<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/x/ Quarterly report pursuant to Section 13 of 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1996
OR
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 0-25120
SECURITY DYNAMICS TECHNOLOGIES, INC.
(Exact name of Registrant as Specified in Its Charter)
DELAWARE 04-2916506
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
20 CROSBY DRIVE
BEDFORD, MA 01730
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 687-7000
ONE ALEWIFE CENTER, CAMBRIDGE, MA 02140
(617) 547-7820
(Former Address, changed since last Report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
--- ---
As of July 31, 1996, there were 17,064,939 shares of the Registrant's Common
Stock, $.01 par value per share, outstanding.
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SECURITY DYNAMICS TECHNOLOGIES, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 1996
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1996 and
December 31, 1995 3
Condensed Consolidated Statements of Income for the three months
and six months ended June 30, 1996 and June 30, 1995 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1996 and June 30, 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
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ASSETS
Current assets
Cash and equivalents $ 5,639 $ 44,583
Marketable securities 83,466 44,957
Accounts receivable (less allowance for doubtful accounts
of $257 in 1996 and $375 in 1995) 8,984 6,219
Inventory 2,365 1,445
Prepaid expenses and other 2,012 758
Deferred taxes 528 476
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Total current assets 102,994 98,438
Property and equipment - net 3,835 2,027
Purchased technology 139 208
Investment 686 510
Deferred taxes 285 229
Other 485 145
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Total $ 108,424 $ 101,557
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,661 $ 1,347
Accrued payroll and related benefits 1,949 2,210
Accrued expenses and other 874 1,176
Income taxes payable -- 190
Deferred revenue 1,993 1,614
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Total current liabilities 7,477 6,537
Stockholders' equity:
Common stock, $.01 par value; authorized 30,000,000 shares; issued,
13,666,478 and 13,452,851 shares in 1996 and 1995; outstanding,
13,666,330 and
13,452,703 shares in 1996 and 1995 137 135
Additional paid-in capital 91,609 90,968
Retained earnings 9,379 3,943
Deferred stock compensation (129) (170)
Treasury stock, common, at cost,
148 shares in 1996 and 1995 -- --
Cumulative translation adjustment (17) 41
Unrealized (loss) gain on marketable securities - net (32) 103
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Total stockholders' equity 100,947 95,020
Total $ 108,424 $ 101,557
========= =========
</TABLE>
See notes to condensed consolidated financial statements
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SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
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1996 1995 1996 1995
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<S> <C> <C> <C> <C>
Revenue $14,070 $ 8,174 $26,240 $14,417
Cost of revenue 3,260 1,792 6,172 3,009
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Gross profit 10,810 6,382 20,068 11,408
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Costs and expenses:
Research and development 1,708 762 3,196 1,407
Marketing and selling 4,190 2,666 7,760 4,932
General and administrative 1,507 947 2,917 1,629
------- ------- ------- -------
Total 7,405 4,375 13,873 7,968
------- ------- ------- -------
Income from operations 3,405 2,007 6,195 3,440
Interest income 1,138 406 2,365 790
------- ------- ------- -------
Income before provision for income taxes 4,543 2,413 8,560 4,230
Provision for income taxes 1,658 928 3,124 1,628
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Net income $ 2,885 $ 1,485 $ 5,436 $ 2,602
======= ======= ======= =======
Net income per common and
common equivalent share $ .20 $ .12 $ .38 $ .21
======= ======= ======= =======
Weighted average number of common and
common equivalent shares outstanding 14,435 12,528 14,365 12,518
======= ======= ======= =======
</TABLE>
See notes to condensed consolidated financial statements
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SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
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Six Months Ended June 30,
-----------------------------------------
1996 1995
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Cash flows from operating activities:
Net income $ 5,436 $ 2,602
Adjustments to reconcile net income to net cash provided by operating
activities:
Deferred taxes (108) (9)
Amortization of purchased technology and capitalized software 69 19
costs
Depreciation 535 189
Amortization of deferred stock compensation 41 34
Allowance for notes receivable -- 200
Stock option compensation 108 --
Increase (decrease) in cash from:
Accounts receivable (2,765) (1,200)
Inventory (920) (589)
Prepaid expenses and other (1,254) (299)
Accounts payable 1,314 (469)
Accrued payroll and related benefits (261) 249
Accrued expenses and other (302) (211)
Income taxes payable (190) 448
Deferred revenue 379 389
-------- --------
Net cash provided by
operating activities 2,082 1,353
-------- --------
Cash flows from investing activities:
Purchase of marketable securities (75,052) (17,897)
Maturities of marketable securities 36,382 3,350
Expenditures for property and equipment (2,343) (581)
Capitalized software costs -- (41)
Investment (176) (510)
Notes receivable -- (251)
Other assets (340) (15)
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Net cash used for investing
activities (41,529) (15,945)
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Cash flows from financing activities:
Proceeds from sale of common stock 535 3,826
-------- --------
Net cash provided by financing
activities 535 3,826
-------- --------
Effects of exchange rate changes on cash and equivalents (32) 45
-------- --------
Net (decrease) in cash and equivalents (38,944) (10,721)
Cash and equivalents, beginning of period 44,583 17,517
-------- --------
Cash and equivalents, end of period $ 5,639 $ 6,796
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</TABLE>
See notes to condensed consolidated financial statements
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SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(In thousands, except share and per share data)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
have been prepared by Security Dynamics Technologies, Inc. (the
"Company") pursuant to the rules and regulations of the Securities and
Exchange Commission regarding interim financial reporting. Accordingly,
they do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements and should be read in conjunction with the audited
consolidated financial statements included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1995.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis
as the audited consolidated financial statements, and include all
adjustments, consisting only of normal recurring adjustments, necessary
for fair presentation of the results of the interim periods presented.
The operating results for the interim periods presented are not
necessarily indicative of the results expected for the full year.
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.
2. Income Per Common Share
Income per common share is computed using the weighted average number
of common and common equivalent shares outstanding during each period
presented.
3. Income Taxes
The Company provides for income taxes at the end of each interim period
based on the estimated effective tax rate for the full year. Cumulative
adjustments to the tax provision are recorded in the interim period in
which a change in the estimated annual effective rate is determined.
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4. Investments
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.
In August 1995, the Company acquired the SecurADM technology of
Infratel S.A.R.L., one of its original equipment manufacturers. The
Company considered the acquisition cost to consist of cash
consideration of $624 plus $302 of notes receivable. The Company 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.
