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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No. 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, Massachusetts 01730
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (617) 687-7000
------------------------------------------------------------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.01 par value
(Title of class)
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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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of the voting stock held by
non-affiliates of the registrant was $655,000,000 based on the last reported
sale price of the registrant's Common Stock on the Nasdaq National Market as of
the close of business on March 20, 1997. There were 34,955,965 shares of Common
Stock outstanding as of March 20, 1997.
DOCUMENTS INCORPORATED BY REFERENCE
Part of Form 10-K
Document into which incorporated
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Portions of the Registrant's
1996 Annual Report to Stockholders Items 6, 7 & 8 of Part II
Portions of the Registrant's Proxy Items 10, 11, 12 & 13
Statement for the 1997 Annual Meeting of Part III
of Stockholders
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PART I
ITEM 1. BUSINESS
SDI
Security Dynamics Technologies, Inc. ("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 and its
subsidiaries are collectively referred to herein as the "Company."
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 unauthorized
access prevention 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 pseudo-random token codes displayed on the SecurID token
at set intervals, typically every 60 seconds. When attempting to log-in, the
user is prompted by the Company'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.
During 1996, SDI also implemented its SecurVAR ( Value Added Reseller ) program,
through which SDI is able to deliver its security solutions through value added
resellers. As of December 31, 1996, the Company had sold or licensed over 6,500
software and hardware access control products and over 1,500,000 SecurID tokens
to over 1,600 customers worldwide. A significant portion of the Company'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.
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RSA
Through SDI's wholly owned subsidiary, RSA Data Security, Inc. ("RSA"), the
Company also develops, markets and supports cryptographic and electronic data
security products and provides cryptographic consulting services. RSA's
developer toolkits 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 toolkit 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.
Security Dynamics, SecurID and ACE/Server are registered trademarks, and
the Security Dynamics logo, PASSCODE, Enterprise Security Services, SoftID,
WebID and PINPAD are trademarks of Security Dynamics Technologies, Inc. SecurPC,
BSAFE, TIPEM, BCERT, S/PAY and S/MAIL are trademarks of RSA Data Security, Inc.
All other trademarks or trade names referenced in this Annual Report on Form
10-K are the property of their respective owners.
Industry Background
SDI and RSA
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
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
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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. The Company's current products are targeted at the fundamental need to
authenticate the identity of system and network users and to provide
cryptographic and electronic data security.
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." The
Company 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
The Company 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).
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These solutions must address the need for:
- Ease of use;
- Interoperability within heterogeneous enterprise environments;
- Scaleability;
- Ease of administration;
- Integration with existing customer applications; and
- System reliability and availability.
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.
In recent years, a number of trends have created an attractive environment
for RSA's proprietary technologies. As described above, the proliferation of
remote computing, enterprise networks, internetworking and, in particular, the
Internet have generated significant demand for cryptographic and electronic data
security.
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. RSA, a
recognized leader in cryptography, supplies its technology and toolkits for
public key encryption to a growing list of major systems and software providers.
RSA's encryption technology is embedded in Microsoft Windows, Novell Netware,
Netscape Navigator, Intuit's Quicken, Lotus Notes and hundreds of other
products. The combined companies are positioned to supply solutions for
corporate enterprise-wide networks, intranets, and the Internet along with its
future promise of electronic commerce.
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.
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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 software ("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 scaleability, 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 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 software 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 the Company can
address other classes of the network security hierarchy to deliver integrated
solutions for protecting information resources.
During the fourth quarter of 1996, the Company began shipping ACE/Server
for Windows NT, a key release of the flagship ACE/Server product. This product
is designed to provide network managers with scaleable performance to support
the authentication needs of NT enterprise users. It is also designed to provide
an easy-to-use Windows NT-based interface and a seamless integration of security
management with NT-based corporate information systems.
During the fourth quarter of 1996, the Company also began shipping the
ACE/Client for Windows NT 4.1 with the new WebID feature. Used in conjunction
with SDI's ACE/Server and SecurID technology, businesses can offer secure access
at the Web page level to their Internet and intranet sites, enabling
corporations to more fully exploit the World Wide Web's commercial potential.
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RSA Solution
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.
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 the Massachusetts Institute of
Technology ("MIT"). This technology has been licensed by MIT to RSA. RSA's
toolkit products built around this technology
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enable RSA's customers to develop applications that are designed to provide
secure electronic data communication.
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. The security afforded by RSA's encryption products
is predicated on the assumption that "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 cryptosystems are ever developed, it would have a material adverse
impact on the business and results of operations of RSA.
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.
Strategy
SDI
The Company's objective is to be a leader in the computer and network
security market. Key elements of the Company's strategy to achieve this
objective are listed below:
- Enhance Enterprise-Enabled Identification and Authentication Product
Line. The Company 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. The Company 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.
