneous................................................................................ 16
9. ESCALATION............................................................................................ 16
9.1 Definitions.................................................................................. 16
9.2 Tax Excess................................................................................... 22
9.3 Operating Expense Excess..................................................................... 22
9.4 Part Years................................................................................... 24
9.5 Effect of Taking............................................................................. 24
9.6 Disputes, etc................................................................................ 25
10. CHANGES OR ALTERATIONS BY LANDLORD.................................................................... 24
11. FIXTURES, EQUIPMENT AND IMPROVEMENTS - REMOVAL BY TENANT.............................................. 25
12. ALTERATIONS AND IMPROVEMENTS BY TENANT................................................................ 26
13. TENANT'S CONTRACTORS - MECHANIC'S AND OTHER LIENS -
STANDARD OF TENANT'S PERFORMANCE - COMPLIANCE WITH LAWS............................................... 27
14. REPAIRS BY TENANT - FLOOR LOAD........................................................................ 28
14.1 Repairs by Tenant............................................................................ 28
14.2 Floor Load - Heavy Machinery................................................................. 28
15. INSURANCE, INDEMNIFICATION, EXONERATION AND EXCULPATION............................................... 29
15.1 General Liability Insurance.................................................................. 29
15.2 Certificates of Insurance.................................................................... 29
15.3 General...................................................................................... 30
15.3A Landlord Indemnity of Tenant................................................................. 30
15.4 Property of Tenant........................................................................... 30
15.5 Bursting of Pipes, etc....................................................................... 30
15.6 Repairs and Alterations - No Diminution ..................................................... 31
of Rental Value
16. ASSIGNMENT, MORTGAGING AND SUBLETTING................................................................. 32
17. MISCELLANEOUS COVENANTS............................................................................... 36
17.1 Rules and Regulations........................................................................ 36
17.2 Access to Premises - Shoring................................................................. 37
17.3 Accidents to Sanitary and Other Systems...................................................... 38
17.4 Signs, Blinds and Drapes..................................................................... 38
</TABLE>
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<TABLE>
<S> <C>
17.5 Estoppel Certificate......................................................................... 39
17.6 Prohibited Materials and Property............................................................ 39
17.7 Requirements of Law - Fines and Penalties.................................................... 40
17.8 Tenant's Acts - Effect on Insurance.......................................................... 40
17.9 Miscellaneous................................................................................ 41
18. DAMAGE BY FIRE, ETC................................................................................... 41
18.1 Casualty Insurances.......................................................................... 41
18.2 Repair of Damage Caused by Casualty.......................................................... 41
18.3 Landlord's Termination Rights................................................................ 42
18.4 Tenant's Termination Rights.................................................................. 42
18.5 General Provisions Relating to Any Casualty Termination...................................... 44
19. WAIVER OF SUBROGATION................................................................................. 44
20. CONDEMNATION - EMINENT DOMAIN......................................................................... 45
20.1 Landlord's Termination Rights................................................................ 45
20.2 Tenant's Termination Rights.................................................................. 45
20.3 General Taking Provisions.................................................................... 45
20.4 Taking Process............................................................................... 46
20.5 Temporary Takings............................................................................ 47
21. DEFAULT............................................................................................... 47
21.1 Conditions of Limitation - Re-entry - Termination............................................ 47
21.2 Damages - Assignment for Benefit of Creditors................................................ 48
21.3 Damages - Termination........................................................................ 49
21.4 Fees and Expenses............................................................................ 50
21.5 Waiver of Redemption......................................................................... 52
21.6 Landlord's Remedies Not Exclusive............................................................ 52
21.7 Grace Period................................................................................. 52
22. END OF TERM - ABANDONED PROPERTY...................................................................... 53
23. SUBORDINATION......................................................................................... 54
24. QUIET ENJOYMENT....................................................................................... 57
25. ENTIRE AGREEMENT - WAIVER - SURRENDER................................................................ 57
25.1 Entire Agreement............................................................................. 57
25.2 Waiver by Landlord........................................................................... 57
25.3 Surrender.................................................................................... 58
26. INABILITY TO PERFORM - EXCULPATORY CLAUSE............................................................. 58
</TABLE>
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<TABLE>
<S> <C>
27. BILLS AND NOTICES..................................................................................... 59
28. PARTIES BOUND - SEIZIN OF TITLE....................................................................... 60
29. MISCELLANEOUS......................................................................................... 60
29.1 Separability................................................................................. 60
29.2 Captions, etc................................................................................ 60
29.3 Broker....................................................................................... 61
29.4 Modifications................................................................................ 61
29.5 Arbitration.................................................................................. 61
29.6 Governing Law................................................................................ 62
29.7 Assignment of Rents.......................................................................... 62
29.8 Representation of Authority.................................................................. 62
29.9 Expenses Incurred by Landlord Upon Tenant Requests........................................... 62
29.10 Survival..................................................................................... 63
</TABLE>
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EXHIBITS
Exhibit 2 Lease Plan
Exhibit 3 Plan and Legal Description of Park; including
Protected Parking Areas
Exhibit 4 Base Building Work
Exhibit 4-A Exclusions from Definitions of Substantial Completion
Exhibit 5 Building Services
Exhibit 6 Rentable Area
Exhibit 7 Existing Site Conditions
Exhibit 7-A Permitted Hazardous Materials
Exhibit 8 Form of Letter of Credit
Exhibit 9 Plan and Legal Description of DEC Land
Exhibit 10 Table of Definitions
Exhibit 11 Form of Acceptable SNDA
Exhibit 12 Option Rights of Existing Tenants in the Park
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<PAGE> 11
THIS INDENTURE OF LEASE made and entered into on the Execution Date as
stated in Exhibit 1 and between the Landlord and the Tenant named in Exhibit 1.
Landlord does hereby demise and lease to Tenant, and Tenant does hereby hire and
take from Landlord, the premises hereinafter mentioned and described
(hereinafter referred to as "premises"), upon and subject to the covenants,
agreements, terms, provisions and conditions of this Lease for the term
hereinafter stated:
1. REFERENCE DATA
Each reference in this Lease to any of the terms and titles contained
in any Exhibit attached to this Lease shall be deemed and construed to
incorporate the data stated under that term or title in such Exhibit.
2. DESCRIPTION OF DEMISED PREMISES
2.1 Demised Premises. The premises are the Building as described
in Exhibit 1 (as the same may from time to time be constituted after changes
therein, additions thereto and eliminations therefrom pursuant to rights of
Landlord hereinafter reserved) and is hereinafter referred to as "Building",
substantially as shown hatched or outlined on the Lease Plan, Exhibit 2 attached
hereto and incorporated by reference as a part hereof.
2.2 Park. The Building is located in the Park described in Exhibit
1, which may be changed, increased or decreased by addition or subdivision of
parcels and/or by construction and/or demolition of buildings and/or other
improvements by Landlord from time to time.
2.3 Appurtenant Rights. Tenant shall have, as appurtenant to the
premises, rights to use in common, with others entitled thereto, subject to
reasonable rules from time to time made by Landlord of which Tenant is given
notice and with due regard for the rights of others to use the same (a) the
common roadways, sidewalks and walkways necessary for the purposes of access to
the Building from public roads, walkways of the Park, and (b) the Parking Areas
for the purpose of parking of motor vehicles by Tenant and Tenant's employees
and invitees on a first-come first served, non-reserved basis; and no other
appurtenant rights or easements. For the purposes hereof, the "Parking Areas"
shall be defined as the portions of the parking areas in the Park which are
available for the common use by all of the tenants in the Park, as may be
designated by Landlord, from time to time and as initially shown outlined.
Notwithstanding anything to the contrary in this Lease contained, Tenant shall
have the exclusive right to use the spaces within the area designated "Tenant's
Exclusive Parking Area" on Exhibit 3 Landlord shall have no right to relocate
such Tenant's Exclusive Parking Area. Landlord shall have no obligation to
police the use of Tenant's Exclusive Parking Area. Landlord agrees to use
reasonable efforts to obtain the agreement of tenants under existing leases to
designate a portion of the other parking areas of the Park for use as a common
visitor parking area which would contain at least twenty-five (25) parking
spaces. It is understood and agreed that
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<PAGE> 12
Landlord shall have no liability to Tenant if it is unable to obtain such
agreement from tenants under existing leases. If such agreement to designate a
common visitor parking area is obtained, Landlord shall have no obligation to
police the use of such common visitor parking area.
2.4 Exclusions and Reservations. There is hereby expressly
reserved to Landlord (a) the right of access through the premises for the
purposes of operation, maintenance, decoration and repair, and (b) any space in
or adjacent to the premises used for shafts, stacks, pipes, conduits, wires, and
appurtenant fixtures, fan rooms, ducts, electric and other utilities, sinks or
other Building facilities, in any case serving any other area(s) in the Park and
the use thereof.
3. TERM OF LEASE
3.1 Definitions. As used in this Lease the words and terms which
follow mean and include the following:
(a) "Specified Commencement Date" - The date set forth in
Exhibit 1 on which it is estimated that the Base Building Work (as defined
below) will be substantially completed (as defined below).
(b) "Term Commencement Date" - The "Term Commencement
Date" is the date on which the Base Building Work has been deemed to have been
substantially completed, but in no event earlier than April 1, 1996.
3.2 Habendum. TO HAVE AND TO HOLD the premises for a term of years
commencing on the Term Commencement Date and ending on the Termination Date as
stated in Exhibit 1 or on such earlier date upon which said term may expire or
be terminated pursuant to any of the conditions of limitation or other
provisions of this Lease or pursuant to law (which date for the termination of
the term hereof is herein referred to as the "Termination Date").
Notwithstanding the foregoing, if the Termination Date as stated in Exhibit 1
shall fall on other than the last day of a calendar month, said Termination Date
shall instead occur on the last day of the calendar month in which said
Termination Date would otherwise have occurred.
3.3 Declaration Fixing Term Commencement Date. As soon as may be
after the execution date hereof, each of the parties hereto agrees, upon demand
of the other party to join in the execution, in recordable form, of a statutory
notice, memorandum, etc. of lease and/or written declaration in which shall be
stated such Term Commencement Date and (if need be) the Termination Date. If
this Lease is terminated before the term expires, then upon Landlord's request
the parties shall execute, deliver and record an instrument acknowledging such
fact and the date of termination of this Lease, and Tenant hereby appoints
Landlord its attorney-in-fact in its name and behalf to execute such instrument
if Tenant shall fail to execute and deliver such instrument within ten (10) days
after Landlord's request therefor.
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<PAGE> 13
4. READINESS FOR OCCUPANCY - ENTRY BY TENANT PRIOR TO TERM COMMENCEMENT
DATE
4.1 Completion Date - Delays.
(a) Landlord Not Responsible. Subject to delay by causes
beyond the reasonable control of Landlord or caused by the action or inaction of
Tenant, Landlord shall use reasonable speed and diligence to have the Base
Building Work, as defined in Article 4.3, substantially completed on the
Specified Commencement Date. The failure to have the Base Building Work
substantially completed on the Specified Commencement Date shall in no way
affect the validity of this Lease or the obligations of Tenant hereunder nor
shall the same be construed in any way to extend the term of this Lease. If the
Base Building Work has not been deemed substantially completed within the
meaning of Article 4.2 hereof on the Specified Commencement Date, Tenant shall
not have any claim against Landlord, and Landlord shall have no liability to
Tenant, by reason thereof.
(b) Tenant's Termination Right. Notwithstanding Article
4.1(a) above, if the Base Building Work has not been deemed substantially
completed within the meaning of Article 4.2, on or before the Completion
Deadline Date (as defined below) for any reason, then on or after the Completion
Deadline Date Tenant shall have the right to give Landlord a written thirty (30)
notice of Tenant's desire to terminate this Lease. If the Base Building Work is
deemed substantially completed, as aforesaid, on or before the thirtieth (30th)
day after Landlord receives such termination notice, Tenant's termination notice
shall be deemed to be void and of no force or effect. If the Base Building Work
is not deemed substantially completed, as aforesaid, on or before the thirtieth
(30th) day after Landlord receives such termination notice, this Lease shall
terminate and shall be of no further force or effect. For the purposes hereof,
the Completion Deadline Date shall mean the date ninety (90) days after the
Specified Commencement Date, plus up to an additional period of time (not to
exceed an additional ninety (90) days) equal to the length of delays in the Base
Building Work arising from causes beyond Landlord's reasonable control as
provided in Article 26 hereof.
(c) Rent Credit. Notwithstanding Article 4.1(a) above, if
the Term Commencement Date has not occurred on or before the Liquidated Damage
Date, as hereinafter defined, then Tenant shall be entitled to a proportionate
credit against the Yearly Rent for an amount equal to the product of (a)
$2,620.20, multiplied by (b) the number of days from the Liquidated Damage Date
to but not including the Term Commencement Date. The "Liquidated Damage Date"
shall be defined as April 16, 1996 plus up to an additional period of time (not
to exceed an additional sixty (60) days) equal to the length of delays in Base
Building Work arising from causes beyond Landlord's reasonable control, as
provided in Article 26.
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<PAGE> 14
4.2 When Base Building Work Deemed Substantially Complete. The
Base Building Work shall be deemed substantially completed on the date when the
same has been substantially completed by Landlord except (i) for minor or
insubstantial details of construction, decoration or mechanical adjustments
which remain to be done in the premises (collectively, "Punchlist Items"), (ii)
the work ("Post-Substantial Completion Work") set forth in Exhibit 4-A attached
hereto and incorporated by reference as a part hereof, and (iii) complete and
final installation of the elevator. Notwithstanding the foregoing, if any
windows have not been installed as of substantial completion, the Base Building
Work shall not be deemed to be substantially complete unless Landlord has, at
Landlord's cost, installed temporary measures to make such window openings
watertight.
Notwithstanding the foregoing, the Base Building Work shall be deemed
substantially completed on such earlier date on which the Base Building Work
would have been substantially completed under the preceding sentence, but for
delays (referred to collectively herein as "Tenant Delays") which are: (i)
caused in whole or in part by Tenant through the delay of Tenant in submitting
any plans and/or specifications, supplying information, approving plans,
specifications or estimates, giving authorizations or otherwise or (ii) caused
in whole or in part by delay and/or default on the part of Tenant or its
contractors including, without limitation, the utility companies and other
entities furnishing communications, data processing or other service or
equipment. Subject to Landlord's reasonable safety requirements, Tenant's
architect and Tenant's representative shall, upon reasonable advance notice to
Landlord, have access to the premises during the performance of the Base
Building Work for the purpose of inspecting the progress of the Base Building
Work. Tenant's architect and Tenant's representative shall have the right to
jointly inspect the premises upon Substantial Completion to review and approve
(which approval shall not be unreasonably withheld) the Punchlist Items. Any of
the Base Building Work in the premises not fully completed on the Term
Commencement Date shall thereafter be so completed with reasonable diligence by
Landlord. Landlord and Tenant shall consult, in good faith, to determine a
schedule for the completion of the elevator and the Post-Substantial Completion
Work so as to cause no delay in the construction of Tenants' Work (as
hereinafter defined).
4.3 Base Building Work and Condition of Premises
(a) Base Building Work. For the purposes hereof, "Base
Building Work" shall be defined as the work described on Exhibit 4 attached
hereto. All of the Base Building Work shall be performed in a good and
workmanlike manner and in compliance with applicable law.
(b) Condition of Premises. Except for the Base Building
Work, and except for such representations and warranties as are expressly set
forth in this Lease, Tenant shall take the premises "as-is" without
representation or warranty by Landlord. Tenant and its representatives shall,
upon reasonable written notice to Landlord and subject to Landlord's reasonable
security and safety requirements, have access to the
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<PAGE> 15
Premises after execution of this Lease for the purposes of planning and
designing the Tenant Work.
4.4 Plans and Specifications and Tenant Work
(a) Tenant's Plans. Tenant shall be solely responsible
for the timely preparation and submission to Landlord of the final
architectural, electrical and mechanical construction drawings, plans and
specifications (called "plans") necessary to improve the premises for Tenant's
occupancy (exclusive of the Base Building Work), which plans shall be subject to
approval by Landlord/s architect and engineers and shall comply with their
reasonable requirements to avoid aesthetic or other conflicts with the design
and function of the balance of the Park. Tenant may submit such plans in stages.
Notwithstanding anything to the contrary contained in this Lease, Tenant shall
provide to Landlord Tenant's plans for the handicap toilet located on the upper
level of the Building on or before May 1, 1996. Landlord's approval of Tenant's
plans shall not be unreasonably withheld, conditioned or delayed. Landlord shall
respond to Tenant's plan submissions within ten (10) days of Landlord's receipt
thereof. Failure by Landlord to respond within such ten (10) day period shall be
deemed to be approval thereof provided that Tenant's submissions shall be
received with a written request for approval which shall expressly state that in
accordance with this Article 4.4, failure by Landlord to respond within ten (10)
days of Landlord's receipt of such plans shall be deemed to constitute approval
thereof. The plans approved by Landlord hereunder are referred to herein as the
"Tenant's Final Plans." Tenant shall be responsible for all elements of the
design of Tenant's plans (including, without limitation, compliance with law,
defects in design and the structural integrity of the design). If requested by
Tenant, Landlord's architect will prepare the plans necessary for such
construction at Tenant's cost and expense. Whether or not the layout and plans
are prepared with the help (in whole or in part) of Landlord's architect, Tenant
agrees to remain solely responsible for the timely preparation and submission of
all such plans and all costs related thereto, except as provided in subparagraph
(b) below. Articles 4.1(b) and 4.1(c) shall be Tenant's sole and exclusive
remedies for any failure of Landlord to cause Landlord's Work to be timely
performed. Upon request from time to time, Landlord shall provide Tenant with a
copy of all changes made by Landlord's architect to Landlord's plans and
specifications for the Base Building Work but Landlord shall have no obligation
to provide Tenant with any as-built plans for the premises. Notwithstanding
anything to the contrary contained in this Lease, Landlord agrees to submit to
Tenant revised Base Building plans for (i) the existing toilet rooms and (ii)
stair finishes in accordance with Exhibit 4. Tenant's approval of Landlord's
plans shall not be unreasonably withheld, conditioned or delayed. Tenant shall
respond to Landlord's plan submissions within ten (10) business days of Tenant's
receipt thereof. Failure by Tenant to respond within such ten (10) business day
period shall be deemed to be approval thereof provided that Landlord's
submissions shall be received with a written request for approval which shall
expressly state that in accordance with this Article 4.4, failure by Tenant to
respond within ten (10) business days of Tenant's receipt of such plans shall be
deemed to constitute approval thereof.
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<PAGE> 16
(b) Landlord's Architectural Contribution. Landlord shall
contribute up to $7,442.60 ("Landlord's Architectural Contribution") toward the
cost of having Tenant's plans prepared by Warren Freedenfeld & Associates, Inc.
("Tenant's Architect"). Landlord's Architectural Contribution shall be disbursed
to Tenant within twenty (20) days of Tenant's invoices therefor, accompanied by
supporting invoices from Tenant's Architect.
(c) Performance of Tenant Work. After the completion of the Base
Building Work, Tenant shall perform such work ("Tenant's Work") as is necessary
to prepare the premises for Tenant's occupancy. All of Tenant's Work shall be
performed in accordance with the provisions of this Lease, including, without
limitation, Articles 12 and 13 thereof.
4.5 Quality and Cost of Materials. Tenant shall bear all costs of
preparing the premises for its occupancy in accordance with the Tenant's Final
Plans, except for the Base Building Work to be performed by Landlord, and
Landlord's Architectural Contribution, all as hereinafter provided. Landlord
shall have no liability or responsibility for any claim, injury or damage
alleged to have been caused by the particular materials selected by Tenant in
the construction or other preparation of the premises for Tenant's occupancy
including, without limitation, furniture and carpeting, whether or not approved
by Landlord.
4.6 Tenant's Delay - Additional Costs. If Tenant fails to honor or
perform its obligations under this Lease, any additional cost to Landlord in
connection with the completion of the premises in accordance with the terms of
this Lease shall be promptly paid by Tenant to Landlord if such additional cost
is in whole or in part the result of such failure, omission or delay of Tenant.
For the purposes of the next preceding sentence, the expression "additional cost
to Landlord" shall mean the cost over and above such cost as would have been the
aggregate cost to Landlord of completing the premises in accordance with the
terms of this Lease had there been no such failure, omission or delay. Nothing
contained in this Article 4.6 shall limit or qualify or prejudice any other
covenants, agreements, terms, provisions and conditions contained in this Lease,
including, but not limited to Article 4.2.
4.7 Entry by Tenant Prior to Term Commencement Date. With
Landlord's prior written consent, which shall not be unreasonably withheld,
Tenant shall have the right to enter the premises prior to the Term Commencement
Date, during normal business hours and without payment of rent, to perform such
work or decoration as is to be performed by, or under the direction or control
of, Tenant and as is otherwise in compliance with the terms of this Lease. Such
right of entry shall be deemed a license from Landlord to Tenant, and any entry
thereunder shall be at the risk of Tenant.
4.8 Conclusiveness of Landlord's Performance. With respect to
patent defects in Landlord's Work, Tenant shall be conclusively deemed to have
agreed that Landlord has performed all of its obligations under this Article 4
unless not later than the end of the second calendar month next beginning after
the Term Commencement Date Tenant shall
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give Landlord written notice specifying the respects in which Landlord has not
performed any such obligation. With respect to latent defects in Landlord's
Work, Tenant shall be conclusively deemed to have agreed that Landlord has
performed all of its obligations under this Article 4 unless not later than the
first anniversary of the Term Commencement Date, Tenant shall give Landlord
written notice specifying the respects in which Landlord has not performed any
such obligation.
4.9 Tenant Payments of Construction Cost. Landlord shall have the
same rights and remedies which Landlord has upon the nonpayment of Yearly Rent
and other charges due under this Lease for nonpayment of any amounts which
Tenant is required to pay to Landlord or Landlord's contractor in connection
with the construction and initial preparation of the premises (including,
without limitation, any amounts which Tenant is required to pay in accordance
with Articles 4.5 and 4.6 hereof) or in connection with any construction in the
premises performed for Tenant by Landlord, Landlord's contractor or any other
person, firm or entity after the Term Commencement Date.
5. USE OF PREMISES
5.1 Permitted Use. Tenant shall occupy and use the premises only
for the purposes as stated in Exhibit 1 and for no other purposes. Service and
utility areas (whether or not a part of the premises) shall be used only for the
particular purpose for which they were designed. Subject to the other terms and
provisions of this Lease, Tenant shall be permitted to install and operate any
kitchen equipment shown on Tenant's Final Plans, and equivalent substitutions
therefor, provided that, and so long as, the same are maintained in good
operating condition. Such kitchen equipment may be used only for the purposes of
serving Tenant's employees and business invitees.
5.2 Prohibited Uses. Notwithstanding any other provision of this
Lease, Tenant shall not use, or suffer or permit the use or occupancy of, or
suffer or permit anything to be done in or anything to be brought into or kept
in or about the premises, the Building, the Park or any part thereof (including,
without limitation, any materials used in the construction or other preparation
of the premises and furniture and carpeting): (i) which would violate any of the
covenants, agreements, terms, provisions and conditions of this Lease or
otherwise applicable to or binding upon the premises; (ii) for any unlawful
purposes or in any unlawful manner; (iii) which, in the reasonable judgment of
Landlord shall in any way (a) impair the appearance or reputation of the
Building or the Park; or (b) impair, interfere with or otherwise diminish the
quality of any of the Building services or the proper and economic heating,
cleaning, air conditioning or other servicing of the Building; or premises, or
with the use or occupancy of any of the other areas of the Building or the Park,
or occasion discomfort, inconvenience or annoyance, or injury or damage to any
occupants of the Park; or (iv) which is inconsistent with the maintenance of the
Building and/or the Park as facilities of the first class in the quality of
their maintenance, use, or occupancy. Tenant shall not install or use any
electrical or other equipment of any kind which, in the reasonable judgment of
Landlord, might cause any such impairment, interference, discomfort,
inconvenience or annoyance.
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5.3 Licenses and Permits. If any governmental license or permit
shall be required for the proper and lawful conduct of Tenant's business, and if
the failure to secure such license or permit would in any way affect Landlord,
the premises, the Building, the park or Tenant's ability to perform any of its
obligations under this Lease, Tenant, at Tenant's expense, shall duly procure
and thereafter maintain such license and submit the same to inspection by
Landlord. Tenant, at Tenant's expense, shall at all times comply with the terms
and conditions of each such license or permit. Tenant shall furnish all data and
information to governmental authorities and Landlord as required in accordance
with legal, regulatory, licensing or other similar requirements as they relate
to Tenant's use or occupancy of the premises, the Building or the Park.
5.4 Vacancy by Tenant. If Tenant shall cease using all or
substantially all of the premises for a period ("Vacancy Period") of one hundred
twenty (120) consecutive days, then Landlord shall have the right, exercisable
by written notice given to Tenant at any time after the Vacancy Period, but
prior to the time that Tenant again recommences its use of the premises, to
terminate this Lease. Such termination of this Lease shall be effective on the
date thirty (30) days after Landlord's termination notice is given, unless
Tenant recommences its use of the premises before the end of such thirty (30)
day period, in which event this Lease shall continue in full force and effect.
Vacancy by Tenant shall not be considered to be a default by Tenant.
6. RENT
(a) In General. During the term of this Lease the Yearly Rent and
other charges, at the rate stated in Exhibit 1, shall be payable by Tenant to
Landlord by monthly payments, as stated in Exhibit 1, in advance and without
demand on the first day of each month for and in respect of such month. The rent
and other charges reserved and covenanted to be paid under this Lease shall
commence in accordance with Article 6(b) below. If, by reason of any provisions
of this Lease, the rent reserved hereunder shall commence or terminate on any
day other than the first day of a calendar month, the rent for such calendar
month shall be prorated. The rent shall be payable to Landlord or, if Landlord
shall so direct in writing, to Landlord's agent or nominee, in lawful money of
the United States which shall be legal tender for payment of all debts and dues,
public and private, at the time of payment, at the office of the Landlord or
such place as Landlord may designate, and the rent and other charges in all
circumstances shall be payable without any setoff or deduction whatsoever.
Rental and any other sums due hereunder not paid within ten (10) days after the
date due shall bear interest for each month or fraction thereof from the due
date until paid computed at the annual rate of two percentage points over the
so-called prime rate then currently from time to time charged to its most
favored corporate customers by the largest national bank (N.A.) located in the
city in which the Building is located, or at any applicable lesser maximum
legally permissible rate for debts of this nature ("Lease Rate").
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(b) Commencement of Rent. Tenant's obligation to pay Yearly Rent,
Tax Excess and Operating Expense Excess shall commence to accrue as of the Rent
Commencement Date, as defined on Exhibit 1. The commencement and performance of
Tenant Work shall not be deemed to be use and occupancy of the premises for the
purposes of determining the Rent Commencement Date.
(c) Rentable Area. Landlord and Tenant acknowledge the Total
Rentable Area of the premises and of the other buildings in the Park have been
determined by agreement to be as set forth in Exhibit 6 attached hereto for the
purposes of this Lease, including, without limitation, Tenant's expansion
options and that the figures set forth therein shall be conclusive and binding
on Landlord and Tenant with regard to the Park as it exists as of the Execution
Date, provided that if any building is physically expanded, the Rentable Area of
such building shall be appropriately increased using the same methodology as was
used to arrive at the figures in Exhibit 6 before said expansion.
7. HAZARDOUS MATERIAL
Landlord and Tenant agree as follows with respect to the existence or
use of "Hazardous Material" in or on the premises.
(a) Tenant, at its sole cost and expense, shall comply
with all laws, statutes, ordinances, rules and regulations of any local, state
or federal governmental authority having jurisdiction concerning environmental,
health and safety matters (collectively, "Environmental Laws"), including, but
not limited to, any discharge into the air, surface, water, sewers, soil or
groundwater of any Hazardous Material (as defined in Article 7(c)), whether
within or outside the buildings or otherwise in the Park.
(b) Tenant shall not cause or permit any Hazardous
Material to be brought upon, kept or used in or about the buildings or otherwise
in the Park by Tenant, its agents, employees, contractors or invitees, without
the prior written consent of Landlord, except for (i) Hazardous Materials which
are typically used in business offices in the greater Boston area, and (ii)
those materials (if any) listed on Exhibit 7-A attached hereto and incorporated
by reference as a part hereof (collectively, "Permitted Hazardous Material").
Notwithstanding the foregoing, with respect to any Permitted Hazardous Material
which Tenant does not properly handle, store or dispose of in compliance with
all applicable Environmental Laws, Tenant shall, upon written notice from
Landlord, no longer have the right to bring such material into the buildings or
the Park until Tenant has demonstrated, to Landlord's reasonable satisfaction,
that Tenant has implemented programs to thereafter properly handle, store or
dispose of such material. If Tenant breaches the obligations stated in either of
the two preceding sentences, or if the presence of any Hazardous Material
(including Permitted Hazardous Materials) in the buildings or otherwise in the
Park caused or permitted by Tenant results in contamination of the buildings or
the Park, then Tenant shall indemnify, defend and hold Landlord harmless from
any and all claims, judgments, damages, penalties, fines, costs, liabilities or
losses (including, without limitation, diminution in value of the premises,
damages for the loss or
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restriction on use of rentable or usable space of or any amenity of the
buildings or the Park, and sums paid in settlement of claims, actual attorneys'
fees, consultant fees and expert fees) which arise after the Effective Date,
whether before, during or after the term of this Lease, as a result of such
contamination. This indemnification of Landlord by Tenant contained in this
paragraph includes, without limitation, costs incurred in connection with any
investigation of site conditions or any cleanup, remedial, removal or
restoration work required by any federal, state or local governmental agency or
political subdivision because of Hazardous Material present in the soil or
ground water on or under the premises. The indemnification and hold harmless
obligations of Tenant under this Article 6 shall survive any termination of this
Lease. Without limiting the foregoing, if the presence of any Hazardous Material
in the buildings or otherwise in the Park caused or permitted by Tenant results
in any contamination of the premises, Tenant shall promptly take all actions at
its sole expense as are necessary to return the premises to a condition which
complies with all Environmental Laws; provided that Landlord's approval of such
actions shall first be obtained, which approval shall not be unreasonably
withheld so long as such actions, in Landlord's reasonable discretion, would not
potentially have any materially adverse long-term or short-term effect on the
premises.
(c) As used herein, the term "Hazardous Material" means
any hazardous or toxic substance, material or waste or petroleum derivative
which is or becomes regulated by any Environmental Law. The term "Hazardous
Material" includes, without limitation, any material or substance which is (i)
designated as a "hazardous substance" pursuant to Section 1311 of the Federal
Water Pollution Control Act (33 U.S.C. Section 1317), (ii) defined as a
"hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation
and Recovery Act, 42 U.S.C. Section 6901 et seq. (42 U.S.C. Section 6903), or
(iii) defined as a "hazardous substance" pursuant to Section 101 of the
Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C.
Section 9601 et seq. (42 U.S.C. Section 9601) or (iv) defined as "hazardous
substance" or "oil" under Chapter 21E of the General Laws of Massachusetts, and
"Environmental Laws" include, without limitation, the laws listed in the
preceding clauses (i) through (iv).
(d) Any increase in the premium for necessary insurance
on the premises or the Park which arises from Tenant's use and/or storage of
these materials shall be solely at Tenant's expense. Tenant shall procure and
maintain at its sole expense such additional insurance as may be necessary to
comply with any requirement of any Federal, State or local government agency
with jurisdiction.
(e) Tenant hereby covenants and agrees to indemnify,
defend and hold Landlord harmless from any and all claims, judgments, damages,
penalties, fines, costs, liabilities or losses (collectively "Losses") which
Landlord may incur arising out of contamination of real estate, the Park or
other property not a part of the premises which contamination arises as a result
of the presence of Hazardous Material in the premises, the presence of which is
caused or permitted by Tenant, or which first occurs within the premises during
the term of this Lease unless caused by Landlord. The indemnification
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and hold harmless provisions of this Article shall survive any termination of
the Lease and shall be co-extensive with the indemnification and hold harmless
rights of Landlord with respect to the premises.
(f) Landlord represents to Tenant that, to the best of
Landlord's knowledge, there are no Hazardous Materials presently located in the
Park, except as described on Exhibit 7.
(g) Landlord agrees that neither Landlord, nor its
agents, employees or contractors, shall introduce Hazardous Materials to the
Park.
(h) Landlord hereby covenants and agrees to indemnify,
defend and hold Tenant harmless from any Losses which arise from: (1) any
matters disclosed on Exhibit 7; (2) any breach by Landlord of the
representations set forth in Article 7(f) above; and (3) any breach by Landlord
of its agreements under Article 7(g) above. Landlord further covenants and
agrees that in the event any Hazardous Materials shall be introduced into the
Park by anyone other than Tenant or Tenant's agents, employees or contractors,
Landlord shall, when required by law, perform such remedial action as is
required by the governmental authorities having jurisdiction thereof.
8. SERVICES FURNISHED BY LANDLORD
8.1 Electric Current.
(a) The parties acknowledge and agree that the
consumption of electricity in the premises will be measured by a separate
sub-meter to be installed by Landlord, at Landlord's cost, as part of the Base
Building Work, provided that electricity for the operation of the base building
HVAC system serving the premises and parking lot lighting in the Park shall not
be connected to such submeter, but any other HVAC equipment installed as part of
the Tenant Improvement Work shall be connected to such submeter. Tenant shall
reimburse Landlord for the entire cost of such electric current as follows:
(1) Commencing as of the Rent Commencement Date and
continuing until the procedures set forth in Paragraph 2 of this
Article 8.1(a) are effected, Tenant shall pay to Landlord at the same
time and in the same manner that it pays its monthly payments of Yearly
Rent hereunder, estimated monthly payments on account of Tenant's
obligation to reimburse Landlord for electricity consumed in the
premises. Said estimated monthly payments are based upon the Base
Electric Cost and Electric Rate set forth on Exhibit 1, which Base
Electric Cost and Electric Rate are the actual and direct costs charged
to Landlord by the utility company supplying such electricity, without
profit to Landlord. The Initial Estimated Monthly Electric Payment is
set forth on Exhibit 1.
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(2) Monthly after the Rent Commencement Date, Landlord
shall determine the actual cost of electricity consumed by Tenant in
the premises (i.e., by reading Tenant's sub-meter and by applying the
actual Electric Rate(s) applicable to the preceding period). If the
total of Tenant's estimated monthly payments on account of such period
is less than the actual cost of electricity consumed in the premises
during such period, Tenant shall pay the difference to Landlord within
twenty (20) days after Landlord's bill therefor. If the total of
Tenant's estimated monthly payments on account of such period is
greater than the actual cost of electricity consumed in the premises
during such period, Tenant may credit the difference against its next
installment of rental or other charges due hereunder.
(3) After each adjustment, as set forth in Paragraph (2)
above, the amount of estimated monthly payments on account of Tenant's
obligation to reimburse Landlord for electricity in the premises shall
be adjusted based upon the actual cost of electricity consumed during
the immediately preceding period.
(b) Landlord shall permit its risers, conduits and
feeders to the extent available, suitable and safely capable, to be used for the
purpose of enabling Tenant to purchase and obtain electric current directly from
such company. Tenant shall, at its expense, maintain and keep in repair all
metering equipment used to measure Tenant's consumption of electricity.
(c) If Tenant shall require electric current for use in
the premises in excess of such reasonable quantity to be furnished for such use
as hereinabove provided and if (i) in Landlord's reasonable judgment, Landlord's
facilities are inadequate for such excess requirements or (ii) such excess use
shall result in an additional burden on the Building air conditioning system and
additional cost to Landlord on account thereof then, as the case may be, (x)
Landlord upon written request and at the sole cost and expense of Tenant, will
furnish and install such additional wire, conduits, feeders, switchboards and
appurtenances as reasonably may be required to supply such additional
requirements of Tenant if current therefor be available to Landlord, provided
that the same shall be permitted by applicable laws and insurance regulations
and shall not cause damage to the Building or the premises or cause or create a
dangerous or hazardous condition or entail excessive or unreasonable alterations
or repairs or interfere with or disturb other tenants or occupants of the Park
or (y) Tenant shall reimburse Landlord for such additional cost, as aforesaid.
(e) Landlord, at Tenant's expense and upon Tenant's
request, shall purchase and install all replacement lamps of types generally
commercially available (including, but not limited to, incandescent and
fluorescent) used in the premises.
(f) Subject to Tenant's rights under Paragraphs (b) and
(c) of Article 8.8, Landlord shall not in any way be liable or responsible to
Tenant for any loss, damage
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or expense which Tenant may sustain or incur if the quantity, character, or
supply of electrical energy is changed or is no longer available or suitable for
Tenant's requirements.
(g) Tenant agrees that it will not make any material
alteration or material addition to the electrical equipment and/or appliances in
the premises without the prior written consent of Landlord in each instance
first obtained, which consent will not be unreasonably withheld, and will
promptly advise Landlord of any other alteration or addition to such electrical
equipment and/or appliances.
8.2 Water. Landlord shall furnish hot and cold water for ordinary
premises, cleaning, toilet, lavatory, drinking and kitchen purposes. If Tenant
requires, uses or consumes water for any purpose other than for the
aforementioned purposes, Landlord may (i) assess a reasonable charge for the
additional water so used or consumed by Tenant or (ii) install a water meter and
thereby measure Tenant's water consumption for all purposes. In the latter
event, Landlord shall pay the cost of the meter and the cost of installation
thereof and shall keep said meter and installation equipment in good working
order and repair. Tenant agrees to pay for water consumed, as shown on said
meter, together with the sewer charge based on said meter charges, as and when
bills are rendered, and on default in making such payment Landlord may pay such
charges and collect the same from Tenant. All piping and other equipment and
facilities for use of water outside the building core will be installed and
maintained by Landlord at Tenant's sole cost and expense.
8.3 Heat and Cleaning.
(a) Landlord at its expense shall: (i) furnish heat
(substantially equivalent to that being furnished in comparably aged first-class
suburban office/research and development buildings in the greater Burlington,
Bedford and Lexington submarket) to the premises during the normal heating
season on Mondays through Fridays, excepting legal holidays, from 8:00 a.m. to
6:00 p.m. and on Saturdays, excepting legal holidays, from 8:00 a.m. to 1:00
p.m. (called "business days") and (ii) cause the office areas of the premises to
be cleaned on business days (except on Saturdays) provided the same are kept in
order by Tenant in accordance with the cleaning standards generally prevailing
in first-class suburban office/R&D buildings in the greater Burlington, Bedford
and Lexington submarket. The heating system serving the premises shall be
capable of maintaining 72(degree)F with an outside temperature of 3(Degree)F.
(b) The parties agree and acknowledge that, despite
reasonable precautions in selecting cleaning and maintenance contractors and
personnel, any property or equipment in the premises of a delicate, fragile or
vulnerable nature may nevertheless be damaged in the course of cleaning and
maintenance services being performed. Accordingly, Tenant shall take reasonable
protective precautions with such property and equipment.
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8.4 Air Conditioning. Landlord shall through the air conditioning
equipment of the Building furnish to and distribute in the premises air
conditioning as seasonal changes may require on business days during the hours
as aforesaid in Article 8.3 when air conditioning may reasonably be required for
the comfortable occupancy of the premises by Tenant. Tenant agrees to lower and
close the blinds or drapes when necessary because of the sun's position,
whenever the air conditioning system is in operation, and to cooperate fully
with Landlord with regard to, and to abide by all the reasonable regulations and
requirements which Landlord may prescribe for the proper functioning and
protection of the air conditioning system. The air conditioning system referred
to in this Article 8.4 shall be capable of providing 78 degrees F dry bulb and
50% relative humidity with outside conditions of 92 degrees F dry bulb and 74
degrees F wet bulb. The foregoing design conditions shall be based upon an
occupancy within each separately partitioned area in the premises of not more
than one person per 100 square feet of Net Rentable Area and upon a combined
lighting and standard electrical load not to exceed 6-1/2 watts per square foot
of Net Rentable Area.
8.5 Additional Heat, Cleaning and Air Conditioning Services.
(a) Upon reasonable advance written notice from Tenant,
which shall not be longer than one (1) day, of its requirements in that regard,
Landlord will furnish additional heat, cleaning or air conditioning services to
the premises on days and at times other than as above provided (the "Overtime
Hours").