5. Accounting for Stock Options
In October 1995, the Financial Accounting Board issued SFAS 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 fair value of the equity instrument awarded. Companies are
permitted, however, to continue to apply APB No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument
awarded. The Company will continue to apply APB 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.
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, subject to stockholder approval of an amendment to the
Company's 1994 Plan increasing the number of shares available for
grant to 2,410,000 shares. On May 22, 1996, the stockholders approved
the amendment to the 1994 Plan.
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 resulted in an 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 effect of this change was to reduce income from operations
by $108 in the second quarter of 1996. The Company does not plan to
grant options in the future that are subject to approval by the
stockholders.
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6. Subsequent Events
On July 26, 1996 at a Special Meeting of Stockholders of the Company,
the stockholders approved 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.
On July 26, 1996, pursuant to a merger agreement (the "Agreement")
dated as of April 14, 1996, the Company acquired RSA Data Security,
Inc. ("RSA"), a Redwood City, California vendor of encryption software,
for approximately 3.3 million shares of its common stock. The Company
is also reserving for issuance approximately 700,000 shares of its
common stock issuable upon exercise of the outstanding options of RSA.
The transaction will be accounted for as a pooling of interests.
The following Unaudited Pro Forma Combined Financial Data give effect
to the acquisition of RSA as a pooling of interests. For the purposes
of the pro forma combined financial data, the Company's financial data
for the three months and six months ended June 30, 1996 and for the
three months and six months ended June 30, 1995 have been combined
with RSA's financial data for the same periods.
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 acquisition of RSA had been
consumated or of future operating results or financial position of
the combined companies.
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(In thousands, except per share data)
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Three Months Ended Six Months Ended
June 30, June 30,
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1996 1995 1996 1995
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Revenue $17,422 $10,079 $32,284 $16,909
Net income 2,885 523 5,052 378
Net income per common and common equivalent share $ .16 $ .03 $ .28 $ .02
======= ======= ======= =======
Weighted average number of common and
common equivalent shares outstanding 18,302 15,642 18,199 15,613
======= ======= ======= =======
</TABLE>
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(In thousands, except share and per share data)
OVERVIEW
This Quarterly Report on Form 10-Q contains forward-looking statements. 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. There are a
number of factors that could cause the Company's actual results to differ
materially from those indicated by such forward-looking statements. These
factors include, without limitation, those set forth below under the caption
"Certain Factors that May Affect Future Results."
RESULTS OF OPERATIONS
The following table sets forth income and expense items as a percentage of total
revenue, and the percentage change in dollar amounts of such items, for the
three months and six months ended June 30, 1996 and 1995.
<TABLE>
<CAPTION>
Percentage of Total Period-to-Period Percentage of Total Period-to-Period
Revenue Change Revenue Change
------- ------ ------- ------
Three Months Ended June 30 Six Months Ended June 30
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1996 1995 1996 1995
---- ---- ---- ----
Revenue 100.0 % 100.0 % 72.1 % 100.0 % 100.0 % 82.0 %
Cost of revenue 23.2 21.9 82.0 23.5 20.9 105.1
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Gross margin 76.8 78.1 69.4 76.5 79.1 75.9
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Costs and expenses:
Research and development 12.1 9.3 124.2 12.2 9.8 127.2
Marketing and selling 29.8 32.6 57.2 29.6 34.2 57.3
General and administrative 10.7 11.6 59.1 11.1 11.3 79.1
-------- --------- --------- -------
Total 52.6 53.5 69.3 52.9 55.3 74.1
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Income from operations 24.2 24.6 69.6 23.6 23.8 80.1
Interest income 8.1 5.0 180.3 9.0 5.5 199.4
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Income before provision for
income taxes 32.3 29.6 88.2 32.6 29.3 102.4
Provision for income taxes 11.8 11.4 78.7 11.9 11.3 91.9
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Net income 20.5 % 18.2 % 94.2 % 20.7 % 18.0 % 108.9 %
======== ======== ======== =======
</TABLE>
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REVENUE
The Company's revenue is derived principally from the 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 72% in the second quarter of 1996 to $14,070 from $8,174
in the second quarter of 1995. This increase in revenue reflected the increase
in unit sales of all of the Company's products to existing and new customers,
except for a decrease in the sale of ACM/100 products. Average selling prices of
the Company's products also increased (except the average selling price of the
Company's ACM/400 and ACM/1600 products). Approximately 35% and 10% of the
increase in revenue was attributable to the increase in unit sales and the
average prices of SecurID tokens, respectively. Approximately 37% of the
increase in revenue was attributable to increases in the sale of the Company's
software (ACE/Server and ACM software products). A further 6% of the increase in
revenue in the second quarter of 1996 was attributable to an increase in
maintenance revenue over the second quarter of 1995. The Company believes that
the increase in unit sales was attributable in part to continued levels of
growth and refinement in the information security market, with the Internet and
corporate intranets continuing to play crucial roles in developing new
opportunities for the Company's business. Average prices change generally due to
the sales product mix and number of user licenses sold rather than changes in
the Company's price list.
International revenue (excluding Canada and Latin America) increased to $3,416
in the second quarter of 1996 from $1,146 in the second quarter of 1995 and
accounted for 24% and 14% of total revenue in the second quarters of 1996 and
1995, respectively. This increase in international revenue was primarily
attributable to the continuing expansion of the Company's international direct
sales force and increased market penetration of the Company's products in
foreign markets.
Total revenue increased 82% in the first six months of 1996 to $26,240 from
$14,417 in the first six months of 1995. This increase in revenue reflected
increases in unit sales of all of the Company's products (other than the
Company's ACM/100 hardware product). Approximately 44% and 6% of the increase in
revenue was attributable to the increase in unit sales and the average prices of
SecurID tokens, respectively. Approximately 34% of the increase in revenue was
attributable to the increases in sales of the Company's software (ACE/Server and
ACM software products). Approximately 6% of the increase in revenues was
attributable to an increase in the unit sales of ACM/1600's and a further 6% of
the increase in revenue was attributable to higher maintenance revenues.
International revenue (excluding Canada and Latin America) increased to $5,591
in the first six months of 1996 from $2,135 in the first six months of 1995 and
accounted for 21% and 15% of total revenue in the first six months of 1996 and
1995, respectively. This increase in international revenue was primarily
attributable to the expansion of the Company's international direct sales force
and increased market penetration in foreign markets.