The Company 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 has also developed 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
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Novell NetWare (Versions 3.11 and 3.12), Microsoft Windows NT RAS
(Version 3.51), Apple Computer Inc.'s AppleTalk and Digital Equipment
Corporation's OSF1. The Company 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. The Company continues to identify
and prioritize various technologies addressing other classes of the
security hierarchy to determine potential future product offerings by
the Company, such as products for encryption and control of user
privileges. For example, during 1995 and 1996, the Company acquired a
minority equity interest in VeriSign, Inc., a company organized to
provide digital certificate and related services that use public key
cryptography to protect the privacy of electronic transmissions on
public and private networks. In December 1996, the Company also
acquired a minority interest in VPNet Technologies, Inc., a company
organized to provide a series of next-generation products designed to
make virtual private networks ("VPN's") a viable, secure and
affordable alternative to dedicated private leased lines.
- Expand Direct Sales and Support Channel. The Company currently sells
its products in North America and in targeted major markets abroad
through its direct sales force. The Company believes that a direct
sales force is well suited to differentiate the Company's products
from those of its competitors and to obtain insights into the future
security requirements of the Company's customers. The Company intends
to continue to expand its direct sales and support organization and to
enhance its direct sales efforts by adding OEMs. During 1996, the
Company added 54 sales and technical sales support personnel,
representing an increase of 96% over the sales and technical sales
support personnel at the end of 1995. During 1996, the Company
implemented its SecurVAR indirect sales channel program and, by
December 31, 1996, the Company had certified an aggregate of over 50
OEMs and VARs. The Company intends to continue to expand its indirect
sales channel opportunities by certifying additional OEMs and VARs in
the future.
- Expand International Presence. Sales outside North America represented
18% of the Company's total revenue for 1996. The Company's
operations outside North America currently consist of sales offices in
London, Paris, Frankfurt, Oslo, Tokyo and Singapore and independent
local distributors located in 17 key foreign markets. Additional
support is provided to the Company's international operations from its
headquarters in Bedford, Massachusetts. The Company believes that
international markets present a large, relatively new market for
computer and network security products, and plans to continue to
expand its business outside North America through the hiring of sales
personnel and the establishment of additional distribution
arrangements, primarily in Europe and the Far East.
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To enhance each of the foregoing strategies, the Company 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 December 31, 1996, the Company's strategic marketing or other
relationships included the following:
OS/NOS
- ------
Apple Computer Inc. (AppleTalk)
Cisco Systems, Inc. (TACACS and TACACA+)
Microsoft Corporation (Windows NT and NT RAS)
Novell (Netware Versions 3.11 and
3.12 and Netware Connect Version 2.0)
INTERNET-RELATED PRODUCTS
- -------------------------
Advanced Network Services, Inc. (Interlock Service)
Border Networks Technologies, Inc. (Janus)
Checkpoint Systems, Inc. (Firewall-1)
IBM (NetSP Firewall)
Milky Way Networks Corporation (Black Hole)
NeXT Software, Inc. (Web Objects)
Raptor Systems, Inc. (Eagle)
Secure Computing Corporation (Sidewinder)
SOS Corporation (Brimstone)
Technologic Inc. (Firewall)
Trusted Information Systems Inc. (Gauntlet)
APPLICATION SOFTWARE
- --------------------
Advantis (Dial Service)
CyberSAFE Corporation (Challenger)
IBM (NetSP)
Mergent International Inc. (PC DACS)
Oracle Corporation (Secure Network Services)
OTG, Incorporated (Call Control System)
TGV Inc. (Secure/IP)
REMOTE ACCESS PRODUCTS
- ----------------------
3Com Corp. (Access Builder)
Ascend Communications Inc.(Max, Pipeline)
Attachmate Corp. (Remote Lan Node)
Bay Networks, Inc. (Lattis System 3000,9000, BAY RS)
Cisco Systems, Inc. (TACACS and TACACS+ supported)
Emulex Corporation (Connect+Pro)
Gandalf Technologies Inc. (XpressWay)
IBM (8235, Lan Distance)
Kasten Chase Applied Research, Inc. (Optiva)
Livingston Enterprises, Inc. (PortMaster)
Microcom, Inc. (Lan Express)
Penril Datability Networks (CSX)
Rockwell (NetHopper)
Shiva Corporation (LanRover)
TechSmith Inc. (Enterprise Wide)
Telebit Corporation (NetBlazer)
U.S. Robotics (Sportster Modem)
Xylogics, Inc. (Annex)
Xyplex, Inc. (MaxServer, Network 9000 Server)
The Company believes its strategic marketing relationships provide it with
a competitive advantage by enabling the Company to expand its network coverage,
increase its installed customer base and increase SecurID token usage.
An overriding goal of the Company 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.