(b) Tenant will pay to Landlord a reasonable charge (i)
for any such additional heat, cleaning or air conditioning service required by
Tenant, (ii) for any extra cleaning of the premises required because of the
carelessness or indifference of Tenant or because of the nature of Tenant's
business, and (iii) for any cleaning done at the request of Tenant of any
portions of the premises which may be used for storage, shipping room or other
non-office purposes. If the cost to Landlord for cleaning the premises shall be
increased due to the installation in the premises, at Tenant's request, of any
materials or finish other than those which are building standard, Tenant shall
pay to Landlord an amount equal to such increase in cost. Notwithstanding the
foregoing, the parties hereby agree that the charge during the first Lease Year
(i.e., commencing as of the Term Commencement Date) for additional heating,
ventilating and air conditioning shall be $50 per hour for air conditioning, $20
per hour for ventilation and $35 per hour for heat. From and after the first
anniversary of the Term Commencement Date, said charges shall only be increased
in relation to the increase in actual costs incurred by Landlord in providing
such heating, ventilating and air conditioning service. To the extent that
another tenant of the Park whose space shares use of common heat,
air-conditioning and ventilation systems with the premises requests such
services during the same Overtime Hours as Tenant, the charge to Tenant for such
Overtime Hours shall be reduced to reflect savings arising from the shared use
of the HVAC System. Landlord shall determine if Landlord can achieve any savings
if Tenant commits to fixed Overtime Hours. In such event, Landlord shall pass
any such savings on to Tenant.
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8.6 Repairs. Except as otherwise provided in Articles 18 and 20,
and subject to Tenant's obligations in Article 14, Landlord shall keep and
maintain the roof, exterior windows and walls, structural floor slabs, columns,
elevators, public stairways and corridors, lavatories, equipment (including,
without limitation, sanitary, electrical, heating, air conditioning, or other
systems) and other common facilities of the Building and the Park, including,
without limitation, all parking area lighting, signage and sewer facilities, in
good condition and repair, and shall maintain all lawns and planted areas in the
Park and keep in good repair and condition all surfaced roadways, walks, and
parking and loading areas which Tenant has a right to use under this Lease, and
shall keep the same reasonably clear and free of snow.
8.7 Interruption or Curtailment of Services.
(a) When necessary by reason of accident or emergency, or
for repairs, alterations, replacements or improvements which in the reasonable
judgment of Landlord are desirable or necessary to be made, or of difficulty or
inability in securing supplies or labor, or of strikes, or of any other cause
beyond the reasonable control of Landlord, whether such other cause be similar
or dissimilar to those hereinabove specifically mentioned until said cause has
been removed, Landlord reserves the right to interrupt, curtail, stop or suspend
(i) the furnishing of heating, elevator, air conditioning, and cleaning services
and (ii) the operation of the plumbing and electric systems. Landlord shall
exercise diligent efforts (including the employment of overtime or after hours
services, if required) promptly to eliminate the cause of any such interruption,
curtailment, stoppage or suspension, but, subject to Paragraphs (b) and (c) of
this Article 8.7, there shall be no diminution or abatement of rent or other
compensation due from Tenant to Landlord hereunder, nor shall this Lease be
affected or any of the Tenant's obligations hereunder reduced, and the Landlord
shall have no responsibility or liability for any such interruption,
curtailment, stoppage, or suspension of services or systems.
(b) Notwithstanding anything to the contrary in this
Lease contained, if the premises shall lack any service which Landlord is
required to provide hereunder (thereby rendering the premises or a portion
thereof untenantable) for a period of five (5) consecutive business days after
Landlord's receipt of written notice from Tenant of such condition, the
untenantability of which substantially adversely affects the continued operation
in the ordinary course of Tenant's business, then, provided that such
untenantability and Landlord's inability to cure such condition is not caused by
the fault or neglect of Tenant or Tenant's agents, employees or contractors, or
causes beyond Landlord's reasonable control, Yearly Rent, Operating Expense
Excess and Tax Excess shall thereafter be abated in proportion to such
untenantability until the day such condition is completely corrected.
(c) Notwithstanding anything to the contrary in this
Lease contained, if the premises shall lack any service which Landlord is
required to provide hereunder (thereby rendering the premises or a portion
thereof untenantable) for a period of ten (10) consecutive business days after
Landlord's receipt of written notice from Tenant of such
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<PAGE> 26
condition, the untenantability of which substantially adversely affects the
continued operation in the ordinary course of Tenant's business, then, provided
that such untenantability and Landlord's inability to cure such condition is
caused by reasons beyond Landlord's control and is not caused by the fault or
neglect of Tenant, or Tenant's agents, employees or contractors, Yearly Rent,
Operating Expense Excess and Tax Excess, and shall thereafter be abated in
proportion to such untenantability until the day such condition is completely
corrected.
8.8 Energy Conservation. Notwithstanding anything to the contrary
in this Article 8 or in this Lease contained, Landlord may institute, and Tenant
shall comply with, such policies, programs and measures as may be necessary,
required, or expedient for the conservation and/or preservation of energy or
energy services, or as may be necessary or required to comply with applicable
codes, rules, regulations or standards.
8.9 Miscellaneous. Other than air conditioning, all services
provided by Landlord to Tenant are based upon an assumed maximum premises
population of one person per one hundred fifty (150) square feet of Total
Rentable Area, which limit Tenant shall in no event exceed.
9. ESCALATION
9.1 Definitions. As used in this Article 9, the words and terms
which follow mean and include the following:
(a) "Operating Year" shall mean a calendar year in which
occurs any part of the term of this Lease.
(b) "Operating Cost Base" shall be the amount as stated
in Exhibit 1.
(c) "Tenant's Operating Cost Percentage" and "Tenant's
Tax Percentage" shall be the respective figures as stated in Exhibit 1.
(d) "Taxes" shall mean the real estate taxes and other
taxes, levies and assessments imposed upon the Park and the land on which it is
located and upon any personal property of Landlord used in the operation
thereof, or Landlord's interest in the Park or such personal property; charges,
fees and assessments for transit, housing, police, fire or other governmental
services or purported benefits to the Park; service or user payments in lieu of
taxes; and any and all other taxes, levies, betterments, assessments and charges
arising from the ownership, leasing, operating, use or occupancy of the Park or
based upon rentals derived therefrom, which are or shall be imposed by National,
State, Municipal or other authorities. As of the Execution Date, "Taxes" shall
not include any franchise, rental, income or profit tax, capital levy or excise,
provided, however, that any of the same and any other tax, excise, fee, levy,
charge or assessment, however described, that may in the future be levied or
assessed as a substitute for or an addition to, in whole or in part, any tax,
levy or assessment which would otherwise constitute "Taxes," whether
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or not now customary or in the contemplation of the parties on the Execution
Date of this Lease, shall constitute "Taxes," but only to the extent calculated
as if the Building and the land upon which it stands is the only real estate
owned by Landlord. In addition, "Taxes" shall exclude any increase in real
estate taxes assessed against any leasehold improvements made within another
tenant's premises to the extent that it is determined from the records of the
assessing authority that such increase is based solely upon such leasehold
improvements (e.g., if the assessing authority determines Taxes for a fiscal
year based upon an income approach to valuation, in no event shall Taxes exclude
an increase based on change in income of the Park). "Taxes" shall also include
expenses of tax abatement or other proceedings contesting assessments or levies.
(e) "Tax Base" shall be the amount stated in Exhibit 1
and shall apply to a Tax Period of twelve (12) months. The Tax Base shall be
reduced pro rata if and to the extent that the Tax Period contains fewer than
twelve (12) months.
(f) "Tax Period" shall be any fiscal/tax period in
respect of which Taxes are due and payable to the appropriate governmental
taxing authority, any portion of which period occurs during the term of this
Lease, the first such Period being the one in which the Term Commencement Date
occurs.
(g) "Operating Costs":
(1) Definition of Operating Costs. "Operating Costs"
shall mean all costs incurred and expenditures of whatever nature made
by Landlord in the operation and management, for repair and
replacements, cleaning and maintenance of the Building and grounds,
including, without limitation, vehicular and pedestrian passageways
related to the Building, related equipment, facilities and
appurtenances, cooling and heating equipment, and a portion reasonably
allocated by Landlord to the Building of the costs and expenditures
made by Landlord in the operation and management, repair and
replacement, cleaning and maintenance of the Park. Landlord agrees that
expenses incurred for the use and/or benefit of all buildings in the
Park shall be allocated to the Building on the basis of Tenant's Tax
Percentage. Expenses incurred for services, facilities or benefits for
the premises as well as other areas of the Park shall be allocated to
the premises based upon the ratio that the square footage of the
premises bears to the aggregate square footage of all areas for which
such expenses were incurred. Operating Costs shall include, without
limitation, those categories of "Specifically Included Operating
Costs", as set forth below, but shall not include "Excluded Costs", as
hereinafter defined.
(2) Definition of Excluded Costs. "Excluded Costs"
shall be defined as:
(i) mortgage charges, brokerage commissions, salaries of
executives and owners not directly employed in the
management/operation of the
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Building, the cost of work done by Landlord for a
particular tenant for which Landlord has the right to be
reimbursed by such Tenant, and, subject to Subparagraph (3)
below, such portion of expenditures as are not properly
chargeable against income.
(ii) Repairs or other work occasioned by fire, windstorm or other
casualty or by the exercise of eminent domain.
(iii) Leasing commissions, attorneys' fees, costs and disbursements
and other expenses incurred in connection with negotiations or
disputes with tenants, other occupants, or prospective tenants
or occupants.
(iv) Renovating or otherwise improving, decorating, painting or
redecorating space for tenants or other occupants of the Park.
(v) Landlord's cost of electricity and other services that are
sold to tenants and for which Landlord is entitled to be
reimbursed by tenants as an additional charge or rental over
and above the basic rent, tax escalation, and operating
expense escalation payable under Landlord's lease with such
tenant.
(vi) Depreciation and amortization, except as provided in this
Article 9.1(g).
(vii) Expenses in connection with services or other benefits of a
type which are not provided Tenant but which are provided to
another tenant or occupant.
(viii) Costs incurred due to violation by Landlord or any tenant of
the terms and conditions of any lease.
(ix) Overhead and profit increment paid to subsidiaries or
affiliates of Landlord for services on or to the Park, to the
extent only that the costs of such services exceed competitive
costs of such services were they not so rendered by a
subsidiary or affiliate. The provisions of this clause (ix)
shall not apply to any management fees payable to Landlord's
managing agent, which shall be limited as provided in
subparagraph (xi).
(x) Interest on debt or amortization payments on any mortgage or
mortgages, and rental under any ground or underlying lease or
leases.
(xi) Landlord's general overhead except as it directly relates to
the operation and management of the Building, Tenant hereby
acknowledging that Operating Costs shall include a management
fee, which shall not exceed four percent (4%) of Landlord's
gross revenue from the Park for such Operating Year.
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(xii) Any compensation paid to clerks, attendants or other persons
in commercial concessions operated by Landlord.
(xiii) All items and services for which Tenant is separately charged,
reimburses Landlord or pays third persons.
(xiv) Advertising and promotional expenditures.
(xv) Any fines or penalties incurred due to violations by Landlord
of any governmental rule or authority.
(xvi) Any costs incurred by Landlord in the event that the Building
does not comply with governmental rules in effect as of the
Execution Date of this Lease.
(xvii) Cost of installing sculpture, paintings or other objects of
art.
(xviii) Wages, salaries, or other compensation paid to any executive
employees above the grade of building superintendent, except
that if any such employee performs a service which would have
been performed by an outside consultant, the compensation paid
to such employee for performing such service shall be included
in Operating Costs, to the extent only that the cost of such
service does not exceed competitive cost of such service had
such service been rendered by an outside consultant.
(3) Capital Expenditures.
(i) Replacements. If, during the term of this Lease, Landlord shall
replace any capital items or make any capital expenditures
(collectively called "capital expenditures") the total amount of which
is not properly includible in Operating Costs for the Operating Year in
which they were made, there shall nevertheless be included in such
Operating Costs and in Operating Costs for each succeeding Operating
Year the amount, if any, by which the Annual Charge-off (determined as
hereinafter provided) of such capital expenditure (less insurance
proceeds, if any, collected by Landlord by reason of damage to, or
destruction of the capital item being replace) exceeds the Annual
Charge-Off of the capital expenditure for the item being replaced.
Notwithstanding the foregoing, with respect to a replacement capital
expenditure, the amount of Annual Charge-Off with respect to such
capital expenditure shall be included in Operating Costs only if:
1. the replacement capital item being acquired is
required by law which was not in effect on the date
of this Lease, or
2. the amount of Annual Charge-Off includible in
Operating Costs on account of such replaced capital
item is reasonably projected to
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reduce Operating Costs (i.e., taking into account the
aggregate annual repair costs which Landlord would
otherwise have been required to incur in order to
keep the item being replaced in working order).
(ii) New Capital Items. If a new capital item is acquired which does
not replace another capital item which was worn out, has become
obsolete, etc., then there shall be included in Operating Costs for
each Operating Year in which and after such capital expenditure is made
the Annual Charge-Off of such capital expenditure. Notwithstanding the
foregoing, with respect to a new (i.e., as opposed to replacement)
capital expenditure, such capital expenditure shall be included in
Operating Costs only if:
1. the new capital item being acquired is required by
law, or
2. the new capital item is reasonably projected to
reduce Operating Costs.
(iii) Annual Charge-Off. "Annual Charge-Off" shall be defined as the
annual amount of principal and interest payments which would be
required to repay a loan ("Capital Loan") in equal monthly installments
over the Useful Life, as hereinafter defined, of the capital item in
question on a direct reduction basis at an annual interest rate equal
to the Capital Interest Rate, as hereinafter defined, where the initial
principal balance is the cost of the capital item in question.
(iv) Useful Life. "Useful Life" shall be reasonably determined by
Landlord in accordance with generally accepted accounting principles
and practices in effect at the time of acquisition of the capital item.
Notwithstanding the foregoing, if Landlord reasonably concludes on the
basis of engineering estimates that a particular capital expenditure
will effect savings in Building operating expenses including, without
limitation, energy-related costs, and that such annual projected
savings will exceed the Annual Charge-Off of capital expenditures
computed as aforesaid, then and in such events, the Annual Charge-Off
shall be determined based upon a Useful Life which would cause the
principal and interest payments in a full repayment of the Capital Loan
in question to equal the amount of projected savings of such Useful
Life.
(v) Capital Interest Rate. "Capital Interest Rate" shall be defined as
an annual rate of either one percentage point over the AA Bond rate
(Standard & Poor's corporate composite or, if unavailable, its
equivalent) as reported in the financial press at the time the capital
expenditure is made or, if the capital item is acquired through
third-party financing, then the actual (including fluctuating) rate
paid by Landlord in financing the acquisition of such capital item.
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(4) Specifically Included Categories of Operating
Costs. Operating Costs shall include, but not be limited to, the following:
Taxes (other than real estate taxes): Sales, Federal Social Security,
Unemployment and Old Age Taxes and contributions and State Unemployment
taxes and contributions accruing to and paid by the Landlord on account
of all employees of Landlord and/or Landlord's managing agent, who are
employed in, about or on account of the Building, except that taxes
levied upon the net income of the Landlord and taxes withheld from
employees, and "Taxes" as defined in Article 9.1(d) shall not be
included herein.
Water: All charges and rates connected with water supplied to the
Building and/or the Park and related sewer use charges.
Heat and Air Conditioning: All charges connected with heat and air
conditioning supplied to the Building and/or Park.
Wages: Wages and cost of all employee benefits of all employees of the
Landlord and/or Landlord's managing agent who are employed in, about or
on account of the Building and/or Park.
Cleaning: The cost of labor and material for cleaning the Building,
surrounding areaways and windows in the Building and/or Park.
Elevator Maintenance: All expenses for or on account of the upkeep and
maintenance of all elevators in the Building (if any).
Electricity: The cost of all electric current for the operation of any
machine, appliance or device used for the operation of the premises and
the Building and/or Park, including the cost of electric current for
the elevators, lights, air conditioning and heating, but not including
electric current which is paid for directly to the utility by the
user/tenant in the Building and/or Park. (If and so long as Tenant is
billed directly by the electric utility for its own consumption as
determined by its separate meter, then Operating Costs shall include
only Building and public area electric current consumption and not any
demised premises electric current consumption.) Wherever separate
metering is unlawful, prohibited by utility company regulation or
tariff or is otherwise impracticable, relevant consumption figures for
the purposes of this Article 9 shall be determined by fair and
reasonable allocations and engineering estimates made by Landlord.
Insurance, etc.: Fire, casualty, liability and such other insurance as
may from time to time be required by lending institutions on
first-class office buildings in the City or Town wherein the Building
is located and all other expenses customarily incurred in connection
with the operation and maintenance of first-class office
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buildings in the City or Town wherein the Building is located
including, without limitation, rental costs associated with the
Building's management office.
(5) Extrapolation to Account for Vacancies. If less than
95% of the Building and/or the Park is occupied by tenants during any Operating
Year or the year on which the Operating Cost Base is determined, then the
Operating Costs for such period shall be extrapolated by Landlord on an item-by
item basis to the estimated Operating Costs that would have been incurred if the
Building and/or Park had been at least 95% occupied by tenants; and such
extrapolated amount shall for the purposes hereof be deemed to be the amount of
Operating Costs for such period.
9.2 Tax Excess.
(a) In General. Commencing as of July 1,1997, and
continuing thereafter throughout the term of this Lease, if in any Tax Period
the Tenant's Tax Percentage of Taxes exceed the Tax Base, Tenant shall pay to
Landlord such excess, such amount being hereinafter referred to as "Tax Excess."
Tax Excess shall be due when billed by Landlord. In implementation and not in
limitation of the foregoing, Tenant shall remit to Landlord pro rata monthly
installments on account of projected Tax Excess, calculated by Landlord on the
basis of the most recent Tax data available. If the total of such monthly
remittances on account of any Tax Period is greater than the actual Tax Excess
for such Tax Period, Tenant may credit the difference against the next
installment of rental or other charges due to Landlord hereunder, except that if
such difference is determined after the end of the term of this Lease, Landlord
shall refund such difference to Tenant to the extent that such difference
exceeds any amounts then due from Tenant to Landlord. If the total of such
remittances is less than the actual Tax Excess for such Tax Period, Tenant shall
pay the difference to Landlord when billed therefor.
(b) Effect of Abatements. Appropriate credit against Tax
Excess shall be given for any refund obtained by reason of a reduction in any
Taxes by the Assessors or the administrative, judicial or other governmental
agency responsible therefor. The original computations, as well as reimbursement
or payments of additional charges, if any, or allowances, if any, under the
provisions of this Article 9.2 shall be based on the original assessed
valuations with adjustments to be made at a later date when the tax refund, if
any, shall be paid to Landlord by the taxing authorities. Expenditures for legal
fees and for other similar or dissimilar expenses incurred in obtaining the tax
refund may be charged against the tax refund before the adjustments are made for
the Tax Period.
9.3 Operating Expense Excess.
(a) In General. Commencing as of January 1, 1997, and
continuing thereafter throughout the term of the Lease, if the Operating Costs
in any Operating Year exceed the Operating Cost Base, Tenant shall pay to
Landlord Tenant's Operating Cost Percentage of such excess, such amount being
hereinafter referred to as "Operating Expense Excess." Operating Expense Excess
shall be due when billed by Landlord. In
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implementation and not in limitation of the foregoing, Tenant shall remit to
Landlord pro rata monthly installments on account of projected Operating Expense
Excess, calculated by Landlord on the basis of the most recent Operating Costs
data or budget available. If the total of such monthly remittances on account of
any Operating Year is greater than the actual Operating Expense Excess for such
Operating Year, Tenant may credit the difference against the next installment of
rent or other charges due to Landlord hereunder, except that if such difference
is determined after the end of the term of this Lease, Landlord shall refund
such difference to Tenant to the extent that such difference exceeds any amounts
then due from Tenant to Landlord. If the total of such remittances is less than
actual Operating Expense Excess for such Operating Year, Tenant shall pay the
difference to Landlord when billed therefor.
(b) Tenant's Audit Rights. Subject to the provisions of
this paragraph, Tenant shall have the right, at Tenant's cost and expense, to
examine all documentation and calculations prepared in the determination of
Operating Expense Excess:
(1) Such documentation and calculation shall be made
available to Tenant at the offices where Landlord keeps such records
during normal business hours within a reasonable time after Landlord
receives a written request from Tenant to make such examination.
(2) Tenant shall have the right to make such examination
no more than once in respect of any period in which Landlord has given
Tenant a statement of the actual amount of Operating Costs.
(3) Any request for examination in respect of any
Operating Year may be made no more than sixty (60) days after Landlord
advises Tenant of the actual amount of Operating Costs in respect of
such period.
(4) Such examination may be made only by a firm
reasonably approved by Landlord. Without limiting Landlord's approval
rights, Landlord may withhold its approval of any representative of
Tenant (other than a nationally recognized independent certified public
accounting firm) who would be paid by Tenant on a contingent fee basis.
(5) As a condition to performing any such examination,
Tenant and its examiners shall be required to execute and deliver to
Landlord an agreement, in form acceptable to Landlord, agreeing to keep
confidential any information which it discovers about Landlord or the
Building in connection with such examination.
(c) Landlord's Bidding of Service Contracts. Landlord
shall, upon Tenant's written request, which request may be made no more often
than every two years, obtain bids from prospective providers of services to the
Park, the cost of which services are included in Operating Costs.
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9.4 Part Years. If any Rent Commencement Date or if the
Termination Date occurs in the middle of an Operating Year or Tax Period, Tenant
shall be liable for only that portion of the Operating Expense or Tax Excess, as
the case may be, in respect of such Operating Year or Tax Period represented by
a fraction the numerator of which is the number of days of the herein term
(commencing as of the applicable Rent Commencement Date) which falls within the
Operating Year or Tax Period and the denominator of which is three hundred
sixty-five (365), or the number of days in said Tax Period, as the case may be.
9.5 Effect of Taking. In the event of any taking of a portion of
the Park, the Building or the land upon which it stands under circumstances
whereby this Lease shall not terminate under the provisions of Article 20 then,
for the purposes of determining Tax Excess, there shall be substituted for the
Tax Base originally provided for herein a fraction of such Tax Base, the
numerator of which fraction shall be the Taxes for the first Tax Period
subsequent to the condemnation or taking which takes into account such
condemnation or taking, and the denominator of which shall be the Taxes for the
last Tax Period prior to the condemnation or taking, which did not take into
account such condemnation or taking. Tenant's Tax Percentage Share shall be
adjusted appropriately to reflect the proportion of the premises and/or the
Building remaining after such taking.
9.6 Disputes, etc. Any disputes arising under this Article 9 may,
at the election of either party, be submitted to arbitration as hereinafter
provided. Any obligations under this Article 9 which shall not have been paid at
the expiration or sooner termination of the term of this Lease shall survive
such expiration and shall be paid when and as the amount of same shall be
determined to be due.
10. CHANGES OR ALTERATIONS BY LANDLORD
Landlord reserves the right, exercisable by itself or its nominee, at
any time and from time to time without the same constituting an actual or
constructive eviction and without incurring any liability to Tenant therefor or
otherwise affecting Tenant's obligations under this Lease, to make such changes,
alterations, additions, improvements, repairs or replacements in or to the
premises, the Building and/or the Park and the fixtures and equipment thereof,
as well as in or to the street entrances, halls, passages, elevators,
escalators, parking areas, tunnels, and stairways thereof, as it may deem
necessary or desirable, and to change the arrangement and/or location of
entrances or passageways, doors and doorways, and corridors, elevators, stairs,
toilets, or other public parts of the Building and/or the Park, provided,
however, that there be no unreasonable obstruction of the right of access to, or
unreasonable interference with the use and enjoyment of, the premises by Tenant.
Notwithstanding the foregoing, unless required by law, Landlord shall not make
any alteration, addition, or improvement within the premises without obtaining
Tenant's prior written consent, which consent shall not be unreasonably
withheld, conditioned, or delayed. Nothing contained in this Article 10 shall be
deemed to relieve Tenant of any duty, obligation or liability of Tenant with
respect to making any repair, replacement or improvement or complying with any
law, order or requirement of
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any governmental or other authority. Landlord reserves the right to adopt and at
any time and from time to time to change the name or address of the Building
and/or the Park. Neither this Lease nor any use by Tenant shall give Tenant any
right or easement for the use of any door or any passage or any concourse
connecting with any other building or to any public convenience, and the use of
such doors, passages and concourses and of such conveniences may be regulated or
discontinued at any time and from time to time by Landlord without notice to
Tenant and without affecting the obligation of Tenant hereunder or incurring any
liability to Tenant therefor, provided, however, that there be no unreasonable
obstruction of the right of access to, or unreasonable interference with the use
of the premises by Tenant. If at any time any windows of the premises are
temporarily (i.e. not in excess of seven days) closed or darkened for any reason
whatsoever including but not limited to, Landlord's own acts, Landlord shall not
be liable for any damage Tenant may sustain thereby and Tenant shall not be
entitled to any compensation therefor nor abatements of rent nor shall the same
release Tenant from its obligations hereunder nor constitute an eviction.
11. FIXTURES, EQUIPMENT AND IMPROVEMENTS--REMOVAL BY TENANT
All fixtures, equipment, improvements and appurtenances attached to or
built into the premises prior to or during the term, whether by Landlord at its
expense or at the expense of Tenant (either or both) or by Tenant shall be and
remain part of the premises and shall not be removed by Tenant during or at the
end of the term unless Landlord otherwise elects to require Tenant to remove
such fixtures, equipment, improvements and appurtenances, in accordance with
Articles 12 and/or 22 of the Lease. All electric, plumbing, heating and
sprinkling systems, fixtures and outlets, vaults, paneling, molding, shelving,
radiator enclosures, cork, rubber, linoleum and composition floors, ventilating,
silencing, air conditioning and cooling equipment, shall be deemed to be
included in such fixtures, equipment, improvements and appurtenances, whether or
not attached to or built into the premises. Where not built into the premises,
all removable electric fixtures, carpets, drinking or tap water facilities,
furniture, or trade fixtures or business equipment or Tenant's inventory or
stock in trade shall not be deemed to be included in such fixtures, equipment,
improvements and appurtenances and may be, and upon the request of Landlord will
be, removed by Tenant upon the condition that such removal shall not materially
damage the premises or the Building and that the cost of repairing any damage to
the premises or the Building arising from installation or such removal shall be
paid by Tenant. Notwithstanding anything contained in this Lease to the
contrary, all shelving and supplemental HVAC systems and equipment which are
owned or installed by Tenant solely at its expense in the premises shall remain
the property of the Tenant may be removed by Tenant at any time prior to or upon
the expiration or prior termination of this Lease, provided that Tenant shall,
at its expense, repair any damage to the premises or the Building caused by any
such installation or removal.
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12. ALTERATIONS AND IMPROVEMENTS BY TENANT
Tenant shall make no alterations, decorations, installations, removals,
additions or improvements in or to the premises without Landlord's prior written
consent and then only those (i) which equal or exceed the Above Base Building
Work initially installed by Landlord in the premises, and (ii) made by
contractors or mechanics approved by Landlord. No installations or work shall be
undertaken or begun by Tenant until: (i) Landlord has approved written plans and
specifications and a time schedule for such work; and (ii) Tenant has made
provision for either written waivers of liens from all contractors, laborers and
suppliers of materials for such installations or work, the filing of lien bonds
on behalf of such contractors, laborers and suppliers, or other appropriate
protective measures approved by Landlord. No amendments or additions to such
plans and specifications shall be made without the prior written consent of
Landlord. Landlord's consent and approval required under this Article 12 shall
not be unreasonably withheld. Landlord shall respond to any request for consent
pursuant to this Article 12 within ten (10) business days of its receipt of such
request. If Landlord fails to respond in writing to any written request for
Landlord's consent pursuant to this Article 12 within ten (10) business days of
Landlord's receipt of Tenant's request for such consent, Landlord shall
conclusively be deemed to have granted such consent, provided that Tenant, in
its request for such consent, advises Landlord that Landlord's failure timely to
respond to such request in accordance with this Article 12 shall be deemed to
constitute the granting of such consent. Landlord's approval is solely given for
the benefit of Landlord and neither Tenant nor any third party shall have the
right to rely upon Landlord's approval of Tenant's plans for any purpose
whatsoever. Without limiting the foregoing, Tenant shall be responsible for all
elements of the design of Tenant's plans (including, without limitation,
compliance with law, functionality of design, and the structural integrity of
the design), and Landlord's approval of Tenant's plans shall in no event relieve
Tenant of the responsibility for such design. Any such work, alterations,
decorations, installations, removals, additions and improvements shall be done
at Tenant's sole expense and at such times and in such manner as Landlord may
from time to time designate. If Tenant shall make any alterations, decorations,
installations, removals, additions or improvements then Landlord may elect to
require the Tenant at the expiration or sooner termination of the term of this
Lease to restore the premises to substantially the same condition as existed at
the Term Commencement Date. If requested by Tenant in writing at the time that
Tenant requests that Landlord approve Tenant's plans for the same, Landlord
shall, at the time that Landlord approves such plans, notify Tenant as to
Landlord's election to require Tenant to remove any items shown on such plans.
Tenant shall pay, as an additional charge, the entire increase in real estate
taxes on the Building which shall, at any time prior to or after the Term
Commencement Date, result from or be attributable to any alteration, addition or
improvement to the premises made by or for the account of Tenant in excess of
the Base Building Work to the extent that it is determined from the records of
the assessing authority that such increase is based solely upon such leasehold
improvements.
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13. TENANT'S CONTRACTORS--MECHANICS' AND OTHER LIENS--STANDARD OF TENANT'S
PERFORMANCE--COMPLIANCE WITH LAWS
Whenever Tenant shall make any alterations, decorations, installations,
removals, additions or improvements in or to the premises--whether such work be
done prior to or after the Term Commencement Date--Tenant will strictly observe
the following covenants and agreements:
(a) Tenant agrees that it will not, either directly or
indirectly, use any contractors and/or materials if their use will create any
difficulty, whether in the nature of a labor dispute or otherwise, with other
contractors and/or labor engaged by Tenant or Landlord or others in the
construction, maintenance and/or operation of the Building or any part thereof.
Landlord agrees, however, that Tenant shall have the right to engage a non-union
contractor in performing the initial Tenant work.
(b) In no event shall any material or equipment be
incorporated in or added to the premises, so as to become a fixture or otherwise
a part of the Building, in connection with any such alteration, decoration,
installation, addition or improvement which is subject to any lien, charge,
mortgage or other encumbrance of any kind whatsoever or is subject to any
security interest or any form of title retention agreement. No installations or
work shall be undertaken or begun by Tenant until Tenant has made provision for
written waiver of liens from all contractors, laborers and suppliers of
materials for such installations or work, and taken other appropriate protective
measures approved by Landlord. Any mechanic's lien filed against the premises or
the Building for work claimed to have been done for, or materials claimed to
have been furnished to, Tenant shall be discharged by Tenant within ten (10)
days thereafter, at Tenant's expense by filing the bond required by law or
otherwise. If Tenant fails so to discharge any lien, Landlord may do so at
Tenant's expense and Tenant shall reimburse Landlord for any expense or cost
incurred by Landlord in so doing within fifteen (15) days after rendition of a
bill therefor.
(c) All installations or work done by Tenant shall be at
its own expense and shall at all times comply with (i) laws, rules, orders and
regulations of governmental authorities having jurisdiction thereof; (ii)
orders, rules and regulations of any Board of Fire Underwriters, or any other
body hereafter constituted exercising similar functions, and governing insurance
rating bureaus; (iii) reasonable Rules and Regulations of Landlord; and (iv)
plans and specifications prepared by and at the expense of Tenant theretofore
submitted to and reasonably approved by Landlord.
(d) Tenant shall procure all necessary permits before
undertaking any work in the premises; do all of such work in a good and
workmanlike manner, employing materials of good quality and complying with all
governmental requirements; and defend, save harmless, exonerate and indemnify
Landlord from all injury, loss or damage to any person or property occasioned by
or growing out of such work. Tenant shall cause
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contractors employed by Tenant to carry Worker's Compensation Insurance in
accordance with statutory requirements, Automobile Liability Insurance and,
naming Landlord as an additional insured, Commercial General Liability Insurance
covering such contractors on or about the premises in the amounts stated in
Article 15 hereof or in such other reasonable amounts as Landlord shall require
and to submit certificates evidencing such coverage to Landlord prior to the
commencement of such work.
14. REPAIRS BY TENANT--FLOOR LOAD
14.1 Repairs by Tenant. Tenant shall keep all and singular the premises
neat and clean (including periodic rug shampoo and waxing of tiled floors and
cleaning of blinds and drapes) and in such repair, order and condition as the
same are in on the Term Commencement Date or may be put in during the term
hereof, reasonable use and wearing thereof and damage by fire or by other
casualty excepted. Tenant shall make, as and when needed as a result of misuse
by, or neglect or improper conduct of, Tenant or Tenant's servants, employees,
agents, contractors, invitees, or licensees or otherwise, all repairs in and
about the premises necessary to preserve them in such repair, order and
condition, which repairs shall be in quality and class equal to the original
work. Landlord may elect, at the expense of Tenant, to make any such repairs or
to repair any damage or injury to the Building or the premises caused by moving
property of Tenant in or out of the Building, or by installation or removal of
furniture or other property, or by misuse by, or neglect, or improper conduct
of, Tenant or Tenant's servants, employees, agents, contractors, or licensees.
14.2 Floor Load--Heavy Machinery. Tenant shall not place a load upon
any floor of the premises exceeding the floor load per square foot of area which
such floor was designed to carry and which is allowed by law. Landlord reserves
the right to prescribe the weight and position of all business machines and
mechanical equipment, including safes, which shall be placed so as to distribute
the weight. Business machines and mechanical equipment shall be placed and
maintained by Tenant at Tenant's expense in settings sufficient in Landlord's
judgment to absorb and prevent vibration, noise and annoyance. Tenant shall not
move any safe, heavy machinery, heavy equipment, freight, bulky matter, or
fixtures into or out of the Building without Landlord's prior written consent.
If such safe, machinery, equipment, freight, bulky matter or fixtures requires
special handling, Tenant agrees to employ only persons holding a Master Rigger's
License to do said work, and that all work in connection therewith shall comply
with applicable laws and regulations. Any such moving shall be at the sole risk
and hazard of Tenant and Tenant will defend, indemnify and save Landlord
harmless against and from any liability, loss, injury, claim or suit resulting
directly or indirectly from such moving. Proper placement of all such business
machines, etc., in the premises shall be Tenant's responsibility.
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15. INSURANCE, INDEMNIFICATION, EXONERATION AND EXCULPATION
15.1 General Liability Insurance. Tenant shall procure, and keep in
force and pay for Commercial General Liability Insurance insuring Tenant on an
occurrence basis against all claims and demands for personal injury liability
(including, without limitation, bodily injury, sickness, disease, and death) or
damage to property which may be claimed to have occurred from and after the time
Tenant and/or its contractors enter the premises in accordance with Article 4 of
this Lease, of not less than Two Million Dollars ($2,000,000) in the event of
personal injury to any number of persons or damage to property, arising out of
any one occurrence, and from time to time thereafter shall be not less than such
higher amounts, if procurable, as may be reasonably required by Landlord and are
customarily carried by responsible similar tenants in the City or Town wherein
the Building is located.
15.2 Certificates of Insurance. Such insurance shall be effected with
insurers approved by Landlord, authorized to do business in the State wherein
the Building is situated under valid and enforceable policies wherein Tenant
names Landlord and Landlord's managing agent as additional insureds. Such
insurance shall provide that it shall not be cancelled or modified without at
least thirty (30) days' prior written notice to each insured named therein. On
or before the time Tenant and/or its contractors enter the premises in
accordance with Articles 4 and 14 of this Lease and thereafter not less than
fifteen (15) days prior to the expiration date of each expiring policy, original
copies of the policies provided for in Article 15.1 issued by the respective
insurers, or certificates of such policies setting forth in full the provisions
thereof and issued by such insurers together with evidence satisfactory to
Landlord of the payment of all premiums for such policies, shall be delivered by
Tenant to Landlord and certificates as aforesaid of such policies shall upon
request of Landlord, be delivered by Tenant to the holder of any mortgage
affecting the premises.
15.3 Tenant Indemnity of Landlord. Tenant will save Landlord, its
agents and employees, harmless and will exonerate, defend and indemnify
Landlord, its agents and employees, from and against any and all claims,
liabilities or penalties asserted by or on behalf of any person, firm,
corporation or public authority arising from the Tenant's breach of the Lease
or:
(a) On account of or based upon any injury to person, or
loss of or damage to property, sustained or occurring on the premises on account
of or based upon the act, omission, fault, negligence or misconduct of any
person whomsoever (other than Landlord, its agents, contractors or employees);
(b) On account of or based upon any injury to person, or
loss of or damage to property, sustained or occurring elsewhere (other than on
the premises) in or about the Building or elsewhere in the Park (and, in
particular, without limiting the generality of the foregoing, on or about the
elevators, stairways, public corridors, sidewalks, concourses, arcades, malls,
galleries, vehicular tunnels, approaches, areaways,
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roof, or other appurtenances and facilities used in connection with the Park,
Building or premises) arising out of the use or occupancy of the Park, Building
or premises by Tenant, or by any person claiming by, through or under Tenant, or
on account of or based upon the act, omission, fault, negligence or misconduct
of Tenant, its agents, employees or contractors; and
(c) On account of or based upon (including monies due on
account of) any work or thing whatsoever done (other than by Landlord or its
contractors, or agents or employees of either) on the premises during the term
of this Lease and during the period of time, if any, prior to the Term
Commencement Date that Tenant may have been given access to the premises.
(d) Tenant's obligations under this Article 15.3 shall be
insured either under the Commercial General Liability Insurance required under
Article 15.1, above, or by a contractual insurance rider or other coverage; and
certificates of insurance in respect thereof shall be provided by Tenant to
Landlord upon request.
15.3A Landlord Indemnity of Tenant. Landlord, subject to the
limitations on Landlord's liability contained elsewhere in this Lease, agrees to
hold Tenant harmless and to defend, exonerate and indemnify Tenant from and
against any and all claims, liabilities, or penalties asserted by or on behalf
of any third party (i.e. any person, firm, corporation or public authority) for
damage to property or injuries to persons on account of or based upon any injury
to persons, or loss of or damage to property, sustained or occurring in the Park
arising from the negligence, or willful misconduct of Landlord or Landlord's
agents, employees or contractors, unless such injury, loss or damage was also
caused by the negligent act or omission of Tenant, or Tenant's agents, employees
or contractors.
15.4 Property of Tenant. In addition to and not in limitation of the
foregoing, Tenant covenants and agrees that, to the maximum extent permitted by
law, all merchandise, furniture, fixtures and property of every kind, nature and
description related or arising out of Tenant's leasehold estate hereunder, which
may be in or upon the premises or Building, in the public corridors, or on the
sidewalks, areaways and approaches adjacent thereto, shall be at the sole risk
and hazard of Tenant, and that if the whole or any part thereof shall be
damaged, destroyed, stolen or removed from any cause or reason whatsoever no
part of said damage or loss shall be charged to, or borne by, Landlord; unless,
subject to Article 19 hereof, such damage or loss is due to the negligence or
willful misconduct of Landlord or those for whom Landlord is legally
responsible, except that, in no event, shall Landlord be responsible for damage
to unusually valuable or exotic property, works of art, and the like.