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COST OF REVENUE AND GROSS PROFIT
The Company's cost of revenue consists primarily of costs associated with the
manufacture and delivery of the Company's SecurID tokens and hardware products
from the Company's assembly contractors. Royalty costs, 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.
The Company's gross profit increased 69% in the second quarter of 1996 to
$10,810, or 76.8% of revenue, from $6,382, or 78.1% of revenue, in the second
quarter of 1995. Approximately 51% 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 40% of the increase in gross profit
was attributable to an increase in the sales of the Company's ACE/Server
software and software product 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 Company's ACE/Server
software.
The Company's gross profit increased 76% in the first six months of 1996 to
$20,068, or 76.5% of revenue, from $11,408, or 79.1% of revenue, in the first
six months of 1995. Approximately 55% of the increase in gross profit was
attributable to an increase in the unit sales and gross profit from the sale of
SecurID tokens. Software revenue as a percentage of total revenue in the first
six months of 1996 increased to 28% of revenue from 22% of revenue in the first
six months of 1995. These factors, which contributed to an improvement in the
gross margin in the first six months of 1996, were partially offset by increases
in production costs associated with the development of the Company's quality
management programs, royalties and the expansion of the Company's customer
support infrastructure.
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 expense increased 124% in the second quarter of 1996 to
$1,708 from $762 in the second quarter of 1995, and increased as a percentage of
revenue to 12.1% from 9.3%. Approximately 38% of the increase in research and
development expenses in the first quarter of 1996 resulted from employment of
additional staff and approximately 29% of the increase was attributable to
increases in consulting expenses to develop enhancements to the Company's
product lines, primarily the Company's ACE/Server software 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.
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Research and development expense increased 127% in the first six months of 1996
to $3,196 from $1,407 in the first six months of 1995, and increased as a
percentage of revenue to 12.2% from 9.8%. Approximately 38% of the increase in
research and development expenses in the first six months of 1996 resulted from
employment of additional staff and approximately 32% of the increase was
attributable to increases in consulting expenses to develop enhancements to the
Company's product lines, primarily the Company's ACE/Server software line.
Research and development expenses also increased due to continuing investment in
new computer equipment resulting in higher depreciation charges and maintenance
fees.
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% in the second quarter of 1996 to
$4,190 from $2,666 in the second quarter of 1995, but decreased as a percentage
of revenue to 29.8% from 32.6%. Approximately 42% of the increase in marketing
and selling expenses was attributable to the employment of additional staff.
Approximately 25% of the increase in marketing and selling expenses was
attributable to the increase in sales commissions on products sold by the
Company's sales force and results from the increase in revenue. Approximately 5%
of the increase in marketing and selling expenses resulted from an expansion of
the Company's general marketing programs, such as trade show and seminar
activity, direct mailing and public relations campaigns.
Marketing and selling expenses increased 57% in the first six months of 1996 to
$7,760 from $4,932 in the first six months of 1995, but decreased as a
percentage of revenue to 29.6% from 34.2%. Approximately 44% of the increase in
marketing and selling expenses was attributable to the employment of additional
staff. Approximately 24% of the increase in marketing and selling expenses was
attributable to the increase in sales commissions on products sold by the
Company's sales force and results from the increase in revenue. Approximately 6%
of the increase in marketing and selling expenses resulted from an expansion of
the Company'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 the Company's United Kingdom, German, French and Pacific/Asian
sales offices and the opening of a sales office in Norway in January of 1996.
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 auditing expenses.
General and administrative expenses increased 59% in the second quarter of 1996
to $1,507, or 10.7% of revenue, from $947, or 11.6% of revenue, in the second
quarter of 1995. Approximately 52% of the increase in general and administrative
expenses was due to the growth in the Company's staff needed to support
increased levels of operation. Approximately 24% of the increase was
attributable to increased amortization of leasehold improvements resulting from
the
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Company's decision to relocate its corporate offices to Bedford, Massachusetts,
which took place on August 2, 1996.
General and administrative expenses increased 79% in the first six months of
1996 to $2,917, or 11.1% of revenue, from $1,629, or 11.3% of revenue, in the
first six months of 1995. Approximately 46% of the increase in general and
administrative expenses was due to the growth in the Company's staff needed to
support increased levels of operation. Approximately 25% of the increase was
attributable to increased amortization of leasehold improvements resulting from
the Company's aforementioned decision to relocate its Corporate headquarters.
INTEREST INCOME
Interest income consists of interest earned on the Company's cash balances and
marketable securities.
Interest income increased 180% to $1,138 in the second quarter of 1996 from $406
in the second quarter of 1995. Interest income increased to $2,365 in the first
six months of 1996 from $790 in the first six months of 1995. These increases
were due to higher average daily balances of invested cash resulting from the
Company's follow-on public offering in November 1995.
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $1,658 in the second quarter of 1996
from $928 in the second quarter of 1995, and the provision for income taxes
increased to $3,124 in the first six months of 1996 from $1,628 in the first six
months of 1995. These increases were primarily a result of higher income.
The Company's estimated effective tax rate was reduced to 36.5% in the second
quarter and first six months of 1996 from 38.5% in the second quarter and first
six months of 1995 to reflect the benefit of the Company's foreign sales
corporation.
NET INCOME
As a result of the above factors, net income in the second quarter of 1996
increased to $2,885, or 20.5% of revenue, from $1,485, or 18.2% of revenue, in
the second quarter of 1995. Net income in the first six months of 1996 increased
to $5,436, or 20.7% of revenue, from $2,602, or 18.0% of revenue, in the first
six months of 1995.
ACCOUNTING FOR CERTAIN STOCK OPTIONS
On October 18, 1995, January 24, 1996, April 1, 1996 and April 24, 1996, the
Company's Board of Directors or the Compensation Committee of the Company's
Board granted stock options to employees to purchase 16,000, 302,800, 100,000
and 19,450 shares of the Company's 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 of the Company's
Common Stock on the dates of
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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, the Company measured
compensation expense on the date of the grant by the Company's Board of
Directors or the Compensation Committee of the Company's Board. 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 effect of this change was to reduce income from operations by $108 in the
second quarter of 1996. The Company does not plan to grant options in the
future that are subject to approval by the stockholders.
LIQUIDITY AND CAPITAL RESOURCES
In December 1994, the Company sold 3,000,000 shares of Common Stock in its
initial public offering which generated $21,600 of net cash proceeds to the
Company. In January 1995, the Company sold 510,000 shares of Common Stock under
the terms of an over-allotment option granted to the underwriters as part of
the initial public offering, generating an additional $3,800 in net cash
proceeds. In November 1995, the Company sold an additional 1,560,000 shares of
Common Stock in its follow-on offering, which generated $55,900 of net cash
proceeds to the Company.