RSA
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;
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- creating value-added cryptographic and electronic data security
toolkits 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.
Because the market for the Company's products is only recently emerging,
declines in demand for the Company'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 the Company's financial condition or
results of operations.
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 the Company.
Similarly, an actual or perceived breach of network or computer security at one
of the Company's customers, regardless of whether such breach is attributable to
the Company's products, could adversely affect the market's perception of the
Company and the Company's financial condition or results of operations. In
addition, although the effectiveness of the Company's products is not dependent
upon the secrecy of its proprietary algorithm, the public disclosure or
"breaking" of this algorithm could result in a perception of breached security
which could have an adverse effect on the Company's financial condition or
results of operations.
Products
The Company's family of security products includes SecurID tokens,
ACE/Serve and ACM software and ACM hardware access control products and RSA
encryption and toolkit products. All of SDI's products use the patented SecurID
token technology as a common user interface. The Company 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 the Company's
computer and network security products.
SecurID Tokens
The Company'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. The
SecurID Modem is an integration of the SecurID token technology with a
high-performance PC Card modem from Motorola. The SoftID authentication
software, deployed on PC's, utilizes the same technology as found in the SecurID
token.
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SDI currently offers the following SecurID tokens:
COMMERCIAL CURRENT U.S.
SecurID Token INTRODUCTION LIST PRICE*
------------- ------------- --------------
SecurID Card 1986 $34 - $90
SecurID PINPAD Card 1989 $42 - $98
SecurID Key Fob 1995 $38 - $90
SecurID Modem 1996 $396 - $450
SoftID Authentication
Software 1996 $25 - $45
* 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 the Company's customers.
SecurID tokens can also be configured with multiple seeds for use by users who
otherwise might require multiple cards.
ACE/Server
The Company'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. The Company's ACE/Server v2.0 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.
ACE/SERVER COMMERCIAL
MODEL INTRODUCTION OPERATING SYSTEM
----- ------------ ----------------
ACM/8101 1991 Sun SunOS
ACM/6201 1992 IBM AIX
ACM/9601 1992 Hewlett-Packard HP-UX
ACM/8201 1994 Sun Solaris
ACM/9401 1996 Windows NT (3.51 and above)
ACE/Server for Windows NT
In the fourth quarter of 1996, the Company began shipping ACE/Server for
Windows NT, the latest version of its ACE/Server network security software.
ACE/Server for Windows NT is designed to provide network managers with scaleable
performance to support the authentication needs of enterprise users,
easy-to-learn Windows NT-based user interfaces and seamless integration of
security management with corporate information systems. Network administration
of SecurID tokens and SoftID authentication software is now optimized for
Microsoft Windows NT environments.
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ACE/Server for Windows NT has the following features:
- ACE/Server for Windows NT serves as the platform for the Company's
Windows NT-based database engine, development tools and user interfaces,
capitalizing on the market demand for Windows NT-based technology.
- administrators can manage the ACE/Server software from distributed
Windows NT workstations, allowing for multiple facilities and organizations to
share in the administration of a single ACE/Server.
- all distributed administrative dialogs with ACE/Server for Windows
NT are encrypted as they travel across the corporate network allowing for
security of SecurID user credentials.
ACE/Server for Windows NT v4.0 with WebID Feature Set
The ACE/Client for Windows NT 4.0 features the first implementation of the
Company's WebID Feature Set. The two-factor end-user authentication found in the
Company's ACE/Server and SecurID technology can be used to protect sensitive
information found on corporate intranets. ACE/Client for Windows NT v4.0 adds
support for Microsoft's Windows NT 4.0 and is integrated with Microsoft's
Internet Information Server (IIS) in accordance with the Microsoft Internet
Security Framework (MISF). The WebID Feature Set defines the necessary
requirements in securing access to Web server content. The WebID Feature Set has
the following features:
- the WebID Feature Set specifies support for major Web servers,
enabling customers to flexibly deploy a security solution over a variety of Web
server platforms.
- administrators have the ability to select specific pages and
directories of pages for protection. Access to sensitive information found on
corporate intranets can be easily secured. Public protected pages effectively
reside on a common Web server.
- the WebID Feature Set allows for high multiple authentication rates,
and integration of administration with Web servers to efficiently deploy SecurID
access controls.
- the WebID Feature Set supports major browsers found on the Internet,
allowing SecurID user authentication to take place irrespective of the end
users' choice of browser. End users authenticate only once per browsing session,
allowing users to securely and conveniently follow links to other protected
pages.
- the addition of SecurID end-user authentication technology adds an
additional layer of security to the Secure Sockets Layer (SSL) encryption that
already exists in current Web products.
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ACM Software
The Company's ACM software products interface directly with the host
computer's operating system to restrict access to the protected system or
resource. The Company's ACM software products can accommodate an unlimited
number of users and provide security audit trails, user accountability and
activity reporting. The Company currently offers the following ACM software
products:
COMMERCIAL CURRENT U.S.