15.5 Bursting of Pipes, etc. Landlord shall not be liable for any
injury or damage to persons or property resulting from fire, explosion, falling
plaster, steam, gas, electricity, electrical or electronic emanations or
disturbance, water, rain or snow or leaks from any part of the Building or from
the pipes, appliances, equipment or plumbing works or from the roof, street or
sub-surface or from any other place or caused by dampness, vandalism,
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malicious mischief or by any other cause of whatever nature, unless caused by or
due to the negligence of Landlord, its agents, servants or employees, and then,
where notice and an opportunity to cure are appropriate (i.e., where Tenant
knows of such condition sufficiently in advance of the occurrence of any such
injury or damage resulting therefrom as would have enabled Landlord to prevent
such damage or loss had Tenant notified Landlord of such condition) only after
(i) notice to Landlord of the condition claimed to constitute negligence and
(ii) the expiration of a reasonable time after such notice has been received by
Landlord without Landlord having taken all reasonable and practicable means to
cure or correct such condition; and pending such cure or correction by Landlord,
Tenant shall take all reasonably prudent temporary measures and safeguards to
prevent any injury, loss or damage to persons or property. In no event shall
Landlord be liable for any loss, the risk of which is covered by Tenant's
insurance or is required to be so covered by this Lease; nor shall Landlord or
its agents be liable for any such damage caused by other tenants or persons in
the Building or caused by operations in construction of any private, public, or
quasi-public work; nor shall Landlord be liable for any latent defect in the
premises or in the Building, provided that the foregoing shall not relieve
Landlord from any obligation which it has to perform maintenance or repairs in
accordance with Article 8.7 or relieve Landlord of any obligation which it has
in connection with Landlord's Work to the extent that Tenant has complied with
the notice requirements of Article 4.8.
15.6 Repairs and Alterations--No Diminution of Rental Value.
(a) Except as otherwise provided in paragraphs (b) and
(c) of this Article 15.6 and as provided in Article 18, there shall be no
allowance to Tenant for diminution of rental value and no liability on the part
of Landlord by reason of inconvenience, annoyance or injury to Tenant arising
from any repairs, alterations, additions, replacements or improvements made by
Landlord, or any related work, Tenant or others in or to any portion of the
Park, Building or premises or any property adjoining the Park, or in or to
fixtures, appurtenances, or equipment thereof, or for failure of Landlord or
others to make any repairs, alterations, additions or improvements in or to any
portion of the Park, Building, or of the premises, or in or to the fixtures,
appurtenances or equipment thereof.
(b) Notwithstanding anything to the contrary in this
Lease contained, if due to any such repairs, alterations, replacements, or
improvements made by Landlord or if due to Landlord's failure to make any
repairs, alterations, or improvements required to be made by Landlord, any
portion of the premises becomes untenantable for a period of five (5)
consecutive business days after Landlord's receipt of written notice from Tenant
of such condition, the untenantability of which would substantially adversely
affect the continued operation in the ordinary course of Tenant's business,
then, provided that such untenantability and Landlord's inability to cure such
condition is not caused by the fault or neglect of Tenant or Tenant's agents,
employees or contractors or causes beyond Landlord's reasonable control, Yearly
Rent, Operating Expense Excess and Tax Excess
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shall thereafter be abated in proportion to such untenantability until the day
such condition is completely corrected.
(c) Notwithstanding anything to the contrary in this
Lease contained, if due to any such repairs, alterations, replacements, or
improvements made by Landlord or if due to Landlord's failure to make any
repairs, alterations, or improvements required to be made by Landlord, any
portion of the premises becomes untenantable for a period of ten (10)
consecutive business days after Landlord's receipt of written notice from Tenant
of such condition, the untenantability of which would substantially adversely
affect the continued operation in the ordinary course of Tenant's business,
then, provided that such untenantability and Landlord's inability to cure such
condition is caused by reasons beyond Landlord's reasonable control and is not
caused by the fault or neglect of Tenant or Tenant's agents, employees or
contractors, Yearly Rent, Operating Expense Excess and Tax Excess shall
thereafter be abated in proportion to such untenantability until the day such
condition is completely corrected.
(d) The provisions of paragraphs (b) and (c) of this
Article 15.6 shall not apply in the event of untenantability caused by fire or
other casualty, or taking (see Articles 18 and 20).
16. ASSIGNMENT, MORTGAGING AND SUBLETTING
(a) Except as provided in this Article 16, Tenant covenants and
agrees that neither this Lease nor the term and estate hereby granted, nor any
interest herein or therein, will be assigned, mortgaged, pledged, encumbered or
otherwise transferred, voluntarily, by operation of law or otherwise, and that
neither the premises, nor any part thereof will be encumbered in any manner by
reason of any act or omission on the part of Tenant, or used or occupied, or
permitted to be used or occupied, or utilized for desk space or for mailing
privileges, by anyone other than Tenant, or for any use or purpose other than as
stated in Exhibit 1, or be sublet, or offered or advertised for subletting.
(b) If Tenant is a corporation, the Tenant may assign or transfer
this Lease, and the term and estate hereby granted, to any corporation
("Permitted Tenant Successor") into which Tenant is merged or with which Tenant
is consolidated or to which all or substantially all of Tenant's assets are
transferred, provided that: (x) such Permitted Tenant Successor shall have a net
worth at least equal to that of Tenant immediately prior to such merger or
consolidation or acquisition, and (y) such Permitted Tenant Successor and Tenant
shall promptly execute, acknowledge and deliver to Landlord an agreement
("Assumption Agreement") in form and substance reasonably satisfactory to
Landlord whereby such Permitted Tenant Successor shall agree to be independently
bound by and upon all the covenants, agreements, terms, provisions and
conditions set forth in this Lease on the part of Tenant to be performed, and
whereby such Permitted Tenant Successor shall expressly agree that the
provisions of this Article 16 shall, notwithstanding such assignment or
transfer, continue to be binding upon it with respect to all future assignments
and transfers.
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(c) Tenant shall have the right to assign its interest in this
Lease, and sublet the premises or any portion thereof, to an Affiliate of
Tenant, as hereinafter defined. For the purposes hereof, an "Affiliate of
Tenant" shall be defined as any entity which controls, is controlled by, or is
under common control with, Tenant, so long as such entity remains in such
relationship with Tenant. Tenant's right to assign its interest in this Lease to
an Affiliate of Tenant shall be further conditioned upon such Affiliate, prior
to such assignment, executing and delivering to Landlord an Assumption
Agreement, as defined in Paragraph (b) of this Article 16.
(d) Notwithstanding anything to the contrary in the Lease
contained, the following provisions shall apply to any proposed sublease of the
premises, or any portion thereof, and to any proposed assignment of Tenant's
interest in the Lease, other than to an Affiliate of Tenant, or to a Permitted
Tenant Successor:
(1) Tenant shall, prior to offering or advertising any
portion of the premises in excess of thirty percent
(30%) thereof, in the aggregate (i.e., including all
portions of the premises then being subleased by
Tenant), for sublease or an assignment of this Lease,
give Landlord a Recapture Offer, as hereinafter
defined.
(2) For the purposes hereof a "Recapture Offer" shall be
defined as a notice in writing from Tenant to
Landlord which:
(i) States that Tenant desires to sublet the
premises, or a portion thereof, or to assign
its interest in this Lease.
(ii) Identifies the affected portion of the
premises ("Recapture Premises").
(iii) Identifies the period of time ("Recapture
Period") during which Tenant proposes to
sublet the Recapture Premises or to assign
its interest in the Lease.
(iv) Offers to Landlord to terminate the Lease in
respect of the Recapture Premises (in the
case of a proposed assignment of Tenant's
interest in the Lease or a subletting for
the remainder of the term of the Lease) or
to suspend the term of the Lease pro tanto
in respect of the Recapture Period (i.e.
the term of the Lease in respect of the
Recapture Premises shall be terminated
during the Recapture Period and Tenant's
rental obligations shall be reduced in
proportion to the ratio of the Total
Rentable Area of the Recapture Premises to
the Total Rentable Area of the premises then
demised to Tenant).
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(3) Landlord shall have forty-five (45) days to accept a
Recapture Offer. If Landlord does not timely give
written notice to Tenant accepting a Recapture Offer,
then Landlord agrees that it will not unreasonably
withhold or delay its consent to a sublease of the
Recapture Premises for the Recapture Period, or an
assignment of Tenant's interest in the Lease, as the
case may be, to a Qualified Transferee, as
hereinafter defined.
(4) For the purposes hereof, "Qualified Transferee" shall
mean any person, firm, corporation, partnership or
other entity which, in Landlord's reasonable opinion:
(i) is financially responsible and of good
reputation;
(ii) is engaged in a use permitted under Article
5 of this Lease;
(iii) is not a tenant or subtenant in the Park,
unless (x) the proposed tenant or subtenant
is expanding its premises and will not
vacate any other space occupied by it in the
Park as a result of the proposed transaction
and (y) Landlord does not have space which
satisfies the expansion needs of such tenant
or subtenant; and
(iv) if Landlord has comparable space on the
market (and for this purpose no space under
any existing lease with more than 18 months
remaining in the term may be considered on
the market), then such prospective subtenant
will pay a rent which equals or exceeds at
least eighty percent (80%) of the then Fair
Market Value of the premises.
(5) Notwithstanding anything to the contrary in this
Paragraph B contained:
(i) If Tenant is in default of its obligations
under the Lease beyond applicable grace or
cure periods at the time that it makes the
aforesaid offer to Landlord, such default
shall be deemed to be a "reasonable" reason
for Landlord withholding its consent to any
proposed subletting or assignment; and
(ii) If Tenant does not enter into a sublease
with a subtenant (or an assignment to an
assignee, as the case may be) approved by
Landlord, as aforesaid, on or before the
date which is one hundred (100) days after
the earlier of: (x) the
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expiration of said sixty (60) day period, or
(y) the date that Landlord notifies Tenant
that Landlord will not accept Tenant's offer
to terminate or suspend the Lease, then
Landlord shall have the right arbitrarily to
withhold its consent to any subletting or
assignment proposed to be entered into by
Tenant after the expiration of said one
hundred (100) day period unless Tenant again
offers, in accordance with this Paragraph B,
either to terminate or to suspend the Lease
in respect of the portion of the premises
proposed to be sublet (or in respect of the
entirety of the premises in the event of a
proposed assignment, as the case may be). If
Tenant shall make any subsequent offers to
terminate or suspend the Lease pursuant to
this Paragraph (d), any such subsequent
offers shall be treated in all respects as
if it is Tenant's first offer to suspend or
terminate the Lease pursuant to this
Paragraph (d), provided that the period of
time Landlord shall have in which to accept
or reject such subsequent offer shall be
thirty (30) days.
(e) If Tenant is an individual who uses and/or occupies
the premises with partners, or if Tenant is a partnership, then:
(i) Each present and future partner shall be personally
bound by and upon all of the covenants, agreements, terms, provisions and
conditions set forth in this Lease on the part of Tenant to be performed; and
(ii) In confirmation of the foregoing, Landlord may (but
without being required to do so) request (and Tenant shall duly comply) that
Tenant, at the time that Tenant admits any new partner to its partnership, shall
require each such new partner to execute an agreement in form and substance
satisfactory to Landlord whereby such new partner shall agree to be personally
bound by and upon all of the covenants, agreements, terms, provisions and
conditions of this Lease on the part of Tenant to be performed, without regard
to the time when such new partner is admitted to partnership or when any
obligations under any such covenants, etc., accrue.
(f) The listing of any name other than that of Tenant,
whether on the doors of the premises or on the Building directory, or otherwise,
shall not operate to vest in any such other person, firm or corporation any
right or interest in this Lease or in the premises or be deemed to effect or
evidence any consent of Landlord, it being expressly understood that any such
listing is a privilege extended by Landlord revocable at will by written notice
to Tenant.
(g) If either: (x) this Lease be assigned, or (y) if
Tenant is in default of any of its obligations under this Lease beyond the
expiration of any applicable grace
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periods, and the premises or any part thereof has been sublet or occupied by
anybody other than Tenant, then, and in either of such events, Landlord may, at
any time and from time to time, collect rent and other charges from the
assignee, subtenant or occupant, and apply the net amount collected to the rent
and other charges herein reserved then due and thereafter becoming due, but no
such assignment, subletting, occupancy or collection shall be deemed a waiver of
this covenant, or the acceptance of the assignee, subtenant or occupant as a
tenant, or a release of Tenant from the further performance by Tenant of
covenants on the part of Tenant herein contained.
(h) Any consent by Landlord to a particular assignment or
subletting shall not in any way diminish the prohibition stated in the first
sentence of this Article 16. No subletting or assignment shall relieve Tenant of
its primary obligation as party-Tenant hereunder, nor shall it reduce or
increase Landlord's obligations under the Lease.
(i) No assignment or subletting or use of the premises by
an affiliate of Tenant shall affect the purpose for which the premises may be
used as stated in Exhibit 1.
(j) In the event of an assignment of this Lease to anyone
other than an Affiliate of Tenant or a Permitted Tenant Successor, Tenant shall
pay to Landlord fifty percent (50%) of any Net Sublease Profits (as defined
below), payable in accordance with the following. In the case of an assignment
of this Lease, "Net Sublease Profit": (1) shall be defined as a lump sum in the
amount (if any) by which any consideration paid by the assignee in consideration
of or as an inducement to Tenant to make said assignment exceeds the reasonable
attorneys' fees, architect's fees, construction costs and brokerage fees
incurred by Tenant in order to effect such assignment (collectively, "Sublease
Expenses"), and (2) be payable concurrently with the payment to be made by the
assignee to Tenant. In the case of a sublease, "Net Sublease Profit": (3) shall
be defined as a monthly amount equal to the amount by which the sublease rent
and other charges payable by the subtenant to Tenant under the sublease exceed
the sum of the rent and other charges payable under this Lease for the premises
or the sublet portion thereof, plus a monthly amount equal to the Sublease
Expenses divided by the number of months in the term of the sublease, and (4)
shall be payable on a monthly basis concurrently with the subtenant's payment of
rent to Tenant under the sublease.
17. MISCELLANEOUS COVENANTS
Tenant covenants and agrees as follows:
17.1 Rules and Regulations. Tenant will faithfully observe and
comply with the Rules and Regulations, if any, annexed hereto and such other and
further reasonable Rules and Regulations as Landlord hereafter at any time or
from time to time may make and may communicate in writing to Tenant, which in
the reasonable judgment of Landlord shall be necessary for the reputation,
safety, care or appearance of the Building and/or the Park, or the preservation
of good order therein, or the operation or maintenance of the Building and/or
the Park, or the equipment thereof, or the comfort of tenants or others in
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the Park, provided, however, that in the case of any conflict between the
provisions of this Lease and any such regulations, the provisions of this Lease
shall control, and provided further that nothing contained in this Lease shall
be construed to impose upon Landlord any duty or obligation to enforce the Rules
and Regulations or the terms, covenants or conditions in any other lease as
against any other tenant and Landlord shall not be liable to Tenant for
violation of the same by any other tenant, its servants, employees, agents,
contractors, visitors, invitees or licensees.
17.2 Access to Premises--Shoring. Tenant shall: (i) permit Landlord
to erect, use and maintain pipes, ducts and conduits in and through the
premises, provided the same do not materially reduce the floor area or
materially adversely affect the appearance thereof; (ii) upon prior oral notice
(except that no notice shall be required in emergency situations), permit
Landlord and any mortgagee of the Building and/or the Park or of the interest of
Landlord therein, and any lessor under any ground or underlying lease, and their
representatives, to have free and unrestricted access to and to enter upon the
premises at all reasonable hours for the purposes of inspection or of making
repairs, replacements or improvements in or to the premises or the Building
and/or the Park or equipment (including, without limitation, sanitary,
electrical, heating, air conditioning or other systems) or of complying with all
laws, orders and requirements of governmental or other authority or of
exercising any right reserved to Landlord by this Lease (including the right
during the progress of any such repairs, replacements or improvements or while
performing work and furnishing materials in connection with compliance with any
such laws, orders or requirements to take upon or through, or to keep and store
within, the premises all necessary materials, tools and equipment); and (iii)
permit Landlord, at reasonable times, to show the premises during ordinary
business hours to any existing or prospective mortgagee, ground lessor, space
lessee, purchaser, or assignee of any mortgage, of the Building and/or the Park
and the land or of the interest of Landlord therein, and during the period of 12
months next preceding the Termination Date to any person contemplating the
leasing of the premises or any part thereof. Notwithstanding the foregoing,
Tenant may from time to time designate in writing certain portions (the
"Restricted Areas") of the premises as restricted areas. Landlord agrees not to
enter the Restricted Areas except in the event of an emergency and in such event
Landlord shall give prior oral notice and endeavor to be accompanied by an
employee of Tenant to the extent practicable under the circumstances. If, during
the last month of the term, Tenant shall have removed all or substantially all
of Tenant's property therefrom, Landlord may immediately enter and alter,
renovate and redecorate the premises, without elimination or abatement of rent,
or incurring liability to Tenant for any compensation, and such acts shall have
no effect upon this Lease. If Tenant shall not be personally present to open and
permit an entry into the premises at any time when for any reason an entry
therein shall be necessary or permissible, Landlord or Landlord's agents may
enter the same by a master key, or may forcibly enter the same, except that
entry to the Restricted Areas shall be made upon the terms and conditions set
forth above in this Section 17.2, without rendering Landlord or such agents
liable therefor (if during such entry Landlord or Landlord's agents shall accord
reasonable care to Tenant's property), and without in any manner affecting the
obligations and covenants of this Lease. Provided that Landlord
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shall incur no additional expense thereby, Landlord shall exercise its rights of
access to the premises permitted under any of the terms and provisions of this
Lease in such manner as to minimize to the extent practicable interference with
Tenant's use and occupation of the premises. If an excavation shall be made upon
land adjacent to the premises or shall be authorized to be made, Tenant shall
afford to the person causing or authorized to cause such excavation, license to
enter upon the premises for the purpose of doing such work as said person shall
deem necessary to preserve the Building from injury or damage and to support the
same by proper foundations without any claims for damages or indemnity against
Landlord, or diminution or abatement of rent (subject, however, to the
provisions of Articles 15.4 and 15.6 of this Lease).
17.3 Accidents to Sanitary and Other Systems. Tenant shall give to
Landlord prompt notice of any fire or accident in the premises or in the
Building and of any damage to, or defective condition in, any part or
appurtenance of the Building including, without limitation, sanitary,
electrical, heating and air conditioning or other systems located in, or passing
through, the premises or the Park. Except as otherwise provided in Articles 18
and 20, and subject to Tenant's obligations in Article 14, such damage or
defective condition shall be remedied by Landlord with reasonable diligence, but
if such damage or defective condition was caused by Tenant or by the employees,
licensees, contractors or invitees of Tenant, the cost to remedy the same shall
be paid by Tenant. Subject to the provisions of Articles 8.8, 15.4 and 15.6 of
this Lease, Tenant shall not be entitled to claim any eviction from the premises
or any damages arising from any such damage or defect unless the same (i) shall
have been occasioned by the negligence of the Landlord, its agents, servants or
employees and (ii) shall not, after notice to Landlord of the condition claimed
to constitute negligence, have been cured or corrected within a reasonable time
after such notice has been received by Landlord; and in case of a claim of
eviction unless such damage or defective condition shall have rendered the
premises untenantable and they shall not have been made tenantable by Landlord
within a reasonable time.
17.4 Signs, Blinds and Drapes.
(a) Except as provided in this Article 17.4, Tenant shall put no
signs in any part of the Building or the Park. No signs or blinds may be put on
or in any window or elsewhere if visible from the exterior of the Building.
Tenant may hang its own drapes, provided that they shall not in any way
interfere with the building standard drapery or blinds or be visible from the
exterior of the Building and that such drapes are so hung and installed that
when drawn, the building standard drapery or blinds are automatically also
drawn.
(b) Neither Landlord's name, nor the name of the Building or the
Park, or the name of any other structure erected therein shall be used without
Landlord's consent in any advertising material (except on business stationery or
as an address in advertising matter), nor shall any such name, as aforesaid, be
used in any undignified, confusing, detrimental or misleading manner.
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(c) Provided that Landlord is able to obtain the necessary
governmental approvals therefor, Landlord shall, at its expense, install
monument signage naming the Park "Crosby Corporate Center" at both entrances to
Crosby Drive.
(d) Subject to obtaining Landlord's approval of the particulars
therefor which shall not be unreasonably withheld, and Tenant's obtaining all
necessary governmental approvals therefor, Tenant may at its sole cost and
expense install an exterior monument sign and one sign on the exterior of
Building, each identifying Tenant in a location approved by Landlord which shall
also not be unreasonably withheld. If Tenant installs such monument sign and/or
exterior Building sign, Tenant shall maintain the same in good order and repair
at all times and shall remove the same from the Park at the expiration or
earlier termination of the term hereof.
(e) Landlord shall install directory signage listing "Security
Dynamics" as an occupant of the Park. In addition, Landlord shall provide
directional signage which clearly identifies the Building, as well as the
entrances, parking areas, and visitor parking areas of the Building.
17.5 Estoppel Certificate. Each party ("Responding Party") shall at
any time and from time to time upon not less than ten (10) days' prior notice
from the other party ("Requesting Party"), execute, acknowledge and deliver to
the Requesting Party a statement in writing certifying that this Lease is
unmodified and in full force and effect (or if there have been modifications,
that the same is in full force and effect as modified and stating the
modifications), and the dates to which the Yearly Rent and other charges have
been paid in advance, if any, stating whether or not the Requesting Party is in
default in performance of any covenant, agreement, term, provision or condition
contained in this Lease and, if so, specifying each such default and such other
facts as the Requesting Party may reasonably request, it being intended that any
such statement delivered pursuant hereto may be relied upon by any prospective
purchaser of the Building or of the Building and the land or of any interest of
Landlord therein, any mortgagee or prospective mortgagee thereof, any lessor or
prospective lessor thereof, any lessee or prospective lessee thereof, or any
prospective assignee of any mortgage thereof, or any prospective subtenant or
assignee. Time is of the essence in respect of any such requested certificate,
each party hereby acknowledging the importance of such certificates in mortgage
financing arrangements, prospective sale and the like.
17.6 Prohibited Materials and Property. Tenant shall not bring or
permit to be brought or kept in or on the premises or elsewhere in the Building
or the Park (i) any inflammable, combustible or explosive fluid, material,
chemical or substance including, without limitation, any hazardous substances as
defined under Massachusetts General Laws chapter 21E, the Federal Comprehensive
Environmental Response Compensation and Liability Act (CERCLA), 42 USC
Section 9601 et seq., as amended, under Section 3001 of the Federal Resource
Conservation and Recovery Act of 1976, as amended, or under any regulation of
any governmental authority regulating environmental or health matters
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(except for standard office supplies stored in proper containers and Permitted
Hazardous Materials), (ii) any material (including, without limitation,
materials selected by Tenant for the construction or other preparation of the
premises and furniture and carpeting) which pose any danger to life, safety or
health or may cause damage, injury or death; (iii) any unique, unusually
valuable, rare or exotic property, work of art or the like unless the same is
fully insured under all-risk coverage, or (iv) any data processing, electronic,
optical or other equipment or property of a delicate, fragile or vulnerable
nature unless the same are housed, shielded and protected against harm and
damage, whether by cleaning or maintenance personnel, radiations or emanations
from other equipment now or hereafter installed in the Building, the Park or
otherwise. Nor shall Tenant cause or permit any odors of cooking or other
processes, or any unusual or other objectionable odors to emanate from or
permeate the premises.
17.7 Requirements of Law--Fines and Penalties.
(a) Subject to Paragraph (b) of this Article 17.7, Tenant at its
sole expense shall comply with all laws, rules, orders and regulations,
including, without limitation, all energy-related requirements, of Federal,
State, County and Municipal Authorities and with any direction of any public
officer or officers, pursuant to law (collectively "Laws"), which shall impose
any duty upon Landlord or Tenant with respect to or arising out of Tenant's use
or occupancy of the premises. If Tenant receives notice of any violation of law,
ordinance, order or regulation applicable to the premises, it shall give prompt
notice thereof to Landlord.
(b) Landlord shall comply with all Laws relating to the
performance of Landlord's Work. Landlord, subject to inclusion of the cost of
compliance as Operating Costs in accordance with the provisions of Article
9.1(g) of this Lease, Landlord shall comply with all Laws which relate to the
structure of the Building, unless the need for such compliance arises from
Tenant's particular use of the premises.
17.8 Tenant's Acts--Effect on Insurance. Tenant shall not do or
permit to be done any act or thing upon the premises or elsewhere in the
Building or the Park which will invalidate or be in conflict with any insurance
policies covering the Building, the Park and the fixtures and property therein;
and shall not do, or permit to be done, any act or thing upon the premises which
shall subject Landlord to any liability or responsibility for injury to any
person or persons or to property by reason of any business or operation being
carried on upon said premises or for any other reason. Tenant at its own expense
shall comply with all rules, orders, regulations and requirements of the Board
of Fire Underwriters, or any other similar body having jurisdiction, and shall
not (i) do, or permit anything to be done, in or upon the premises, or bring or
keep anything therein, except as now or hereafter permitted by the Fire
Department, Board of Underwriters, Fire Insurance Rating Organization, or other
authority having jurisdiction, and then only in such quantity and manner of
storage as will not increase the rate for any insurance applicable to the
Building and/or the Park, or (ii) use the premises in a manner which shall
increase such insurance rates on the Building, the Park or on property located
therein, over that
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applicable when Tenant first took occupancy of the premises hereunder. If by
reason of the failure of Tenant to comply with the provisions hereof the
insurance rate applicable to any policy of insurance shall at any time
thereafter be higher than it otherwise would be, the Tenant shall reimburse
Landlord for that part of any insurance premiums thereafter paid by Landlord,
which shall have been charged because of such failure by Tenant.
17.9 Miscellaneous. Tenant shall not suffer or permit the premises
or any fixtures, equipment or utilities therein or serving the same, to be
overloaded, damaged or defaced, nor permit any hole to be drilled or made in any
part thereof. Tenant shall not suffer or permit any employee, contractor,
business invitee or visitor to violate any covenant, agreement or obligations of
the Tenant under this Lease.
18. DAMAGE BY FIRE, ETC.
18.1 Casualty Insurance. During the entire term of this Lease, and
adjusting insurance coverages to reflect current values from time to time:--(i)
Landlord shall keep the Building (excluding any Tenant Work and any other
property installed by or at the expense of Tenant) insured against loss or
damage caused by any peril covered under fire, extended coverage and all risk
insurance in an amount equal to one hundred percent (100%) of the full insurable
value thereof above foundation walls; and (ii) Tenant shall keep its personal
property in and about the premises and the Above Base Building Work insured
against loss or damage caused by any peril covered under fire, extended coverage
and all risk insurance in an amount equal to one hundred percent (100%) of the
full insurable value thereof. Such Tenant's insurance shall insure the interests
of both Landlord and Tenant as their respective interests may appear from time
to time and shall name Landlord as an additional insured; and the proceeds
thereof shall be used only for the replacement or restoration of such personal
property and the Above Base Building Work except that Tenant shall be entitled
to retain the proceeds of Tenant's insurance in the event that this Lease is
terminated pursuant to this Article 18.
18.2 Repair of Damage Caused by Casualty. If any portion of the
premises required to be insured by Landlord under Article 18.1 shall be damaged
by fire or other insured casualty, Landlord shall proceed with diligence,
subject to the then applicable statutes, building codes, zoning ordinances, and
regulations of any governmental authority, and at the expense of Landlord (but
only to the extent of insurance proceeds made available to Landlord by any
mortgagee and/or ground lessor of the real property of which the premises are a
part) to repair or cause to be repaired such damage, provided, however, that any
repairs to Tenant Work or other property installed by Tenant which is damaged by
such fire or other casualty which (in the judgment of Landlord) can more
effectively be repaired as an integral part of Landlord's repair work on the
premises, such repairs shall be performed by Landlord but at Tenant's expense;
in all other respects, all repairs to and replacements of Tenant Work and such
other property shall be made by and at the expense of Tenant. If the premises or
any part thereof shall have been rendered unfit for use and occupation hereunder
by reason of such damage the Yearly Rent, Operating Cost Excess, Tax Excess and
other charges or a just and proportionate part
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thereof, according to the nature and extent to which the premises shall have
been so rendered unfit, shall be suspended or abated until the earlier of: (x)
one hundred twenty (120) days after the premises (except as to the property
which is to be repaired by or at the expense of Tenant) shall have been restored
as nearly as practicably may be to the condition in which they were immediately
prior to such fire or other casualty, or (y) the date that Tenant first
recommences its use and occupancy of the premises or any portion thereof for the
operation of its business. Tenant agrees to cooperate with Landlord and any
mortgagee of the Building or of the Building and the land in such manner as
Landlord may reasonably request in assisting Landlord and such mortgagee in
collecting the insurance proceeds (including rent insurance proceeds) applicable
to such damage. Landlord shall not be liable for delays in the making of any
such repairs which are due to government regulation, casualties and strikes,
unavailability of labor and materials, and other causes beyond the reasonable
control of Landlord, nor shall Landlord be liable for any inconvenience or
annoyance to Tenant or injury to the business of Tenant resulting from delays in
repairing such damage.
18.3 Landlord's Termination Rights. If (i) the premises are so
damaged by fire or other casualty (whether or not insured) at any time during
the last thirty months of the term hereof that the cost to repair such damage is
reasonably estimated to exceed one third of the total Yearly Rent payable
hereunder for the period from the estimated date of restoration until the
Termination Date, or (ii) the Building or the Park (whether or not including any
portion of the premises) is so damaged by fire or other casualty (whether or not
insured) that substantial alteration or reconstruction or demolition of the
Building shall in Landlord's judgment be required, then and in either of such
events, this Lease and the term hereof may be terminated at the election of
Landlord by a notice in writing of its election so to terminate which shall be
given by Landlord to Tenant within sixty (60) days following such fire or other
casualty, the effective termination date of which shall be not less than thirty
(30) days after the day on which such termination notice is received by Tenant.
18.4 Tenant's Termination Rights.
(a) Termination Based Upon Estimated Restoration Period.
If all or any portion of any Building comprising the premises shall be
damaged or destroyed by fire or other casualty to the extent that the operation
of Tenant's business in such Building in the normal course is materially
adversely affected, then, within forty-five (45) days of such fire or other
casualty, Landlord shall submit to Tenant a reasonable engineering estimate as
to the estimated length of time required to complete such repairs. If the time
period ("Estimated Restoration Period") set forth in such estimate shall exceed
two hundred seventy (270) days from the date of such casualty, Tenant may elect,
by a notice sent within thirty (30) days after notice of such estimate is sent
to Tenant, to terminate this Lease in respect of such Building. If such estimate
shall fall within said two hundred seventy (270) day limit, Tenant shall have no
such right to terminate and Landlord shall, subject to the provisions of this
Article 18, proceed with due diligence and
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promptness to reasonably complete the repairs or restoration within such one
year period, subject always to delays for causes beyond Landlord's reasonable
control including, but not limited to the causes specified in Article 26 hereof,
and the other limitations set forth in this Article 18.
(b) Termination Based Upon Actual Restoration Period.
If all or any portion of any Building comprising the premises is
damaged by fire or other casualty to such an extent so as to render such
Building untenantable, and if Landlord shall fail to substantially complete the
restoration work on or before the date (the "Restoration Deadline Date") which
is the later of : (1) the end of the Estimated Restoration Period and (2) two
hundred forty (240) days after the date of such fire or other casualty, for any
reason other than Tenant's fault, Tenant may terminate this Lease by giving
Landlord written notice as follows:
(i) Said notice shall be given after the Restoration Deadline
Date.
(ii) Said notice shall set forth an effective date which is not
earlier than thirty (30) days after Landlord receives said
notice.
(iii) If the restoration work is substantially complete within
thirty (30) days (which thirty-(30)-day period shall be
extended by the length of any delays caused by Tenant or
Tenant's contractors) after Landlord receives such notice,
said notice shall have no further force and effect.
(iv) If the restoration work is not substantially complete on or
before the date thirty (30) days (which thirty-(30)-day period
shall be extended by the length of any delays caused by Tenant
or Tenant's contractors) after Landlord receives such notice,
the Lease shall terminate as of said effective date.
(c) General Provisions Relating to Tenant's Termination Rights.
Notwithstanding the provisions of the preceding Paragraphs (a) and (b)
of this Article 18.4 or the provisions of Article 19 below, if the premises
consist of more than one building at any time, Tenant's termination rights under
said provisions shall only apply to whichever Building(s) comprising the
premises may have been damaged by the fire or other casualty or taking in
question, and not any other Building(s) included in the premises that may not
have been affected thereby. Thus, for example, if the premises consist of two
buildings and one is substantially destroyed by fire and the Estimated
Restoration Period therefor is fourteen months, Tenant would have the right
under paragraph (a) above to terminate this Lease as it relates to the damaged
Building, but not as it relates to the undamaged Building.
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18.5 General Provisions Relating to Any Casualty Termination.
In the event of any termination, this Lease and the term hereof shall
expire as of such effective termination date as though that were the Termination
Date as stated in Exhibit 1 and the Yearly Rent and other charges payable under
this Lease shall be apportioned as of such date; and if the premises or any part
thereof shall have been rendered unfit for use and occupation by reason of such
damage the Yearly Rent and other charges for the period from the date of the
fire or other casualty to the effective termination date, or a just and
proportionate part thereof, according to the nature and extent to which the
premises shall have been so rendered unfit, shall be abated.
19. WAIVER OF SUBROGATION
(a) In any case in which Tenant shall be obligated to pay to
Landlord any loss, cost, damage, liability, or expense suffered or incurred by
Landlord, Landlord shall allow to Tenant as an offset against the amount thereof
(i) the net proceeds of any insurance collected by Landlord for or on account of
such loss, cost, damage, liability or expense, provided that the allowance of
such offset does not invalidate or prejudice the policy or policies under which
such proceeds were payable, and (ii) if such loss, cost, damage, liability or
expense shall have been caused by a peril which could be covered by fire
insurance with the broadest form of property insurance generally available on
buildings similar to the Building, whether or not actually procured by Landlord.
(b) In any case in which Landlord or Landlord's managing agent
shall be obligated to pay to Tenant any loss, cost, damage, liability or expense
suffered or incurred by Tenant, Tenant shall allow to Landlord or Landlord's
managing agent, as the case may be, as an offset against the amount thereof (i)
the net proceeds of any insurance collected by Tenant for or on account of such
loss, cost, damage, liability, or expense, provided that the allowance of such
offset does not invalidate the policy or policies under which such proceeds were
payable and (ii) the amount of any loss, cost, damage, liability or expense
caused by a peril covered by fire insurance with the broadest form of property
insurance generally available on property in buildings of the type of the
Building, whether or not actually procured by Tenant.
(c) The parties hereto shall each procure an appropriate clause
in, or endorsement on, any property insurance policy covering the premises and
the Building and personal property, fixtures and equipment located thereon and
therein, pursuant to which the insurance companies waive subrogation or consent
to a waiver of right of recovery in favor of either party, its respective agents
or employees. Having obtained such clauses and/or endorsements, each party
hereby agrees that it will not make any claim against or seek to recover from
the other or its agents or employees for any loss or damage to its property or
the property of others resulting from fire or other perils covered by such
property insurance.
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20. CONDEMNATION - EMINENT DOMAIN
20.1 Landlord's Termination Rights. In the event that the premises
or any part thereof, or the whole or any material part of the Park, shall be
taken or appropriated by eminent domain or shall be condemned for any public or
quasi-public use, or (by virtue of any such taking, appropriation or
condemnation) shall suffer any damage (direct, indirect or consequential) for
which Landlord or Tenant shall be entitled to compensation, so that, in
Landlord's bona fide business judgment, the continued operation of the Park
shall be rendered uneconomic, then (and in any such event) this Lease and the
term hereof may be terminated at the election of Landlord by a notice in writing
of its election so to terminate which shall be given by Landlord to Tenant
within sixty (60) days following the date on which Landlord shall have received
notice of such taking, appropriation or condemnation.
20.2 Tenant's Termination Rights. In the event that a material part
of the premises, the means of access thereto, or the Parking Areas shall be so
taken, appropriated or condemned, so that, in Tenant's bona fide business
judgment, the continued operation of Tenant's business in the premises is
materially adversely affected, then (and in any such event) this Lease and the
term hereof may be terminated at the election of Tenant by a notice in writing
of its election so to terminate which shall be given by Tenant to Landlord
within sixty (60) days following the date on which Tenant shall have received
notice of such taking, appropriation or condemnation. Notwithstanding anything
to the contrary herein contained, if the premises consist of more than one
building at any time, Tenant's termination rights under this Article 20.2 shall
only apply to whichever Building(s) comprising the premises may have been by the
taking in question, and not any other Building(s) included in the premises that
may not have been affected thereby.
20.3 General Taking Provisions. Upon the giving of any notice of
termination (either by Landlord or Tenant) this Lease and the term hereof shall
terminate on or retroactively as of the date on which Tenant shall be required
to vacate any part of the premises or shall be deprived of a substantial part of
the means of access thereto, provided, however, that Landlord may in Landlord's
notice elect to terminate this Lease and the term hereof retroactively as of the
date on which such taking, appropriation or condemnation became legally
effective. In the event of any such termination, this Lease and the term hereof
shall expire as of such effective termination date as though that were the
Termination Date as stated in Exhibit 1, and the Yearly Rent shall be
apportioned as of such date. If neither party (having the right so to do) elects
to terminate Landlord will, with reasonable diligence and at Landlord's expense,
restore the remainder of the premises, or the remainder of the means of access,
as nearly as practicably may be to the same condition as obtained prior to such
taking, appropriation or condemnation in which event (i) the Total Rentable Area
shall be adjusted as in Exhibit 5 provided, (ii) a just proportion of the Yearly
Rent, according to the nature and extent of the taking, appropriation or
condemnation and the resulting permanent injury to the premises and the means of
access thereto, shall be permanently abated, and (iii) a just proportion of the
remainder of the Yearly Rent, according to the nature and extent of the taking,
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appropriation or condemnation and the resultant injury sustained by the premises
and the means of access thereto, shall be abated until what remains of the
premises and the means of access thereto shall have been restored as fully as
may be for permanent use and occupation by Tenant hereunder.
20.4 Taking Proceeds.
(a) Except for any award specifically reimbursing Tenant for
moving or relocation expenses, there are expressly reserved to Landlord all
rights to compensation and damages created, accrued or accruing by reason of any
such taking, appropriation or condemnation, in implementation and in
confirmation of which Tenant does hereby acknowledge that Landlord shall be
entitled to receive all such compensation and damages, grant to Landlord all and
whatever rights (if any) Tenant may have to such compensation and damages, and
agree to execute and deliver all and whatever further instruments of assignment
as Landlord may from time to time request.
(b) For the purposes of this Article 20, the following terms shall
have the following meanings:
"Award Balance" shall be the amount, if any, by which the total
compensation and damages awarded in respect of a permanent taking exceeds the
total of the portion of award allocable to the land on which the Building is
situated (i.e. as if the land were not improved but as encumbered by, for
example, all title matters) and all amounts payable in such event under bona
fide ground leases or underlying leases and under all bona fide mortgages or
other encumbrances which may now or hereafter be placed on, encumber or affect
the real property of which the premises are a part, or any part of such real
property.
"Area Ratio" shall be a fraction having as numerator the number of
square feet of Total Rentable Area comprising the premises as of the date of
such taking and as denominator the total floor area of the entire Building
including office, commercial and public areas.
"Premises Award Balance" shall be that amount of the Award Balance
allocable to the premises determined by multiplying the Award Balance by the
Area Ratio.
"Tenant's Improvements" shall be the unamortized portion (calculated on
a straight-line basis over the initial term of this Lease), of Tenant's costs of
leasehold improvements actually made to the Premises as part of Tenant's Work,
which may not be removed by Tenant under the terms of Article 11 of this Lease,
determined as of the date of the eminent domain taking.
"Building Book Value" shall be the unamortized cost of the Building and
related facilities (calculated on a straight-line basis over a 40-year period
commencing on the Term Commencement Date), determined as of the date of the
eminent domain taking, less all amounts payable in such event under bona fide
ground leases or underlying leases and
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under all bona fide mortgages or other encumbrances which may now or hereafter
be placed on, encumber or affect the real property of which the premises are a
part, or any part of such real property..
"Premises Book Value" shall be the product of Area Ratio multiplied by
Building Book Value.
Notwithstanding anything to the contrary contained in the reservation
in Art. 20, in the event of a permanent taking which results in the termination
of this Lease, Tenant shall be entitled to receive out of the Award Balance (i)
its relocation costs (to the extent the same are allocated as such out of the
compensation and damages awarded) and (ii) the amount of Tenant's Improvements,
provided, however, that if the sum of Tenant's Improvements and Premises Book
Value exceeds the Premises Award Balance, then Tenant's Improvements and
Premises Book Value shall then be proportionately reduced to an amount which,
when added together, shall equal the Premises Award Balance; and, in such event,
Tenant shall be entitled to receive out of the Award Balance the amount of
Tenant's Improvements as so reduced.