At June 30, 1996, the Company had cash and marketable securities of $89,105 and
working capital of $95,517. Since 1990, the Company has funded its operations
primarily from cash generated from its operating activities. During 1995 and
1996, the Company used the cash provided by operations principally for working
capital needs and property and equipment additions necessary to support the
Company's growth.
The Company's capital expenditures for the second quarter and first six months
of 1996 were $1,379 and $2,343, respectively. Capital expenditures for the
second quarter and first six months 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 the
Company's continued growth.
On February 20, 1996, the Company increased its investment in VeriSign by
purchasing 72,091 shares of Series B Convertible Preferred for an aggregate
purchase price of $176. 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. The Company's
investments in VeriSign represent a minority interest of less than 10% of
Verisign's capitalization. The Company is accounting for its investment at cost.
On July 26, 1996, the Company acquired RSA Data Security, Inc., a Redwood City,
California vendor of encryption software ("RSA"). Transaction costs in
connection with the acquisition of RSA are estimated to
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approximate $6,100 ($5,400, net of related tax effects). See Note 6 of Notes to
Condensed Consolidated Financial Statements.
In March 1996, the Company entered into a noncancelable operating lease expiring
in 2006 for a new corporate executive office in Bedford, Massachusetts and
commenced its tenancy in August 1996. The new facility consists of 75,000 square
feet of office space and the annual base rent for the first year is $956,
increasing annually up to $1,180 from years five through ten.
In December 1994, the Company entered into an agreement with Progress Software
for the right to use certain of its 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 and in order to obtain
favorable pricing, paid $1,500 during the first quarter of 1996.
The Company intends to seek acquisitions of businesses, products and
technologies that are complementary to those of the Company. The Company 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 the Company engages from time to time in
discussions with respect to potential acquisitions, there can be no assurances
that any such acquisitions will be made or that the Company will be able to
successfully integrate any acquired business. In order to finance such
acquisitions, it may be necessary for the Company 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 the Company and, in
the case of equity financings, may result in dilution to the Company's
stockholders.
The Company 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.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made in
this Quarterly Report on Form 10-Q and presented elsewhere by management from
time to time.
A number of uncertainties exist that could affect the Company's future operating
results, including, without limitation, general economic conditions, the
Company's continued ability to develop and introduce products, the introduction
of new products by competitors, pricing practices of competitors, expansion of
its sales distribution capability, the cost and availability of components and
the Company's ability to control costs.
The Company's success is dependent in part on its ability to integrate the
operations of RSA in an efficient and effective manner. The successful
combination of the Company and RSA 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
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<PAGE> 16
smoothly or successfully. The difficulties of such integration may be increased
by the necessity of coordinating geographically separated organizations. The
integration of certain operations 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 the Company.
The Company's success is highly dependent on its ability to enhance its existing
products and to develop and introduce new products in a timely manner. If the
Company were to fail to introduce new products on a timely basis, the Company's
operating results could be adversely affected. To date, substantially all of the
Company's revenues have been attributable to sales of its computer and network
security products and related services, all of which are currently used with the
Company's SecurID token technology. As a result, any factor adversely affecting
sales of these products and services could have a material adverse effect on the
Company's financial condition and results of operations.
Certain components of the Company's products are currently purchased from sole
or limited sources and any interruption in the supply of such components could
adversely affect the Company's operating results.
The Company's quarterly operating results may vary significantly depending on a
number of factors, including the timing of the introduction or enhancement of
products by the Company or its competitors, the sizes, timing and shipment of
individual orders, market acceptance of new products, changes in the Company's
operating expenses, personnel changes, mix of products sold, changes in product
pricing, development of the Company's direct and indirect distribution channels
and general economic conditions.
International sales have represented a significant portion of the Company's
sales. The international business and financial performance of the Company may
be affected by fluctuations in foreign exchange rates, difficulties in managing
accounts receivable, tariff regulations and difficulties in obtaining export
licenses.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
At the 1996 Annual Meeting of Stockholders of the Company (the "Annual
Meeting") held on May 22, 1996, the following matters were acted upon by the
stockholders of the Company:
1. The election of Richard L. Earnest and Sanford M. Sherizen as Class
II Directors for the ensuing three years;
2. The approval of an amendment to the Company's 1994 Stock Option Plan
(the "1994 Plan") increasing from 300,000 to 2,410,000 the number of shares of
Common Stock authorized under the 1994 Plan ("Plan Amendment No. 1");
3. Approval of an amendment to the 1994 Plan increasing to 300,000 the
number of shares of Common Stock that may be issued in any calendar year to any
employee of the Company thereunder ("Plan Amendment No. 2"); and
4. Ratification of the appointment of Deloitte & Touche LLP as
independent auditors of the Company for the current year.
The number of shares of Common Stock outstanding and entitled to vote
at the Annual Meeting was 13,650,870. The other directors of the Company, whose
terms of office as directors continued after the Annual Meeting, were Charles R.
Stuckey, Jr., George M. Middlemas and Marino R. Polestra. The results of the
voting on each of the matters presented to stockholders at the Annual Meeting
are set forth below:
<TABLE>
<CAPTION>
Votes Votes Votes Broker
For Withheld Against Abstentions Non-Votes
----- -------- ------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
1. Election of Class II Directors:
Richard L. Earnest 9,362,338 91,410 N.A N.A. N.A.
Sanford M. Sherizen 9,362,338 91,410 N.A. N.A. N.A.
2. Plan Amendment No. 1 6,036,147 N.A. 2,585,641 54,691 777,269
3. Plan Amendment No. 2 9,096,301 N.A. 173,568 181,379 2,500
4. Ratification of
Independent Auditors 9,333,284 N.A. 5,629 106,699 8,136
</TABLE>
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
(a) Exhibits - The Exhibits listed in the Exhibit Index immediately
preceding such Exhibits are filed as part of this Quarterly Report on Form 10-Q.
b) Reports on Form 8-K:
On May 23, 1996, the Company filed a Current Report on Form 8-K, dated
May 21, 1996, announcing under Item 6 (Resignations of Registrant's Directors)
that Kenneth P. Weiss had announced his immediate resignation as a director and
as Chairman of the Board and Chief Technical Officer of the Company, citing
material disagreements with the operations, policy and practices of the Company
and certain directors of the Company. On June 4 and June 13, 1996, the Company
filed Amendments No. 1 and 2, respectively, to its Current Report on Form 8-K
providing additional disclosure relating to the resignation of Mr. Weiss.