MODEL INTRODUCTION OPERATING SYSTEM LIST PRICE*
----- ------------ ---------------- -----------
ACM/5100 1988 Digital VAX/VMS $1,950 - $25,000
ACM/6150 1988 IBM MVS, MVS/ESA $18,500 - $32,500
* List prices vary depending upon the number of authorized users.
ACM Hardware
The Company'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.
The Company currently offers the following ACM hardware products:
COMMERCIAL NUMBER OF CURRENT U.S.
MODEL INTRODUCTION PORTS/USERS LIST PRICE
----- ------------ ----------- ----------
ACM/1600HS 1995 16 RS-232 Ports; 400 users; $9,850
expandable to 256 ports, 6400
users; up to 115.2k baud
ACM/400HS 1995 4 RS-232 Ports; 200 users; up $2,850
to 115.2k baud
ACM/100HS 1995 1 RS-232 Port; 100 users; up $650
to 115.2k baud
SecurADM Software
The Company acquired Infratel S.A.R.L.'s SecurADM technology during 1995.
SecurADM software provides secure single sign-on and central administration and
management for heterogeneous network environments. SecurADM software utilizes
the Company'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
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<PAGE> 16
European insurance companies and financial institutions and will initially be
marketed by the Company in Europe through the Company's direct sales force and
its European distributors.
RSA SecurPC
In the fourth quarter of 1996, the Company began shipping RSA SecurPC, an
easy-to-use encryption product based on the RSA public key cryptosystem. RSA
SecurPC marks the first end-user encryption product offered by the Company since
the acquisition of RSA. RSA SecurPC is a general purpose encryption product
designed to protect data stored on users' local hard drives, network drives and
laptop computers and can also be used to protect confidential data in transit
via email by utilizing RSA's encryption technology. RSA SecurPC is
cross-compatible, enabling users to exchange encrypted files across multiple
platforms, in addition to transparently securing information throughout extended
enterprises. Users can provide the "combination" or pass phrase to a person who
needs to decrypt files so users not equipped with RSA SecurPC can decrypt
encrypted files. Emergency Access file recovery enables administrators to split
emergency decryption authority among multiple authorities. Promoting ease of use
as a central feature, the AutoCrypt function enables files to be encrypted
on-demand automatically.
RSA SecurPC is available from the Company for Windows 3.1x, Windows 95,
Windows NT 3.51 and Macintosh, and the U.S. price list currently ranges from $29
to $129 per licensed copy, depending on the number of users. Maintenance, sold
at 20% of the cost of the product, entitles the user to all updates and upgrades
released during the period of maintenance coverage, as well as technical
support.
Toolkit Products
BSAFE. BSAFE, RSA's flagship product, was introduced in 1987 as a
general-purpose cryptography toolkit 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 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.
TIPEM. TIPEM is an interoperable, secure electronic mail development
toolkit based on the Secure Multipurpose Internet Mail Extension (S/MIME)
standard. TIPEM 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). TIPEM customers include Netscape, America Online and IBM/Lotus.
TIPEM is RSA's core messaging toolkit and is complemented by other add-on
toolkit products such as S/MAIL.
BCERT. The BCERT development toolkit 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
toolkit supports the ITU-T X.509 V3 international standard for public key
certificates. BCERT, introduced in October 1996, contains all the cryptographic
support necessary to generate certificate requests, sign certificates and create
and distribute certificate revocation lists
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<PAGE> 17
(CRLs). A public key certificate infrastructure is an important part of the
combined Company's next-generation security architecture and forms the framework
for the Company's future information security solutions, ranging from RSA
cryptographic engines to Security Dynamics' Enterprise Security Services.
S/MAIL. The S/MAIL development toolkit is a standards-based secure
messaging solution designed to allow developers to provide a secure messaging
infrastructure based on the Secure Multipurpose Internet Mail Extension (S/MIME)
standard. Introduced in January 1997, the S/MAIL developer kit is offered as a
special-purpose add-on to RSA's TIPEM toolkit and offers specific message
formatting, user interface primitives, local management of certificates,
database integration and management of other configuration information. The
S/MAIL developer kit is designed to remove the confidentiality and integrity
threats to electronic mail by providing that electronic mail messages are read
only by designated recipients, regardless of their electronic mail platform. The
S/MAIL developer kit is also designed to authenticate the sender and maintain
the validity of the message contents as intended by the sender through
implementation of digital signatures and hashing algorithms.