20.5 Temporary Takings. In the event of any taking of the premises
or any part thereof for temporary use (i.e. not in excess of one year): (i) this
Lease shall be and remain unaffected thereby, and (ii) Tenant shall be entitled
to receive for itself any award made for such use, provided, that if any taking
is for a period extending beyond the term of this Lease, such award shall be
apportioned between Landlord and Tenant as of the Termination Date or earlier
termination of this Lease.
21. DEFAULT
21.1 Conditions of Limitation - Re-entry - Termination. This Lease
and the herein term and estate are, upon the condition that if (a) subject to
Article 21.7, Tenant shall neglect or fail to perform or observe any of the
Tenant's covenants or agreements herein, including (without limitation) the
covenants or agreements with regard to the payment when due of rent, additional
charges, reimbursement for increase in Landlord's costs, or any other charge
payable by Tenant to Landlord (all of which shall be considered as part of
Yearly Rent for the purposes of invoking Landlord's statutory or other rights
and remedies in respect of payment defaults); or (b) Tenant shall desert or
abandon the premises; or (c) Tenant shall admit in writing Tenant's inability to
pay its debts generally as they become due, or make or offer to make a
composition of its debts with its creditors; or (d) Tenant shall make an
assignment or trust mortgage, or other conveyance or transfer of like nature, of
all or a substantial part of its property for the benefit of its creditors, or
(e) an attachment on mesne process, on execution or otherwise, or other legal
process shall issue against Tenant or its property and a sale of any of its
assets shall be held thereunder; or (f) any judgment, final beyond appeal or any
lien, attachment or the like shall be entered, recorded or filed against Tenant
in any court, registry, etc. and Tenant shall fail to pay such judgment within
sixty (60) days after the judgment shall have become final beyond appeal or to
discharge or secure by surety bond such lien,
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attachment, etc. within sixty (60) days of such entry, recording or filing, as
the case may be; or (g) the leasehold hereby created shall be taken on execution
or by other process of law and shall not be revested in Tenant within sixty (60)
days thereafter; or (h) a receiver, sequesterer, trustee or similar officer
shall be appointed by a court of competent jurisdiction to take charge of all or
any part of Tenant's property and such appointment shall not be vacated within
sixty (60) days; or (i) any proceeding shall be instituted by or against Tenant
pursuant to any of the provisions of any Act of Congress or State law relating
to bankruptcy, reorganizations, arrangements, compositions or other relief from
creditors, and, in the case of any proceeding instituted against it, if Tenant
shall fail to have such proceedings dismissed within sixty (60) days or if
Tenant is adjudged bankrupt or insolvent as a result of any such proceeding, or
(j) any event shall occur or any contingency shall arise whereby this Lease, or
the term and estate thereby created, would (by operation of law or otherwise)
devolve upon or pass to any person, firm or corporation other than Tenant,
except as expressly permitted under Article 16 hereof - then, and in any such
event (except as hereinafter in Article 21.2 otherwise provided) Landlord may,
by notice to Tenant, elect to terminate this Lease; and thereupon (and without
prejudice to any remedies which might otherwise be available for arrears of rent
or other charges due hereunder or preceding breach of covenant or agreement and
without prejudice to Tenant's liability for damages as hereinafter stated), upon
the giving of such notice, this Lease shall terminate as of the date specified
therein as though that were the Termination Date as stated in Exhibit 1. Without
being taken or deemed to be guilty of any manner of trespass or conversion, and
without being liable to indictment, prosecution or damages therefor, Landlord
may, forcibly if necessary, enter into and upon the premises (or any part
thereof in the name of the whole); repossess the same as of its former estate;
and expel Tenant and those claiming under Tenant. Wherever "Tenant " is used in
subdivisions (c), (d), (e), (f), (g), (h) and (i) of this Article 21.1, it shall
be deemed to include any one of (i) any corporation of which Tenant is a
controlled subsidiary and (ii) any guarantor of any of Tenant's obligations
under this Lease. The words "re-entry" and "re-enter" as used in this Lease are
not restricted to their technical legal meanings.
21.2 Damages - Assignment for Benefit of Creditors. For the more
effectual securing to Landlord of the rent and other charges and payments
reserved hereunder, it is agreed as a further condition of this Lease that if at
any time Tenant shall make any transfer similar to or in the nature of an
assignment of its property for the benefit of its creditors, the term and estate
hereby created shall terminate ipso facto, without entry or other action by
Landlord; and notwithstanding any other provisions of this Lease, Landlord shall
forthwith upon such termination, without prejudice to any remedies which might
otherwise be available for arrears of rent or other charges due hereunder or
preceding breach of this Lease, be ipso facto entitled to recover as liquidated
damages the sum of (a) the amount described in clause (x) of Article 21.3 and
(b) (in view of the uncertainty of prompt re-letting and the expense entailed in
re-letting the premises) an amount equal to the rent and other charges payable
for and in respect of the twelve-(12)-month period next preceding the date of
termination, as aforesaid.
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21.3 Damages - Termination.
(a) Upon the termination of this Lease under the provisions of
this Article 21, then except as hereinabove in Article 21.2 otherwise provided,
Tenant shall pay to Landlord the rent and other charges payable by Tenant to
Landlord up to the time of such termination, shall continue to be liable for any
preceding breach of covenant, and in addition, shall pay to Landlord as damages,
at the election of Landlord
either:
(x) the amount (discounted to present value) by which, at
the time of the termination of this Lease (or at any time thereafter if
Landlord shall have initially elected damages under subparagraph (y),
below), (i) the aggregate of the rent and other charges projected over
the period commencing with such termination and ending on the
Termination Date as stated in Exhibit 1 exceeds (ii) the aggregate
projected rental value of the premises for such period;
or:
(y) amounts equal to the rent and other charges which
would have been payable by Tenant had this Lease not been so
terminated, payable upon the due dates therefor specified herein
following such termination and until the Termination Date as specified
in Exhibit 1, provided, however, if Landlord shall re-let the premises
during such period, that Landlord shall credit Tenant with the net
rents received by Landlord from such re-letting, such net rents to be
determined by first deducting from the gross rents as and when received
by Landlord from such re-letting the expenses incurred or paid by
Landlord in terminating this Lease, as well as the expenses of
re-letting, including altering and preparing the premises for new
tenants, brokers' commissions, and all other similar and dissimilar
expenses properly chargeable against the premises and the rental
therefrom, it being understood that any such re-letting may be for a
period equal to or shorter or longer than the remaining term of this
Lease; and provided, further, that (i) in no event shall Tenant be
entitled to receive any excess of such net rents over the sums payable
by Tenant to Landlord hereunder and (ii) in no event shall Tenant be
entitled in any suit for the collection of damages pursuant to this
Subparagraph (y) to a credit in respect of any net rents from a
re-letting except to the extent that such net rents are actually
received by Landlord prior to the commencement of such suit. If the
premises or any part thereof should be re-let in combination with other
space, then proper apportionment on a square foot area basis shall be
made of the rent received from such re-letting and of the expenses of
re-letting.
In calculating the rent and other charges under Subparagraph (x), above, there
shall be included, in addition to the Yearly Rent, Tax Excess and Operating
Expense Excess and all other considerations agreed to be paid or performed by
Tenant, on the assumption that
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all such amounts and considerations would have remained constant (except as
herein otherwise provided) for the balance of the full term hereby granted.
(b) Suit or suits for the recovery of such damages, or any
installments thereof, may be brought by Landlord from time to time at its
election, and nothing contained herein shall be deemed to require Landlord to
postpone suit until the date when the term of this Lease would have expired if
it had not been terminated hereunder.
(c) Nothing herein contained shall be construed as limiting or
precluding the recovery by Landlord against Tenant of any sums or damages to
which, in addition to the damages particularly provided above, Landlord may
lawfully be entitled by reason of any default hereunder on the part of Tenant.
(d) Landlord agrees to use reasonable efforts to relet the
premises after Tenant vacates the premises in the event that the Lease is
terminated based upon a default by Tenant hereunder. Marketing of Tenant's
premises in a manner similar to the manner in which Landlord markets other
premises within Landlord's control in the Park shall be deemed to have satisfied
Landlord's obligation to use "reasonable efforts." In no event shall Landlord be
required to (i) solicit or entertain negotiations with any other prospective
tenants for the premises until Landlord obtains full and complete possession of
the premises including, without limitation, the final and unappealable legal
right to re-let the premises free of any claim of Tenant, (ii) lease the
premises to a tenant whose proposed use, in Landlord's sole but bona fide
judgment, will cause an unacceptable mix of uses in the Park, (iii) relet the
premises before leasing other vacant space in the Park, (iv) lease the premises
for a rental less than the current fair market rental then prevailing for
similar space in the Park, or (v) enter into a lease with any proposed tenant
that does not have, in Landlord's reasonable opinion, sufficient financial
resources or operating experience to operate the premises in a first-class
manner. Landlord agrees that if Tenant offers a replacement tenant to lease the
premises after the termination of the Lease based upon the default of Tenant,
Landlord shall not offer to lease other premises in the Park at substantially
below the then Fair Market Rental Value of such premises in lieu of entering
into a lease of the premises to such replacement tenant.
21.4 Fees and Expenses.
(a) Landlord's Self Help. If Tenant shall default in the
performance of any covenant on Tenant's part to be performed as in this Lease
contained, Landlord may immediately, or at any time thereafter, without notice
in an emergency, or otherwise if such default continues uncured for thirty (30)
days after notice to Tenant (or such longer time as Tenant may reasonably
require to cure such default, provided that Tenant commences to cure such
default within such thirty day period and diligently prosecutes such cure to
completion) without further notice, perform the same for the account of Tenant.
If Landlord at any time is compelled to pay or elects to pay any sum of money,
or do any act which will require the payment of any sum of money, by reason of
the failure of Tenant to comply with any provision hereof, or if Landlord is
compelled to or
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does incur any expense, including reasonable attorneys' fees, in instituting,
prosecuting, and/or defending any action or proceeding instituted by reason of
any default of Tenant hereunder, Tenant shall on demand pay to Landlord by way
of reimbursement the sum or sums so paid by Landlord with all costs and damages,
plus interest computed as provided in Article 6 hereof.
(b) Tenant's Self-Help. If a Landlord Default, as
hereinafter defined, shall occur, Tenant may, without the need of Landlord's
consent, (notwithstanding Articles 12 and 13 to the contrary) if Landlord fails
to cure such Landlord Default within the Landlord Cure Period, as hereinafter
defined, perform the same for the account of Landlord. Landlord shall, within
thirty (30) days of demand therefor, reimburse Tenant the sum(s) so paid by
Tenant in curing such Landlord Default, plus interest computed at the Lease Rate
as provided in Article 6 hereof. Any sums so paid by Tenant shall be included in
Operating Costs to the extent permitted under this Lease. For the purposes of
this Article 21.4(b), a "Landlord Default" shall be defined as a failure by
Landlord to (i) pay Real Estate Taxes to the Town of Bedford, (ii) perform
Landlord's obligation to clean the premises, pursuant to Article 8.3(a)(ii)
and/or (iii) perform any of Landlord's service, maintenance or repair
obligations under the Lease, excluding those maintenance and repair obligations,
the cure or performance of which would adversely affect any other tenant in the
Park (e.g., without limitation, Tenant shall have no right to perform any
maintenance or repairs to any common areas or facilities of the Park). For the
purposes of this Article 21.4, the "Landlord Cure Period" shall be defined as
follows:
(1) In the event of an emergency threatening life or property, or
Tenant's interest in this Lease, three (3) days after receipt
by Landlord of written notice from Tenant of such default;
(2) In the event of a Landlord Default under clause (i) of this
Article 21.4, five (5) days after receipt by Landlord of
written notice from Tenant of such default;
(3) In the event of any other Landlord Default, thirty (30) days
after receipt by Landlord of written notice from Tenant of
such default. Notwithstanding the foregoing, in the event that
Landlord has commenced to cure such Landlord Default within
said thirty-(30)-day period, and so long as Landlord
thereafter diligently prosecutes such cure to completion, the
thirty-(30)-day period shall be extended to such period of
time as Landlord reasonably requires to cure such default.
(c) Attorneys' Fees. In the event of any litigation or
other legal proceeding (e.g. arbitration) between Landlord and Tenant relating
to the provisions of this Lease or Tenant's occupancy of the Premises, the
losing party shall, upon demand, reimburse the prevailing party for its
reasonable costs of prosecuting and/or defending such proceeding (including,
without limitation, reasonable attorneys fees).
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21.5 Waiver of Redemption. Tenant does hereby waive and surrender
all rights and privileges which it might have under or by reason of any present
or future law to redeem the premises or to have a continuance of this Lease for
the term hereby demised after being dispossessed or ejected therefrom by process
of law or under the terms of this Lease or after the termination of this Lease
as herein provided.
21.6 Remedies Not Exclusive. Unless otherwise specified in this
Lease, the specified remedies to which either party may resort hereunder are
cumulative and are not intended to be exclusive of any remedies or means of
redress to which either party may at any time be lawfully entitled, and either
party may invoke any remedy (including the remedy of specific performance)
allowed at law or in equity as if specific remedies were not herein provided
for.
21.7 Grace Period. Notwithstanding anything to the contrary in this
Article contained, Landlord agrees not to take any action to terminate this
Lease (a) for default by Tenant in the payment when due of any sum of money, if
Tenant shall cure such default within ten (10) days after written notice thereof
is given by Landlord to Tenant, provided, however, that no such notice need be
given and no such default in the payment of money shall be curable if on two (2)
prior occasions in the same twelve month period, there had been a default in the
payment of money which had been cured after notice thereof had been given by
Landlord to Tenant as herein provided or (b) for default by Tenant in the
performance of any covenant other than a covenant to pay a sum of money, if
Tenant shall cure such default within a period of thirty (30) days after written
notice thereof given by Landlord to Tenant (except where the nature of the
default is such that remedial action should appropriately take place sooner, as
indicated in such written notice), or within such additional period as may
reasonably be required to cure such default if (because of governmental
restrictions or any other cause beyond the reasonable control of Tenant) the
default is of such a nature that it cannot be cured within such thirty-(30)-day
period, provided, however, (1) that there shall be no extension of time beyond
such thirty-(30)-day period for the curing of any such default unless, not more
than twenty (20) days after the receipt of the notice of default, Tenant in
writing (i) shall specify the cause on account of which the default cannot be
cured during such period and shall advise Landlord of its intention duly to
institute all steps necessary to cure the default and (ii) shall, as soon as
reasonably practicable, duly institute and thereafter diligently prosecute to
completion all steps necessary to cure such default and, (2) that no notice of
the opportunity to cure a default need be given, and no grace period whatsoever
shall be allowed to Tenant, if the default is incurable or if the covenant or
condition the breach of which gave rise to default had, by reason of a breach on
a prior occasion, been the subject of a notice hereunder to cure such default.
Notwithstanding anything to the contrary in this Article 21.7 contained, except
to the extent prohibited by applicable law, any statutory notice and grace
periods provided to Tenant by law are hereby expressly waived by Tenant.
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22. END OF TERM - ABANDONED PROPERTY
(a) Upon the expiration or other termination of the term of this
Lease, Tenant shall peaceably quit and surrender to Landlord the premises and
all alterations and additions thereto, broom clean, in good order, repair and
condition (except as provided herein and in Articles 8.7, 18 and 20) excepting
only ordinary wear and use and damage by fire or other casualty for which, under
other provisions of this Lease, Tenant has no responsibility of repair or
restoration. Subject to Article 12, Tenant shall remove all of its property and,
to the extent specified by Landlord, all alterations and additions made by
Tenant and all partitions wholly within the premises, and shall repair any
damages to the premises, the Park or the Building caused by their installation
or by such removal. Tenant's obligation to observe or perform this covenant
shall survive the expiration or other termination of the term of this Lease.
(b) Tenant will remove any personal property from the Building,
the Park and the premises upon or prior to the expiration or termination of this
Lease and any such property which shall remain in the Building or the premises
thereafter shall be conclusively deemed to have been abandoned, and may either
be retained by Landlord as its property or sold or otherwise disposed of in such
manner as Landlord may see fit. If any part thereof shall be sold, Landlord may
receive and retain the proceeds of such sale and apply the same, at its option,
against the expenses of the sale, the cost of moving and storage, any arrears of
Yearly Rent, additional or other charges payable hereunder by Tenant to Landlord
and any damages to which Landlord may be entitled under Article 21 hereof or
pursuant to law.
(c) If Tenant or anyone claiming under Tenant shall remain in
possession of the premises or any part thereof after the expiration or prior
termination of the term of this Lease without any agreement in writing between
Landlord and Tenant with respect thereto, then, prior to the acceptance of any
payments for rent or use and occupancy by Landlord, the person remaining in
possession shall be deemed a tenant-at-sufferance. Whereas the parties hereby
acknowledge that Landlord may need the premises after the expiration or prior
termination of the term of the Lease for other tenants and that the damages
which Landlord may suffer as the result of Tenant's holding-over cannot be
determined as of the Execution Date hereof, in the event that Tenant so holds
over, Tenant shall pay to Landlord in addition to all rental and other charges
due and accrued under the Lease prior to the date of termination, charges (based
upon fair market rental value of the premises) for use and occupation of the
premises thereafter and, in addition to such sums and any and all other rights
and remedies which Landlord may have at law or in equity, an additional use and
occupancy charge in the amount of fifty percent (50%) of either the Yearly Rent
and other charges calculated (on a daily basis) at the highest rate payable
under the terms of this Lease, but measured from the day on which Tenant's
hold-over commenced and terminating on the day on which Tenant vacates the
premises or the fair market value of the premises for such period, whichever is
greater. Notwithstanding the foregoing, if Tenant holds over in the premises for
a period in excess of ninety (90) days after the termination of the term of this
Lease, Landlord shall have the
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right to elect to recover any other damages which Landlord is permitted to
recover under this Lease in lieu of said liquidated damages by giving Tenant
written notice of such election on or after the date ninety (90) days after the
termination of the term of this Lease. From and after the date on which Landlord
gives Tenant such notice, said liquidated damages shall cease to accrue and
Tenant shall be liable to Landlord for any damages recoverable under this Lease
which accrue thereafter.
23. SUBORDINATION
(a) Subject to any mortgagee's or ground lessor's election, as
hereinafter provided for, this Lease is subject and subordinate in all respects
to all matters of record (including, without limitation, deeds and land
disposition agreements), ground leases and/or underlying leases, and all
mortgages, any of which may now or hereafter be placed on or affect such leases
and/or the real property of which the premises are a part, or any part of such
real property, and/or Landlord's interest or estate therein, and to each advance
made and/or hereafter to be made under any such mortgages, and to all renewals,
modifications, consolidations, replacements and extensions thereof and all
substitutions therefor. This Article 23 shall be self-operative and no further
instrument or subordination shall be required. In confirmation of such
subordination, Tenant shall execute, acknowledge and deliver promptly any
certificate or instrument that Landlord and/or any mortgagee and/or lessor under
any ground or underlying lease and/or their respective successors in interest
may request, subject to Landlord's, mortgagee's and ground lessor's right to do
so for, on behalf and in the name of Tenant under certain circumstances, as
hereinafter provided. Tenant acknowledges that, where applicable, any consent or
approval hereafter given by Landlord may be subject to the further consent or
approval of such mortgagee and/or ground lessor; and the failure or refusal of
such mortgagee and/or ground lessor to give such consent or approval shall,
notwithstanding anything to the contrary in this Lease contained, constitute
reasonable justification for Landlord's withholding its consent or approval.
Notwithstanding anything to the contrary in this Article 23 contained, as to any
future mortgages, ground leases, and/or underlying lease or deeds of trust, the
herein provided subordination and attornment shall be effective only if the
mortgagee, ground lessor or trustee therein, as the case may be, agrees, by a
written instrument ("Nondisturbance Agreement") substantially in the form
attached hereto, together with such commercially reasonable modifications as
such mortgagee, ground lessor, or trustee may reasonably require that, as long
as Tenant shall not be in terminable default of the obligations on its part to
be kept and performed under the terms of this Lease, this Lease will not be
affected and Tenant's possession hereunder will not be disturbed by any default
in, termination, and/or foreclosure of, such mortgage, ground lease, and/or
underlying lease or deed of trust, as the case may be. In addition to, and not
in limitation of the foregoing, Landlord shall provide a Nondisturbance
Agreement from its present mortgagee of the Park.
(b) Any such mortgagee or ground lessor may from time to time
subordinate or revoke any such subordination of the mortgage or ground lease
held by it to this Lease. Such subordination or revocation, as the case may be,
shall be effected by written notice
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to Tenant and by recording an instrument of subordination or of such revocation,
as the case may be, with the appropriate registry of deeds or land records and
to be effective without any further act or deed on the part of Tenant. In
confirmation of such subordination or of such revocation, as the case may be,
Tenant shall execute, acknowledge and promptly deliver any certificate or
instrument that Landlord, any mortgagee or ground lessor may request, subject to
Landlord's, mortgagee's and ground lessor's right to do so for, on behalf and in
the name of Tenant under certain circumstances, as hereinafter provided.
(c) Without limitation of any of the provisions of this Lease, if
any ground lessor or mortgagee shall succeed to the interest of Landlord by
reason of the exercise of its rights under such ground lease or mortgage (or the
acceptance of voluntary conveyance in lieu thereof) or any third party
(including, without limitation, any foreclosure purchaser or mortgage receiver)
shall succeed to such interest by reason of any such exercise or the expiration
or sooner termination of such ground lease, however caused, then such successor
may, upon notice and request to Tenant (which, in the case of a ground lease,
shall be within thirty (30) days after such expiration or sooner termination),
succeed to the interest of Landlord under this Lease, provided, however, that
such successor shall not: (i) be liable for any previous act or omission of
Landlord under this Lease; (ii) be subject to any offset, defense, or
counterclaim which shall theretofore have accrued to Tenant against Landlord;
(iii) have any obligation with respect to any security deposit unless it shall
have been paid over or physically delivered to such successor; or (iv) be bound
by any previous modification of this Lease or by any previous payment of Yearly
Rent for a period greater than one (1) month, made without such ground lessor's
or mortgagee's consent where such consent is required by applicable ground lease
or mortgage documents. In the event of such succession to the interest of the
Landlord -- and notwithstanding that any such mortgage or ground lease may
antedate this Lease -- the Tenant shall attorn to such successor and shall ipso
facto be and become bound directly to such successor in interest to Landlord to
perform and observe all the Tenant's obligations under this Lease without the
necessity of the execution of any further instrument. Nevertheless, Tenant
agrees at any time and from time to time during the term hereof to execute a
suitable instrument in confirmation of Tenant's agreement to attorn, as
aforesaid, subject to Landlord's, mortgagee's and ground lessor's right to do so
for, on behalf and in the name of Tenant under certain circumstances, as
hereinafter provided.
(d) The term "mortgage(s)" as used in this Lease shall include any
mortgage or deed of trust. The term "mortgagee(s)" as used in this Lease shall
include any mortgagee or any trustee and beneficiary under a deed of trust or
receiver appointed under a mortgage or deed of trust. The term "mortgagor(s)" as
used in this Lease shall include any mortgagor or any grantor under a deed of
trust.
(e) Tenant hereby irrevocably constitutes and appoints Landlord or
any such mortgagee or ground lessor, and their respective successors in
interest, acting singly, Tenant's attorney-in-fact to execute and deliver any
such certificate or instrument for, on
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behalf and in the name of Tenant, but only if Tenant fails to execute,
acknowledge and deliver any such certificate or instrument in the following
circumstances:
1. Landlord, such mortgagee, or ground lessor
("Requesting Party") shall have given Tenant a
written request ("First Request") therefore, stating
that if Tenant does not timely execute and deliver
such certificate or instrument, the Requesting Party
may act as Tenant's attorney-in-fact in accordance
with this Article 23(e), together with a
Nondisturbance Agreement, as defined in Article
23(a), executed on behalf of the mortgagee, ground
lessor, or trustee in question;
2. Tenant shall fail to execute and deliver such
certificate or instrument within ten (10) days of the
First Request;
3. The Requesting Party shall, after the expiration of
such ten (10) day period, have given Tenant another
request ("Second Request") therefor, stating that
Tenant has failed timely to respond to the First
Request for such certificate or instrument and that
if Tenant does not execute and deliver such
certificate or instrument within ten (10) days of the
Second Request, the Requesting Party may act as
Tenant's attorney-in-fact in accordance with this
Article 23(e); and
4. Tenant shall fail to execute and deliver such
certificate or instrument within ten (10) days of the
Second Request.
(f) Notwithstanding anything to the contrary contained in this
Article 23, if all or part of Landlord's estate and interest in the real
property of which the premises are a part shall be a leasehold estate held under
a ground lease, then: (i) the foregoing subordination provisions of this Article
23 shall not apply to any mortgages of the fee interest in said real property to
which Landlord's leasehold estate is not otherwise subject and subordinate; and
(ii) the provisions of this Article 23 shall in no way waive, abrogate or
otherwise affect any agreement by any ground lessor (x) not to terminate this
Lease incident to any termination of such ground lease prior to its term
expiring or (y) not to name or join Tenant in any action or proceeding by such
ground lessor to recover possession of such real property or for any other
relief.
(g) In the event of any failure by Landlord to perform, fulfill or
observe any agreement by Landlord herein, in no event will the Landlord be
deemed to be in default under this Lease permitting Tenant to exercise any or
all rights or remedies under this Lease until the Tenant shall have given
written notice of such failure to any mortgagee (ground lessor and/or trustee)
of which Tenant shall have been advised and until a reasonable period of time
shall have elapsed following the giving of such notice, during
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which such mortgagee (ground lessor and/or trustee) shall have the right, but
shall not be obligated, to remedy such failure.
24. QUIET ENJOYMENT
Landlord covenants that if, and so long as, Tenant keeps and performs
each and every covenant, agreement, term, provision and condition herein
contained on the part and on behalf of Tenant to be kept and performed, Tenant
shall quietly enjoy the premises from and against the claims of all persons
claiming by, through or under Landlord subject, nevertheless, to the covenants,
agreements, terms, provisions and conditions of this Lease and to the mortgages,
ground leases and/or underlying leases to which this Lease is subject and
subordinate, as hereinabove set forth.
Without incurring any liability to Tenant, Landlord may permit access
to the premises and open the same, whether or not Tenant shall be present, upon
any demand of any receiver, trustee, assignee for the benefit of creditors,
sheriff, marshal or court officer entitled to, or reasonably purporting to be
entitled to, such access for the purpose of taking possession of, or removing,
Tenant's property or for any other lawful purpose (but this provision and any
action by Landlord hereunder shall not be deemed a recognition by Landlord that
the person or official making such demand has any right or interest in or to
this Lease, or in or to the premises), or upon demand of any representative of
the fire, police, building, sanitation or other department of the city, state or
federal governments.
25. ENTIRE AGREEMENT -- WAIVER -- SURRENDER
25.1 Entire Agreement. This Lease and the Exhibits made a part
hereof contain the entire and only agreement between the parties and any and all
statements and representations, written and oral, including previous
correspondence and agreements between the parties hereto, are merged herein.
Tenant acknowledges that all representations and statements upon which it relied
in executing this Lease are contained herein and that the Tenant in no way
relied upon any other statements or representations, written or oral. Any
executory agreement hereafter made shall be ineffective to change, modify,
discharge or effect an abandonment of this Lease in whole or in part unless such
executory agreement is in writing and signed by the party against whom
enforcement of the change, modification, discharge or abandonment is sought.
25.2 Waiver. The failure of either party to seek redress for
violation, or to insist upon the strict performance, of any covenant or
condition of this Lease, or any of the Rules and Regulations promulgated
hereunder, shall not prevent a subsequent act, which would have originally
constituted a violation, from having all the force and effect of an original
violation. The receipt by Landlord of rent with knowledge of the breach of any
covenant of this Lease shall not be deemed a waiver of such breach. The failure
of Landlord to enforce any of such Rules and Regulations against Tenant and/or
any other tenant in the Building shall not be deemed a waiver of any such Rules
and Regulations. No provisions of this Lease shall be deemed to have been waived
by either unless such
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waiver be in writing signed by Landlord and Tenant. No payment by Tenant or
receipt by Landlord of a lesser amount than the monthly rent herein stipulated
shall be deemed to be other than on account of the stipulated rent, nor shall
any endorsement or statement on any check or any letter accompanying any check
or payment as rent be deemed an accord and satisfaction, and Landlord may accept
such check or payment without prejudice to Landlord's right to recover the
balance of such rent or pursue any other remedy in this Lease provided.
25.3 Surrender. No act or thing done by Landlord during the term
hereby demised shall be deemed an acceptance of a surrender of the premises, and
no agreement to accept such surrender shall be valid, unless in writing signed
by Landlord. No employee of Landlord or of Landlord's agents shall have any
power to accept the keys of the premises prior to the termination of this Lease.
The delivery of keys to any employee of Landlord or of Landlord's agents shall
not operate as a termination of the Lease or a surrender of the premises. In the
event that Tenant at any time desires to have Landlord underlet the premises for
Tenant's account, Landlord or Landlord's agents are authorized to receive the
keys for such purposes without releasing Tenant from any of the obligations
under this Lease, and Tenant hereby relieves Landlord of any liability for loss
of or damage to any of Tenant's effects in connection with such underletting.
26. INABILITY TO PERFORM - EXCULPATORY CLAUSE
(a) Except as provided in Article 4.1 and 4.2 hereof, this Lease
and the obligations of Tenant to pay rent hereunder and perform all the other
covenants, agreements, terms, provisions and conditions hereunder on the part of
Tenant to be performed shall in no way be affected, impaired or excused because
Landlord is unable to fulfill any of its obligations under this Lease or is
unable to supply or is delayed in supplying any service expressly or impliedly
to be supplied or is unable to make or is delayed in making any repairs,
replacements, additions, alterations, improvements or decorations or is unable
to supply or is delayed in supplying any equipment or fixtures if Landlord is
prevented or delayed from so doing by reason of strikes or labor troubles or any
other similar or dissimilar cause whatsoever beyond Landlord's reasonable
control, including but not limited to, governmental preemption in connection
with a national emergency or by reason of any rule, order or regulation of any
department or subdivision thereof of any governmental agency or by reason of the
conditions of supply and demand which have been or are affected by war,
hostilities or other similar or dissimilar emergency. In each such instance of
inability of Landlord to perform, Landlord shall exercise reasonable diligence
to eliminate the cause of such inability to perform.
Tenant shall neither assert nor seek to enforce any claim against
Landlord, or Landlord's agents or employees, or the assets of Landlord or of
Landlord's agents or employees, for breach of this Lease or otherwise, other
than against Landlord's interest in the Building of which the premises are a
part and in the uncollected rents, issues and profits thereof, and Tenant agrees
to look solely to such interest for the satisfaction of any liability of
Landlord under this Lease, it being specifically agreed that in no event shall
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Landlord or Landlord's agents or employees (or any of the officers, trustees,
directors, partners, beneficiaries, joint venturers, members, stockholders or
other principals or representatives, and the like, disclosed or undisclosed,
thereof) ever be personally liable for any such liability. This paragraph shall
not limit any right that Tenant might otherwise have to obtain injunctive relief
against Landlord or to take any other action which shall not involve the
personal liability of Landlord to respond in monetary damages from Landlord's
assets other than the Landlord's interest in said real estate, as aforesaid. In
no event shall Landlord or Landlord's agents or employees (or any of the
officers, trustees, directors, partners, beneficiaries, joint venturers,
members, stockholders or other principals or representatives and the like,
disclosed or undisclosed, thereof) ever be liable for consequential or
incidental damages. If by reason of Landlord's failure to complete Landlord's
Work, Landlord shall be held to be in breach of this Lease, Tenant's sole and
exclusive remedy shall be a right to terminate this Lease in accordance with
Article 4.1(b) or a credit against Yearly Rent in accordance with Article
4.1(c), as the case may be.
(b) Except as provided in the last sentence of Article 22(c), in
no event shall Tenant or Tenant's agents or employees (or any of the officers,
trustees, directors, partners, beneficiaries, joint venturers, members,
stockholders or other principals or representatives and the like, disclosed or
undisclosed, thereof) ever be liable for consequential or incidental damages.
27. BILLS AND NOTICES
Any notice, consent, request, bill, demand or statement hereunder by
either party to the other party shall be in writing and, if received at
Landlord's or Tenant's address, shall be deemed to have been duly given when
either delivered or served personally or mailed by certified or registered mail,
return receipt requested in a postpaid envelope, deposited in the United States
mail or sent by nationally recognized overnight delivery service addressed to
Landlord at its address as stated in Exhibit 1 and to Tenant at the premises (or
at Tenant's address as stated in Exhibit 1, if mailed prior to Tenant's
occupancy of the premises) to the attention of its Facilities Director, or if
any address for notices shall have been duly changed as hereinafter provided, if
mailed as aforesaid to the party at such changed address. Either party may at
any time change the address or specify an additional address for such notices,
consents, requests, bills, demands or statements by delivering or mailing, as
aforesaid, to the other party a notice stating the change and setting forth the
changed or additional address, provided such changed or additional address is
within the United States. A copy of all notices to Tenant shall be give to Hale
and Dorr, Attention: Jeffrey A. Hermanson, Esq., Sixty State Street, Boston,
Massachusetts 02109, or such other addresses for this purposes as Tenant may
designate by notice to Landlord hereunder, from time to time.
If Tenant is a partnership, Tenant, for itself, and on behalf of all of
its partners, hereby appoints Tenant's Service Partner, as identified on Exhibit
1, to accept service of any notice, consent, request, bill, demand or statement
hereunder by Landlord and any
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service of process in any judicial proceeding with respect to this Lease on
behalf of Tenant and as agent and attorney-in-fact for each partner of Tenant.
All bills and statements for reimbursement or other payments or charges
due from Tenant to Landlord hereunder shall be due and payable in full ten (10)
days, unless herein otherwise provided, after submission thereof by Landlord to
Tenant. Tenant's failure to make timely payment of any amounts indicated by such
bills and statements, whether for work done by Landlord at Tenant's request,
reimbursement provided for by this Lease or for any other sums properly owing by
Tenant to Landlord, shall be treated as a default in the payment of rent, in
which event Landlord shall have all rights and remedies provided in this Lease
for the nonpayment of rent.
28. PARTIES BOUND -- SEIZIN OF TITLE
The covenants, agreements, terms, provisions and conditions of this
Lease shall bind and benefit the successors and assigns of the parties hereto
with the same effect as if mentioned in each instance where a party hereto is
named or referred to, except that no violation of the provisions of Article 16
hereof shall operate to vest any rights in any successor or assignee of Tenant
and that the provisions of this Article 28 shall not be construed as modifying
the conditions of limitation contained in Article 21 hereof.
If, in connection with or as a consequence of the sale, transfer or
other disposition of the real estate (land and/or Building, either or both, as
the case may be) of which the premises are a part, Landlord ceases to be the
owner of the reversionary interest in the premises, Landlord shall be entirely
freed and relieved from the performance and observance thereafter of all
covenants and obligations hereunder on the part of Landlord to be performed and
observed, it being understood and agreed in such event (and it shall be deemed
and construed as a covenant running with the land) that the person succeeding to
Landlord's ownership of said reversionary interest shall thereupon and
thereafter assume, and perform and observe, any and all of such covenants and
obligations of Landlord. Without limiting the foregoing, if Landlord retains
ownership of other buildings which are subject to the rights pursuant to
Paragraphs 4 and/or 5 of the Rider to this Lease, after Landlord conveys its
interest in the Building, Landlord (and any successor of Landlord) shall
continue to be subject to its obligations pursuant to said Paragraphs so long as
Landlord (or such successor) continues to own such building.
29. MISCELLANEOUS
29.1 Separability. If any provision of this Lease or portion of
such provision or the application thereof to any person or circumstance is for
any reason held invalid or unenforceable, the remainder of the Lease (or the
remainder of such provision) and the application thereof to other persons or
circumstances shall not be affected thereby.
29.2 Captions, etc. The captions are inserted only as a matter of
convenience and for reference, and in no way define, limit or describe the scope
of this Lease nor the
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intent of any provisions thereof. References to "State" shall mean, where
appropriate, the District of Columbia and other Federal territories,
possessions, as well as a state of the United States.
29.3 Broker.
(a) Tenant represents and warrants that it has not directly or
indirectly dealt, with respect to the leasing of space in the Building or the
Park (called "Building, etc." in this Article 29.3) with any broker or had its
attention called to the premises or other space to let in the Building, etc. by
anyone other than the broker, person or firm, if any, designated in Exhibit 1.
Tenant agrees to defend, exonerate and save harmless and indemnify Landlord and
anyone claiming by, through or under Landlord against any claims for a
commission arising out of the execution and delivery of this Lease or out of
negotiations between Landlord and Tenant with respect to the leasing of other
space in the Building, etc., which claim arises in breach of the foregoing
representation, provided that Landlord shall be solely responsible for the
payment of brokerage commissions to the broker, person or firm, if any,
designated in Exhibit 1.
(b) Landlord represents and warrants that, in connection with the
execution and delivery of the Lease, it has not directly or indirectly dealt
with any broker other than the brokers designated on Exhibit 1. Landlord agrees
to defend, exonerate and save harmless Tenant and anyone claiming by, through,
or under Tenant against any claims arising in breach of the representation and
warranty set forth in the immediately preceding sentence.
29.4 Modifications. If in connection with obtaining financing for
the Building, a bank, insurance company, pension trust or other institutional
lender shall request reasonable modifications in this Lease as a condition to
such financing, Tenant will not withhold, delay or condition its consent
thereto, provided that such modifications do not increase the obligations of
Tenant hereunder or materially adversely affect the leasehold interest hereby
created.
29.5 Arbitration. Any disputes relating to provisions or
obligations in this Lease as to which a specific provision for a reference to
arbitration is made herein shall be submitted to arbitration in accordance with
the provisions of applicable state law (as identified on Exhibit 1), as from
time to time amended. Arbitration proceedings, including the selection of an
arbitrator, shall be conducted pursuant to the rules, regulations and procedures
from time to time in effect as promulgated by the American Arbitration
Association. Prior written notice of application by either party for arbitration
shall be given to the other at least ten (10) days before submission of the
application to the said Association's office in the City wherein the Building is
situated (or the nearest other city having an Association office). The
arbitrator shall hear the parties and their evidence. The decision of the
arbitrator shall be binding and conclusive, and judgment upon the award or
decision of the arbitrator may be entered in the appropriate court of law (as
identified on Exhibit 1); and the parties consent to the jurisdiction of such
court and
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further agree that any process or notice of motion or other application to the
Court or a Judge thereof may be served outside the State wherein the Building is
situated by registered mail or by personal service, provided a reasonable time
for appearance is allowed. The costs and expenses of each arbitration hereunder
and their apportionment between the parties shall be determined by the
arbitrator in his award or decision. No arbitrable dispute shall be deemed to
have arisen under this Lease prior to (i) the expiration of the period of twenty
(20) days after the date of the giving of written notice by the party asserting
the existence of the dispute together with a description thereof sufficient for
an understanding thereof; and (ii) where a Tenant payment (e.g., Tax Excess or
Operating Expense Excess under Article 9 hereof) is in issue, the amount billed
by Landlord having been paid by Tenant.
29.6 Governing Law. This Lease is made pursuant to, and shall be
governed by, and construed in accordance with, the laws of the State wherein the
Building is situated and any applicable local municipal rules, regulations,
by-laws, ordinances and the like.
29.7 Assignment of Rents. With reference to any assignment by
Landlord of its interest in this Lease, or the rents payable hereunder,
conditional in nature or otherwise, which assignment is made to or held by a
bank, trust company, insurance company or other institutional lender holding a
mortgage or ground lease on the Building, Tenant agrees:
(a) that the execution thereof by Landlord and the
acceptance thereof by such mortgagee and/or ground lessor shall never be deemed
an assumption by such mortgagee and/or ground lessor of any of the obligations
of the Landlord thereunder, unless such mortgagee and/or ground lessor shall, by
written notice sent to the Tenant, specifically otherwise elect; and
(b) that, except as aforesaid, such mortgagee and/or
ground lessor shall be treated as having assumed the Landlord's obligations
thereunder only upon foreclosure of such mortgagee's mortgage or deed of trust
or termination of such ground lessor's ground lease and the taking of possession
of the demised premises after having given notice of its exercise of the option
stated in Article 23 hereof to succeed to the interest of the Landlord under
this Lease.