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<PAGE> 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SECURITY DYNAMICS TECHNOLOGIES, INC.
Dated: August 13, 1996 /s/ Arthur W. Coviello, Jr.
-------------------------------------
Arthur W. Coviello, Jr.
Executive Vice President,
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
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<PAGE> 20
EXHIBIT INDEX
ITEM DESCRIPTION
3 Third Restated Certificate of Incorporation, as amended, of
the Company.
11 Computation of Income (Loss) Per Common Share.
18 Letter regarding change in accounting principles.
27 Financial Data Schedule.
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<PAGE> 1
Exhibit 3
---------
THIRD RESTATED
CERTIFICATE OF INCORPORATION
OF
SECURITY DYNAMICS TECHNOLOGIES, INC.
Security Dynamics Technologies, Inc., a corporation organized and
existing under and by virtue of the General Corporation Law of the State of
Delaware, does hereby certify as follows:
1. The Corporation filed its original Certificate of Incorporation
with the Secretary of State of Delaware on May 23, 1986. A Second Restated
Certificate of Incorporation was filed with the Secretary of State of the State
of Delaware on September 7, 1988, which Second Restated Certificate of
Incorporation was amended by a Certificate of Amendment of Second Restated
Certificate of Incorporation filed on April 27, 1990, a Second Certificate of
Amendment of Second Restated Certificate of Incorporation filed on September
21, 1990, a Third Certificate of Amendment of Second Restated Certificate of
Incorporation filed on March 19, 1991, a Fourth Certificate of Amendment of
Second Restated Certificate of Incorporation filed on July 13, 1993, a Fifth
Certificate of Amendment of Second Restated Certificate of Incorporation filed
on October 28, 1993, a Sixth Certificate of Amendment of Second Restated
Certificate of Incorporation filed on October 24, 1994, and a Certificate of
Retirement of Stock filed on even date herewith.
2. At a meeting of the Board of Directors of the Corporation, a
resolution was duly adopted, pursuant to
<PAGE> 2
Sections 141(f) and 245 of the General Corporation Law of the State of
Delaware, setting forth a Third Restated Certificate of Incorporation of the
Corporation and declaring said Third Restated Certificate of Incorporation
advisable. The stockholders of the Corporation duly approved said proposed
Third Restated Certificate of Incorporation by written consent in accordance
with Sections 228, 242 and 245 of the General Corporation Law of the State of
Delaware, and written notice of such consent has been given to all stockholders
who have not consented in writing to said restatement. The resolution setting
forth the Third Restated Certificate of Incorporation is as follows:
RESOLVED: That the Second Restated Certificate of Incorporation of the
Corporation, as amended, be and hereby is amended and restated in its entirety
so that the same shall read as follows:
FIRST. The name of the Corporation is:
Security Dynamics Technologies, 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 all classes of stock which the
Corporation shall have authority to issue is Thirty Million (30,000,000) shares
of Common Stock, $.01 par value per share ("Common Stock").
The following is a statement of the designations and the powers,
privileges and rights, and the qualifications, limitations or restrictions
thereof in respect of the Common Stock.
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<PAGE> 3
1. VOTING. The holders of the Common Stock are entitled to one vote
for each share held at all meetings of stockholders. There shall be no
cumulative voting.
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.
2. DIVIDENDS. Dividends may be declared and paid on the Common Stock
from funds lawfully available therefor as and when determined by the Board of
Directors.
3. LIQUIDATION. Upon the dissolution or liquidation of the
Corporation, whether voluntary or involuntary, holders of Common Stock will be
entitled to receive all assets of the Corporation available for distribution to
its stockholders.
FIFTH. The Corporation shall have a perpetual existence.
SIXTH. In furtherance of and not in limitation of powers conferred
by statute, it is further provided that the Board of Directors is expressly
authorized to adopt, amend or repeal the By-Laws of the Corporation.
SEVENTH. 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 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 promise 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
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<PAGE> 4
stockholders, of this corporation, as the case may be, and also on this
corporation.
EIGHTH. Except to the extent that the General Corporation Law of the
State 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.
NINTH. 1. ACTION, SUITS AND PROCEEDINGS OTHER THAN BY OR IN THE
RIGHT OF THE CORPORATION. The Corporation shall 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 (other than an action by or in the right of the Corporation),
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) judgment, fines and amounts paid in settlement
actually and reasonably incurred by him or on his behalf in connection with
such action, suit or proceeding and any appeal therefrom, 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 Corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which 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 reasonable cause to believe that his conduct was unlawful.
Notwithstanding anything to the contrary in this Article, except as set forth
in Section 6 below, the Corporation shall not indemnify an Indemnitee seeking
indemnification in connection with a proceeding (or part thereof) initiated by
the Indemnitee unless the initiation thereof was approved by the Board of
Directors of the Corporation.
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<PAGE> 5
2. ACTIONS OR SUITS BY OR IN THE RIGHT OF THE CORPORATION. The
Corporation shall indemnify any Indemnitee who was or is a party or is
threatened to be made a party to any threatened, pending or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor
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), or by reason of any
action alleged to have been taken or omitted in such capacity, against all
expenses (including attorneys' fees) and amounts paid in settlement actually
and reasonably incurred by him or on his behalf in connection with such action,
suit or proceeding and any appeal therefrom, 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 Corporation, except that no indemnification shall be made in respect of
any claim, issue or matter as to which such person shall have been adjudged to
be liable to the Corporation unless and only to the extent that the Court of
Chancery of Delaware shall determine upon application that, despite the
adjudication of such liability but in view of all the circumstances of the
case, such person is fairly and reasonably entitled to indemnity for such
expenses (including attorneys' fees) which the Court of Chancery of Delaware
shall deem proper.