The Company's Enterprise Security Services is an extension of the
ACE/Server technology to support services such as certificate management, key
management and privilege management. During 1997, the Company intends to
introduce products and form partnerships that will enable delivery of security
services such as certificate management (certificates which attest to the
authenticity of the owners of public keys), key management (services which are
currently expected to include generation, distribution, validation, replacement,
termination and recovery of keys) and privilege management (services which are
currently expected to manage privileges that define what enterprise resources
users can access and what they can do with those resources). In conjunction with
the enhancement of the ACE/Server platform and the availability of add-on
service modules, the Company currently intends to add machine-readable, credit
card-sized smart cards to its existing token offerings. It is currently expected
that these smart cards would provide a secure and convenient form factor for
delivering authentication functions and key and certificate storage. The Company
expects that ACE/Server will provide a common management interface, accessible
through Web browsers, to manage all Enterprise Security Services, thereby
enabling the administration of the various security services from a single,
easy-to-use management platform.
Because the Company currently derives substantially all of its revenue from
sales of its computer and network security products, developer toolkits and
related services, any factor adversely affecting sales of these products and
services would have a material adverse effect on the Company. Existing and new
versions of such products are expected to continue to represent a high
percentage of the Company's revenues for the foreseeable future. As a result,
any factor adversely affecting sales of these products, or any factor impeding
or delaying the Company's ability to diversify its product offering to lessen
its dependency on those products, would have a material adverse effect on the
business and financial results of the Company.
The RSA/MIT Patent (as defined below), 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 (as defined 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, which may adversely impact sales of
RSA's products. See "Item 3 -- Legal Proceedings."
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<PAGE> 18
The market for 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 the
Company is adopted as the standard for implementing network and computer
security, sales of the Company's existing and planned products in that market
segment may be adversely impacted, which could have a material adverse effect on
the Company'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 the Company's
competitive position or render its products or technologies noncompetitive or
obsolete. Thus, the Company's future success will depend in part upon its
customers' and end users' demand for electronic security products and upon the
Company'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 the
Company will be successful in doing so. Delays in product enhancement and
development or the failure of the Company's new products or enhancements to gain
market acceptance would have a material adverse effect on the Company'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 the Company's competitive position.
Sales and Marketing
The Company has established a multi-channel distribution and sales network
to serve the computer and network security market. The Company sells and
licenses its products in the Americas, the United Kingdom, France, Germany,
Norway, Japan 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, the Company supports its
direct and indirect sales efforts through strategic marketing relationships and
public relations programs, trade shows and other marketing activities. The
Company sells and licenses its products through written sales and license
agreements under terms and conditions that the Company believes are consistent
with industry practice. In August 1996, the Company launched its SecurVAR
reseller program comprising remote access and vertical industry VARs. The
SecurVAR program enables resellers to integrate the Company's user
authentication and encryption technology with their existing product portfolios.
All SecurVAR resellers are provided with sales training and must complete a
technical certification program designed to enable them to install, troubleshoot
and offer first level support to customers.
Sales
The Company believes that a direct sales force is well suited to
differentiate the Company'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.
The Company's direct sales staff solicits prospective customers, provides
technical advice and support with respect to the Company's products and works
closely with customers and the Company's distributors and OEMs. As of December
31, 1996, the Company's direct sales organization consisted of 67 sales and
technical support personnel operating at 32 locations in North America and 48
sales and technical support personnel operating at four locations in Europe with
locations also in Singapore and Japan. The Company's revenue from direct sales
efforts for the years ended December 31, 1994, 1995 and 1996 was approximately
97%, 97% and 95% of total revenue, respectively.
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<PAGE> 19
SDI also markets, sells and licenses its products indirectly through
distributors and OEMs. As of December 31, 1996, SDI had relationships with 31
distributors, and over 50 OEMs and VARs. SDI's OEMs sublicense, on a
non-exclusive 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.
RSA typically licenses its toolkit technology to OEMs. As of December 31, 1996,
RSA had relationships with over 250 OEMs. RSA also licenses its patent
technology and as of December 31, 1996, RSA had relationships with over 10
patent licensees. 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.
The Company's international sales are being made through its direct sales
force as well as through 31 distributors located in Europe, the Middle East,
South America and the Pacific Rim. The Company's international distributors
provide initial sales support, installation, technical support and follow-on
service to local customers. The Company generally grants its distributors
non-exclusive distribution rights.
Sales outside North America accounted for approximately 11%, 13% and 18% of
the Company's revenue in the years ended December 31, 1994, 1995 and 1996,
respectively. While the Company 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
the Company's financial condition or results of operations. In addition, the
Company'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. The Company's direct sales in
Canada, the United Kingdom, France, Germany, Norway and Japan are denominated in
the local currency, and the Company 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 the Company's products sold in these markets. In addition, the
Company 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.