29.8 Representation of Authority. By his execution hereof each of
the signatories on behalf of the respective parties hereby warrants and
represents to the other that he is duly authorized to execute this Lease on
behalf of such party. If Tenant is a corporation, Tenant hereby appoints the
signatory whose name appears below on behalf of Tenant as Tenant's
attorney-in-fact for the purpose of executing this Lease for and on behalf of
Tenant.
29.9 Expenses Incurred by Landlord Upon Tenant Requests. Tenant
shall, upon demand, reimburse Landlord for all reasonable expenses, including,
without limitation, legal fees, incurred by Landlord in connection with all
requests by Tenant for
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consents, approvals or execution of collateral documentation related to this
Lease, including, without limitation, costs incurred by Landlord in the review
and approval of Tenant's plans and specifications in connection with proposed
alterations to be made by Tenant to the premises other than the Tenant's Final
Plans, requests by Tenant to sublet the premises or assign its interest in the
Lease, the execution by Landlord of estoppel certificates requested by Tenant,
and requests by Tenant for Landlord to execute waivers of Landlord's interest in
Tenant's property in connection with third party financing by Tenant. Such costs
shall be deemed to be additional rent under the Lease.
29.10 Suvival. Without limiting any other obligation which may
survive the expiration or prior termination of the term of the Lease, all
obligations on the part of either party to indemnify, defend, or hold the other
party harmless, as set forth in this Lease (including, without limitation,
obligations under Articles 7, 13(d), 15.3, and 29.3) shall survive the
expiration or prior termination of the term of the Lease.
IN WITNESS WHEREOF the parties hereto have executed this Indenture of
Lease in multiple copies, each to be considered an original hereof, as a sealed
instrument
LANDLORD: TENANT:
BEACON PROPERTIES, L.P. SECURITY DYNAMICS
TECHNOLOGIES, INC.
By: Beacon Properties Corporation
By: /s/A.W. Coviello Jr.
------------------------
Name: A.W. Coviello Jr.
By: /s/Lionel P. Fortin Title: Executive V.P.
--------------------- Duly Authorized
Lionel P. Fortin
Senior Vice President
A SECRETARY'S OR CLERK'S CERTIFICATE OF THE AUTHORITY AND THE
INCUMBENCY OF THE PERSON SIGNING ON BEHALF OF TENANT SHOULD BE ATTACHED.
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COMMONWEALTH, DISTRICT OR
STATE OF MA
COUNTY OF MIDDLESEX
On the Execution Date stated in Exhibit 1, the person above signing
this Lease for and on behalf of the Tenant, to me personally known, did sign and
execute this Lease and, being by me duly sworn, did depose and say that he is
the officer of the above named Tenant, as noted, and that he signed his name
hereto by order of the Board of Directors of said Tenant.
/s/Liesl M. Hoffman
---------------------------------------
Notary Public LIESL M. HOFFMAN
My Commission Expires: January 20, 2000
-----------------
COMMONWEALTH OF MASSACHUSETTS
COUNTY OF SUFFOLK
On the Execution Date stated in Exhibit 1, the person above signing
this Lease for and on behalf of Landlord to me personally known, did sign and
execute this Lease and, being by me duly sworn, did depose and say that he is
the duly authorized representative of Landlord.
/s/Kathleen M. McCarthy
---------------------------------------
Notary Public
My Commission Expires: 6/15/01
-----------------
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RIDER TO LEASE
LANDLORD: BEACON PROPERTIES, L.P.
TENANT: SECURITY DYNAMICS TECHNOLOGIES, INC.
The attached and foregoing Lease is hereby amended and supplemented as
follows.
1. TENANT'S TERMINATION RIGHT
A. Notwithstanding anything to the contrary in the Lease
contained, on the conditions (which conditions Landlord may waive by written
notice to Tenant at any time) that Tenant is not in default, beyond the
expiration of any applicable grace periods, of its covenants or obligations
under the Lease, both as of the time that Tenant gives Tenant's Termination
Notice (defined below) and as of the Effective Termination Date (as defined
below), Tenant shall have the right to terminate the term of this Lease of the
premises (the "Original Premises") initially demised Tenant effective as of the
fifth anniversary of the Rent Commencement Date (the "Effective Termination
Date") by giving Landlord written notice ("Tenant's Termination Notice") of its
election to do so on or before the fourth anniversary of the Term Commencement
Date, and by payment to Landlord concurrently with Tenant's Termination Notice
of the applicable Termination Payment (as defined below). In the event that
Tenant exercises the herein termination option, the Yearly Rent, Operating
Expense Excess, Tax Excess and other charges due under the Lease shall be
apportioned as of the Effective Termination Date, and the term of the Lease in
respect of the Original Premises shall terminate as of the Effective Termination
Date. If Tenant fails timely to give Tenant's Termination Notice or timely to
pay the Termination Payment, Tenant shall have no right to terminate the Lease
pursuant to this Paragraph 1, time being of the essence of this Paragraph 1.
B. For the purposes hereof, the Termination Payment shall mean
the aggregate of the Fixed Rent Amount, plus the Rent Differential Amount, plus
Landlord's Unamortized Transaction Costs (as each is defined below):
(1) The "Fixed Rent Amount" shall mean Five Hundred Fifty-Eight
Thousand One Hundred Ninety-Five and 00/100 ($558,195.00)
Dollars.
(2) The "Rent Differential Amount" shall mean Three Hundred
Sixteen Thousand Three Hundred Ten and 50/100 Dollars
($316,310.50).
(3) "Landlord's Unamortized Transaction Costs" shall mean the
aggregate amount of principal and interest that remains
unamortized as of the Effective Termination Date if Landlord's
Transaction Costs are amortized on a direct reduction basis in
equal monthly installments of principal and interest over the
ten (10) year term of this Lease at an annual rate of
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interest of eleven percent (11%) per annum. For the purposes
of this Subparagraph (3) "Landlord's Transaction Costs" shall
mean the aggregate of all costs and expenses incurred by
Landlord in connection with the negotiation, execution and
implementation of this Lease, including, without limitation,
the following: legal, brokerage, design and engineering and
other professional fees; and Landlord's Architectural
Contribution.
C. Notwithstanding anything to the contrary contained herein, in
the event that on or before the fourth anniversary of the Term Commencement
Date, Tenant exercises its right to lease the Expansion Area pursuant to
Paragraph 4 below, or any RFO Premises pursuant to Paragraph 5 below, or if
Landlord offers in writing to make available for lease to Tenant space in
comparable buildings on Crosby Drive owned by Landlord (it being understood that
Landlord shall have no obligation to do so) and such Expansion Area and/or any
RFO Premises and/or such other space consists of at least 50,000 square feet of
Total Rentable Area in the aggregate and shall be available for lease to Tenant
on or before the fifth anniversary of the Term Commencement Date, then Tenant
shall have no right under this Paragraph 1 to terminate this Lease.
2. LEASE EXTENSION OPTIONS
A. Tenant's Option to Extend the Term of Lease.
On the conditions, which conditions Landlord may waive, at its
election, by written notice to Tenant at any time, that: (i) Tenant is not in
default, beyond the expiration of any applicable grace periods, of its covenants
and obligations under the Lease, and (ii) both as of the time of option exercise
and as of the commencement of the hereinafter described additional term,
Security Dynamics Technologies, Inc., a Permitted Tenant Successor, and/or an
Affiliate of Tenant are occupying at least seventy percent (70%) of the premises
then demised to Tenant, in the aggregate (i.e., including all portions of the
premises then being subleased by Tenant), Tenant shall have the option to extend
the term of this Lease in respect of all premises then demised to Tenant under
this Lease for one (1) additional five (5) year term (the "Extension Term")
which Extension Term shall commence as of the expiration of the initial term of
this Lease. Notwithstanding the foregoing, if Tenant would otherwise be deemed
to have failed to satisfy the condition set forth in clause (ii) above as the
result of any sublease(s), Tenant shall nevertheless be deemed to have satisfied
such condition so long as the term (including any extension or renewal options)
of each such sublease(s) will expire no later than one (1) year after the
commencement of such additional term. Tenant may exercise such option to extend
by giving Landlord written notice on or before the date twelve (12) months prior
to the expiration date of the initial term of this Lease. Upon the timely giving
of such notice, the term of this Lease shall be deemed extended upon all of the
terms and conditions of this Lease, except that Landlord shall have no
obligation to construct or renovate the Premises and that the Yearly Rent,
Operating Cost Base, and Tax Base during such additional term shall be as
hereinafter set forth. If Tenant fails to
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give timely notice, as aforesaid, Tenant shall have no further right to extend
the term of this Lease, Time being of the essence of this Paragraph 2. If Tenant
has exercised its early termination right pursuant to Paragraph 1 of this Rider,
Tenant shall have no right to extend the term of the Lease in respect of such
premises pursuant to this Paragraph 2.
B. Yearly Rent
The Yearly Rent during the additional term shall be based upon the
greater of the following: (i) ninety-five percent (95%) of the Fair Market
Rental Value, as defined in Paragraph 3 of this Rider, as of the commencement of
the additional term, of the premises then demised to Tenant, (ii) the sum of
Yearly Rent, Operating Expense Excess and Tax Excess payable by Tenant in
respect of the twelve-(12)- month period immediately preceding the commencement
of the additional term; provided, however, that in no event shall the sum of
Yearly Rent, Operating Expense Excess and Tax Excess payable by Tenant for any
twelve (12) month-period during the additional term be more than the Fair Market
Rental Value, as of the commencement of the additional term, of the premises
then demised to Tenant.
C. No Further Extension Options.
Tenant shall have no further option to extend the term of the
Lease other than the one (1) additional five (5) year term herein provided.
D. Notwithstanding the fact that upon Tenant's exercise of the
herein option to extend the term of the Lease such extension shall be
self-executing, as aforesaid, the parties shall promptly execute a lease
amendment reflecting such additional term after Tenant exercises the herein
option, except that the Yearly Rent payable in respect of such additional term,
the Operating Cost Base during such additional term, and the Tax Base during
such additional term, may not be set forth in said amendment. Subsequently,
after such Yearly Rent, Operating Cost Base, and Tax Base are determined, the
parties shall execute a written agreement confirming the same. The execution of
such lease amendment shall not be deemed to waive any of the conditions to
Tenant's exercise of its rights under this Paragraph 2, unless otherwise
specifically provided in such lease amendment.
3. DEFINITION OF FAIR MARKET RENTAL VALUE
For the purpose of this Rider:
A. Definition.
"Fair Market Rental Value" shall be computed as of the date in question
at the then current annual rental charge (i.e., the sum of Yearly Rent plus
escalation and other charges), including provisions for subsequent increases and
other adjustments for leases
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or agreements to lease then currently being negotiated or executed for
comparable space located elsewhere in first-class suburban office research and
development buildings in the greater Burlington, Bedford and Lexington
submarket, including the Park. In determining Fair Market Rental Value, the
following factors, among others, shall be taken into account and given effect:
size, location of premises, lease term, condition of building, and services
provided by the Landlord.
B. Escalation Bases.
Notwithstanding anything to the contrary herein contained, the parties
hereby agree that upon the determination of any Fair Market Rental Value,
Landlord shall have the right, exercisable by written notice to Tenant on or
before the time that Landlord gives Tenant its initial designation of Fair
Market Rental Value:
(1) to change Operating Cost Base as stated on Exhibit 1
from the amount stated on Exhibit 1 to an amount
equal to the actual amount of Operating Costs for the
immediately preceding Operating Year, and
(2) to change the Tax Base as stated on Exhibit 1 from
the amount stated on Exhibit 1 to an amount equal to
the actual amount of Taxes for the immediately
preceding fiscal/tax year for which landlord has
actual data.
If Landlord shall exercise such right, the amount of Yearly
Rent payable hereunder shall be commensurately adjusted to reflect such change
on Operating Cost Base and in Tax Base.
C. Dispute as to Fair Market Rental Value
Landlord shall initially designate Fair Market Rental Value
and Landlord shall furnish data in support of such designation. If Tenant
disagrees with Landlord's designation of a Fair Market Rental Value, Tenant
shall have the right, by written notice given within thirty (30) days after
Tenant has been notified of Landlord's designation, to submit such Fair Market
Rental Value to arbitration. Fair Market Rental Value shall be submitted to
arbitration as follows: Fair Market Rental Value shall be determined by
impartial arbitrators, one to be chosen by the Landlord, one to be chosen by
Tenant, and a third to be selected, if necessary, as below provided. The
unanimous written decision of the two first chosen, without selection and
participation of a third arbitrator, or otherwise, the written decision of a
majority of three arbitrators chosen and selected as aforesaid, shall be
conclusive and binding upon Landlord and Tenant. Landlord and Tenant shall each
notify the other of its chosen arbitrator with ten (10) days following the call
for arbitration and, unless such two arbitrators shall have reached a unanimous
decision within thirty (30) days after their designation, they shall so notify
the President of the
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Boston Bar Association (or such organization as may succeed to said Boston Bar
Association) and request him to select an impartial third arbitrator, who shall
be an office building owner, a real estate counselor or a broker dealing with
the like types of properties, to determine Fair Market Rental Value as herein
defined. Such third arbitrator and the first two chosen shall, subject to
commercial arbitration rules of the American Arbitration Association, hear the
parties and their evidence and render their decision within thirty (30) days
following the conclusion of such hearing and notify Landlord and Tenant thereof.
Landlord and Tenant shall bear the expense of the third arbitrator (if any)
equally. The fifth (5th) grammatical sentence of Article 29.5 of the Lease is
hereby incorporated by reference in this Subparagraph C. If the dispute between
the parties as to a Fair Market Rental Value has not been resolved before the
commencement of Tenant's obligation to pay rent based upon such Fair Market
Rental Value, then Tenant shall pay Yearly Rent and other charges under the
Lease in respect of the premises in question based upon the Fair Market Rental
Value designated by Landlord until either the agreement of the parties as to the
Fair Market Rental Value, or the decision of the arbitrators, as the case may
be, at which time Tenant shall pay any underpayment of rent and other charges to
Landlord, or Landlord shall refund any overpayment of rent and other charges to
Tenant.
4. EXPANSION AREA IN DEC LAND
A. In the event that, on or before the expiration of the first
thirty (30) months after the Rent Commencement Date (the "Offer Period"),
Landlord acquires the parcels of land (the "DEC Land") adjacent to the Park, as
more particularly described in Exhibit 9 attached hereto and incorporated by
reference as a part hereof, then the following provisions shall apply. On the
conditions (collectively, "Exercise Conditions") (which Exercise Conditions
Landlord may waive, at its election, by written notice to Tenant at any time)
that: (i) Tenant is not in default, beyond the expiration of any applicable
grace periods of its covenants or obligations under the Lease, both as of the
time of option exercise and as of the expiration of the Offer Period, and (ii)
only Security Dynamics Technologies, Inc., a Permitted Tenant Successor, and/or
an Affiliate of Tenant are occupying at least seventy percent (70%) of the
premises then demised to Tenant in the aggregate, and (iii) Tenant has not given
Landlord a Termination Notice under Paragraph 1 above, then during the Offer
Period Landlord will notify Tenant that it has acquired the DEC Land promptly
after the date of acquisition of the DEC Land.
Upon written request ("Tenant's Request") from Tenant within the Offer
Period and subject to the Exercise Conditions, Landlord will negotiate with
Tenant in good faith to attempt to reach mutually acceptable terms under a
written agreement (the "DEC Land Agreement") pursuant to which Landlord will
lease and demise to Tenant, and Tenant shall hire and take from Landlord, an
agreed upon portion of the DEC Land for the development and construction thereon
of a building containing at least 75,000 square feet of Total Rentable Area and
related improvements. The parties estimate that, subject to delays in the
permitting process, Tenant's delays, and other causes beyond Landlord's
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reasonable control, six (6) months is a reasonable period of time to prepare
plans for a building on the DEC Land and twelve (12) months is a reasonable
period of time to construct a building on the DEC Land.
B. Notwithstanding the foregoing, if prior to receipt by Landlord
of Tenant's Requests Landlord decides to construct any building and at such time
there shall be at least one (1) other site on the DEC Land which is available to
Landlord to develop and improve which can accommodate a building (the "Alternate
Building") of at least 75,000 square feet of Total Rentable Area, then Tenant's
right under this Paragraph 4 may, at Landlord's election, apply to the Alternate
Building in lieu of any other building on the DEC Land. In the event the parties
reach agreement as aforesaid, the parties hereby agree promptly to execute the
DEC Land Agreement reflecting the demise of the agreed upon area upon the agreed
upon terms. If Tenant elects to lease the Alternate Building pursuant to this
Paragraph 4, then in no event shall Tenant be required to pay any rent for the
Alternate Building earlier than the expiration of thirty-six (36) months after
the Rent Commencement Date.
C. In the event that for any reason the parties shall not have
executed the DEC Land Agreement prior to the expiration of the Offer Period and
so long as Landlord has sent to Tenant the notice required under Paragraph 4.A
and has negotiated with Tenant in good faith after receipt of Tenant's Request
as required under Paragraph 4.B, then Tenant shall have no further right to
lease all or any portion of the DEC Land pursuant to this Paragraph 4.
5. TENANT'S RIGHT OF FIRST OFFER TO LEASE OTHER PREMISES IN THE PARK AND WITHIN
ONE MILE OF THE PARK
On the conditions (which conditions Landlord may waive, at its
election, by written notice to Tenant at any time) that (1) Tenant is not in
default, beyond the expiration of any applicable grace periods, of its covenants
or obligations under the Lease, (2) only Security Dynamics Technologies, Inc., a
Permitted Tenant Successor, and/or Affiliates of Tenant (both as defined in
Article 16 of the Lease) are occupying the entirety of the premises then demised
to Tenant, and (3) Tenant has not given Landlord a Termination Notice under
Paragraph 1 above, both at the time that Landlord is required to give Landlord's
Notice, as hereinafter defined, and as of the Term Commencement Date in respect
of the RFO Premises, Tenant shall have the following right to lease the RFO
Premises, as hereinafter defined, when the RFO Premises become available for
lease to Tenant, as hereinafter defined.
A. Definition of RFO Premises
The parties acknowledge that each of Buildings 2, 3, 4 and 5 in the
Park is presently leased, and that the parties intend to give Tenant the right
to lease all or any portion of Buildings 2, 3, 4 and 5 after the tenant(s) of
each Building vacate such
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Building, subject and subordinate, in all respects, to the rights of other
existing tenants in the Park, as set forth on Exhibit 12 attached hereto and
incorporated by reference as a part hereof, and to the right of Landlord to
renew any existing leases, and before Landlord offers any such premises for
lease to other tenants in the Park which do not presently have rights in such
premises, set forth on Exhibit 12 and to the general market place. Therefore,
"RFO Premises" shall be defined as any separately demised area in Building 2, 3,
4 or 5 or on any other land and improvements thereon owned by Landlord and
located within a one (1) mile radius of the Park (the "Other Property") when
such area becomes available for lease to Tenant, as hereinafter defined, during
the initial term of this Lease. For the purposes of this Paragraph 5, an RFO
Premises shall be deemed to be "available for lease to Tenant" if, during the
then current term of this Lease, Landlord, in its bona fide business judgment,
determines that such area will become available for leasing to Tenant (i.e. when
Landlord determines that the then initial tenant of such RFO Premises will
vacate such RFO Premises, and when Landlord intends to offer such area for lease
to anyone other than a tenant in the Park which does not presently (i.e., as of
the Execution Date) have rights in such area) or, with respect to premises in
the Other Property, when Landlord intends to offer such area for lease to anyone
other than a tenant who then occupies any portion of the Other Property. In no
event shall Tenant have any rights under this Paragraph 5 on or after the
earlier of (x) the date that Tenant gives Landlord a notice exercising Tenant's
Termination Right pursuant to Paragraph 1 of this Rider, or (y) the date twelve
(12) months prior to the expiration of the then current term of the Lease (i.e.
Landlord shall have no obligation to give Landlord's Notice, as hereinafter
defined, to Tenant on or after the earlier of (x) the date twelve (12) months
prior to the expiration of the then current term of the Lease or (y) the date
that Tenant gives Landlord a notice exercising Tenant's Termination Right
pursuant to Paragraph 1 of this Rider).
B. Exercise of Right to Lease RFO Premises
Landlord shall give Tenant written notice ("Landlord's Notice") at the
time that Landlord determines, as aforesaid, that an RFO Premises will become
available for lease to Tenant. Landlord's Notice shall set forth the exact
location of the RFO Premises, Landlord's designation of the Fair Market Rental
Value (as defined in Paragraph 3 of this Rider) applicable to the RFO Premises
and the Specified Commencement Date in respect of the RFO Premises. Tenant shall
have the right, exercisable upon written notice ("Tenant's Exercise Notice")
given to Landlord within twenty (20) days after the receipt of Landlord's
Notice, to lease the RFO Premises. If Tenant fails timely to give Tenant's
Exercise Notice, Tenant shall have no further right to lease such RFO Premises
pursuant to this Paragraph 3, provided however, that Tenant shall have the right
from time to time thereafter throughout the term of the Lease until Tenant's
right to lease the RFO Premises has lapsed, to lease the same RFO Premises when
it again becomes available for lease to Tenant, and any other subsequently
available RFO Premises. Upon the timely giving of such notice, Landlord shall
lease and demise to Tenant and Tenant shall hire and take from Landlord, such
RFO Premises, upon all of the same terms and conditions of the Lease except as
hereinafter set forth.
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C. Lease Provisions Applying to RFO Premises
The leasing to Tenant of any RFO Premises shall be upon all of
the same terms and conditions of the Lease (including, without limitation, the
expiration date of the term of this Lease), except as follows:
(1) Term Commencement Date
The Term Commencement Date in respect of the RFO Premises
shall be the later of: (x) the Specified Commencement Date in respect of such
RFO Premises as set forth in Landlord's Notice, or (y) the date that Landlord
delivers such RFO Premises to Tenant.
(2) Yearly Rent
The Yearly Rent rental rate in respect of such RFO Premises
shall be based upon the Fair Market Rental Value, as defined in Paragraph 3 of
this Rider, of such RFO Premises as of the Term Commencement Date in respect of
such RFO Premises. The Rent Commencement Date in respect of such RFO Premises
shall be the Term Commencement Date in respect of such RFO Premises.
(3) Escalation
The Operating Cost Base for any RFO Premises shall be equal to
the actual amount of Operating Costs for the applicable Building for the
calendar year immediately preceding the Term Commencement Date in respect of
such RFO Premises. Tenant's Operating Cost Percentage for any RFO Premises shall
be based upon the ratio of the Total Rentable Area of such RFO Premises to the
Total Rentable Area of the applicable Building. The Tax Base for the applicable
Building shall be the actual amount of Taxes on the Park for the fiscal/tax year
immediately preceding the Term Commencement Date in respect of such RFO
Premises, and Tenant's Tax Percentage in respect of such RFO Premises shall be
based upon the ratio of the Total Rentable Area of such RFO Premises to the
Total Rentable Area of the Park.
(4) Definition of Building
The term "Building" with respect to any RFO Premises shall
mean the Building in which such RFO Premises are located.
(5) Condition of RFO Premises
Tenant shall take such RFO Premises "as-is" in its then (i.e.
as of the date of premises delivery) state of construction, finish, and
decoration, without any obligation
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on the part of Landlord to construct or prepare any RFO Premises for Tenant's
occupancy, and Landlord shall have no obligation to provide any funds or
Landlord Contribution to Tenant on account of the RFO Premises, unless otherwise
agreed to by the parties in the determination of the Fair Market Rental Value
applicable to such RFO Premises.
(6) Additional Letter of Credit
If Landlord is required to provide any funds or Landlord
Contribution to Tenant on account of any RFO Premises, Landlord shall have the
right to require, as a condition to the exercise of Tenant's right to lease such
RFO Premises, the delivery of an additional letter of credit, with a Letter of
Credit Amount in the same proportion to the Total Rentable Area of such RFO
Premises as the Letter of Credit Amount provided by Tenant in connection with
the initially demised premises to the Total Rentable Area of the premises.
(7) Termination Option
Tenant shall have no right to terminate its lease of the RFO
Premises pursuant to Paragraph 1 hereof.
(8) Other Inconsistent Provisions
Any other provisions of the Lease that are inconsistent with the demise
of Expansion Area contemplated hereby shall not apply thereto.
D. Execution of Lease Amendments
Notwithstanding the fact that Tenant's exercise of the
above-described option to lease any RFO Premises shall be self-executing, as
aforesaid, the parties hereby agree promptly to execute a lease amendment
reflecting the addition of an RFO Premises, except that the Yearly Rent payable
in respect of such RFO Premises, Operating Costs in the Base Year in respect of
such RFO Premises, and Tax Base may not be as set forth in such amendment. At
the time that such Yearly Rent, Operating Costs in the Base Year, and Tax Base
are determined, the parties shall execute a written agreement confirming the
same. The execution of such lease amendment shall not be deemed to waive any of
the conditions to Tenant's exercise of the herein option to lease the RFO
Premises, unless otherwise specifically provided in such lease amendment.
6. TENANT'S SECURITY
A. Tenant acknowledges that Landlord is unwilling to execute the
Lease unless Tenant provides Landlord with security for Tenant's obligations
under the Lease. Therefore, Tenant shall deliver to Landlord, on the date that
Tenant executes and delivers
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<PAGE> 84
the Lease to Landlord, an Irrevocable Standby Letter of Credit (the "Original
Letter of Credit") which shall be (1) in the form attached hereto as Exhibit 8,
(2) issued by a bank reasonably acceptable to Landlord upon which presentment
may be made in Boston, Massachusetts, (3) equal to the Letter of Credit Amount,
as hereinafter defined, (4) for a term of one (1) year, subject to the
provisions of Subparagraph C of this Paragraph 2. The Original Letter of Credit
and any Replacement Letter(s) of Credit, Substitute Letter(s) of Credit and
Additional Letter(s) of Credit are referred to herein collectively and
respectively as the "Letter of Credit."
B. For the purposes hereof, the "Letter of Credit Amount" shall
be Seven Hundred Fifty Thousand and 00/100 Dollars ($750,000.00).
C. The Letter of Credit shall be automatically renewable in
accordance with the second to last grammatical paragraph of Exhibit 8; provided
however, that Tenant shall be required to deliver to Landlord a new letter of
credit satisfying the conditions set forth in Subparagraph A of this Paragraph 6
("Substitute Letter of Credit") on or before the date thirty (30) days prior to
the expiration of the term of the Letter of Credit then in effect, if the issuer
of such Letter of Credit gives notice of its election not to renew such Letter
of Credit for any additional period pursuant thereto. Upon written request of
Tenant, Landlord shall deliver to the issuer an instruction authorizing the
issuing bank to reduce the Letter of Credit Amount in accordance with the
schedule set forth herein.
D. In the event that Tenant is in default, beyond the expiration
of any applicable grace periods, of its obligations under this Lease, then the
Landlord shall have the right, at any time after such event, to draw down from
said Letter of Credit (a) the amount necessary to cure such default, or (b) if
such default cannot reasonably be cured by the expenditure of money, to exercise
all rights and remedies Landlord may have on account of such default, the amount
which, in Landlord's opinion, is necessary to satisfy Tenant's liability in
account thereof. In the event of any such draw by the Landlord, Tenant shall,
within fifteen (15) business days of written demand therefor, deliver to
Landlord an additional Letter of Credit satisfying the foregoing conditions
("Additional Letter of Credit"), except that the amount of such Additional
Letter of Credit shall be the amount of such draw. Failure by Tenant timely to
deliver to Landlord such Additional Letter of Credit shall be a default not
susceptible of cure entitling Landlord to exercise any and all remedies pursuant
to Article 21 of the Lease on account thereof.
E. In the event that Tenant fails timely to deliver to Landlord a
Substitute Letter of Credit, then Landlord shall have the right, at any time
after such event, without giving any further notice to Tenant, to draw down the
Letter of Credit and to hold the proceeds thereof ("Security Proceeds") in a
segregated bank account interest bearing in the name of Landlord which may be
withdrawn and applied by Landlord under the same circumstances and for the same
purposes as if the Security Proceeds were a Letter of Credit. If Landlord draws
down the Letter of Credit pursuant to this Subparagraph E, then:
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<PAGE> 85
(1) Such draw and Landlord's right to hold the Security
Proceeds pursuant to this Subparagraph E shall be Landlord's sole
remedy based Tenant's failure to timely deliver a Substitute Letter of
Credit as required hereunder; and
(2) Upon the expiration or prior termination of the term of
the Lease, Landlord shall return to Tenant any Security Proceeds then
being held by Landlord, to the extent that such Security Proceeds
exceed any amounts then due from Tenant to Landlord.
G. To the extent that Landlord has not previously drawn upon any
Letter of Credit, or Security Proceeds (collectively, the "Collateral") held by
Landlord, and to the extent that Tenant is not otherwise in default of its
obligations under the Lease as of the Termination Date, Landlord shall return
such Collateral to Tenant at the expiration of the term of the Lease, as the
same may be extended.
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<PAGE> 86
EXHIBIT 1, SHEET 1
Building No. 1
CROSBY CORPORATE CENTER
Bedford, Massachusetts
Execution Date: March 11, 1996
Tenant: SECURITY DYNAMICS TECHNOLOGIES, INC.
(a Delaware corporation)
Mailing Address: One Alewife Center
Cambridge, Massachusetts 02140
Landlord: Beacon Properties, L.P., a Delaware limited partnership (the
sole general partner of which is Beacon Properties
Corporation, a Maryland corporation.)
Mailing Address: 50 Rowes Wharf, Boston, Massachusetts 02110, Attention:
General Partner
Park: The land, buildings and other improvements thereon, from time
to time, located off Crosby Drive in the Town of Bedford,
Middlesex County, Commonwealth of Massachusetts known as
Crosby Corporate Center, substantially as shown on the plan,
and as more particularly described in the legal description,
both of which are attached hereto as Exhibit 3.
Building: 20 Crosby Drive, Bedford, MA (Building One in the Park).
Art. 2
Premises: The entirety of the Building, substantially as shown on Lease
Plan, Exhibit 2.
Art. 3.1
Specified
Commencement
Date: April 1, 1996
<PAGE> 87
EXHIBIT 1, SHEET 2
Building No. 1
CROSBY CORPORATE CENTER
Bedford, Massachusetts
Tenant: SECURITY DYNAMICS TECHNOLOGIES, INC.
Execution Date: March 11, 1996
Art. 3.2
Termination
Date: Subject to the provisions of the Lease, ten (10) years after
the Rent Commencement Date.
Art. 5
Use of Premises: General office purposes, research, development, light
manufacturing and any uses ancillary thereto.
Art. 6
Yearly Rent:
<TABLE>
<CAPTION>
Lease Year Yearly Rent Monthly Payment
<S> <C> <C> <C>
1 $ 956,374.10 $ 79,697.84
2 $ 993,587.10 $ 82,798.93
3 $1,030,800.10 $ 85,900.00
4 $1,105,226.10 $ 92,102.18
5-10 $1,179,652.10 $ 98,304.34
</TABLE>
Lease Year: Any twelve (12) month period during the term of this Lease
commencing on the Rent Commencement Date or on any anniversary
of the Rent Commencement Date, except that the last Lease Year
shall end on the expiration or earlier termination of the term
hereof.
Rent
Commencement
Date: Subject to the provisions of Article 4.1 of the Lease, the
earlier of: (x) one hundred twenty (120) days after the Term
Commencement Date, or (y) the date that Tenant first commences
to use the Premises, or any portion thereof, for the operation
of its business (but not for the construction of leasehold
improvements) under the Lease.
Art. 7
Total
Rentable Area: 74,426 square feet
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<PAGE> 88
EXHIBIT 1, SHEET 3
Building No. 1
CROSBY CORPORATE CENTER
Bedford, Massachusetts
Tenant: SECURITY DYNAMICS TECHNOLOGIES, INC.
Execution Date: March 11, 1996
Art. 8
Electricity: Electric current for lighting and outlet plug use will be
sub-metered and paid to Landlord in accordance with Articles
8.1 and 8.5.
Base Electric Cost: $.96 per square foot of Total Rentable
Area per year Electric Rate: $.096 per kilowatt hour Initial
Estimated Monthly Electric Payment: $5,954.08 per month
Art. 9
Operating
Cost Base: The actual amount of Operating Costs for calendar year 1996,
as the same may be adjusted to account for vacancies in the
Park in accordance with Article 9.1(g)(5) hereof.
Tenant's
Operating Cost
Percentage: One hundred percent (100%) of the Building.
Tax Base: $81,868.00.
Tenant's
Tax Percentage: 22% (i.e., the percentage determined by dividing the Total
Rentable Area of the Premises, 74,426 square feet, by the
Total Rentable Area of the Park, 338,563 square feet).
Art. 29.3
Co-Brokers: Spaulding & Slye and Beacon Management Company.
Art. 29.5
Arbitration: Massachusetts; Superior Court
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<PAGE> 89
EXHIBIT 1, SHEET 4
Building No. 1
CROSBY CORPORATE CENTER
Bedford, Massachusetts
Tenant: SECURITY DYNAMICS TECHNOLOGIES, INC.
Execution Date: March 11, 1996
LANDLORD: TENANT:
BEACON PROPERTIES, L.P. SECURITY DYNAMICS
TECHNOLOGIES, INC.
By: Beacon Properties Corporation
General Partner
By: /s/ A.W. Coviello Jr.
------------------------
Name: A.W. Coviello Jr.
By: /s/ Lionel P. Fortin Title: Executive V.P.
--------------------- Duly Authorized
Lionel P. Fortin,
Senior Vice President
Date Signed: 4/10/96 Date Signed: 3/19/96
-------------------- -----------------
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<PAGE> 1
Exhibit 10.18
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement"), made this 14th day of April,
1996, is entered into by and between RSA Data Security, Inc., a Delaware
corporation with its principal place of business at 100 Marine Parkway, Suite
500, Redwood City, California 94065-1031 (the "Company"), and D. James Bidzos,
residing at 748 Newport Circle, Redwood City, California 94065 (the "Employee").
On the date hereof, the Company, Security Dynamics Technologies, Inc.,
a Delaware corporation (the "Parent Corporation"), and Card-Key Inc.
("Acquisition Sub"), have entered into an Agreement and Plan of Merger (the
"Merger Agreement"), pursuant to which, among other things, Acquisition Sub will
merger with and into the Company and the Company will become a wholly-owned
subsidiary of the Parent Corporation. In connection with the consummation of the
transactions contemplated by the Merger Agreement, the Parent Corporation
desires that the Company and the Employee enter into this Agreement. The Company
desires to employ the Employee, and the Employee desires to be employed by the
Company. In consideration of the mutual covenants and promises contained herein,
and other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged by the parties hereto, the parties agree as follows:
<PAGE> 2
1. Term of Employment. The Company hereby agrees to employ the
Employee, and the Employee hereby accepts employment with the Company, upon the
terms set forth in this Agreement, for the period commencing on the Closing
Date, as such term is defined in the Merger Agreement (the "Commencement Date")
and ending on the day immediately prior to the second anniversary of the
Commencement Date, unless sooner terminated in accordance with the provisions of
Section 4 (such period, as it may be extended, the "Employment Period").
2. Title; Capacity. The Employee shall serve as President of the
Company or in such other position as the Company or its Board of Directors (the
"Board") may from time to time determine. The Employee shall be subject to the
supervision of, and shall have such authority as is delegated to him by, the
Chief Executive Officer of the Parent Corporation, the Board or such officer of
the Company as may be designated by the Board.
The Employee hereby accepts such employment and agrees to undertake the
duties and responsibilities inherent in such position and such other duties and
responsibilities as the Board or its designee shall from time to time reasonably
assign to him. Except as set forth on Schedule A attached hereto, the Employee
agrees to devote his entire business time, attention and energies to the
business and interests of the Company during the Employment Period, it being
understood that the Employee shall devote no more
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<PAGE> 3
than ten percent of his business time to the activities set forth on such
Schedule A. The Employee agrees to abide by the rules, regulations,
instructions, personnel practices and policies of the Company and any changes
therein which may be adopted from time to time by the Company. The Employee
acknowledges receipt of copies of all such rules and policies committed to
writing as of the date of this Agreement.
3. Compensation and Benefits.
3.1 Salary. The Company shall pay the Employee, at such times
as the Company pays its employees in general, an annual base salary of $200,000
for the one-year period commencing on the Commencement Date. Such base salary
shall be subject to adjustment thereafter as determined by the Board; provided,
however, that the Board shall not decrease the base salary during the Employment
Period without the prior written consent of the Employee; and provided further,
however, that the Employee's total annual compensation pursuant to Sections 3.1
and 3.2 hereof shall be no less than $250,000.
3.2 Bonus. The Employee shall be entitled to bonus payments in
accordance with Schedule A attached hereto.
3.3 Fringe Benefits. The Employee shall be entitled to
participate in all benefit programs that the Company establishes and makes
available to its employees, if any, to the
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<PAGE> 4
extent that Employee's position, tenure, salary, age, health and other
qualifications make him eligible to participate.
3.4 Reimbursement of Expenses. The Company shall reimburse the
Employee for all reasonable travel, entertainment and other expenses incurred or
paid by the Employee in connection with, or related to, the performance of his
duties, responsibilities or services under this Agreement, upon presentation by
the Employee of documentation, expense statements, vouchers and/or such other
supporting information as the Company may request; provided, however, that the
amount available for such travel, entertainment and other expenses may be fixed
in advance by the Board.
3.5 Stock Option.
(a) Option Grant. Subject to compliance with
applicable securities laws and approval by the Compensation Committee of the
Board of Directors of the Parent Corporation (the "Compensation Committee"), the
Parent Corporation shall grant to the Employee as of the date hereof an option
(the "Stock Option") to purchase 150,000 shares of the Parent Corporation's
Common Stock, $.01 par value per share (the "Common Stock"), at a per share
price equal to the lesser of (x) the last reported sale price of the Common
Stock on the Nasdaq National Market on the date hereof, or (y) the average of
the last reported sale prices
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<PAGE> 5
of the Common Stock on the Nasdaq National Market for the five trading days
prior to the date hereof.
(b) Option Terms. The Stock Option shall have a term
of ten years and shall become exercisable in four equal annual installments, on
the first through fourth anniversary dates of the Commencement Date, so long as
the Employee shall remain in the employment of the Company on such dates. The
Stock Option shall contain such other terms as are customary in options awarded
by the Parent Corporation to employees of the Parent Corporation and its
subsidiaries under the Parent Corporation's 1994 Stock Option Plan, as amended.
(c) Best Efforts. The Parent Corporation agrees to
use its best efforts to cause the Compensation Committee to grant the Stock
Option to the Employee in accordance with the provisions of this Section 3.5.
4. Employment Termination. The employment of the Employee by the
Company pursuant to this Agreement shall terminate upon the occurrence of any of
the following:
4.1 Expiration of the Employment Period in accordance with
Section 1;
4.2 At the election of the Company, for cause, immediately
upon written notice by the Company to the Employee;
4.3 Upon the death or disability of the Employee. As used in
this Agreement, the term "disability" shall mean the
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<PAGE> 6
inability of the Employee, due to a physical or mental disability, for a period
of 90 days, whether or not consecutive, during any 360-day period to perform the
services contemplated under this Agreement. A determination of disability shall
be made by a physician satisfactory to both the Employee and the Company;
provided that if the Employee and the Company do not agree on a physician, the
Employee and the Company shall each select a physician and these two together
shall select a third physician, whose determination as to disability shall be
binding on all parties; or
4.4 At the election of the Company, upon not less than 30
days' prior written notice of termination.
5. Effect of Termination.
5.1 Termination for Cause. In the event the Employee's
employment is terminated for cause pursuant to Section 4.2, the Company shall
pay to the Employee the compensation and benefits which would otherwise be
payable to him through the last day of his actual employment by the Company.
5.2 Termination for Death or Disability. If the Employee's
employment is terminated by death or because of disability pursuant to Section
4.3, the Company shall pay to the estate of the Employee or to the Employee, as
the case may be, the compensation and benefits which would otherwise be payable
to the
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<PAGE> 7
Employee through the date of his termination of employment because of death or
disability.