3. INDEMNIFICATION FOR EXPENSES OF SUCCESSFUL PARTY. Notwithstanding
the other provisions of this Article, to the extent that an Indemnitee has been
successful, on the merits or otherwise, in defense of any action, suit or
proceeding referred to in Sections 1 and 2 of this Article, or in defense of
any claim, issue or matter therein, or on appeal from any such action, suit or
proceeding, he shall be indemnified against all expenses (including attorneys'
fees) actually and reasonably incurred by him or on his behalf in connection
therewith. Without limiting the foregoing, if any action, suit or proceeding
is disposed of, on the merits or otherwise (including a disposition without
prejudice), without (i) the disposition being adverse to the Indemnitee, (ii)
an adjudication that the Indemnitee was liable to the Corporation, (iii) a plea
of guilty or NOLO CONTENDERE by the Indemnitee, (iv) an adjudication 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 (v) with
respect to any criminal proceeding, an adjudication that the Indemnitee had
reasonable cause to believe his conduct was unlawful, the Indemnitee shall be
considered for the purposes hereof to have been wholly successful with respect
thereto.
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<PAGE> 6
4. NOTIFICATION AND DEFENSE OF CLAIM. 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. After notice from the
Corporation to the Indemnitee of its election so to assume such defense, the
Corporation shall not be liable to the Indemnitee for any legal or other
expenses subsequently incurred by the Indemnitee in connection with such claim,
other than as provided below in this Section 4. The Indemnitee shall have the
right to employ his own counsel in connection with such claim, but the fees and
expenses of such counsel incurred after notice from the Corporation of its
assumption of the defense thereof shall be at the expense of the Indemnitee
unless (i) the employment of counsel by the Indemnitee has been authorized by
the Corporation, (ii) counsel to the Indemnitee shall have reasonably concluded
that there may be a conflict of interest or position on any significant issue
between the Corporation and the Indemnitee in the conduct of the defense of
such action or (iii) the Corporation shall not in fact have employed counsel to
assume the defense of such action, in each of which cases the fees and expenses
of counsel for the Indemnitee shall be at the expense of the Corporation,
except as otherwise expressly provided by this Article. The Corporation shall
not be entitled, without the consent of the Indemnitee, to assume the defense
of any claim brought by or in the right of the Corporation or as to which
counsel for the Indemnitee shall have reasonably made the conclusion provided
for in clause (ii) above.
5. ADVANCE OF EXPENSES. Subject to the provisions of Section 6
below, in the event that the Corporation does not assume the defense pursuant
to Section 4 of this Article of any action, suit, proceeding or investigation
of which the Corporation receives notice under this Article, any expenses
(including attorneys' fees) incurred by an Indemnitee in defending a civil or
criminal action, suit, proceeding or investigation or any appeal therefrom
shall be paid by the Corporation in advance of the final disposition of such
matter; PROVIDED, HOWEVER, that the payment of such expense 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. Such undertaking shall be accepted without
reference to the financial ability of the Indemnitee to make such repayment.
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<PAGE> 7
6. PROCEDURE FOR INDEMNIFICATION. In order to obtain indemnification
or advancement of expenses pursuant to Section 1, 2, 3 or 5 of this Article,
the Indemnitee shall submit to the Corporation a written request, including in
such request such documentation and information as is reasonably available to
the Indemnitee and is reasonably necessary to determine whether and to what
extent the Indemnitee is entitled to indemnification or advancement of
expenses. Any such indemnification or advancement of expenses shall be made
promptly, and in any event within 60 days after receipt by the Corporation of
the written request of the Indemnitee, unless with respect to requests under
Section 1, 2 or 5 the Corporation determines, by clear and convincing evidence,
within such 60-day period that the Indemnitee did not meet the applicable
standard of conduct set forth in Section 1 or 2, as the case may be. Such
determination 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
directors"), even though less than 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 be regular legal counsel to the
Corporation), or (d) a court of competent jurisdiction.
7. REMEDIES. The right to indemnification or advances as granted by
this Article shall be enforceable by the Indemnitee in any court of competent
jurisdiction if the Corporation denies such request, in whole or in part, or if
no disposition thereof is made within the 60-day period referred to above in
Section 6. Unless otherwise provided by law, the burden of proving that the
Indemnitee is not entitled to indemnification or advanced of expenses under
this Article shall be on the Corporation. Neither the failure of the
Corporation to have made a determination prior to the commencement of such
action that indemnification is proper in the circumstances because the
Indemnitee has met the applicable standard of conduct, nor an actual
determination by the Corporation pursuant to Section 6 that the Indemnitee has
not met such applicable standard of conduct, shall be a defense to the action
or create a presumption that the Indemnitee has not met the applicable standard
of conduct. The Indemnitee's expenses (including attorneys' fees) incurred in
connection with successfully establishing his right to indemnification, in
whole or in part, in any such proceeding shall also be indemnified by the
Corporation.
8. SUBSEQUENT AMENDMENT. No amendment, termination or repeal of this
Article or of the relevant provisions of the General Corporation Law of
Delaware or any other applicable laws
- 7 -
<PAGE> 8
shall affect or diminish in any way the rights of any Indemnitee to
indemnification under the provisions hereof with respect to any action, suit,
proceeding or investigation arising out of or relating to any actions,
transactions or facts occurring prior to the final adoption of such amendment,
termination or repeal.
9. OTHER RIGHTS. The indemnification and advancement of expenses
provided by this Article shall not be deemed exclusive of any other rights to
which an Indemnitee seeking indemnification or advancement of expenses may be
entitled under any law (common or statutory), agreement or vote of stockholders
or disinterested directors or otherwise, both as to action in his official
capacity and as to action in any other capacity while holding office for the
Corporation, and shall continue as to an Indemnitee who has ceased to be a
director or officer, and shall inure to the benefit of the estate, heirs,
executors and administrators of the Indemnitee. Nothing contained in this
Article shall be deemed to prohibit, and the Corporation is specifically
authorized to enter into, agreements with officers and directors providing
indemnification rights and procedures different from those set forth in this
Article. In addition, 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.
10. PARTIAL INDEMNIFICATION. If an Indemnitee is entitled under any
provision of this Article to indemnification by the Corporation for some or a
portion of the expenses (including attorneys' fees), judgments, fines or
amounts paid in settlement actually and reasonably incurred by him or on his
behalf in connection with any action, suit, proceeding or investigation and any
appeal, therefrom but not, however, for the total amount thereof, the
Corporation shall nevertheless indemnify the Indemnitee for the portion of such
expenses (including attorneys' fees), judgments, fines or amounts paid in
settlement to which the Indemnitee is entitled.
11. INSURANCE. The Corporation may purchase and maintain insurance,
at its expense, to protect itself and any director, officer, employee or agent
of the Corporation or another corporation, partnership, joint venture, trust or
other enterprise (including any employee benefit plan) against any expense,
liability or loss incurred by him in any such capacity, or arising out of his
status as such, whether or not the Corporation would have the power to
indemnify such person against such expense, liability or loss under the General
Corporation law of Delaware.