The Company has experienced, and may experience in the future, significant
seasonality in its business, and the Company'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. The Company believes that revenue tends to be higher in
the last quarter due to the Company's quota-based compensation plans, year-end
budgetary pressures on the Company's customers and the tendency of certain of
the Company's customers to implement changes in computer or network security
prior to the end of the calendar year. In addition, revenue tends to be lower in
the summer months, particularly in Europe, when businesses defer purchase
decisions. Because the Company's operating expenses are based on anticipated
revenue levels and a high percentage of the Company's expenses are fixed, a
small variation in the time of recognition of revenue can cause significant
variations in operating results from quarter to quarter. The Company believes
that its order backlog is not a material factor in determining future revenues.
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Marketing
In support of its sales efforts, the Company 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. The Company 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 the Company's access control products on their
own system and generally run pilot programs with up to ten SecurID token users.
The Company 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 the Company's client software into their products to provide
compatibility between their product offerings and the Company's ACE/Server
software. Other vendors build call routines, software hooks or application
program interfaces (API's) into their products to provide compatibility with the
Company's ACE/Server software. The Company has also entered into strategic
relationships with vendors that share technical information with the Company to
enable it to develop products which will be interoperable with the vendors'
products. The Company has developed a separate program, the SecurID Ready
strategic partner program, to market the compatibility between the vendors'
products and the Company's ACE/Server software. The end-user customers of all of
these vendors must purchase tokens and license ACE/Server software directly from
the Company. The Company believes that these relationships help the Company and
its customers to expand their enterprise network coverage and assist the Company
in increasing its installed customer base and SecurID token usage.
There can be no assurance, however, that the Company's existing strategic
relationships will be commercially successful, that the Company will be able to
negotiate additional strategic relationships, that such additional relationships
will be available to the Company 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 the Company has established
strategic relationships will not pursue alternative technologies or develop
alternative products in addition to or in lieu of the Company's products either
on their own or in collaboration with others, including the Company's
competitors. The Company's financial condition or results of operations may also
be affected by the success of its collaborators in marketing any successfully
developed products.
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
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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.
Customers
As of December 31, 1996, SDI had sold or licensed over 6,500 ACE/Server and
ACM products and approximately 1,500,000 SecurID tokens to over 1,600 customers
worldwide. Historically, SDI's principal customers have been in the
telecommunications, pharmaceutical, financial and medical industries as well as
academic institutions, research laboratories and government organizations. These
customers are generally sophisticated and knowledgeable purchasers of security
systems and work with highly confidential information. The Company believes that
as corporate networks proliferate and become more complex, the number of
industries concerned with system security and access to information will grow.
As of December 31, 1996, RSA had licensed it's toolkit and patent licensing
technology to over 250 OEM's. RSA licenses its products to OEM's who incorporate
RSA's encryption technology into their products. RSA's developer toolkits 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 and Windows NT, 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.
In the year ended December 31, 1996, no customer accounted for more than
10% of the Company's total revenue.
Customer Service and Support
SDI maintains a customer support help desk and technical support
organization at its headquarters in Bedford, Massachusetts and in Wokingham,
United Kingdom. RSA also offers customer support through its offices at Redwood
City, California. During 1996, the Company added advanced technical support
personnel to its support staff to address anticipated additional demands arising
from the deployment of the Company's security solutions into larger and more
complex user environments. The Company also has field technical support
personnel that work directly with the Company's direct sales force, distributors
and customers. Most of the Company's products are designed for easy customer
installation. Accordingly, a significant portion of the Company's service and
support activities is provided remotely from the Company's headquarters in
Bedford, Massachusetts. As of December 31, 1996, the Company's customer support
organization consisted of an aggregate of 40 full-time employees located in
Massachusetts, California, the United Kingdom, Germany and France.
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
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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.
Customers rely on the Company's information security products for critical
electronic security applications. Failure of the Company's products to work as
designed could result in tort or warranty claims. The Company 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 the Company's
liability. Any liability for damages resulting from any such failure could be
substantial and could have a material adverse effect on the Company's business
and results of operations.
Product Development
The Company's product development efforts are focused on enhancing the
functionality, reliability, performance and flexibility of its existing
products. In the fourth quarter of 1996, the Company began shipping it's
ACE/Server software version for Windows NT. In the fourth quarter of 1995, the
Company 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, the Company began
shipping versions of its ACE/Server client software for Microsoft Windows NT and
Novell NetWare Connect (Version 2.0), respectively. The Company is developing
technology to enhance the administrative capabilities of its ACE/Server and ACM
products and the scaleability of its ACE/Server. Areas for future development of
the ACE/Server currently being pursued by the Company include cross realm
authentication, enhanced redundancy and interoperability with additional network
operating systems and directory services. The Company also is developing tools
to assist customers, strategic marketing partners and other third-party
integrators in integrating the Company's products with custom and other
third-party network or system applications.
RSA plans to increase its competitive position by strengthening its core
cryptography toolkit 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.