5.3 Termination Without Cause. If the Employee's employment is
terminated at the election of the Company pursuant to Section 4.4, and in
consideration of the post-termination non-compete and non-solicitation agreement
set forth in Section 6, the Company shall pay to the Employee the compensation
and benefits payable to him under Section 3, at the times provided in Section 3,
through the last day of the Non-Compete Period (as such term is defined in
Section 6(b) below).
5.4 Survival. The provisions of Sections 5 and 6 shall survive
the termination of this Agreement.
6. Non-Compete and Non-Solicitation.
(a) The Employee recognizes that his willingness to enter into
the restrictive covenants contained in this Section 6 was a critical condition
precedent to the willingness of the Parent Corporation to acquire the Company
and of the Parent Corporation and the Company to enter into and perform under
this Agreement. The Employee also acknowledges that the restrictions contained
in this Section 6 will not materially or unreasonably interfere with the
Employee's ability to earn a living.
(b) During the Employment Period and for a period extending
through the later of (x) the second anniversary of the Commencement Date or (y)
the first anniversary of the date on
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<PAGE> 8
which the Employee ceases to be employed by the Company (the Non-Compete
Period"), the Employee will not directly or indirectly:
(i) subject to the exceptions set forth on Schedule A
attached hereto, as an individual proprietor, partner, stockholder, officer,
employee, director, joint venturer, investor, agent, distributor, dealer,
representative, lender, or in any other capacity whatsoever (other than as the
holder of not more than one percent (1%) of the total outstanding stock of a
publicly held company), engage in any business which offers products or services
that are competitive with the products or services which the Company offers or
proposes to offer at any time during the Employment Period, as set forth in (x)
the Parent Corporation's registration statements and periodic filings with the
Securities and Exchange Commission or (y) any written memoranda prepared
internally by officers or employees of the Company and presented to and approved
by an executive officer or the Board of Directors of the Company or the Parent
Corporation (it being understood that nothing in this Section 6(b)(i) shall
prohibit the Employee from working for an organization, a business unit of which
offers products or services that are competitive with those offered by the
Company, provided that the Employee is not employed by or responsible for such
business unit). The parties agree that, in the event of a dispute regarding the
scope and applicability of this Section 6(b)(i), then the Employee shall
-8-
<PAGE> 9
be entitled to meet and discuss such dispute with the Board of Directors of the
Parent Corporation; or
(ii) recruit, solicit or induce, or attempt to
induce, any employee or employees of the Company to terminate their employment
with, or otherwise cease their relationship with, the Company; or
(iii) subject to the exceptions set forth on Schedule
A attached hereto, solicit, divert or take away, or attempt to divert or to take
away, the business or patronage of any of the clients, customers, dealers,
distributors, representatives or accounts, or prospective clients, customers,
dealers, distributors, representatives or accounts, of the Company which were
contacted, solicited or served by employees of the Company while the Employee
was employed by the Company.
(c) In the event that any court of competent jurisdiction
determines that the duration or the geographic scope, or both, of the
non-competition and non-solicitation provisions set forth in this Section 6 are
unreasonable and that such provisions are to that extent unenforceable, the
parties hereto agree that the provisions shall remain in full force and effect
for the greatest time period and in the greatest area that would not render them
unenforceable. The parties intend that these non-competition and
non-solicitation provisions shall be deemed to be a series of separate
covenants, one for each and every county of
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<PAGE> 10
each and every state of the United States of America and each and every
political subdivision of each and every country outside the United States of
America where this provision is intended to be effective.
(d) The restrictions contained in this Section 6 are necessary
for the protection of the business and goodwill of the Company and are
considered by the Employee to be reasonable for such purpose. The Employee
agrees that any breach of this Section 6 will cause the Company substantial and
irrevocable damage and therefore, in the event of any such breach, in addition
to such other remedies which may be available, the Company shall have the right
to seek specific performance and injunctive relief.
(e) For purposes of this Section 6, the "Company" refers to
the Company, the Parent Corporation and any of their respective affiliates.
7. Proprietary Information and Developments. Concurrently with the
execution of this Agreement, the Employee shall enter into the Parent
Corporation's standard Employee Nondisclosure and Developments Agreement, a copy
of which is attached hereto as Exhibit A (the "Nondisclosure Agreement").
8. Notices. All notices required or permitted under this Agreement
shall be in writing and shall be deemed effective upon personal delivery or upon
deposit in the United States Post Office, by registered or certified mail,
postage prepaid,
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<PAGE> 11
addressed to the other party at the address shown above, or at such other
address or addresses as either party shall designate to the other in accordance
with this Section 8.
9. Pronouns. Whenever the context may require, any pronouns used in
this Agreement shall include the corresponding masculine, feminine or neuter
forms, and the singular forms of nouns and pronouns shall include the plural,
and vice versa.
10. Entire Agreement. This Agreement, together with the Nondisclosure
Agreement, constitutes the entire agreement between the parties and, effective
as of the Commencement Date, terminates and supersedes all prior agreements and
understandings, whether written or oral, relating to the subject matter of this
Agreement.
11. Amendment. This Agreement may be amended or modified only by a
written instrument executed by all of the parties hereto.
12. Governing Law. This Agreement shall be construed, interpreted and
enforced in accordance with the internal laws (and not the law of conflicts) of
the Commonwealth of Massachusetts.
13. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of all of the parties hereto and their respective
successors and assigns, including any corporation with which or into which the
Company or the Parent Corporation may be merged or which may succeed to its
respective assets or
-11-
<PAGE> 12
business; provided, however, that the obligations of the Employee are personal
and shall not be assigned by him.
14. Miscellaneous.
14.1 No delay or omission by the Company or the Parent
Corporation in exercising any right under this Agreement shall operate as a
waiver of that or any other right. A waiver or consent given by the Company or
the Parent Corporation on any one occasion shall be effective only in that
instance and shall not be construed as a bar or waiver of any right on any other
occasion.
14.2 The captions of the sections of this Agreement are for
convenience of reference only and in no way define, limit or affect the scope or
substance of any section of this Agreement.
14.3 In case any provision of this Agreement shall be invalid,
illegal or otherwise unenforceable, the validity, legality and enforceability of
the remaining provisions shall in no way be affected or impaired thereby.
14.4 This Agreement shall become effective upon the Closing
Date (as such term is defined in the Merger Agreement) and shall be of no force
and effect if the Merger Agreement is terminated in accordance with its terms.
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<PAGE> 13
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year set forth above.
RSA DATA SECURITY, INC.
By:/s/ Ronald L. Rivest
--------------------------------
Name: Ronald L. Rivest
Title: Chairman
EMPLOYEE
/s/ D. James Bidzos
--------------------------------
D. James Bidzos
The undersigned has executed this Agreement only for purposes of
becoming bound by Section 3.5 hereof.
SECURITY DYNAMICS TECHNOLOGIES, INC.
By:/s/ Charles R. Stuckey, Jr.
--------------------------------
Name: Charles R. Stuckey, Jr.
Title: President & CEO
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<PAGE> 14
Schedule A
BONUS PLAN AND EXCEPTIONS TO EMPLOYMENT AGREEMENT
BONUS PLAN
The Employee shall be eligible to receive an annual bonus based on
threshold, target and superior revenue objectives for the Company. The amounts
of the bonuses and the revenue objectives shall be agreed to by the Employee and
the Company.
EXCEPTIONS TO EMPLOYMENT AGREEMENT
The Employee may devote no more than 10% of his business time, attention
and energies, either directly or through Kairdos, L.L.C., to the following
businesses with which the Employee has historically been associated:
1. Kairdos, L.L.C.
2. Smartdiskette
3. Surety, Inc.
Notwithstanding the foregoing, the Employee shall not take or usurp any
corporate opportunities of the Company, the Parent Corporation or any of their
respective corporate affiliates (the "Affiliated Group") for himself, the
entities listed above or any other entity without first offering the corporate
opportunity to the members of the Affiliated Group.
<PAGE> 15
Exhibit A
Security Dynamics
One Alewife Center, Cambridge, MA 02140-2312 USA
(617) 547-7820 - Fax (617) 354-8836
EMPLOYEE NONDISCLOSURE
AND
DEVELOPMENTS AGREEMENTS
In consideration and as a condition of my employment by Security
Dynamics Technologies, Inc. (the "Company"), I hereby agree with the Company as
follows:
1. I will not at any time, whether during or after the termination of my
employment, reveal to any person or entity any of the trade secrets or
confidential information concerning the organization, business or
finances of the Company or of any third party which the Company is under
an obligation to keep confidential (including but not limited to trade
secrets or confidential information respecting inventions, products,
designs, methods, know-how, techniques, systems, processes, software
programs, works of authorship, customer lists, projects, plans and
proposals), except as may be requried in the ordinary course of
performing my duties as an employee of the Company, and I shall keep
secret all matters entrusted to me and shall not use or attempt to use
any such information in any manner which may injure or cause loss or may
be calculated to injure or cause loss whether directly or indirectly to
the Company.
Further, I agree that during my employment I shall not make, use or
permit to be used any notes, memoranda, reports, lists, records,
drawings, sketches, specifications, software programs, date,
documentation or other materials of any nature relating to any matter
within the scope of the business of the Company or concerning any of its
dealings or affairs otherwise than for the benefit of the Company. I
further agree that I shall not, after the termination of my employment,
use or permit to be used any such notes, memoranda, reports, lists,
records, drawings, sketches, specifications, software programs, data,
documentation or other materials, it being agreed that all of the
foregoing shall be and remain the sole and exclusive property of the
Company and that immediately upon the termination of my employment I
shall deliver all of
<PAGE> 16
the foregoing, and all copies thereof, to the Company at its main
office.
2. If at any time or times during my employment, I shall (either alone or
with others) make, conceive, discover, or reduce to practice any
invention, modification, discovery, design, development, improvement,
process, software program, work of authorship, documentation, formula,
data, technique, know-how, secret or intellectual property right
whatsoever or any interest therein (whether or not patentable or
registrable under copyright or similar statutes or subject to analogous
protection) (herein call "Developments") that (a) relates to the
business of the Company or any customer of or supplier to the Company or
any of the products or services being developed, manufactured or sold by
the Company or which may be used in relation therewith, (b) results from
tasks assigned me by the Company or (c) results from the use of premises
or personal property (whether tangible or intangible) owned, leased or
contracted for by the Company, such Developments and the benefits
thereof shall immediately become the sole and absolute property of the
Company and its assigns, and I shall promptly disclose to the Company
(or any persons designated by it) each such Development and hereby
assign any rights I may have or acquire in the Developments and benefits
and/or rights resulting therefrom to the Company and its assigns without
further compensation and shall communicate, without cost or delay, and
without publishing the same, all available information relating thereto
(with all necessary plans and models) to the Company.
I will also promptly disclose to the Company, and the Company hereby
agrees to receive all such disclosures in confidence, any other
invention, modification, discovery, design, development, improvement,
process, formula, data, technique, know-how, secret or intellectual
property right whatsoever or any interest therein (whether or not
patentable or registrable under copyright or similar statutes or subject
to analogous protection) made, conceived, discovered, reduced to
practice or possessed by me (either alone or with others) at any time or
times during my employment and for a period of one (1) year thereafter
for the purpose of determining whether they constitute "Developments" as
defined herein.
Upon disclosure of each Development to the Company I will, during my
employment and at any time thereafter, at the request and cost of the
Company, sign, execute, make and do all such deeds, documents, acts and
things as the Company and its duly authorized agents may reasonably
require.
<PAGE> 17
(a) to apply for, obtain and vest in the name of the Company alone
(unless the Company otherwise directs) letters patent,
copyrights or other analogous protection in any country
throughout the world and when so obtained or vested to renew and
restore the same; and
(b) to defend any opposition proceedings in respect of such
applications and any opposition or petitions or applications for
revocation of such letters patent, copyright or other analogous
protection.
In the event the Company is unable, after reasonable effort, to secure
my signature on any letters patent, copyright or other analogous
protection relating to a Development, whether because of my physical or
mental incapacity or for any other reason whatsoever, I hereby
irrevocably designate and appoint the Company and its duly authorized
officers and agents as my agent and attorney-in-fact, to act for and in
my behalf and stead to execute and file any such application or
applications and to do all other lawfully permitted acts to further the
prosecution and issuance of letters patent, copyright or other analogous
protection thereon with the same legal force and effect as if executed
by me.
3. I agree that any breach of this agreement by me will cause irreparable
damage to the Company and that in the event of such breach the Company
shall have, in addition to any and all remedies of law, the right to an
injunction, specific performance or other equitable relief to prevent
the violation of my obligations hereunder.
4. I understand that this Agreement does not create an obligation on the
Company or any other person or entity to continue my employment.
5. I represent that the Developments identified in these pages, if any,
represent and comprise hereto all the unpatented any uncopyrighted
Developments which I have made or conceived prior to my employment by
the Company, which Developments are excluded from this Agreement. I
understand that it is only necessary to list the title and purpose of
such Developments but not details thereof. IF THERE ARE ANY SUCH
UNPATENTED DEVELOPMENTS TO BE EXCLUDED, THE UNDERSIGNED SHOULD INITIAL
HERE. OTHERWISE IT WILL BE DEEMED THAT THERE ARE NO SUCH EXCLUSIVE.
------------------------------.
<PAGE> 18
I further represent that my performance of all of the terms of this
Agreement and as an employee of the Company does not and will not breach
any agreement to keep in confidence proprietary information acquired by
me in confidence or in trust prior to my employment by the Company. I
have not entered into, and I agree I will not enter into, any agreement
either written or oral in conflict herewith.
6. Any waiver by the Company of a breach of any provision of this Agreement
shall not operate or be construed as a waiver of any subsequent breach
of such provision or any other provision hereof.
7. I hereby agree that each provision herein shall be teated as a separate
and independent clause, and the unenforceability of any of the other
clauses herein. Moreover, if one or more of the provisions contained in
this Agreement shall for any reason be held to be excessively broad as
to scope, activity or subject so as to be unenforceable at law, such
provision or provisions shall be construed by the appropriate judicial
body by limiting and reducing it to them, so as to be enforceable to the
maximum extent compatible with the applicable law as it shall then
appear.
8. My obligations under this Agreement shall survive the termination of my
employment regardless of the manner of such termination and shall be
binding upon my heirs, executors, administrators and legal
representatives.
9. The term "Company" shall include Security Dynamics Technologies, Inc., a
Delaware corporation, its predecessor corporation, Security Dynamics,
Inc., as Massachusetts corporation, and any of the Company's
subsidiaries, subdivisions or affiliates. The Company shall have the
right to assign this Agreement to its successors and assigns, and all
covenants and agreements hereunder shall inure to the benefit of and be
enforceable by said successors or assigns.
10. This Agreement shall be governed by and construed in accordance with the
laws of the Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the undersigned has executed this Agreement as a
sealed instrument as of the 14th day of April, 1996.
/s/ D. James Bidzos
- -------------------------------
D. James Bidzos
748 Newport Circle
Redwood City, CA 94065
<PAGE> 19
AMENDMENT TO EMPLOYMENT AGREEMENT
THIS AMENDMENT TO EMPLOYMENT AGREEMENT (the "Amendment") is entered into
as of the 6th day of June, 1996, by and between RSA Data Security, Inc., a
Delaware corporation (the "Company"), Security Dynamics Technologies, Inc., a
Delaware Corporation ("SDI"), and D. James Bidzos (the "Employee").
WHEREAS, the Company, the Employee and SDI have entered into an
Employment Agreement dated as of April 14, 1996; and
WHEREAS, the Company, the Employee and SDI desire to amend the Agreement
as set forth below;
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants
and agreements hereinafter set forth, and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the parties hereto
agree that Section 3.5 of the Agreement shall be deleted in its entirety and the
following new Section 3.5 inserted in lieu thereof:
"3.5 Stock Option.
(a) Option Grant. Subject to compliance with
applicable securities laws and approval by the Compensation Committee of
the Board of Directors of the Parent Corporation (the "Compensation
Committee"), the Parent Corporation shall grant to the Employee as of
the Commencement Date an option (the "Stock Option") to purchase 150,000
shares of the Parent Corporation's Common Stock, $.01 par value per
share (the "Common Stock"), at a per share price equal to the lesser of
(x) the last reported sale price of the Common Stock on the Nasdaq
National Market on the Commencement Date, or (y) the average of the last
reported sale prices of the Common Stock on the Nasdaq National Market
for the five trading days prior to the Commencement Date.
(b) Option Terms. The Stock Option shall have a
term of ten years and shall become exercisable with respect to 37,500
shares on the first anniversary of the Commencement Date, and, with
respect to the remaining 112,500 shares, in 12 equal installments of
9,375 shares at the end of each three month period following the first
anniversary of the Commencement Date, so long as the Employee shall
remain in the employment of the Company on such dates. The Stock
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<PAGE> 20
Option shall contain such other terms as are customary in options
awarded by the Parent Corporation to employees of the Parent Corporation
and its subsidiaries under the Parent Corporation's 1994 Stock Option
Plan, as amended.
(c) Best Efforts. The Parent Corporation agrees
to use its best efforts to cause the Compensation Committee to grant the
Stock Option to the Employee in accordance with the provisions of this
Section 3.5."
In all other respects, the Agreement is hereby ratified and confirmed
and shall remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Amendment as
of the date first above written.
RSA DATA SECURITY, INC.
By:/s/ Ronald L. Rivest
--------------------------------
Title: Chairman
SECURITY DYNAMICS TECHNOLOGIES, INC.
By:/s/ Charles R. Stuckey, Jr.
--------------------------------
Title: President & CEO
/s/ D. James Bidzos
------------------------------------
D. James Bizdos
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<PAGE> 1
Exhibit 10.19
RSA DATA SECURITY, INC.
STOCKHOLDER AGREEMENT
THIS STOCKHOLDER AGREEMENT (the "Agreement") is made and entered into
as of April 14, 1996, by and among SECURITY DYNAMICS TECHNOLOGIES, INC., a
Delaware corporation (the "Buyer"), RSA DATA SECURITY, INC., a Delaware
corporation (the "Company") and the undersigned stockholder (the "Stockholder")
of the Company. Capitalized terms used herein but not otherwise defined herein
shall have the meanings ascribed to them in the Merger Agreement (as defined
below).
RECITALS
A. Concurrently with the execution of this Agreement, the Buyer,
Card-Key Inc., a Delaware corporation and wholly-owned subsidiary of the Buyer
(the "Sub"), and the Company have entered into an Agreement and Plan of Merger
(the "Merger Agreement"), which provides for the merger (the "Merger") of Sub
with and into the Company. Pursuant to the Merger, all outstanding capital stock
of the Company will be converted into the right to receive common stock of the
Buyer, as set forth in the Merger Agreement.
B. The Stockholder is the beneficial owner (as defined in Rule 13d-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) or,
in the case of shares held by any grantor retained annuity trust formed by the
Stockholder for the benefit of his children (a "Trust"), a duly appointed and
acting trustee of the legal owner of such number of shares of the outstanding
capital stock of the Company and shares subject to outstanding options and
warrants as is indicated on the signature page of this Agreement (the "Shares").
C. In consideration of the execution of the Merger Agreement by the
Buyer, the Stockholder agrees to restrict the transfer or disposition of any of
the Shares, or any other shares of capital stock of the Company acquired by the
Stockholder hereafter and prior to the Expiration Date (as defined in Section
1.1 below), agrees to vote the Shares and any other such shares of capital stock
of the Company so as to facilitate consummation of the Merger and agrees to vote
all shares of common stock of the Buyer held by the Stockholder after the Merger
in accordance with the terms hereof.
<PAGE> 2
NOW, THEREFORE, the parties agree as follows:
1. Agreement to Retain Shares.
1.1 Transfer and Encumbrance. The Stockholder agrees, during
the period beginning the date thirty (30) days prior to the Closing Date and
ending on the Expiration Date, not to transfer, sell, exchange, pledge or
otherwise dispose of or encumber (collectively, "Transfer") any of the Shares or
any New Shares (as defined in Section 1.2 below). The Stockholder further agrees
that from the date hereof until the date thirty (30) days prior to the Closing
Date, in the event that the Stockholder proposes to Transfer any of the Shares
or any New Shares, the Stockholder shall cause any such proposed transferee of
such shares, and each such transferee shall cause any subsequent transferee of
such shares, to take such shares subject to the provisions of Sections 1, 2, 3,
5 and 8 hereof (collectively, the "Covenants") and subject to the Proxy (as
defined herein) attached hereto as Exhibit A, and it shall be a condition to any
such proposed Transfer that the proposed transferee agree in writing to be bound
by the Covenants and the Proxy as if this Agreement and the Proxy had been
executed by such proposed transferee. If necessary to effectuate the intent of
the foregoing sentence, any such proposed transferee shall be required, as a
condition to the Transfer, to execute this Agreement and a Proxy. The
Stockholder, each transferee and each subsequent transferee acknowledges that
the intent of the foregoing sentences is to ensure that the Buyer enjoys the
benefit of the Covenants and retains the right under the Proxy to vote the
Shares and any New Shares in accordance with the terms of the Proxy,
notwithstanding any subsequent Transfer of such shares by the Stockholder, any
transferee or any subsequent transferee, and the Stockholder, each transferee
and each subsequent transferee agree not to Transfer any of the Shares or any
New Shares unless the Buyer enjoys the benefit of the Covenants and retains its
right to vote any such shares in accordance with the Proxy. As used herein, the
term "Expiration Date" shall mean the earlier to occur of (i) such date and time
as the Merger shall become effective in accordance with the terms and provisions
of the Merger Agreement or (ii) the termination of the Merger Agreement in
accordance with its terms.
1.2 New Shares. The Stockholder agrees that any shares of
capital stock of the Company that the Stockholder purchases or with respect to
which the Stockholder otherwise directly or indirectly acquires beneficial,
legal or record ownership after the date of this Agreement and prior to the
Expiration Date ("New Shares") shall be subject to the terms and conditions of
this Agreement to the same extent as if they constituted Shares.
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<PAGE> 3
2. Agreement to Vote Shares. At every meeting of the Stockholders of
the Company called with respect to any of the following, and at every
adjournment thereof, and on every action or approval by written consent of the
Company Stockholders with respect to any of the following, the Stockholder shall
vote the Shares and any New Shares: (i) in favor of approval of the Merger
Agreement and the Merger; and (ii) against approval of any proposal made in
opposition to or in competition with consummation of the Merger and the Merger
Agreement, against any merger, consolidation, sale of assets, reorganization or
recapitalization with any party other than the Buyer or any designee thereof and
against any liquidation or winding up of the Company (each of the foregoing is
referred to as an "Opposing Proposal").
3. Irrevocable Proxy. Concurrently with the execution of this
Agreement, the Stockholder agrees to deliver to the Buyer a proxy in the form
attached as Exhibit A (the "Proxy"), which shall be irrevocable to the extent
provided in Section 212 of General Corporation Law of the State of Delaware,
covering the total number of Shares and New Shares.
4. Representations, Warranties and Covenants of Stockholder. The
Stockholder represents, warrants and covenants to the Buyer as follows: the
Stockholder: (i) is the sole beneficial owner of the Shares (other than Shares
held by the Trust, as to which he is the sole beneficial owner or shares
beneficial ownership), which at the date of this Agreement and at all times up
until the Expiration Date will be free and clear of any liens, claims, options,
charges or other encumbrances, (ii) does not directly or indirectly
beneficially, legally or of record own any shares of capital stock of the
Company other than the Shares, and (iii) has full power and authority,
individually and/or in his capacity as a trustee of the Trust, to make, enter
into and carry out the terms of this Agreement and the Proxy.
5. Registration Rights.
5.1 Certain Definitions. As used in this Agreement, the
following terms shall have the following respective meanings:
(a) "Commission" means the Securities and Exchange Commission,
or any other Federal agency at the time administering the Securities Act.
(b) "Common Stock" means the Common Stock, $.01 par value per
share, of the Buyer.
(c) "Exchange Act" means the Securities Exchange Act of 1934,
as amended, or any similar Federal statute, and the rules
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<PAGE> 4
and regulations of the Commission issued under such Act, as they each may, from
time to time, be in effect.
(d) "Registrable Shares" means (i) the Merger Shares issued to
the Stockholder pursuant to the Merger Agreement in respect of the Shares and
any New Shares and (ii) any other shares of Common Stock issued in respect of
such shares (because of stock splits, stock dividends, reclassifications,
recapitalizations, or similar events); provided, however, that shares of Common
Stock which are Registrable Shares shall cease to be Registrable Shares upon any
transfer, sale or disposition thereof, whether pursuant to a Registration
Statement, Rule 144 under the Securities Act or otherwise, other than a transfer
by will or the laws of descent or distribution or pursuant to a marital
settlement agreement or divorce decree if such transfer is made in accordance
with the provisions of Section 10.2 of this Agreement.
(e) "Registration Expenses" means the expenses described in
Section 5.5.
(f) "Registration Rights Commencement Date" means the date
that is 90 days following the date on which the Buyer has published (within the
meaning of Accounting Series Release No. 130, as amended, of the Commission)
financial results covering at least 30 days of combined operations of the
Company and the Buyer.
(g) "Registration Statement" means a registration statement
filed by the Buyer with the Commission for a public offering and sale of Common
Stock (other than a registration statement on Form S-8 or Form S-4, or their
successors, or any other form for a similar limited purpose, or any registration
statement covering only securities proposed to be issued in exchange for
securities or assets of another corporation).
(h) "Securities Act" means the Securities Act of 1933, as
amended, or any similar Federal statute, and the rules and regulations of the
Commission issued under such Act, as they each may, from time to time, be in
effect.
5.2 Required Registrations.
(a) At any time after the Registration Rights Commencement
Date, the Stockholder may request the Buyer, in writing, to effect the
registration on Form S-3 (or any successor form relating to secondary offerings)
of Registrable Shares having an aggregate offering price of at least $1,000,000
(based on the then current public market price). Thereupon, the Buyer shall, as
expeditiously as possible, use its best efforts to effect the registration on
Form S-3 (or such successor form) of all
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<PAGE> 5
Registrable Shares which the Buyer has been requested to so register.
(b) The Buyer shall not be required to effect more than one
registration initiated at the request of the Stockholder pursuant to Section
5.2(a) above.
(c) If at the time of any request to register Registrable
Shares pursuant to this Section 5.2, the Buyer is engaged or has fixed plans to
engage within 60 days of the time of the request in a registered public offering
as to which the Stockholder may include Registrable Shares pursuant to Section
5.3 or is engaged in any other activity which, in the good faith determination
of the Buyer's Board of Directors, would be adversely affected by the requested
registration to the material detriment of the Buyer, then the Buyer may at its
option direct that such request be delayed for a period not in excess of 120
days from the effective date of such offering or the date of commencement of
such other material activity, as the case may be, such right to delay a request
to be exercised by the Buyer for not more than an aggregate of 150 days during
any consecutive 12-month period.
(d) Anything contained herein to the contrary notwithstanding,
with respect to a registration requested pursuant to this Section 5.2, the Buyer
may include in such registration any issued and outstanding shares of Common
Stock by others; provided, however, that the inclusion of such issued and
outstanding shares of Common Stock by others in such registration shall not
prevent the Stockholder from registering the entire number of Registrable Shares
requested by it.
5.3 Incidental Registration.
(a) Whenever the Buyer proposes to file a Registration
Statement (other than pursuant to Section 5.2) at any time and from time to time
after the Registration Rights Commencement Date, it will, prior to such filing,
give written notice to the Stockholder of its intention to do so and, upon the
written request of the Stockholder given within 20 days after the Buyer provides
such notice (which request shall state the intended method of disposition of
such Registrable Shares), the Buyer shall use its best efforts to cause all
Registrable Shares which the Buyer has been requested by the Stockholder to
register to be registered under the Securities Act to the extent necessary to
permit their sale or other disposition in accordance with the intended methods
of distribution specified in the request of the Stockholder; provided that the
Buyer shall have the right to postpone or withdraw any registration effected
pursuant to this Section 5.3 without obligation to the Stockholder.
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<PAGE> 6
(b) In connection with any registration under this Section 5.3
involving an underwriting, the Buyer shall not be required to include any
Registrable Shares in such registration unless the Stockholder accepts the terms
of the underwriting as agreed upon between the Buyer and the underwriters
selected by it. If in the opinion of the managing underwriter it is appropriate
because of marketing factors to limit the number of Registrable Shares to be
included in the offering, then the Buyer shall be required to include in the
registration only that number of Registrable Shares, if any, which the managing
underwriter believes should be included therein; provided that no persons or
entities other than the Buyer and holders of securities of the Buyer who have
registration rights ("Registration Rights Holders") shall be permitted to
include securities in the offering if the underwriters determine to limit the
numbers of Registrable Shares to be included therein. If the number of shares of
Common Stock to be included in the offering in accordance with the foregoing
limitation is less than the total number of shares which the Registration Rights
Holders have requested to be included, then the Registration Rights Holders who
have requested registration (including the Stockholder) shall participate in the
registration pro rata based upon their total ownership of shares of Common
Stock. If any Registration Rights Holder would thus be entitled to include more
securities than such Registration Rights Holder requested to be registered, the
excess shall be allocated among other requesting holders pro rata in the manner
described in the preceding sentence.
5.4 Registration Procedures. If and whenever the Buyer is
required by the provisions of this Agreement to use its best efforts to effect
the registration of any of the Registrable Shares under the Securities Act, the
Buyer shall:
(a) file with the Commission a Registration Statement with
respect to such Registrable Shares and use its best efforts to cause that
Registration Statement to become effective;
(b) as expeditiously as possible prepare and file with the
Commission any amendments and supplements to the Registration Statement and the
prospectus included in the Registration Statement as may be necessary to keep
the Registration Statement effective, in the case of a firm commitment
underwritten public offering, until each underwriter has completed the
distribution of all securities purchased by it and, in the case of any other
offering, until the earlier of the sale of all Registrable Shares covered
thereby or 120 days after the effective date thereof (excluding any days in
which the Buyer requires the Stockholder to cease sales of shares as provided
below); provided, however, that the Buyer may by written notice require that the
Stockholder immediately cease sales of shares pursuant to such Registration
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<PAGE> 7
Statement at any time that (i) the Buyer becomes engaged in a business activity
or negotiation which is not disclosed in the Registration Statement (or the
prospectus included therein) which the Buyer reasonably believes must be
disclosed therein under applicable law and which the Buyer desires to keep
confidential for business purposes, (ii) the Buyer determines that a particular
disclosure so determined to be required to be disclosed therein would be
premature or would adversely affect the Buyer or its business or prospects, or
(iii) the Registration Statement can no longer be used under the existing rules
and regulations promulgated under the Securities Act. The Buyer shall not be
required to disclose to the Stockholder which of the reasons specified in
clauses (i), (ii) or (iii) above are the basis for requiring a suspension of
sales hereunder;
(c) as expeditiously as possible furnish to the Stockholder
such reasonable numbers of copies of the prospectus, including a preliminary
prospectus, in conformity with the requirements of the Securities Act, and such
other documents as the Stockholder may reasonably request in order to facilitate
the public sale or other disposition of the Registrable Shares owned by the
Stockholder; and
(d) as expeditiously as possible use its best efforts to
register or qualify the Registrable Shares covered by the Registration Statement
under the securities or Blue Sky laws of such states as the Stockholder shall
reasonably request, and do any and all other acts and things that may be
necessary or desirable to enable the Stockholder to consummate the public sale
or other disposition in such states of the Registrable Shares owned by the
Stockholder; provided, however, that the Buyer shall not be required in
connection with this paragraph (d) to qualify as a foreign corporation or
execute a general consent to service of process in any jurisdiction.
If the Buyer has delivered preliminary or final prospectuses to the
Stockholder and after having done so the prospectus is amended to comply with
the requirements of the Securities Act, the Buyer shall promptly notify the
Stockholder and, if requested, the Stockholder shall immediately cease making
offers of Registrable Shares and return all prospectuses to the Buyer. The Buyer
shall promptly provide the Stockholder with revised prospectuses and, following
receipt of the revised prospectuses, the Stockholder shall be free to resume
making offers of the Registrable Shares.
5.5 Allocation of Expenses. The Buyer will pay all
Registration Expenses of all registrations under this Section 5; provided,
however, that if a registration under Section 5.2 is withdrawn at the request of
the Stockholder (other than as a result of information concerning the business
or financial
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<PAGE> 8
condition of the Buyer which is made known to the Stockholder after the date on
which such registration was requested) and if the Stockholder elects not to have
such registration counted as a registration requested under Section 5.2, the
Stockholder shall pay the Registration Expenses of such registration pro rata in
accordance with the number of its Registrable Shares included in such
registration. For purposes of this Section 5.5, the term "Registration Expenses"
shall mean all expenses incurred by the Buyer in complying with this Section 5,
including without limitation all registration and filing fees, exchange listing
fees, printing expenses and fees and expenses of counsel for the Buyer, state
Blue Sky fees and expenses, and the expense of any special audits incident to or
required by any such registration, and the reasonable fees and disbursements of
one counsel for all registration rights holders participating in the
registration (with such counsel being selected by the participating registration
rights holders), but excluding underwriting discounts and selling commissions.
5.6. Indemnification and Contribution.
(a) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Section 5, the Buyer will
indemnify and hold harmless the Stockholder, each underwriter of such
Registrable Shares, and each other person, if any, who controls the Stockholder
or underwriter within the meaning of the Securities Act or the Exchange Act
against any losses, claims, damages or liabilities, joint or several, to which
the Stockholder, underwriter or controlling person may become subject under the
Securities Act, the Exchange Act, state securities or Blue Sky laws or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement
under which such Registrable Shares were registered under the Securities Act,
any preliminary prospectus or final prospectus contained in the Registration
Statement, or any amendment or supplement to such Registration Statement, or
arise out of or are based upon the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and the Buyer will reimburse the Stockholder,
underwriter and each such controlling person for any legal or any other expenses
reasonably incurred by the Stockholder, underwriter or controlling person in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the Buyer will not be liable in any
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon any untrue statement or omission made in such
Registration Statement, preliminary prospectus or final prospectus, or any such
amendment
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<PAGE> 9
or supplement, in reliance upon and in conformity with information furnished to
the Buyer, in writing, by or on behalf of the Stockholder, underwriter or
controlling person specifically for use in the preparation thereof.
(b) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Section 5, the Stockholder will
indemnify and hold harmless the Buyer, each of its directors and officers and
each underwriter (if any) and each person, if any, who controls the Buyer or any
such underwriter within the meaning of the Securities Act or the Exchange Act,
against any losses, claims, damages or liabilities, joint or several, to which
the Buyer, such directors and officers, underwriter or controlling person may
become subject under the Securities Act, the Exchange Act, state securities or
Blue Sky laws or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in any
Registration Statement under which such Registrable Shares were registered under
the Securities Act, any preliminary prospectus or final prospectus contained in
the Registration Statement, or any amendment or supplement to the Registration
Statement, or arise out of or are based upon any omission or alleged omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, if the statement or omission was made in
reliance upon and in conformity with information relating to the Stockholder
furnished in writing to the Buyer by or on behalf of the Stockholder
specifically for use in connection with the preparation of such Registration
Statement, prospectus, amendment or supplement; provided, however, that the
obligations of the Stockholder hereunder shall be limited to an amount equal to
the proceeds to the Stockholder of Registrable Shares sold in connection with
such registration.
(c) Each party entitled to indemnification under this Section
5.6 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided, that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld); and, provided, further, that the failure of any Indemnified Party to
give notice as provided herein shall not relieve the Indemnifying Party of its
obligations under this Section 5.6, except to the extent the Indemnifying Party
is prejudiced thereby. The Indemnified Party may participate in such defense at
such party's expense; provided,
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<PAGE> 10
however, that the Indemnifying Party shall pay such expense if representation of
such Indemnified Party by the counsel retained by the Indemnifying Party would
be inappropriate due to actual or potential differing interests between the
Indemnified Party and any other party represented by such counsel in such
proceeding. No Indemnifying Party, in the defense of any such claim or
litigation shall, except with the consent of each Indemnified Party, consent to
entry of any judgment or enter into any settlement which does not include as an
unconditional term thereof the giving by the claimant or plaintiff to such
Indemnified Party of a release from all liability in respect of such claim or
litigation, and no Indemnified Party shall consent to entry of any judgment or
settle such claim or litigation without the prior written consent of the
Indemnifying Party.
(d) In order to provide for just and equitable contribution to
joint liability under the Securities Act in any case in which either (i) the
Stockholder, or any controlling person of the Stockholder, makes a claim for
indemnification pursuant to this Section 5.6 but it is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that this Section 5.6 provides for indemnification in such case, or (ii)
contribution under the Securities Act may be required on the part of the
Stockholder or any such controlling person in circumstances for which
indemnification is provided under this Section 5.6; then, in each such case, the
Buyer and the Stockholder will contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (after contribution from
others) in such proportions so that such holder is responsible for the portion
represented by the percentage that the public offering price of its Registrable
Shares offered by the Registration Statement bears to the public offering price
of all securities offered by such Registration Statement, and the Buyer is
responsible for the remaining portion; provided, however, that, in any such
case, (A) the Stockholder will not be required to contribute any amount in
excess of the proceeds to it of all Registrable Shares sold by it pursuant to
such Registration Statement, and (B) no person or entity guilty of fraudulent
misrepresentation, within the meaning of Section 11(f) of the Securities Act,
shall be entitled to contribution from any person or entity who is not guilty of
such fraudulent misrepresentation.
5.7 Information by Holder. The Stockholder shall furnish to
the Buyer such information regarding the Stockholder and the distribution
proposed by the Stockholder as the Buyer may request in writing and as shall be
required in connection with any
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<PAGE> 11
registration, qualification or compliance referred to in this Section 5.
5.8 Rule 144 Requirements. The Buyer agrees to:
(a) comply with the requirements of Rule 144(c) under the
Securities Act with respect to current public information about the Buyer;
(b) use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Buyer under the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements); and
(c) furnish to the Stockholder upon written request (i) a
written statement by the Buyer as to its compliance with the requirements of
said Rule 144(c) and the reporting requirements of the Securities Act and the
Exchange Act, (ii) a copy of the most recent annual or quarterly report of the
Buyer, and (iii) such other reports and documents of the Buyer as such holder
may reasonably request to avail itself of any similar rule or regulation of the
Commission allowing it to sell any such securities without registration.
6. Additional Documents. The Stockholder and the Company hereby
covenant and agree to execute and deliver any additional documents reasonably
necessary or desirable to carry out the purpose and intent of this Agreement.
7. Consent and Waiver. The Stockholder hereby gives any consents or
waivers that are reasonably required for the consummation of the Merger under
the terms of any agreement to which the Stockholder is a party or pursuant to
any rights the Stockholder may have.
8. Termination. The provisions of Sections 1, 2, 3 and 4 of this
Agreement and the Proxy delivered in connection herewith shall terminate and
shall have no further force or effect as of the Expiration Date. The remaining
provisions of this Agreement shall terminate on the earliest of (i) the
termination of the Merger Agreement in accordance with its terms, (ii) the first
date following the Merger on which all of the Registrable Shares then held by
the Stockholder are eligible for sale pursuant to Rule 144 under the Securities
Act within a three-month period, and (iii) the fifth anniversary of the
Effective Time.
9. Legending of Shares. If so requested the Buyer, the Stockholder
agrees that the Shares and any New Shares shall bear a legend stating that they
are subject to this Agreement and to an irrevocable proxy. The Stockholder
agrees that he shall not
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<PAGE> 12
Transfer the Shares or any New Shares without first having the aforementioned
legend affixed to the certificates representing the Shares or any New Shares.
10. Miscellaneous.
10.1 Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, then the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
10.2 Binding Effect and Assignment. This Agreement and all of
the provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but,
except as otherwise specifically provided herein, neither this Agreement nor any
of the rights, interests or obligations of the parties hereto may be assigned by
any of the parties without the prior written consent of the other parties. The
parties agree that Registrable Shares held by the Stockholder, and the
registration rights relating thereto set forth in Section 5 of this Agreement,
may be transferred by the Stockholder by will or the laws of descent or
distribution or pursuant to a marital settlement agreement or divorce decree;
provided, that (i) the Buyer is provided with written notice of such transfer,
(ii) the transferee agrees in writing to be bound by the terms hereof, and (iii)
from and after the effective date of such transfer any and all actions,
consents, approvals and waivers by the Stockholder pursuant to Section 5 shall
be effected only by the affirmative vote of the holders of a majority of the
Registrable Shares then held by the Stockholder and all such permitted
transferees.