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<PAGE> 9
12. MERGER OR CONSOLIDATION. If the Corporation is merged into or
consolidated with another corporation and the Corporation is not the surviving
corporation, the surviving corporation shall assume the obligations of the
Corporation under this Article with respect to any action, suit, proceeding or
investigation arising out of or relating to any actions, transactions or facts
occurring prior to the date of such merger or consolidation.
13. SAVINGS CLAUSE. If this Article or any portion hereof shall be
invalidated on any ground by any court of competent jurisdiction, then the
Corporation shall nevertheless indemnify each Indemnitee as to any expenses
(including attorneys' fees) judgments, fines and amounts paid in settlement in
connection with any action, suit, proceeding or investigation, whether civil,
criminal or administrative, including an action by or in the right of the
Corporation, to the fullest extent permitted by any applicable portion of this
Article that shall not have been invalidated and to the fullest extent
permitted by applicable law.
14. DEFINITIONS. Terms used herein and defined in Section 145(h) and
Section 145(i) of the General Corporation Law of Delaware shall have the
respective meanings assigned to such terms in such Section 145(h) and Section
145(i).
15. SUBSEQUENT LEGISLATION. If the General Corporation Law of
Delaware is amended after adoption of this Article to expand further the
indemnification permitted to Indemnitees, then the Corporation shall indemnify
such persons to the fullest extent permitted by the General Corporation Law of
Delaware, as so amended.
TENTH. The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Third Restated Certificate of
Incorporation, in the manner now or hereafter prescribed by statute and this
Third Restated Certificate of Incorporation, and all rights conferred upon
stockholders herein are granted subject to this reservation.
ELEVENTH. This Article is inserted for the management of the business
and for the conduct of the affairs of the Corporation.
1. NUMBER OF DIRECTORS. The number of directors of the Corporation
shall not be less than three. The exact number of directors within the
limitations specified in the preceding sentence shall be fixed from time to
time by, or in the manner provided in, the Corporation's By-Laws.
2. CLASSES OF DIRECTORS. The Board of Directors shall be and is
divided into three classes: Class I, Class II and Class III. No one class
shall have more than one director more than any
- 9 -
<PAGE> 10
other class. If a fraction is contained in the quotient arrived at by dividing
the designated number of directors by three, then, if such fraction is
one-third, the extra director shall be a member of Class I, and if such
fraction is two-thirds, one of the extra directors shall be a member of Class I
and one of the extra directors shall be a member of Class II, unless otherwise
provided from time to time by resolution adopted by the Board of Directors.
3. ELECTION OF DIRECTORS. Elections of directors need not be by
written ballot except as and to the extent provided in the By-Laws of the
Corporation.
4. TERMS OF OFFICE. Each director shall serve for a term ending on
the date of the third annual meeting following the annual meeting at which such
director was elected; PROVIDED, that each initial director in Class I shall
serve for a term ending on the date of the annual meeting in 1995; each initial
director in Class II shall serve for a term ending on the date of the annual
meeting in 1996; and each initial director in Class III shall serve for a term
ending on the date of the annual meeting in 1997; and PROVIDED FURTHER, that
the term of each director shall be subject to the election and qualification of
his successor and to his earlier death, resignation or removal.
5. ALLOCATION OF DIRECTORS AMONG CLASSES IN THE EVENT OF INCREASES OR
DECREASES IN THE NUMBER OF DIRECTORS. In the event of any increase or decrease
in the authorized number of directors, (i) each director then serving as such
shall nevertheless continue as a director of the class of which he is a member
and (ii) the newly created or eliminated directorships resulting from such
increase or decrease shall be apportioned by the Board of Directors among the
three classes of directors so as to ensure that no one class has more than one
director more than any other class. To the extent possible, consistent with
the foregoing rule, any newly created directorships shall be added to those
classes whose terms of office are to expire at the latest dates following such
allocation, and any newly eliminated directorships shall be subtracted from
those classes whose terms of offices are to expire at the earliest dates
following such allocation, unless otherwise provided from time to time by
resolution adopted by the Board of Directors.
6. QUORUM; ACTION AT MEETING. A majority of the directors at any
time in office shall constitute a quorum for the transaction of business. In
the event one or more of the directors shall be disqualified to vote at any
meeting, then the required quorum shall be reduced by one for each director so
disqualified, provided that in no case shall less than one-third of the number
of directors fixed pursuant to Section 1 above constitute a quorum. If at any
meeting of the Board of Directors
- 10 -
<PAGE> 11
there shall be less than such a quorum, a majority of those present may
adjourn the meeting from time to time. Every act or decision done or made by a
majority of the directors present at a meeting duly held at which a quorum is
present shall be regarded as the act of the Board of Directors unless a greater
number is required by law, by the By-Laws of the Corporation or by this Third
Restated Certificate of Incorporation.
7. REMOVAL. Directors of the Corporation may be removed only for
cause by the affirmative vote of the holders of at least two-thirds of the
shares of the capital stock of the Corporation issued and outstanding and
entitled to vote.
8. VACANCIES. Any vacancy in the Board of Directors, however
occurring, including a vacancy resulting from an enlargement of the board,
shall be filled only by a vote of a majority of the directors then in office,
although less than a quorum, or by a sole remaining director. A director
elected to fill a vacancy shall be elected to hold office until the next
election of the class for which such director shall have been chosen, subject
to the election and qualification of his successor and to his earlier death,
resignation or removal.
9. STOCKHOLDER NOMINATIONS AND INTRODUCTION OF BUSINESS, ETC.
Advance notice of stockholder nominations for election of directors and other
business to be brought by stockholders before a meeting of stockholders shall
be given in the manner provided by the By-Laws of the Corporation.
10. AMENDMENTS TO ARTICLE. Notwithstanding any other provisions of
law, this Third Restated Certificate of Incorporation or the By-Laws of the
Corporation, each as amended, and notwithstanding the fact that a lesser
percentage may be specified by law, the affirmative vote of the holders of at
least seventy-five percent (75%) of the shares of capital stock of the
Corporation issued and outstanding and entitled to vote shall be required to
amend or repeal, or to adopt any provision inconsistent with, this Article
ELEVENTH.