RSA is currently developing the following enhanced toolkits based on its
general purpose cryptography engine to enable emerging new applications. Each of
these value-added toolkits will be designed to address the needs of a specific
market segment.
SET Toolkit. RSA has developed a suite of toolkits known as S/PAY to
support the Secure Electronic Transaction (SET) protocol developed by an
industry group led by MasterCard and Visa for secure credit card purchases over
the Internet. The S/PAY toolkit consists of three separate toolkits, one each
for the three participants defined by the SET protocol involved in the
transaction: the cardholder, the merchant and the payment gateway. The toolkits
have a common core cryptographic architecture, but are tailored to fit the
specific actions of the three different entities. RSA began shipping S/PAY 1.0
in March 1997.
In addition to S/PAY 1.0, RSA is working with NEC on extensions to the SET
protocol that will meet the needs of the Japanese payment environment. It is
currently anticipated that the Japanese version of the SET toolkit, known as
J/PAY, will premier during 1997. RSA anticipates working with a
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group of vendors in Japan in addition to NEC to evolve the payment protocol
extensions into a widely adopted standard.
In 1996, RSA purchased the Secure Messenger Toolkit from WorldTalk
Corporation as the basis for RSA's S/MAIL toolkit, a complete, secure messaging
development solution that will make it much easier for developers to create
applications that conform to the S/MIME standard. Building on top of RSA's core
messaging toolkit, TIPEM, S/MAIL saves developers significant development effort
by providing the infrastructure for managing certificates, creating a consistent
user interface, and formatting messages according to the S/MIME protocol.
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 toolkit 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.
RSA Secure. 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.
In addition to enhancing its existing products, one of the Company's
strategies is to offer products in other classes of the network security
hierarchy. The Company continues to identify and prioritize various technologies
for potential future product offerings. The Company 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 the
Company will be successful in enhancing or developing existing products or
identifying and successfully acquiring new technologies.
The Company's strategy also includes the acquisition of businesses that
complement or augment the Company's existing product lines. Product acquisitions
are difficult to identify and complete for a number of reasons, including
competition for prospective buyers and the need for regulatory approvals,
including antitrust approvals. There can be no assurance that the Company will
be able to complete future acquisitions 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.
As of December 31, 1996, the Company's product development staff consisted
of 84 full-time employees engaged in engineering and development, including
software and hardware engineering, testing and quality assurance and technical
documentation. The Company also engages outside contractors where appropriate to
supplement the Company's in- house expertise or expedite projects based on
customer or market demand. The Company's total research and development expenses
for the years ended December 31, 1994, 1995 and 1996 were approximately $3.3
million, $5.7 million and $11.2 million, respectively.
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, bugs or viruses may result in loss of or
delay in market acceptance, recalls of hardware products incorporating the
software or loss of data. In December 1992, the Company recalled approximately
13,000 SecurID tokens due to an error in token programming software. Delays or
difficulties associated with new
21
<PAGE> 24
product introductions or product enhancements could have a material adverse
effect on the Company's financial condition or results of operations.
In addition, a number of factors, including the timing of the introduction
or enhancement of products by the Company or its competitors, market acceptance
of new products, and customer order deferrals in anticipation of new products,
may cause significant variations in the Company's quarterly operating results.
Manufacturing, Suppliers, and Quality Control
Manufacturing
SecurID Tokens. The Company has historically contracted for the manufacture
of its SecurID tokens with RJP International, Ltd. ("RJP"), an assembly
subcontractor located in China. During 1996, the Company qualified two
additional source suppliers in the United States for the manufacture of its
SecurID Card and PINPAD tokens. Although RJP will continue to provide the
Company with tokens, the Company believes that the qualification of the
additional token suppliers reduces the risks associated with the supply of its
products and product components. After delivery to the Company, 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. The Company has established an
in-house software duplication operation for its UNIX ACE/Server and VAX ACM
software products. The Company purchases duplicating services for its other ACM
software products from outside vendors. The Company'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. The Company contracts for the manufacture of its ACM
hardware products with an assembly operation located in New England. This
subcontractor manufactures products in accordance with the Company's
specifications and, with the exception of microprocessor chips, purchases all
components from independent vendors selected by the subcontractor. The Company
specifies the vendor from which its subcontractor may purchase microprocessor
chips for ACM hardware products.
The Company currently has limited sources for the manufacture of each of
its SecurID tokens and ACM hardware products. The Company 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 the
Company's financial condition or results of operations and could impact customer
relations.