10.3 Amendments and Modification. This Agreement may not be
modified, amended, altered or supplemented except by the execution and delivery
of a written agreement executed by the parties hereto.
10.4 Specific Performance; Injunctive Relief. The parties
acknowledge that the Buyer will be irreparably harmed and that there will be no
adequate remedy at law for a violation of any of the covenants or agreements of
the Stockholder set forth herein. Therefore, it is agreed that, in addition to
any other remedies that may be available to the Buyer upon any such violation,
the Buyer shall have the right to enforce such covenants and agreements by
specific performance, injunctive relief or by any other means available to the
Buyer at law or in equity.
-12-
<PAGE> 13
10.5 Notices. All notices and other communications pursuant to
this Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to the
parties at the following address (or at such other address for a party as shall
be specified by like notice):
If to the Buyer: Security Dynamics
Technologies, Inc.
One Alewife Center
Cambridge, MA 02140-2312
With a copy to: Hale and Dorr
60 State Street
Boston, MA 02109
Attn: Jay E. Bothwick, Esq.
If to Stockholder: To the address for notice set
forth on the last page hereof.
With a copy to: RSA Data Security, Inc.
100 Marine Parkway
Suite 500
Redwood City, CA 94065-1031
With copies to: Fenwick & West
Two Palo Alto Square
Palo Alto, CA 94306
Attn: Joel D. Kellman, Esq.
Tomlinson Zisko Morosoli
& Maser LLP
200 Page Mill Road
Second Floor
Palo Alto, CA 94306
Attn: Timothy Tomlinson, Esq.
10.6 Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the internal laws of the State of Delaware, without
giving effect to any choice or conflict of law provision or rule (whether of the
State of Delaware or any
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<PAGE> 14
other jurisdiction) that would cause the application of the laws of any
jurisdiction other than the State of Delaware.
10.7 Entire Agreement. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof, and
supersede all prior negotiations and understandings between the parties with
respect to such subject matter.
10 8 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
10.9 Effect of Headings. The section headings herein are for
convenience only and shall not affect the construction or interpretation of this
Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
SECURITY DYNAMICS
TECHNOLOGIES, INC. Stockholder
Name: /s/ Addison M. Fischer
------------------------------
Addison Fischer, individually
and in his capacity as Trustee
of the Trust
By: /s/ Charles R. Stuckey, Jr.
---------------------------
Title: President & CEO
------------------------
Stockholder's Address for Notice:
RSA DATA SECURITY, INC.
c/o RSA Data Security, Inc.
100 Marine Parkway
Suite 500
By: /s/ D. James Bidzos Redwood City, CA 94065-1031
---------------------------
Title: CEO Shares beneficially or, in the case
------------------------- of shares held by the Trust,
legally owned:
1,081,483 shares of Company Common
Stock
-14-
<PAGE> 15
150,000 shares of Company Series A
Preferred Stock
299,950 shares of Company Series B
Preferred Stock
300,000 shares of Company Series C
Preferred Stock
333,334 shares of Company Series D
Preferred Stock
0 shares of Company Common Stock
issuable upon exercise of
outstanding options and warrants
-15-
<PAGE> 16
IRREVOCABLE PROXY
to Vote
RSA Data Security, Inc. Stock
The undersigned stockholder of RSA Data Security, Inc., a Delaware
corporation (the "Company"), hereby irrevocably (to the full extent permitted by
Section 212 of the General Corporation Law of the State of Delaware) appoints
the directors on the Board of Directors of Security Dynamics Technologies, Inc.,
a Delaware Corporation (the "Buyer"), and each of them, as the sole and
exclusive attorneys and proxies of the undersigned, with full power of
substitution and resubstitution, to vote and exercise all voting and related
rights (to the full extent that the undersigned is entitled to do so) with
respect to all of the shares of capital stock of the Company that now are or
hereafter may be beneficially, legally or of record owned by the undersigned,
either individually or in his capacity as Trustee of any grantor retained
annuity trust formed by the undersigned for the benefit of his children (a
"Trust"), and any and all other shares or securities of the Company issued or
issuable in respect thereof on or after the date hereof (collectively, the
"Shares") in accordance with the terms of this Proxy. The Shares beneficially,
legally or of record owned by the undersigned stockholder of the Company as of
the date of this Proxy are listed on the final page of this Proxy, along with
the number of the share certificates which represent such Shares. Upon the
undersigned's execution of this Proxy, any and all prior proxies given by each
undersigned with respect to any Shares are hereby revoked and the undersigned
agrees not to grant any subsequent proxies with respect to the Shares until
after the Expiration Date (as defined below).
This Proxy is irrevocable (to the extent provided in Section 212 of the
General Corporation Law of the State of Delaware), is granted pursuant to that
certain Stockholder Agreement dated as of April 14, 1996, and is granted in
consideration of the Buyer's entering into that certain Agreement and Plan of
Merger dated as of April 14, 1996 (the "Merger Agreement"), among the Buyer,
Card-Key Inc., a Delaware corporation and wholly-owned subsidiary of the Buyer
("Sub") and the Company. The Merger Agreement provides for the merger of Sub
into the Company in accordance with its terms (the "Merger") and the Stockholder
is receiving a portion of the proceeds of the Merger. As used herein, the term
"Expiration Date" shall mean the earlier to occur of (i) such date and time as
the Merger shall become effective in accordance with the terms and provisions of
the Reorganization Agreement or (ii) the termination of the Merger Agreement in
accordance with its terms.
The attorneys and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time
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<PAGE> 17
prior to the Expiration Date; to act as the undersigned's attorney and proxy to
vote the Shares, and to exercise all voting, consent and similar rights of the
undersigned with respect to the Shares (including, without limitation, the power
to execute and deliver written consents pursuant to Section 228(a) of the
General Corporation Law of the State of Delaware) at every annual, special or
adjourned meeting of the stockholders of the Company and in every written
consent in lieu of such meeting: (a) in favor of approval of the Merger and the
Merger Agreement; and (b) against approval of any proposal made in opposition to
or in competition with the consummation of the Merger and the Merger Agreement,
against any merger, consolidation, sale of assets, reorganization or
recapitalization of the Company with any party other than the Buyer and its
affiliates and against any liquidation or winding up of the Company. The
attorneys and proxies named above may not exercise this Irrevocable Proxy on any
other matter except as provided in clauses (a) and (b) above. The undersigned
Stockholder may vote the Shares on all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
This Proxy is irrevocable (to the fullest extent permitted by Section
212 of the General Corporation Law of the State of Delaware). This Proxy shall
terminate, and be of no further force and effect, automatically upon the
Expiration Date.
Dated: April 14, 1996 /s/ Addison M. Fischer
----------------------------------------
Addison Fischer, individually and in
his capacity as Trustee of the Trust
Shares beneficially or, in the
case of shares held by the
Trust, legally owned:
1,081,483 shares of Company Common Stock
150,000 shares of Company Series A
Preferred Stock
299,950 shares of Company Series B
Preferred Stock
300,000 shares of Company Series C
Preferred Stock
-17-
<PAGE> 18
333,334 shares of Company Series D
Preferred Stock
0 shares of Company Common Stock
issuable upon exercise of outstanding
options and warrants
-18-
<PAGE> 1
Exhibit 10.20
RSA DATA SECURITY, INC.
STOCKHOLDER AGREEMENT
THIS STOCKHOLDER AGREEMENT (the "Agreement") is made and entered into
as of April 14, 1996, by and among SECURITY DYNAMICS TECHNOLOGIES, INC., a
Delaware corporation (the "Buyer"), RSA DATA SECURITY, INC., a Delaware
corporation (the "Company") and the undersigned stockholder (the "Stockholder")
of the Company. Capitalized terms used herein but not otherwise defined herein
shall have the meanings ascribed to them in the Merger Agreement (as defined
below).
RECITALS
A. Concurrently with the execution of this Agreement, the Buyer,
Card-Key Inc., a Delaware corporation and wholly-owned subsidiary of the Buyer
(the "Sub"), and the Company have entered into an Agreement and Plan of Merger
(the "Merger Agreement"), which provides for the merger (the "Merger") of Sub
with and into the Company. Pursuant to the Merger, all outstanding capital stock
of the Company will be converted into the right to receive common stock of the
Buyer, as set forth in the Merger Agreement.
B. The Stockholder is the beneficial owner (as defined in Rule 13d-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of
such number of shares of the outstanding capital stock of the Company and shares
subject to outstanding options and warrants as is indicated on the signature
page of this Agreement (the "Shares").
C. In consideration of the execution of the Merger Agreement by the
Buyer, the Stockholder agrees to restrict the transfer or disposition of any of
the Shares, or any other shares of capital stock of the Company acquired by the
Stockholder hereafter and prior to the Expiration Date (as defined in Section
1.1 below), agrees to vote the Shares and any other such shares of capital stock
of the Company so as to facilitate consummation of the Merger and agrees to vote
all shares of common stock of the Buyer held by the Stockholder after the Merger
in accordance with the terms hereof.
<PAGE> 2
NOW, THEREFORE, the parties agree as follows:
1. Agreement to Retain Shares.
1.1 Transfer and Encumbrance. The Stockholder agrees, during
the period beginning the date thirty (30) days prior to the Closing Date and
ending on the Expiration Date, not to transfer, sell, exchange, pledge or
otherwise dispose of or encumber (collectively, "Transfer") any of the Shares or
any New Shares (as defined in Section 1.2 below). The Stockholder further agrees
that from the date hereof until the date thirty (30) days prior to the Closing
Date, in the event that the Stockholder proposes to Transfer any of the Shares
or any New Shares, the Stockholder shall cause any such proposed transferee of
such shares, and each such transferee shall cause any subsequent transferee of
such shares, to take such shares subject to the provisions of Sections 1, 2, 3,
5 and 8 hereof (collectively, the "Covenants") and subject to the Proxy (as
defined herein) attached hereto as Exhibit A, and it shall be a condition to any
such proposed Transfer that the proposed transferee agree in writing to be bound
by the Covenants and the Proxy as if this Agreement and the Proxy had been
executed by such proposed transferee. If necessary to effectuate the intent of
the foregoing sentence, any such proposed transferee shall be required, as a
condition to the Transfer, to execute this Agreement and a Proxy. The
Stockholder, each transferee and each subsequent transferee acknowledges that
the intent of the foregoing sentences is to ensure that the Buyer enjoys the
benefit of the Covenants and retains the right under the Proxy to vote the
Shares and any New Shares in accordance with the terms of the Proxy,
notwithstanding any subsequent Transfer of such shares by the Stockholder, any
transferee or any subsequent transferee, and the Stockholder, each transferee
and each subsequent transferee agree not to Transfer any of the Shares or any
New Shares unless the Buyer enjoys the benefit of the Covenants and retains its
right to vote any such shares in accordance with the Proxy. As used herein, the
term "Expiration Date" shall mean the earlier to occur of (i) such date and time
as the Merger shall become effective in accordance with the terms and provisions
of the Merger Agreement or (ii) the termination of the Merger Agreement in
accordance with its terms.
1.2 New Shares. The Stockholder agrees that any shares of
capital stock of the Company that the Stockholder purchases or with respect to
which the Stockholder otherwise acquires beneficial ownership after the date of
this Agreement and prior to the Expiration Date ("New Shares") shall be subject
to the terms and conditions of this Agreement to the same extent as if they
constituted Shares.
-2-
<PAGE> 3
2. Agreement to Vote Shares. At every meeting of the Stockholders of
the Company called with respect to any of the following, and at every
adjournment thereof, and on every action or approval by written consent of the
Company Stockholders with respect to any of the following, the Stockholder shall
vote the Shares and any New Shares: (i) in favor of approval of the Merger
Agreement and the Merger; and (ii) against approval of any proposal made in
opposition to or in competition with consummation of the Merger and the Merger
Agreement, against any merger, consolidation, sale of assets, reorganization or
recapitalization with any party other than the Buyer or any designee thereof and
against any liquidation or winding up of the Company (each of the foregoing is
referred to as an "Opposing Proposal").
3. Irrevocable Proxy. Concurrently with the execution of this
Agreement, the Stockholder agrees to deliver to the Buyer a proxy in the form
attached as Exhibit A (the "Proxy"), which shall be irrevocable to the extent
provided in Section 212 of General Corporation Law of the State of Delaware,
covering the total number of Shares and New Shares of capital stock of the
Company beneficially owned (as such term is defined in Rule 13d-3 under the
Exchange Act) by the Stockholder set forth therein.
4. Representations, Warranties and Covenants of Stockholder. The
Stockholder represents, warrants and covenants to the Buyer as follows: the
Stockholder: (i) is the beneficial owner of the Shares, which at the date of
this Agreement and at all times up until the Expiration Date will be free and
clear of any liens, claims, options, charges or other encumbrances, (ii) does
not beneficially own any shares of capital stock of the Company other than the
Shares (excluding shares as to which Stockholder currently disclaims beneficial
ownership in accordance with applicable law), and (iii) has full power and
authority to make, enter into and carry out the terms of this Agreement and the
Proxy.
5. Registration Rights.
5.1 Certain Definitions. As used in this Agreement, the
following terms shall have the following respective meanings:
(a) "Commission" means the Securities and Exchange Commission,
or any other Federal agency at the time administering the Securities Act.
(b) "Common Stock" means the Common Stock, $.01 par value per
share, of the Buyer.
-3-
<PAGE> 4
(c) "Exchange Act" means the Securities Exchange Act of 1934,
as amended, or any similar Federal statute, and the rules and regulations of the
Commission issued under such Act, as they each may, from time to time, be in
effect.
(d) "Registrable Shares" means (i) the Merger Shares issued to
the Stockholder pursuant to the Merger Agreement in respect of the Shares and
any New Shares and (ii) any other shares of Common Stock issued in respect of
such shares (because of stock splits, stock dividends, reclassifications,
recapitalizations, or similar events); provided, however, that shares of Common
Stock which are Registrable Shares shall cease to be Registrable Shares upon any
transfer, sale or disposition thereof, whether pursuant to a Registration
Statement, Rule 144 under the Securities Act or otherwise, other than a transfer
by will or the laws of descent or distribution or pursuant to a marital
settlement agreement or divorce decree if such transfer is made in accordance
with the provisions of Section 10.2 of this Agreement.
(e) "Registration Expenses" means the expenses described in
Section 5.5.
(f) "Registration Rights Commencement Date" means the date
that is 90 days following the date on which the Buyer has published (within the
meaning of Accounting Series Release No. 130, as amended, of the Commission)
financial results covering at least 30 days of combined operations of the
Company and the Buyer.
(g) "Registration Statement" means a registration statement
filed by the Buyer with the Commission for a public offering and sale of Common
Stock (other than a registration statement on Form S-8 or Form S-4, or their
successors, or any other form for a similar limited purpose, or any registration
statement covering only securities proposed to be issued in exchange for
securities or assets of another corporation).
(h) "Securities Act" means the Securities Act of 1933, as
amended, or any similar Federal statute, and the rules and regulations of the
Commission issued under such Act, as they each may, from time to time, be in
effect.
5.2 Required Registrations.
(a) At any time after the Registration Rights Commencement
Date, the Stockholder may request the Buyer, in writing, to effect the
registration on Form S-3 (or any successor form relating to secondary offerings)
of Registrable Shares having an aggregate offering price of at least $1,000,000
(based on the then current public market price). Thereupon, the Buyer shall, as
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<PAGE> 5
expeditiously as possible, use its best efforts to effect the registration on
Form S-3 (or such successor form) of all Registrable Shares which the Buyer has
been requested to so register.
(b) The Buyer shall not be required to effect more than one
registration initiated at the request of the Stockholder pursuant to Section
5.2(a) above.
(c) If at the time of any request to register Registrable
Shares pursuant to this Section 5.2, the Buyer is engaged or has fixed plans to
engage within 60 days of the time of the request in a registered public offering
as to which the Stockholder may include Registrable Shares pursuant to Section
5.3 or is engaged in any other activity which, in the good faith determination
of the Buyer's Board of Directors, would be adversely affected by the requested
registration to the material detriment of the Buyer, then the Buyer may at its
option direct that such request be delayed for a period not in excess of 120
days from the effective date of such offering or the date of commencement of
such other material activity, as the case may be, such right to delay a request
to be exercised by the Buyer for not more than an aggregate of 150 days during
any consecutive 12-month period.
(d) Anything contained herein to the contrary notwithstanding,
with respect to a registration requested pursuant to this Section 5.2, the Buyer
may include in such registration any issued and outstanding shares of Common
Stock by others; provided, however, that the inclusion of such issued and
outstanding shares of Common Stock by others in such registration shall not
prevent the Stockholder from registering the entire number of Registrable Shares
requested by it.
5.3 Incidental Registration.
(a) Whenever the Buyer proposes to file a Registration
Statement (other than pursuant to Section 5.2) at any time and from time to time
after the Registration Rights Commencement Date, it will, prior to such filing,
give written notice to the Stockholder of its intention to do so and, upon the
written request of the Stockholder given within 20 days after the Buyer provides
such notice (which request shall state the intended method of disposition of
such Registrable Shares), the Buyer shall use its best efforts to cause all
Registrable Shares which the Buyer has been requested by the Stockholder to
register to be registered under the Securities Act to the extent necessary to
permit their sale or other disposition in accordance with the intended methods
of distribution specified in the request of the
-5-
<PAGE> 6
Stockholder; provided that the Buyer shall have the right to postpone or
withdraw any registration effected pursuant to this Section 5.3 without
obligation to the Stockholder.
(b) In connection with any registration under this Section 5.3
involving an underwriting, the Buyer shall not be required to include any
Registrable Shares in such registration unless the Stockholder accepts the terms
of the underwriting as agreed upon between the Buyer and the underwriters
selected by it. If in the opinion of the managing underwriter it is appropriate
because of marketing factors to limit the number of Registrable Shares to be
included in the offering, then the Buyer shall be required to include in the
registration only that number of Registrable Shares, if any, which the managing
underwriter believes should be included therein; provided that no persons or
entities other than the Buyer and holders of securities of the Buyer who have
registration rights ("Registration Rights Holders") shall be permitted to
include securities in the offering if the underwriters determine to limit the
numbers of Registrable Shares to be included therein. If the number of shares of
Common Stock to be included in the offering in accordance with the foregoing
limitation is less than the total number of shares which the Registration Rights
Holders have requested to be included, then the Registration Rights Holders who
have requested registration (including the Stockholder) shall participate in the
registration pro rata based upon their total ownership of shares of Common
Stock. If any Registration Rights Holder would thus be entitled to include more
securities than such Registration Rights Holder requested to be registered, the
excess shall be allocated among other requesting holders pro rata in the manner
described in the preceding sentence.
5.4 Registration Procedures. If and whenever the Buyer is
required by the provisions of this Agreement to use its best efforts to effect
the registration of any of the Registrable Shares under the Securities Act, the
Buyer shall:
(a) file with the Commission a Registration Statement with
respect to such Registrable Shares and use its best efforts to cause that
Registration Statement to become effective;
(b) as expeditiously as possible prepare and file with the
Commission any amendments and supplements to the Registration Statement and the
prospectus included in the Registration Statement as may be necessary to keep
the Registration Statement effective, in the case of a firm commitment
underwritten public offering, until each underwriter has completed the
distribution of all securities purchased by it and, in the case of any other
offering, until the earlier of the sale of all Registrable Shares covered
thereby or 120 days after the effective date thereof
-6-
<PAGE> 7
(excluding any days in which the Buyer requires the Stockholder to cease sales
of shares as provided below); provided, however, that the Buyer may by written
notice require that the Stockholder immediately cease sales of shares pursuant
to such Registration Statement at any time that (i) the Buyer becomes engaged in
a business activity or negotiation which is not disclosed in the Registration
Statement (or the prospectus included therein) which the Buyer reasonably
believes must be disclosed therein under applicable law and which the Buyer
desires to keep confidential for business purposes, (ii) the Buyer determines
that a particular disclosure so determined to be required to be disclosed
therein would be premature or would adversely affect the Buyer or its business
or prospects, or (iii) the Registration Statement can no longer be used under
the existing rules and regulations promulgated under the Securities Act. The
Buyer shall not be required to disclose to the Stockholder which of the reasons
specified in clauses (i), (ii) or (iii) above are the basis for requiring a
suspension of sales hereunder;
(c) as expeditiously as possible furnish to the Stockholder
such reasonable numbers of copies of the prospectus, including a preliminary
prospectus, in conformity with the requirements of the Securities Act, and such
other documents as the Stockholder may reasonably request in order to facilitate
the public sale or other disposition of the Registrable Shares owned by the
Stockholder; and
(d) as expeditiously as possible use its best efforts to
register or qualify the Registrable Shares covered by the Registration Statement
under the securities or Blue Sky laws of such states as the Stockholder shall
reasonably request, and do any and all other acts and things that may be
necessary or desirable to enable the Stockholder to consummate the public sale
or other disposition in such states of the Registrable Shares owned by the
Stockholder; provided, however, that the Buyer shall not be required in
connection with this paragraph (d) to qualify as a foreign corporation or
execute a general consent to service of process in any jurisdiction.
If the Buyer has delivered preliminary or final prospectuses to the
Stockholder and after having done so the prospectus is amended to comply with
the requirements of the Securities Act, the Buyer shall promptly notify the
Stockholder and, if requested, the Stockholder shall immediately cease making
offers of Registrable Shares and return all prospectuses to the Buyer. The Buyer
shall promptly provide the Stockholder with revised prospectuses and, following
receipt of the revised prospectuses, the Stockholder shall be free to resume
making offers of the Registrable Shares.
-7-
<PAGE> 8
5.5 Allocation of Expenses. The Buyer will pay all
Registration Expenses of all registrations under this Section 5; provided,
however, that if a registration under Section 5.2 is withdrawn at the request of
the Stockholder (other than as a result of information concerning the business
or financial condition of the Buyer which is made known to the Stockholder after
the date on which such registration was requested) and if the Stockholder elects
not to have such registration counted as a registration requested under Section
5.2, the Stockholder shall pay the Registration Expenses of such registration
pro rata in accordance with the number of its Registrable Shares included in
such registration. For purposes of this Section 5.5, the term "Registration
Expenses" shall mean all expenses incurred by the Buyer in complying with this
Section 5, including without limitation all registration and filing fees,
exchange listing fees, printing expenses and fees and expenses of counsel for
the Buyer, state Blue Sky fees and expenses, and the expense of any special
audits incident to or required by any such registration, and the reasonable fees
and disbursements of one counsel for all registration rights holders
participating in the registration (with such counsel being selected by the
participating registration rights holders), but excluding underwriting discounts
and selling commissions.
5.6. Indemnification and Contribution.
(a) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Section 5, the Buyer will
indemnify and hold harmless the Stockholder, each underwriter of such
Registrable Shares, and each other person, if any, who controls the Stockholder
or underwriter within the meaning of the Securities Act or the Exchange Act
against any losses, claims, damages or liabilities, joint or several, to which
the Stockholder, underwriter or controlling person may become subject under the
Securities Act, the Exchange Act, state securities or Blue Sky laws or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement
under which such Registrable Shares were registered under the Securities Act,
any preliminary prospectus or final prospectus contained in the Registration
Statement, or any amendment or supplement to such Registration Statement, or
arise out of or are based upon the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and the Buyer will reimburse the Stockholder,
underwriter and each such controlling person for any legal or any other expenses
reasonably incurred by the Stockholder, underwriter or controlling person in
connection with investigating or defending any such loss, claim, damage,
-8-
<PAGE> 9
liability or action; provided, however, that the Buyer will not be liable in any
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon any untrue statement or omission made in such
Registration Statement, preliminary prospectus or final prospectus, or any such
amendment or supplement, in reliance upon and in conformity with information
furnished to the Buyer, in writing, by or on behalf of the Stockholder,
underwriter or controlling person specifically for use in the preparation
thereof.
(b) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Section 5, the Stockholder will
indemnify and hold harmless the Buyer, each of its directors and officers and
each underwriter (if any) and each person, if any, who controls the Buyer or any
such underwriter within the meaning of the Securities Act or the Exchange Act,
against any losses, claims, damages or liabilities, joint or several, to which
the Buyer, such directors and officers, underwriter or controlling person may
become subject under the Securities Act, the Exchange Act, state securities or
Blue Sky laws or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in any
Registration Statement under which such Registrable Shares were registered under
the Securities Act, any preliminary prospectus or final prospectus contained in
the Registration Statement, or any amendment or supplement to the Registration
Statement, or arise out of or are based upon any omission or alleged omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, if the statement or omission was made in
reliance upon and in conformity with information relating to the Stockholder
furnished in writing to the Buyer by or on behalf of the Stockholder
specifically for use in connection with the preparation of such Registration
Statement, prospectus, amendment or supplement; provided, however, that the
obligations of the Stockholder hereunder shall be limited to an amount equal to
the proceeds to the Stockholder of Registrable Shares sold in connection with
such registration.
(c) Each party entitled to indemnification under this Section
5.6 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided, that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld); and, provided,
-9-
<PAGE> 10
further, that the failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under this
Section 5.6, except to the extent the Indemnifying Party is prejudiced thereby.
The Indemnified Party may participate in such defense at such party's expense;
provided, however, that the Indemnifying Party shall pay such expense if
representation of such Indemnified Party by the counsel retained by the
Indemnifying Party would be inappropriate due to actual or potential differing
interests between the Indemnified Party and any other party represented by such
counsel in such proceeding. No Indemnifying Party, in the defense of any such
claim or litigation shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect of such
claim or litigation, and no Indemnified Party shall consent to entry of any
judgment or settle such claim or litigation without the prior written consent of
the Indemnifying Party.
(d) In order to provide for just and equitable contribution to
joint liability under the Securities Act in any case in which either (i) the
Stockholder, or any controlling person of the Stockholder, makes a claim for
indemnification pursuant to this Section 5.6 but it is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that this Section 5.6 provides for indemnification in such case, or (ii)
contribution under the Securities Act may be required on the part of the
Stockholder or any such controlling person in circumstances for which
indemnification is provided under this Section 5.6; then, in each such case, the
Buyer and the Stockholder will contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (after contribution from
others) in such proportions so that such holder is responsible for the portion
represented by the percentage that the public offering price of its Registrable
Shares offered by the Registration Statement bears to the public offering price
of all securities offered by such Registration Statement, and the Buyer is
responsible for the remaining portion; provided, however, that, in any such
case, (A) the Stockholder will not be required to contribute any amount in
excess of the proceeds to it of all Registrable Shares sold by it pursuant to
such Registration Statement, and (B) no person or entity guilty of fraudulent
misrepresentation, within the meaning of Section 11(f) of the Securities Act,
shall be entitled to contribution from any person or entity who is not guilty of
such fraudulent misrepresentation.
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<PAGE> 11
5.7 Information by Holder. The Stockholder shall furnish to
the Buyer such information regarding the Stockholder and the distribution
proposed by the Stockholder as the Buyer may request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to in this Section 5.
5.8 Rule 144 Requirements. The Buyer agrees to:
(a) comply with the requirements of Rule 144(c) under the
Securities Act with respect to current public information about the Buyer;
(b) use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Buyer under the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements); and
(c) furnish to the Stockholder upon written request (i) a
written statement by the Buyer as to its compliance with the requirements of
said Rule 144(c) and the reporting requirements of the Securities Act and the
Exchange Act, (ii) a copy of the most recent annual or quarterly report of the
Buyer, and (iii) such other reports and documents of the Buyer as such holder
may reasonably request to avail itself of any similar rule or regulation of the
Commission allowing it to sell any such securities without registration.
6. Additional Documents. The Stockholder and the Company hereby
covenant and agree to execute and deliver any additional documents reasonably
necessary or desirable to carry out the purpose and intent of this Agreement.
7. Consent and Waiver. The Stockholder hereby gives any consents or
waivers that are reasonably required for the consummation of the Merger under
the terms of any agreement to which the Stockholder is a party or pursuant to
any rights the Stockholder may have.
8. Termination. The provisions of Sections 1, 2, 3 and 4 of this
Agreement and the Proxy delivered in connection herewith shall terminate and
shall have no further force or effect as of the Expiration Date. The remaining
provisions of this Agreement shall terminate on the earliest of (i) the
termination of the Merger Agreement in accordance with its terms, (ii) the first
date following the Merger on which all of the Registrable Shares then held by
the Stockholder are eligible for sale pursuant to Rule 144 under the Securities
Act within a three-month period, and (iii) the fifth anniversary of the
Effective Time.
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<PAGE> 12
9. Legending of Shares. If so requested the Buyer, the Stockholder
agrees that the Shares and any New Shares shall bear a legend stating that they
are subject to this Agreement and to an irrevocable proxy. The Stockholder
agrees that he shall not Transfer the Shares or any New Shares without first
having the aforementioned legend affixed to the certificates representing the
Shares or any New Shares.
10. Miscellaneous.
10.1 Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, then the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
10.2 Binding Effect and Assignment. This Agreement and all of
the provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but,
except as otherwise specifically provided herein, neither this Agreement nor any
of the rights, interests or obligations of the parties hereto may be assigned by
any of the parties without the prior written consent of the other parties. The
parties agree that Registrable Shares held by the Stockholder, and the
registration rights relating thereto set forth in Section 5 of this Agreement,
may be transferred by the Stockholder by will or the laws of descent or
distribution or pursuant to a marital settlement agreement or divorce decree;
provided, that (i) the Buyer is provided with written notice of such transfer,
(ii) the transferee agrees in writing to be bound by the terms hereof, and (iii)
from and after the effective date of such transfer any and all actions,
consents, approvals and waivers by the Stockholder pursuant to Section 5 shall
be effected only by the affirmative vote of the holders of a majority of the
Registrable Shares then held by the Stockholder and all such permitted
transferees.
10.3 Amendments and Modification. This Agreement may not be
modified, amended, altered or supplemented except by the execution and delivery
of a written agreement executed by the parties hereto.
10.4 Specific Performance; Injunctive Relief. The parties
acknowledge that the Buyer will be irreparably harmed and that there will be no
adequate remedy at law for a violation of any of the covenants or agreements of
the Stockholder set forth herein. Therefore, it is agreed that, in addition to
any other remedies that may be available to the Buyer upon any such violation,
the Buyer shall have the right to enforce such
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<PAGE> 13
covenants and agreements by specific performance, injunctive relief or by any
other means available to the Buyer at law or in equity.
10.5 Notices. All notices and other communications pursuant to
this Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to the
parties at the following address (or at such other address for a party as shall
be specified by like notice):
If to the Buyer: Security Dynamics
Technologies, Inc.
One Alewife Center
Cambridge, MA 02140-2312
With a copy to: Hale and Dorr
60 State Street
Boston, MA 02109
Attn: Jay E. Bothwick, Esq.
If to Stockholder: To the address for notice set
forth on the last page hereof.
With a copy to: RSA Data Security, Inc.
100 Marine Parkway
Suite 500
Redwood City, CA 94065-1031
With copies to: Fenwick & West
Two Palo Alto Square
Palo Alto, CA 94306
Attn: Joel D. Kellman, Esq.
Tomlinson Zisko Morosoli
& Maser LLP
200 Page Mill Road
Second Floor
Palo Alto, CA 94306
Attn: Timothy Tomlinson, Esq.
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<PAGE> 14
10.6 Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the internal laws of the State of Delaware, without
giving effect to any choice or conflict of law provision or rule (whether of the
State of Delaware or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Delaware.
10.7 Entire Agreement. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof, and
supersede all prior negotiations and understandings between the parties with
respect to such subject matter.
10 8 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
10.9 Effect of Headings. The section headings herein are for
convenience only and shall not affect the construction or interpretation of this
Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
SECURITY DYNAMICS
TECHNOLOGIES, INC. Stockholder
Name: /s/ D. James Bidzos
----------------------
D. James Bidzos
By: /s/ Charles R. Stuckey, Jr.
----------------------------
Title: President & CEO
-------------------------
Stockholder's Address for Notice:
RSA DATA SECURITY, INC.
c/o RSA Data Security, Inc.
100 Marine Parkway
Suite 500
By: /s/ D. James Bidzos Redwood City, CA 94065-1031
----------------------------
Title: CEO Shares beneficially owned:
-------------------------
455,000 shares of Company Common
Stock
0 shares of Company Series A
Preferred Stock
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<PAGE> 15
0 shares of Company Series B
Preferred Stock
0 shares of Company Series C
Preferred Stock
0 shares of Company Series D
Preferred Stock
300,000 shares of Company Common
Stock issuable upon exercise of
outstanding options and warrants
-15-
<PAGE> 16
IRREVOCABLE PROXY
to Vote
RSA Data Security, Inc. Stock
The undersigned stockholder of RSA Data Security, Inc., a Delaware
corporation (the "Company"), hereby irrevocably (to the full extent permitted by
Section 212 of the General Corporation Law of the State of Delaware) appoints
the directors on the Board of Directors of Security Dynamics Technologies, Inc.,
a Delaware Corporation (the "Buyer"), and each of them, as the sole and
exclusive attorneys and proxies of the undersigned, with full power of
substitution and resubstitution, to vote and exercise all voting and related
rights (to the full extent that the undersigned is entitled to do so) with
respect to all of the shares of capital stock of the Company that now are or
hereafter may be beneficially owned by the undersigned, and any and all other
shares or securities of the Company issued or issuable in respect thereof on or
after the date hereof (collectively, the "Shares") in accordance with the terms
of this Proxy. The Shares beneficially owned by the undersigned stockholder of
the Company as of the date of this Proxy are listed on the final page of this
Proxy, along with the number of the share certificates which represent such
Shares. Upon the undersigned's execution of this Proxy, any and all prior
proxies given by each undersigned with respect to any Shares are hereby revoked
and the undersigned agrees not to grant any subsequent proxies with respect to
the Shares until after the Expiration Date (as defined below).
This Proxy is irrevocable (to the extent provided in Section 212 of the
General Corporation Law of the State of Delaware), is granted pursuant to that
certain Stockholder Agreement dated as of April 14, 1996, and is granted in
consideration of the Buyer's entering into that certain Agreement and Plan of
Merger dated as of April 14, 1996 (the "Merger Agreement"), among the Buyer,
Card-Key Inc., a Delaware corporation and wholly-owned subsidiary of the Buyer
("Sub") and the Company. The Merger Agreement provides for the merger of Sub
into the Company in accordance with its terms (the "Merger") and the Stockholder
is receiving a portion of the proceeds of the Merger. As used herein, the term
"Expiration Date" shall mean the earlier to occur of (i) such date and time as
the Merger shall become effective in accordance with the terms and provisions of
the Reorganization Agreement or (ii) the termination of the Merger Agreement in
accordance with its terms.
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<PAGE> 17
The attorneys and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time prior to the Expiration
Date; to act as the undersigned's attorney and proxy to vote the Shares, and to
exercise all voting, consent and similar rights of the undersigned with respect
to the Shares (including, without limitation, the power to execute and deliver
written consents pursuant to Section 228(a) of the General Corporation Law of
the State of Delaware) at every annual, special or adjourned meeting of the
stockholders of the Company and in every written consent in lieu of such
meeting: (a) in favor of approval of the Merger and the Merger Agreement; and
(b) against approval of any proposal made in opposition to or in competition
with the consummation of the Merger and the Merger Agreement, against any
merger, consolidation, sale of assets, reorganization or recapitalization of the
Company with any party other than the Buyer and its affiliates and against any
liquidation or winding up of the Company. The attorneys and proxies named above
may not exercise this Irrevocable Proxy on any other matter except as provided
in clauses (a) and (b) above. The undersigned Stockholder may vote the Shares on
all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
This Proxy is irrevocable (to the fullest extent permitted by Section
212 of the General Corporation Law of the State of Delaware). This Proxy shall
terminate, and be of no further force and effect, automatically upon the
Expiration Date.
Dated: April 14, 1996 /s/ D. James Bidzos
-------------------
D. James Bidzos
Shares beneficially owned:
455,000 shares of Company Common
Stock
0 shares of Company Series A
Preferred Stock
0 shares of Company Series B
Preferred Stock
0 shares of Company Series C
Preferred Stock
-17-
<PAGE> 18
0 shares of Company Series D
Preferred Stock
300,000 shares of Company Common
Stock issuable upon exercise of
outstanding options and warrants
-18
<PAGE> 1
Exhibit 10.21
RSA DATA SECURITY, INC.
STOCKHOLDER AGREEMENT
THIS STOCKHOLDER AGREEMENT (the "Agreement") is made and entered into
as of April 14, 1996, by and among SECURITY DYNAMICS TECHNOLOGIES, INC., a
Delaware corporation (the "Buyer"), RSA DATA SECURITY, INC., a Delaware
corporation (the "Company") and the undersigned stockholder (the "Stockholder")
of the Company. Capitalized terms used herein but not otherwise defined herein
shall have the meanings ascribed to them in the Merger Agreement (as defined
below).
RECITALS
A. Concurrently with the execution of this Agreement, the Buyer,
Card-Key Inc., a Delaware corporation and wholly-owned subsidiary of the Buyer
(the "Sub"), and the Company have entered into an Agreement and Plan of Merger
(the "Merger Agreement"), which provides for the merger (the "Merger") of Sub
with and into the Company. Pursuant to the Merger, all outstanding capital stock
of the Company will be converted into the right to receive common stock of the
Buyer, as set forth in the Merger Agreement.
B. The Stockholder is the beneficial owner (as defined in Rule 13d-3
under the Securities Exchange Act of 1934, as amended (the "Exchange Act")) of
such number of shares of the outstanding capital stock of the Company and shares
subject to outstanding options and warrants as is indicated on the signature
page of this Agreement (the "Shares").
C. In consideration of the execution of the Merger Agreement by the
Buyer, the Stockholder agrees to restrict the transfer or disposition of any of
the Shares, or any other shares of capital stock of the Company acquired by the
Stockholder hereafter and prior to the Expiration Date (as defined in Section
1.1 below), agrees to vote the Shares and any other such shares of capital stock
of the Company so as to facilitate consummation of the Merger and agrees to vote
all shares of common stock of the Buyer held by the Stockholder after the Merger
in accordance with the terms hereof.
<PAGE> 2
NOW, THEREFORE, the parties agree as follows:
1. Agreement to Retain Shares.
1.1 Transfer and Encumbrance. The Stockholder agrees, during
the period beginning the date thirty (30) days prior to the Closing Date and
ending on the Expiration Date, not to transfer, sell, exchange, pledge or
otherwise dispose of or encumber (collectively, "Transfer") any of the Shares or
any New Shares (as defined in Section 1.2 below). The Stockholder further agrees
that from the date hereof until the date thirty (30) days prior to the Closing
Date, in the event that the Stockholder proposes to Transfer any of the Shares
or any New Shares, the Stockholder shall cause any such proposed transferee of
such shares, and each such transferee shall cause any subsequent transferee of
such shares, to take such shares subject to the provisions of Sections 1, 2, 3,
5 and 8 hereof (collectively, the "Covenants") and subject to the Proxy (as
defined herein) attached hereto as Exhibit A, and it shall be a condition to any
such proposed Transfer that the proposed transferee agree in writing to be bound
by the Covenants and the Proxy as if this Agreement and the Proxy had been
executed by such proposed transferee. If necessary to effectuate the intent of
the foregoing sentence, any such proposed transferee shall be required, as a
condition to the Transfer, to execute this Agreement and a Proxy. The
Stockholder, each transferee and each subsequent transferee acknowledges that
the intent of the foregoing sentences is to ensure that the Buyer enjoys the
benefit of the Covenants and retains the right under the Proxy to vote the
Shares and any New Shares in accordance with the terms of the Proxy,
notwithstanding any subsequent Transfer of such shares by the Stockholder, any
transferee or any subsequent transferee, and the Stockholder, each transferee
and each subsequent transferee agree not to Transfer any of the Shares or any
New Shares unless the Buyer enjoys the benefit of the Covenants and retains its
right to vote any such shares in accordance with the Proxy. As used herein, the
term "Expiration Date" shall mean the earlier to occur of (i) such date and time
as the Merger shall become effective in accordance with the terms and provisions
of the Merger Agreement or (ii) the termination of the Merger Agreement in
accordance with its terms.