TWELFTH. Stockholders of the Corporation may not take any action by
written consent in lieu of a meeting. Notwithstanding any other provisions of
law, the Third Restated Certificate of Incorporation or the By-Laws of the
Corporation, each as amended, and notwithstanding the fact that a lesser
percentage may be specified by law, the affirmative vote of the holders of at
least seventy-five percent (75%) of the shares of capital stock of the
Corporation issued and outstanding and entitled to vote shall be required to
amend or repeal, or to adopt any provision inconsistent with, this Article
TWELFTH.
- 11 -
<PAGE> 12
THIRTEENTH. Special meetings of stockholders may be called at any time
by only the Chairman of the Board of Directors, the Chief Executive Officer (or
if there is no Chief Executive Officer, the President) or the Board of
Directors. Business transacted at any special meeting of stockholders shall be
limited to matters relating to the purpose or purposes stated in the notice of
meeting. Notwithstanding any other provision of law, this Third Restated
Certificate of Incorporation or the By-Laws of the Corporation, each as
amended, and notwithstanding the fact that a lesser percentage may be specified
by law, the affirmative vote of the holders of at least seventy-five percent
(75%) of the shares of capital stock of the Corporation issued and outstanding
and entitled to vote shall be required to amend or repeal, or to adopt any
provision inconsistent with, this Article THIRTEENTH.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
affixed hereto and this Third Restated Certificate of Incorporation to be
signed by its President this 21st day of December, 1994.
SECURITY DYNAMICS TECHNOLOGIES, INC.
By:/s/ Charles R. Stuckey, Jr.
------------------------------
President
- 12 -
<PAGE> 13
CERTIFICATE OF AMENDMENT
OF
THIRD RESTATED CERTIFICATE OF INCORPORATION
OF
SECURITY DYNAMICS TECHNOLOGIES, INC.
Pursuant to Section 242 of the General Corporation Law of the State of
Delaware, Security Dynamics Technologies, Inc., a corporation organized and
existing under the General Corporation Law of the State of Delaware (the
"Corporation"), does hereby certify:
FIRST: That the Board of Directors of the Corporation, at a meeting
of the Board of Directors held on April 24, 1996, duly adopted resolutions
proposing and declaring advisable the following amendment to the Third Restated
Certificate of Incorporation of the Corporation:
RESOLVED: That the Third Restated Certificate of Incorporation of the
- -------- Corporation be amended by deleting the first paragraph of
Article FOURTH in its entirety and inserting the following in
lieu thereof:
"FOURTH. The total number of shares of all classes of stock
which the Corporation shall have authority to issue is Eighty
Million (80,000,000) shares of Common Stock, $.01 par value
per share ("Common Stock")."
SECOND: That the stockholders of the Corporation, at a Special
Meeting of Stockholders held on July 26, 1996, duly approved said proposed
Certificate of Amendment of Third Restated Certificate of Incorporation in
accordance with Section 242 of the General Corporation Law of the State of
Delaware.
- 13 -
<PAGE> 14
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Amendment to be signed by its President this 31st day of July, 1996.
SECURITY DYNAMICS TECHNOLOGIES, INC.
By:Charles R. Stuckey, Jr.
--------------------------
Charles R. Stuckey, Jr.
President
- 14 -
<PAGE> 1
EXHIBIT 11
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
(in thousands, except per share data) -------- --------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
PRIMARY
Weighted average number of common and common equivalent shares outstanding:
Common stock 13,654 11,832 13,586 11,800
Common stock equivalent shares
resulting from stock options
(treasury stock method) 781 696 779 718
------- ------- ------- -------
Total 14,435 12,528 14,365 12,518
======= ======= ======= =======
Net income $ 2,885 $ 1,485 $ 5,436 $ 2,602
======= ======= ======= =======
Net income per common and common equivalent share $ 0.20 $ 0.12 $ 0.38 $ 0.21
======= ======= ======= =======
FULLY DILUTED
Weighted average number of common and common equivalent shares outstanding:
Common stock 13,654 11,832 13,586 11,800
Common stock equivalent shares
resulting from stock options
(treasury stock method) 787 700 824 726
------- ------- ------- -------
Total 14,441 12,532 14,410 12,526
======= ======= ======= =======
Net income $ 2,885 $ 1,485 $ 5,436 $ 2,602
======= ======= ======= =======
Net income per common and common equivalent share $ 0.20 $ 0.12 $ 0.38 $ 0.21
======= ======= ======= =======
</TABLE>
<PAGE> 1
August 13, 1996
The Board of Directors
Security Dynamics Technologies, Inc.
20 Crosby Drive
Bedford, Massachusetts
Dear Sirs:
At your request, we have read the description included in your Quarterly Report
on Form 10-Q to the Securities and Exchange Commission for the quarter ended
June 30, 1996, of the facts relating to Security Dynamics Technologies, Inc.'s
(the "Company") change, effective April 1, 1996, in its accounting policy for
option grants to purchase the Company's common stock requiring stockholder
approval to measure compensation expense on the approval date. We believe, on
the basis of the facts so set forth and other information furnished to us by
appropriate officials of the Company, that the accounting change described in
your Form 10-Q is to an alternative accounting principle that is preferable
under the circumstances.
We have not audited any consolidated financial statements of the Company and
its consolidated subsidiaries as of any date or for any period subsequent to
December 31, 1995. Therefore, we are unable to express, and we do not express,
an opinion on the facts set forth in the above-mentioned Form 10-Q, on the
related information furnished to us by officials of the Company, or on the
financial position, results of operations, or cash flows of the Company and its
consolidated subsidiaries as of any date or for any period subsequent to
December 31, 1995.
Yours truly,
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from the
Company's financial statements included in the Quarterly Report on Form 10-Q and
is qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000932064
<NAME> SECURITY DYNAMICS TECHNOLOGIES INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 5,639
<SECURITIES> 83,466
<RECEIVABLES> 9,241
<ALLOWANCES> 257
<INVENTORY> 2,365
<CURRENT-ASSETS> 102,994
<PP&E> 5,633
<DEPRECIATION> 1,798
<TOTAL-ASSETS> 108,424
<CURRENT-LIABILITIES> 7,477
<BONDS> 0
0
0
<COMMON> 137
<OTHER-SE> 100,810
<TOTAL-LIABILITY-AND-EQUITY> 108,424
<SALES> 26,240
<TOTAL-REVENUES> 26,240
<CGS> 6,172
<TOTAL-COSTS> 20,045
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 72
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,560
<INCOME-TAX> 3,124
<INCOME-CONTINUING> 5,436
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,436
<EPS-PRIMARY> .38
<EPS-DILUTED> .38
</TABLE>