1.2 New Shares. The Stockholder agrees that any shares of
capital stock of the Company that the Stockholder purchases or with respect to
which the Stockholder otherwise acquires beneficial ownership after the date of
this Agreement and prior to the Expiration Date ("New Shares") shall be subject
to the terms and conditions of this Agreement to the same extent as if they
constituted Shares.
-2-
<PAGE> 3
2. Agreement to Vote Shares. At every meeting of the Stockholders of
the Company called with respect to any of the following, and at every
adjournment thereof, and on every action or approval by written consent of the
Company Stockholders with respect to any of the following, the Stockholder shall
vote the Shares and any New Shares: (i) in favor of approval of the Merger
Agreement and the Merger; and (ii) against approval of any proposal made in
opposition to or in competition with consummation of the Merger and the Merger
Agreement, against any merger, consolidation, sale of assets, reorganization or
recapitalization with any party other than the Buyer or any designee thereof and
against any liquidation or winding up of the Company (each of the foregoing is
referred to as an "Opposing Proposal").
3. Irrevocable Proxy. Concurrently with the execution of this
Agreement, the Stockholder agrees to deliver to the Buyer a proxy in the form
attached as Exhibit A (the "Proxy"), which shall be irrevocable to the extent
provided in Section 212 of General Corporation Law of the State of Delaware,
covering the total number of Shares and New Shares of capital stock of the
Company beneficially owned (as such term is defined in Rule 13d-3 under the
Exchange Act) by the Stockholder set forth therein.
4. Representations, Warranties and Covenants of Stockholder. The
Stockholder represents, warrants and covenants to the Buyer as follows: the
Stockholder: (i) is the beneficial owner of the Shares, which at the date of
this Agreement and at all times up until the Expiration Date will be free and
clear of any liens, claims, options, charges or other encumbrances, (ii) does
not beneficially own any shares of capital stock of the Company other than the
Shares (excluding shares as to which Stockholder currently disclaims beneficial
ownership in accordance with applicable law), and (iii) has full power and
authority to make, enter into and carry out the terms of this Agreement and the
Proxy.
5. Registration Rights.
5.1 Certain Definitions. As used in this Agreement, the
following terms shall have the following respective meanings:
(a) "Commission" means the Securities and Exchange Commission,
or any other Federal agency at the time administering the Securities Act.
(b) "Common Stock" means the Common Stock, $.01 par value per
share, of the Buyer.
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<PAGE> 4
(c) "Exchange Act" means the Securities Exchange Act of 1934,
as amended, or any similar Federal statute, and the rules and regulations of the
Commission issued under such Act, as they each may, from time to time, be in
effect.
(d) "Registrable Shares" means (i) the Merger Shares issued to
the Stockholder pursuant to the Merger Agreement in respect of the Shares and
any New Shares and (ii) any other shares of Common Stock issued in respect of
such shares (because of stock splits, stock dividends, reclassifications,
recapitalizations, or similar events); provided, however, that shares of Common
Stock which are Registrable Shares shall cease to be Registrable Shares upon any
transfer, sale or disposition thereof, whether pursuant to a Registration
Statement, Rule 144 under the Securities Act or otherwise, other than a transfer
by will or the laws of descent or distribution or pursuant to a marital
settlement agreement or divorce decree if such transfer is made in accordance
with the provisions of Section 10.2 of this Agreement.
(e) "Registration Expenses" means the expenses described in
Section 5.5.
(f) "Registration Rights Commencement Date" means the date
that is 90 days following the date on which the Buyer has published (within the
meaning of Accounting Series Release No. 130, as amended, of the Commission)
financial results covering at least 30 days of combined operations of the
Company and the Buyer.
(g) "Registration Statement" means a registration statement
filed by the Buyer with the Commission for a public offering and sale of Common
Stock (other than a registration statement on Form S-8 or Form S-4, or their
successors, or any other form for a similar limited purpose, or any registration
statement covering only securities proposed to be issued in exchange for
securities or assets of another corporation).
(h) "Securities Act" means the Securities Act of 1933, as
amended, or any similar Federal statute, and the rules and regulations of the
Commission issued under such Act, as they each may, from time to time, be in
effect.
5.2 Required Registrations.
(a) At any time after the Registration Rights Commencement
Date, the Stockholder may request the Buyer, in writing, to effect the
registration on Form S-3 (or any successor form relating to secondary offerings)
of Registrable Shares having an aggregate offering price of at least $1,000,000
(based on the then current public market price). Thereupon, the Buyer shall, as
-4-
<PAGE> 5
expeditiously as possible, use its best efforts to effect the registration on
Form S-3 (or such successor form) of all Registrable Shares which the Buyer has
been requested to so register.
(b) The Buyer shall not be required to effect more than one
registration initiated at the request of the Stockholder pursuant to Section
5.2(a) above.
(c) If at the time of any request to register Registrable
Shares pursuant to this Section 5.2, the Buyer is engaged or has fixed plans to
engage within 60 days of the time of the request in a registered public offering
as to which the Stockholder may include Registrable Shares pursuant to Section
5.3 or is engaged in any other activity which, in the good faith determination
of the Buyer's Board of Directors, would be adversely affected by the requested
registration to the material detriment of the Buyer, then the Buyer may at its
option direct that such request be delayed for a period not in excess of 120
days from the effective date of such offering or the date of commencement of
such other material activity, as the case may be, such right to delay a request
to be exercised by the Buyer for not more than an aggregate of 150 days during
any consecutive 12-month period.
(d) Anything contained herein to the contrary notwithstanding,
with respect to a registration requested pursuant to this Section 5.2, the Buyer
may include in such registration any issued and outstanding shares of Common
Stock by others; provided, however, that the inclusion of such issued and
outstanding shares of Common Stock by others in such registration shall not
prevent the Stockholder from registering the entire number of Registrable Shares
requested by it.
5.3 Incidental Registration.
(a) Whenever the Buyer proposes to file a Registration
Statement (other than pursuant to Section 5.2) at any time and from time to time
after the Registration Rights Commencement Date, it will, prior to such filing,
give written notice to the Stockholder of its intention to do so and, upon the
written request of the Stockholder given within 20 days after the Buyer provides
such notice (which request shall state the intended method of disposition of
such Registrable Shares), the Buyer shall use its best efforts to cause all
Registrable Shares which the Buyer has been requested by the Stockholder to
register to be registered under the Securities Act to the extent necessary to
permit their sale or other disposition in accordance with the intended methods
of distribution specified in the request of the
-5-
<PAGE> 6
Stockholder; provided that the Buyer shall have the right to postpone or
withdraw any registration effected pursuant to this Section 5.3 without
obligation to the Stockholder.
(b) In connection with any registration under this Section 5.3
involving an underwriting, the Buyer shall not be required to include any
Registrable Shares in such registration unless the Stockholder accepts the terms
of the underwriting as agreed upon between the Buyer and the underwriters
selected by it. If in the opinion of the managing underwriter it is appropriate
because of marketing factors to limit the number of Registrable Shares to be
included in the offering, then the Buyer shall be required to include in the
registration only that number of Registrable Shares, if any, which the managing
underwriter believes should be included therein; provided that no persons or
entities other than the Buyer and holders of securities of the Buyer who have
registration rights ("Registration Rights Holders") shall be permitted to
include securities in the offering if the underwriters determine to limit the
numbers of Registrable Shares to be included therein. If the number of shares of
Common Stock to be included in the offering in accordance with the foregoing
limitation is less than the total number of shares which the Registration Rights
Holders have requested to be included, then the Registration Rights Holders who
have requested registration (including the Stockholder) shall participate in the
registration pro rata based upon their total ownership of shares of Common
Stock. If any Registration Rights Holder would thus be entitled to include more
securities than such Registration Rights Holder requested to be registered, the
excess shall be allocated among other requesting holders pro rata in the manner
described in the preceding sentence.
5.4 Registration Procedures. If and whenever the Buyer is
required by the provisions of this Agreement to use its best efforts to effect
the registration of any of the Registrable Shares under the Securities Act, the
Buyer shall:
(a) file with the Commission a Registration Statement with
respect to such Registrable Shares and use its best efforts to cause that
Registration Statement to become effective;
(b) as expeditiously as possible prepare and file with the
Commission any amendments and supplements to the Registration Statement and the
prospectus included in the Registration Statement as may be necessary to keep
the Registration Statement effective, in the case of a firm commitment
underwritten public offering, until each underwriter has completed the
distribution of all securities purchased by it and, in the case of any other
offering, until the earlier of the sale of all Registrable Shares covered
thereby or 120 days after the effective date thereof
-6-
<PAGE> 7
(excluding any days in which the Buyer requires the Stockholder to cease sales
of shares as provided below); provided, however, that the Buyer may by written
notice require that the Stockholder immediately cease sales of shares pursuant
to such Registration Statement at any time that (i) the Buyer becomes engaged in
a business activity or negotiation which is not disclosed in the Registration
Statement (or the prospectus included therein) which the Buyer reasonably
believes must be disclosed therein under applicable law and which the Buyer
desires to keep confidential for business purposes, (ii) the Buyer determines
that a particular disclosure so determined to be required to be disclosed
therein would be premature or would adversely affect the Buyer or its business
or prospects, or (iii) the Registration Statement can no longer be used under
the existing rules and regulations promulgated under the Securities Act. The
Buyer shall not be required to disclose to the Stockholder which of the reasons
specified in clauses (i), (ii) or (iii) above are the basis for requiring a
suspension of sales hereunder;
(c) as expeditiously as possible furnish to the Stockholder
such reasonable numbers of copies of the prospectus, including a preliminary
prospectus, in conformity with the requirements of the Securities Act, and such
other documents as the Stockholder may reasonably request in order to facilitate
the public sale or other disposition of the Registrable Shares owned by the
Stockholder; and
(d) as expeditiously as possible use its best efforts to
register or qualify the Registrable Shares covered by the Registration Statement
under the securities or Blue Sky laws of such states as the Stockholder shall
reasonably request, and do any and all other acts and things that may be
necessary or desirable to enable the Stockholder to consummate the public sale
or other disposition in such states of the Registrable Shares owned by the
Stockholder; provided, however, that the Buyer shall not be required in
connection with this paragraph (d) to qualify as a foreign corporation or
execute a general consent to service of process in any jurisdiction.
If the Buyer has delivered preliminary or final prospectuses to the
Stockholder and after having done so the prospectus is amended to comply with
the requirements of the Securities Act, the Buyer shall promptly notify the
Stockholder and, if requested, the Stockholder shall immediately cease making
offers of Registrable Shares and return all prospectuses to the Buyer. The Buyer
shall promptly provide the Stockholder with revised prospectuses and, following
receipt of the revised prospectuses, the Stockholder shall be free to resume
making offers of the Registrable Shares.
-7-
<PAGE> 8
5.5 Allocation of Expenses. The Buyer will pay all
Registration Expenses of all registrations under this Section 5; provided,
however, that if a registration under Section 5.2 is withdrawn at the request of
the Stockholder (other than as a result of information concerning the business
or financial condition of the Buyer which is made known to the Stockholder after
the date on which such registration was requested) and if the Stockholder elects
not to have such registration counted as a registration requested under Section
5.2, the Stockholder shall pay the Registration Expenses of such registration
pro rata in accordance with the number of its Registrable Shares included in
such registration. For purposes of this Section 5.5, the term "Registration
Expenses" shall mean all expenses incurred by the Buyer in complying with this
Section 5, including without limitation all registration and filing fees,
exchange listing fees, printing expenses and fees and expenses of counsel for
the Buyer, state Blue Sky fees and expenses, and the expense of any special
audits incident to or required by any such registration, and the reasonable fees
and disbursements of one counsel for all registration rights holders
participating in the registration (with such counsel being selected by the
participating registration rights holders), but excluding underwriting discounts
and selling commissions.
5.6. Indemnification and Contribution.
(a) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Section 5, the Buyer will
indemnify and hold harmless the Stockholder, each underwriter of such
Registrable Shares, and each other person, if any, who controls the Stockholder
or underwriter within the meaning of the Securities Act or the Exchange Act
against any losses, claims, damages or liabilities, joint or several, to which
the Stockholder, underwriter or controlling person may become subject under the
Securities Act, the Exchange Act, state securities or Blue Sky laws or
otherwise, insofar as such losses, claims, damages or liabilities (or actions in
respect thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in any Registration Statement
under which such Registrable Shares were registered under the Securities Act,
any preliminary prospectus or final prospectus contained in the Registration
Statement, or any amendment or supplement to such Registration Statement, or
arise out of or are based upon the omission or alleged omission to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading; and the Buyer will reimburse the Stockholder,
underwriter and each such controlling person for any legal or any other expenses
reasonably incurred by the Stockholder, underwriter or controlling person in
connection with investigating or defending any such loss, claim, damage,
-8-
<PAGE> 9
liability or action; provided, however, that the Buyer will not be liable in any
such case to the extent that any such loss, claim, damage or liability arises
out of or is based upon any untrue statement or omission made in such
Registration Statement, preliminary prospectus or final prospectus, or any such
amendment or supplement, in reliance upon and in conformity with information
furnished to the Buyer, in writing, by or on behalf of the Stockholder,
underwriter or controlling person specifically for use in the preparation
thereof.
(b) In the event of any registration of any of the Registrable
Shares under the Securities Act pursuant to this Section 5, the Stockholder will
indemnify and hold harmless the Buyer, each of its directors and officers and
each underwriter (if any) and each person, if any, who controls the Buyer or any
such underwriter within the meaning of the Securities Act or the Exchange Act,
against any losses, claims, damages or liabilities, joint or several, to which
the Buyer, such directors and officers, underwriter or controlling person may
become subject under the Securities Act, the Exchange Act, state securities or
Blue Sky laws or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in any
Registration Statement under which such Registrable Shares were registered under
the Securities Act, any preliminary prospectus or final prospectus contained in
the Registration Statement, or any amendment or supplement to the Registration
Statement, or arise out of or are based upon any omission or alleged omission to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, if the statement or omission was made in
reliance upon and in conformity with information relating to the Stockholder
furnished in writing to the Buyer by or on behalf of the Stockholder
specifically for use in connection with the preparation of such Registration
Statement, prospectus, amendment or supplement; provided, however, that the
obligations of the Stockholder hereunder shall be limited to an amount equal to
the proceeds to the Stockholder of Registrable Shares sold in connection with
such registration.
(c) Each party entitled to indemnification under this Section
5.6 (the "Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified Party
has actual knowledge of any claim as to which indemnity may be sought, and shall
permit the Indemnifying Party to assume the defense of any such claim or any
litigation resulting therefrom; provided, that counsel for the Indemnifying
Party, who shall conduct the defense of such claim or litigation, shall be
approved by the Indemnified Party (whose approval shall not be unreasonably
withheld); and, provided,
-9-
<PAGE> 10
further, that the failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under this
Section 5.6, except to the extent the Indemnifying Party is prejudiced thereby.
The Indemnified Party may participate in such defense at such party's expense;
provided, however, that the Indemnifying Party shall pay such expense if
representation of such Indemnified Party by the counsel retained by the
Indemnifying Party would be inappropriate due to actual or potential differing
interests between the Indemnified Party and any other party represented by such
counsel in such proceeding. No Indemnifying Party, in the defense of any such
claim or litigation shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does not
include as an unconditional term thereof the giving by the claimant or plaintiff
to such Indemnified Party of a release from all liability in respect of such
claim or litigation, and no Indemnified Party shall consent to entry of any
judgment or settle such claim or litigation without the prior written consent of
the Indemnifying Party.
(d) In order to provide for just and equitable contribution to
joint liability under the Securities Act in any case in which either (i) the
Stockholder, or any controlling person of the Stockholder, makes a claim for
indemnification pursuant to this Section 5.6 but it is judicially determined (by
the entry of a final judgment or decree by a court of competent jurisdiction and
the expiration of time to appeal or the denial of the last right of appeal) that
such indemnification may not be enforced in such case notwithstanding the fact
that this Section 5.6 provides for indemnification in such case, or (ii)
contribution under the Securities Act may be required on the part of the
Stockholder or any such controlling person in circumstances for which
indemnification is provided under this Section 5.6; then, in each such case, the
Buyer and the Stockholder will contribute to the aggregate losses, claims,
damages or liabilities to which they may be subject (after contribution from
others) in such proportions so that such holder is responsible for the portion
represented by the percentage that the public offering price of its Registrable
Shares offered by the Registration Statement bears to the public offering price
of all securities offered by such Registration Statement, and the Buyer is
responsible for the remaining portion; provided, however, that, in any such
case, (A) the Stockholder will not be required to contribute any amount in
excess of the proceeds to it of all Registrable Shares sold by it pursuant to
such Registration Statement, and (B) no person or entity guilty of fraudulent
misrepresentation, within the meaning of Section 11(f) of the Securities Act,
shall be entitled to contribution from any person or entity who is not guilty of
such fraudulent misrepresentation.
-10-
<PAGE> 11
5.7 Information by Holder. The Stockholder shall furnish to
the Buyer such information regarding the Stockholder and the distribution
proposed by the Stockholder as the Buyer may request in writing and as shall be
required in connection with any registration, qualification or compliance
referred to in this Section 5.
5.8 Rule 144 Requirements. The Buyer agrees to:
(a) comply with the requirements of Rule 144(c) under the
Securities Act with respect to current public information about the Buyer;
(b) use its best efforts to file with the Commission in a
timely manner all reports and other documents required of the Buyer under the
Securities Act and the Exchange Act (at any time after it has become subject to
such reporting requirements); and
(c) furnish to the Stockholder upon written request (i) a
written statement by the Buyer as to its compliance with the requirements of
said Rule 144(c) and the reporting requirements of the Securities Act and the
Exchange Act, (ii) a copy of the most recent annual or quarterly report of the
Buyer, and (iii) such other reports and documents of the Buyer as such holder
may reasonably request to avail itself of any similar rule or regulation of the
Commission allowing it to sell any such securities without registration.
6. Additional Documents. The Stockholder and the Company hereby
covenant and agree to execute and deliver any additional documents reasonably
necessary or desirable to carry out the purpose and intent of this Agreement.
7. Consent and Waiver. The Stockholder hereby gives any consents or
waivers that are reasonably required for the consummation of the Merger under
the terms of any agreement to which the Stockholder is a party or pursuant to
any rights the Stockholder may have.
8. Termination. The provisions of Sections 1, 2, 3 and 4 of this
Agreement and the Proxy delivered in connection herewith shall terminate and
shall have no further force or effect as of the Expiration Date. The remaining
provisions of this Agreement shall terminate on the earliest of (i) the
termination of the Merger Agreement in accordance with its terms, (ii) the first
date following the Merger on which all of the Registrable Shares then held by
the Stockholder are eligible for sale pursuant to Rule 144 under the Securities
Act within a three-month period, and (iii) the fifth anniversary of the
Effective Time.
-11-
<PAGE> 12
9. Legending of Shares. If so requested the Buyer, the Stockholder
agrees that the Shares and any New Shares shall bear a legend stating that they
are subject to this Agreement and to an irrevocable proxy. The Stockholder
agrees that he shall not Transfer the Shares or any New Shares without first
having the aforementioned legend affixed to the certificates representing the
Shares or any New Shares.
10. Miscellaneous.
10.1 Severability. If any term, provision, covenant or
restriction of this Agreement is held by a court of competent jurisdiction to be
invalid, void or unenforceable, then the remainder of the terms, provisions,
covenants and restrictions of this Agreement shall remain in full force and
effect and shall in no way be affected, impaired or invalidated.
10.2 Binding Effect and Assignment. This Agreement and all of
the provisions hereof shall be binding upon and inure to the benefit of the
parties hereto and their respective successors and permitted assigns, but,
except as otherwise specifically provided herein, neither this Agreement nor any
of the rights, interests or obligations of the parties hereto may be assigned by
any of the parties without the prior written consent of the other parties. The
parties agree that Registrable Shares held by the Stockholder, and the
registration rights relating thereto set forth in Section 5 of this Agreement,
may be transferred by the Stockholder by will or the laws of descent or
distribution or pursuant to a marital settlement agreement or divorce decree;
provided, that (i) the Buyer is provided with written notice of such transfer,
(ii) the transferee agrees in writing to be bound by the terms hereof, and (iii)
from and after the effective date of such transfer any and all actions,
consents, approvals and waivers by the Stockholder pursuant to Section 5 shall
be effected only by the affirmative vote of the holders of a majority of the
Registrable Shares then held by the Stockholder and all such permitted
transferees.
10.3 Amendments and Modification. This Agreement may not be
modified, amended, altered or supplemented except by the execution and delivery
of a written agreement executed by the parties hereto.
10.4 Specific Performance; Injunctive Relief. The parties
acknowledge that the Buyer will be irreparably harmed and that there will be no
adequate remedy at law for a violation of any of the covenants or agreements of
the Stockholder set forth herein. Therefore, it is agreed that, in addition to
any other remedies that may be available to the Buyer upon any such violation,
the Buyer shall have the right to enforce such
-12-
<PAGE> 13
covenants and agreements by specific performance, injunctive relief or by any
other means available to the Buyer at law or in equity.
10.5 Notices. All notices and other communications pursuant to
this Agreement shall be in writing and deemed to be sufficient if contained in a
written instrument and shall be deemed given if delivered personally,
telecopied, sent by nationally-recognized overnight courier or mailed by
registered or certified mail (return receipt requested), postage prepaid, to the
parties at the following address (or at such other address for a party as shall
be specified by like notice):
If to the Buyer: Security Dynamics
Technologies, Inc.
One Alewife Center
Cambridge, MA 02140-2312
With a copy to: Hale and Dorr
60 State Street
Boston, MA 02109
Attn: Jay E. Bothwick, Esq.
If to Stockholder: To the address for notice set forth
on the last page hereof.
With a copy to: RSA Data Security, Inc.
100 Marine Parkway
Suite 500
Redwood City, CA 94065-1031
With copies to: Fenwick & West
Two Palo Alto Square
Palo Alto, CA 94306
Attn: Joel D. Kellman, Esq.
Tomlinson Zisko Morosoli
& Maser LLP
200 Page Mill Road
Second Floor
Palo Alto, CA 94306
Attn: Timothy Tomlinson, Esq.
-13-
<PAGE> 14
10.6 Governing Law. This Agreement shall be governed by, construed and
enforced in accordance with the internal laws of the State of Delaware, without
giving effect to any choice or conflict of law provision or rule (whether of the
State of Delaware or any other jurisdiction) that would cause the application of
the laws of any jurisdiction other than the State of Delaware.
10.7 Entire Agreement. This Agreement and the Proxy contain the entire
understanding of the parties in respect of the subject matter hereof, and
supersede all prior negotiations and understandings between the parties with
respect to such subject matter.
10.8 Counterparts. This Agreement may be executed in several
counterparts, each of which shall be an original, but all of which together
shall constitute one and the same agreement.
10.9 Effect of Headings. The section headings herein are for
convenience only and shall not affect the construction or interpretation of
this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the day and year first above written.
SECURITY DYNAMICS
TECHNOLOGIES, INC. Stockholder
Name: /s/ Ronald L. Rivest
--------------------
Ronald Rivest
By: /s/ Charles R. Stuckey, Jr.
---------------------------
Title: President & CEO
Stockholder's Address for Notice:
RSA DATA SECURITY, INC.
c/o RSA Data Security, Inc.
100 Marine Parkway
Suite 500
By: /s/ D. James Bidzos Redwood City, CA 94065-1031
-------------------
Title: CEO Shares beneficially owned:
318,000 shares of Company Common Stock
0 shares of Company Series A Preferred
Stock
<PAGE> 15
0 shares of Company Series B Preferred
Stock
0 shares of Company Series C Preferred
Stock
10,000 shares of Company Series D
Preferred Stock
50,000 shares of Company Common Stock
issuable upon exercise of outstanding
options and warrants
-15-
<PAGE> 16
IRREVOCABLE PROXY
to Vote
RSA Data Security, Inc. Stock
The undersigned stockholder of RSA Data Security, Inc., a Delaware
corporation (the "Company"), hereby irrevocably (to the full extent permitted by
Section 212 of the General Corporation Law of the State of Delaware) appoints
the directors on the Board of Directors of Security Dynamics Technologies, Inc.,
a Delaware Corporation (the "Buyer"), and each of them, as the sole and
exclusive attorneys and proxies of the undersigned, with full power of
substitution and resubstitution, to vote and exercise all voting and related
rights (to the full extent that the undersigned is entitled to do so) with
respect to all of the shares of capital stock of the Company that now are or
hereafter may be beneficially owned by the undersigned, and any and all other
shares or securities of the Company issued or issuable in respect thereof on or
after the date hereof (collectively, the "Shares") in accordance with the terms
of this Proxy. The Shares beneficially owned by the undersigned stockholder of
the Company as of the date of this Proxy are listed on the final page of this
Proxy, along with the number of the share certificates which represent such
Shares. Upon the undersigned's execution of this Proxy, any and all prior
proxies given by each undersigned with respect to any Shares are hereby revoked
and the undersigned agrees not to grant any subsequent proxies with respect to
the Shares until after the Expiration Date (as defined below).
This Proxy is irrevocable (to the extent provided in Section 212 of the
General Corporation Law of the State of Delaware), is granted pursuant to that
certain Stockholder Agreement dated as of April 14, 1996, and is granted in
consideration of the Buyer's entering into that certain Agreement and Plan of
Merger dated as of April 14, 1996 (the "Merger Agreement"), among the Buyer,
Card-Key Inc., a Delaware corporation and wholly-owned subsidiary of the Buyer
("Sub") and the Company. The Merger Agreement provides for the merger of Sub
into the Company in accordance with its terms (the "Merger") and the Stockholder
is receiving a portion of the proceeds of the Merger. As used herein, the term
"Expiration Date" shall mean the earlier to occur of (i) such date and time as
the Merger shall become effective in accordance with the terms and provisions of
the Reorganization Agreement or (ii) the termination of the Merger Agreement in
accordance with its terms.
-16-
<PAGE> 17
The attorneys and proxies named above, and each of them, are hereby
authorized and empowered by the undersigned, at any time prior to the Expiration
Date; to act as the undersigned's attorney and proxy to vote the Shares, and to
exercise all voting, consent and similar rights of the undersigned with respect
to the Shares (including, without limitation, the power to execute and deliver
written consents pursuant to Section 228(a) of the General Corporation Law of
the State of Delaware) at every annual, special or adjourned meeting of the
stockholders of the Company and in every written consent in lieu of such
meeting: (a) in favor of approval of the Merger and the Merger Agreement; and
(b) against approval of any proposal made in opposition to or in competition
with the consummation of the Merger and the Merger Agreement, against any
merger, consolidation, sale of assets, reorganization or recapitalization of the
Company with any party other than the Buyer and its affiliates and against any
liquidation or winding up of the Company. The attorneys and proxies named above
may not exercise this Irrevocable Proxy on any other matter except as provided
in clauses (a) and (b) above. The undersigned Stockholder may vote the Shares on
all other matters.
Any obligation of the undersigned hereunder shall be binding upon the
successors and assigns of the undersigned.
This Proxy is irrevocable (to the fullest extent permitted by Section
212 of the General Corporation Law of the State of Delaware). This Proxy shall
terminate, and be of no further force and effect, automatically upon the
Expiration Date.
Dated: April 14, 1996 /s/ Ronald L. Rivest
--------------------
Ronald Rivest
Shares beneficially owned:
318,000 shares of Company Common Stock
0 shares of Company Series A Preferred Stock
0 shares of Company Series B Preferred Stock
0 shares of Company Series C Preferred Stock
-17-
<PAGE> 18
10,000 shares of Company Series D Preferred
Stock
50,000 shares of Company Common Stock
issuable upon exercise of outstanding options
and warrants
-18-
<PAGE> 1
EXHIBIT 11
SECURITY DYNAMICS TECHNOLOGIES, INC.
AND SUBSIDIARIES
COMPUTATION OF INCOME (LOSS) PER COMMON SHARE
(IN THOUSANDS EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months
Ended
March 31, Year Ended December 31,
--------------- ----------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
PRO FORMA(1):
Weighted average number of
common and common equivalent
shares outstanding:
Common stock........................ 2,682 2,336 2,314 2,166
Assumed conversion of
preferred stock................... 5,474 5,964 6,250 6,250
Common equivalent shares
resulting from stock options
(treasury stock method)........... 784 570 536 494
------ ------ ------ ------
Subtotal........................ 8,940 8,870 9,100 8,910
Cheap stock (treasury
stock method)..................... 140 140 140 140
------ ------ ------ ------
Total........................... 9,080 9,010 9,240 9,050
====== ====== ====== ======
Pro forma income per
common and common
equivalent share:
Income before cumulative
effect of change in
accounting...................... $ .25 $ .19
Cumulative effect................. -- .06
------ ------
Net income........................ $ .25 $ .25
====== ======
HISTORICAL -- PRIMARY:
Weighted average number of
common and common equivalent
shares outstanding:
Common stock........................ 13,519 11,766 11,978 2,682 2,336 2,314 2,166
Assumed conversion of
preferred stock................... -- -- -- 410 410 410 410
Common equivalent shares
resulting from stock
options and warrants
(treasury stock method)........... 783 748 704 729 570 536 --
------ ------ ------ ------ ------ ------ ------
Subtotal........................ 14,302 12,514 12,682 3,821 3,316 3,260 2,576
Cheap stock (treasury
stock method)..................... -- -- -- 140 140 140 140
------ ------ ------ ------ ------ ------ ------
Total........................... 14,302 12,514 12,682 3,961 3,456 3,400 2,716
====== ====== ====== ====== ====== ====== ======
Net income (loss) applicable
to common stock................... $2,551 $1,117 $5,812 $1,898 $1,772 $ 724 $ (20)
====== ====== ====== ====== ====== ====== ======
Income (loss) per common and
common equivalent share:
Income (loss) before cumulative
effect of change in accounting
and extraordinary item........... $ .18 $ .09 $ .46 $ 48 $ .35 $ .09 $ (.06)
Extraordinary item................. -- -- -- -- -- .12 .05
Cumulative effect.................. -- -- -- -- .16 -- --
------ ------ ------ ------ ------ ------ ------
Net income (loss)................ $ .18 $ .09 $ .46 $ 48 $ .51 $ .21 $ (.01)
====== ====== ====== ====== ====== ====== ======
</TABLE>
- ----------
(1) 1995 and 1996 share and per share data is actual.
<PAGE> 2
EXHIBIT 11 -- Continued
SECURITY DYNAMICS TECHNOLOGIES, INC.
AND SUBSIDIARIES
COMPUTATION OF INCOME (LOSS) PER COMMON SHARE -- Continued
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months
Ended March 31, Year Ended December 31,
----------------- --------------------------------------------------
1996 1995 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL -- FULLY DILUTED:
Weighted average number of common
and common equivalent shares
outstanding:
Common stock............................. 13,519 11,766 11,978 2,682 2,336 2,314 2,166
Assumed conversion of preferred stock.... -- -- -- 5,474 5,964 6,250 6,250
Common equivalent shares resulting
from stock options (treasury stock
method)................................ 783 756 758 828 602 536 718
------- ------- ------- ------ ------ ------ ------
Subtotal............................. 14,302 12,522 12,736 8,984 8,902 9,100 9,134
Cheap stock (treasury stock method)...... -- -- -- 140 140 140 140
------- ------- ------- ------ ------ ------ ------
Total................................ 14,302 12,522 12,736 9,124 9,042 9,240 9,274
======= ======= ======= ====== ====== ====== ======
Fully diluted income per common and
common equivalent share:
Income before cumulative effect of change
in accounting and extraordinary item... $ .18 $ .09 $ .46 $ .25 $ .19 $ .09 $ .03
Extraordinary item...................... -- -- -- -- -- .04 .02
Cumulative effect....................... -- -- -- -- .06 -- --
------- ------- ------- ------ ------ ------ ------
Net income............................ $ .18 $ .09 $ .46 $ .25 $ .25 $ .13 $ .05
======= ======= ======= ====== ====== ====== ======
</TABLE>
- ------------------------------
(1) 1995 and 1996 share and per share data is actual.
<PAGE> 1
EXHIBIT 23.3
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
We consent to the use in this Registration Statement of Security Dynamics
Technologies, Inc. (the "Company") on Form S-4 of our report dated January 22,
1996 (which report expresses an unqualified opinion and includes an explanatory
paragraph referring to a change in the Company's method of accounting for income
taxes in 1993), appearing in the Joint Proxy Statement and Prospectus, which is
part of this Registration Statement, and to references to us under the headings
"Selected Consolidated Financial Data" and "Experts" in such Joint Proxy
Statement and Prospectus.
Our audits of the consolidated financial statements referred to in our
aforementioned report also included the financial statement schedule of the
Company, listed in Item 21(b). This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audits. In our opinion, such financial statement schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
June 28, 1996
<PAGE> 1
EXHIBIT 23.4
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to
the use 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) of Security Dynamics Technologies, Inc. for the registration of
shares to be issued in the merger transaction.
/s/ Ernst & Young LLP
--------------------------------------
ERNST & YOUNG LLP
Palo Alto, California
June 25, 1996
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SECURITY
DYNAMICS 1996 10Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
QUARTERLY REPORT ON FORM 10Q.
</LEGEND>
<CIK> 0000932064
<NAME> SECURITY DYNAMICS TECHNOLOGIES, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> QUARTER
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 17,655
<SECURITIES> 73,532
<RECEIVABLES> 7,481
<ALLOWANCES> 240
<INVENTORY> 1,322
<CURRENT-ASSETS> 101,877
<PP&E> 4,253
<DEPRECIATION> 1,530
<TOTAL-ASSETS> 105,849
<CURRENT-LIABILITIES> 7,966
<BONDS> 0
0
0
<COMMON> 136
<OTHER-SE> 91,321
<TOTAL-LIABILITY-AND-EQUITY> 105,849
<SALES> 12,170
<TOTAL-REVENUES> 12,170
<CGS> 2,912
<TOTAL-COSTS> 2,912
<OTHER-EXPENSES> 6,468
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,017
<INCOME-TAX> 1,466
<INCOME-CONTINUING> 2,551
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,551
<EPS-PRIMARY> 0.18
<EPS-DILUTED> 0.18
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SECURITY
DYNAMICS 1995 ANNUAL REPORT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH ANNUAL REPORT ON FORM 10-K.
</LEGEND>
<CIK> 0000932064
<NAME> SECURITY DYNAMICS TECHNOLOGIES, INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 44,583
<SECURITIES> 44,957
<RECEIVABLES> 6,594
<ALLOWANCES> 375
<INVENTORY> 1,445
<CURRENT-ASSETS> 98,438
<PP&E> 3,290
<DEPRECIATION> 1,263
<TOTAL-ASSETS> 101,557
<CURRENT-LIABILITIES> 6,537
<BONDS> 0
0
0
<COMMON> 135
<OTHER-SE> 94,885
<TOTAL-LIABILITY-AND-EQUITY> 101,557
<SALES> 33,804
<TOTAL-REVENUES> 33,804
<CGS> 7,235
<TOTAL-COSTS> 7,235
<OTHER-EXPENSES> 18,817
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 9,451
<INCOME-TAX> 3,639
<INCOME-CONTINUING> 5,812
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,812
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
</TABLE>
<PAGE> 1
EXHIBIT 99.2
- --------------------------------------------------------------------------------
SECURITY DYNAMICS TECHNOLOGIES, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
SPECIAL MEETING OF STOCKHOLDERS -- JULY 26, 1996
Those signing on the reverse side, revoking any prior proxies, hereby
appoint(s) Charles R. Stuckey, Jr. and Arthur W. Coviello, Jr., or
each of them, with full power of substitution, as proxies for those
signing on the reverse side to act and vote at the Special Meeting of
Stockholders of Security Dynamics Technologies, Inc. to be held on
July 26, 1996 and at any adjournments or postponements thereof as
indicated upon all matters referred to on the reverse side and
described in the Proxy Statement for the Meeting, and, in their
discretion, upon any other matters which may properly come before the
Meeting.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED
BY THE UNDERSIGNED STOCKHOLDER(S). IF NO OTHER INDICATION IS MADE, THE
PROXIES SHALL VOTE "FOR" PROPOSAL NUMBERS 1 AND 2.
----------------------------------------------------------------------
PLEASE VOTE, DATE AND SIGN ON THE OTHER SIDE AND RETURN PROMPTLY IN
THE ENCLOSED ENVELOPE.
Please sign this proxy exactly as your name appears hereon. Joint
owners should each sign personally. Trustees and other fiduciaries
should indicate the capacity in which they sign. If a corporation or
partnership, the signature should be that of an authorized officer who
should state his or her title.
<TABLE>
<S> <C>
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
--------------------------------------------- ---------------------------------------------
--------------------------------------------- ---------------------------------------------
--------------------------------------------- ---------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 2
- --------------------------------------------------------------------------------
/X/ PLEASE MARK VOTES AS IN THIS EXAMPLE
1. Approval of issuance of up to 4,000,000 shares of the Company's
Common Stock in order to effect the proposed acquisition of RSA
Data Security, Inc.
FOR / / AGAINST / / ABSTAIN / /
2. Approval of an amendment to the Company's Third Restated
Certificate of Incorporation increasing the authorized number
of shares of Common Stock from 30,000,000 to 80,000,000 shares.
FOR / / AGAINST / / ABSTAIN / /
A vote FOR proposal numbers 1 and 2 is recommended by the Board of
Directors.
IN THEIR DISCRETION THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENTS
OR POSTPONEMENTS THEREOF.
PLEASE BE SURE TO SIGN AND DATE THIS PROXY.
<TABLE>
<C> <S> <C>
/ / Mark box at left if comments or address change Stockholder sign here
have been noted on the reverse side of this card. ---------------------------------------------
Co-owner sign here
---------------------------------------------
Date: ---------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 99.3
PROXY
RSA DATA SECURITY, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
I hereby appoint D. James Bidzos, Addison M. Fischer, Ronald L. Rivest and
Kathryn Conrow, or any of them, my proxies, with full power of substitution, to
vote all shares of capital stock of the Company which I am entitled to vote at
the Special Meeting of Stockholders of the Company, to be held at the offices of
Fenwick & West LLP, Two Palo Alto Square, Palo Alto, California 94306, on
Friday, July 26, 1996, at 10:00 a.m., local time, and at any adjournment or
postponement thereof, as follows:
/ X /
Please mark
your votes as in
this example.
<TABLE>
<S> <C> <C> <C>
1. Approve and Adopt the Merger Agreement and the Merger, as described FOR AGAINST ABSTAIN
further in the accompanying Joint Proxy Statement, dated / / / / / /
, 1996. Approval of the Merger Agreement and the Merger
shall constitute approval of the appointment of Messrs. Bidzos,
Fischer and Rivest as the Indemnification Representatives, as
described in the Joint Proxy Statement, and the agreement of the
undersigned to be bound by the Merger Agreement and the Escrow
Agreement.
</TABLE>
IN THEIR DISCRETION, THE PROXIES MAY VOTE ON ANY OTHER MATTERS THAT MAY PROPERLY
COME BEFORE THE MEETING OR ANY ADJOURNMENT OR POSTPONEMENT THEREOF.
THIS PROXY WHEN PROPERLY EXECUTED WILL BE VOTED IN THE MANNER DIRECTED HEREIN BY
THE UNDERSIGNED STOCKHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED
FOR PROPOSAL 1.
<TABLE>
<S> <C>
SIGNATURE(S) Date ________ (Please indicate change of address below)
SIGNATURE(S) Date ________ ------------------------------------------
NOTE: Please sign exactly as name appears hereon. Joint owners should each ------------------------------------------
sign. When signing as attorney, executor, administrator, trustee or ------------------------------------------
guardian, please give full title as such.
</TABLE>
Number and type of shares in your name: Common:
- ---------------------------------
Series A Convertible Preferred:
---------------------------------------------
Series B Convertible Preferred:
---------------------------------------------
Series C Convertible Preferred:
---------------------------------------------
Series D Convertible Preferred:
---------------------------------------------
WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, SIGN AND
RETURN THIS PROXY IN THE ACCOMPANYING ENVELOPE, TO SUSAN F. DWORAK, LEGAL
ASSISTANT, FENWICK & WEST LLP, TWO PALO ALTO SQUARE, PALO ALTO, CA 94306,
FACSIMILE: (415) 494-0674, NO LATER THAN JULY 25, 1996. DO NOT SEND ANY STOCK
CERTIFICATES WITH THIS PROXY