Suppliers
Although the Company 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 the
Company's SecurID tokens are currently purchased only from Sanyo Electric Co.,
Ltd. ("Sanyo"), a Japanese computer chip manufacturer. Sanyo has introduced
22
<PAGE> 25
commercially an alternative chip and is continuing to work with the Company on
the development and testing of this chip as a replacement chip for the Company's
SecurID tokens. Sanyo has agreed to give the Company 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 the Company with a sufficient
number of chips to meet customer demand, that the Company will be able to
purchase chips from Sanyo at commercially acceptable prices or, if Sanyo
discontinues the manufacture of certain chips, that the Company will be able to
procure chips from another supplier on a timely basis and at commercially
acceptable prices. The inability of the Company to obtain a sufficient number of
chips at commercially acceptable prices could result in delays in product
shipments or increase the Company's material costs, either of which would
adversely affect the Company's financial condition or results of operations.
The lithium batteries contained in the Company's SecurID tokens are
purchased from one supplier located in the United States, Gould Electronics
("Gould"). Gould has agreed to give the Company at least 24 months' notice prior
to 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 the Company's material costs, either of
which would adversely affect the Company's financial condition or results of
operations.
The Company 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 the Company's SecurID tokens. The Company
attempts to maintain a three-month supply of SecurID tokens in inventory.
Quality Control
The Company 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. The Company has a formal quality control program
to satisfy its customers' requirements for high quality and reliable security
products. As part of this program, the Company is working with its suppliers to
improve process control and product design. The Company's SecurID tokens and ACM
hardware products are tested by the Company's subcontractors prior to shipment
and tested again by the Company as part of the Company's acceptance-inspection
procedure.
The Company is currently experiencing a period of rapid growth that could
place a significant strain on its management and other resources. The Company's
ability to manage its growth will require it to continue to improve its
operational, financial and management information systems, and to motivate and
effectively manage its employees. If the Company's management is unable to
manage growth effectively, the quality of the Company's products, its ability to
identify, hire and retain key personnel and its results of operations could be
materially and adversely affected.
Competition
SDI
The market for computer and network security products is highly competitive
and subject to rapid technological change. The Company believes that competition
in this market is likely to intensify as a result of increasing demand for
security products. The Company currently experiences competition from a number
of sources, including (i) software operating systems suppliers and application
software
23
<PAGE> 26
vendors that incorporate a single-factor static password security system into
their products, (ii) token-based password generator vendors promoting
challenge/response technology, such ActiveCard Inc., AXENT Technologies, Inc.,
Vasco Data Security, Inc., Secure Computing Corporation, Leemah DataCom Security
Corporation and Racal-Guardata, Inc., (iii) smart card security device vendors,
such as Gemplus, Siemens A.G. and Schlumberger, Limited, (iv) biometric security
device vendors, such as Ultra-Scan Corporation, The National Registry, Inc., Eye
Dentify Systems, Fingermatrix (U.K.) Limited, IriScan Inc. and Identix, Inc. and
(v) public-key infrastructure and hardware suppliers such as Entrust
Technologies Inc. and Cylink Corporation. In some cases, these vendors also
support the Company's products and those of its competitors. The Company 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 the Company. 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 the Company. While
the Company believes that it does not currently compete against manufacturers of
other classes of security products (such as encryption), there can be no
assurance that the Company's customers will not perceive such other companies as
competitors of SDI.
RSA
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 and as the
Internet becomes a viable medium for electronic commerce. RSA's competitors
include Cylink Corporation, Entrust Technologies Inc. and Terisa Systems, Inc.
and other organizations that provide cryptographic software products based upon
approaches similar to and different from those employed by RSA. RSA's
competitors include organizations with certain rights to RSA's technology and
organizations with alternate technologies that perform substantially the same
operations as RSA's products. 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.
The Company 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 the Company believes that its
products currently compete favorably with respect to such factors, there can be
no assurance that the Company can maintain its competitive position against
current and potential competitors, especially those with significantly greater
financial, marketing, service, support, technical and other competitive
resources.
Many of the Company's potential competitors have significantly greater
financial, marketing, technical and other competitive resources than the
Company. 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 the Company.
Competition could increase if new companies enter the market or if existing
competitors expand their product lines. Any reduction in gross margins could
have a material adverse effect on the Company's financial condition or results
of operations. Although the Company believes it has certain technological and
other advantages over its competitors, maintaining such advantages will require
continued investment by the Company in research and development and sales and
marketing. There can be no assurance that the Company will have sufficient
resources to make such investments or that the Company 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
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<PAGE> 27
relationships among themselves or with third parties, including third parties
with whom the Company has strategic relationships, to increase the ability of
their products to address the security needs of the Company'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 the Company would be materially
adversely affected.
Proprietary Rights
The Company 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. The Company 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 the Company's
products or to obtain and use information that the Company regards as
proprietary. The Company 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 the Company's patents, do
not protect the Company'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.
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 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 its intellectual property adequately could have
a material adverse effect on its financial condition or results of operations.
See "Item 3 -- Legal Proceedings."
The Company has from time to time received correspondence alleging that its
products may infringe patents held by third parties. To date, none of these
allegations has been pursued, and the Company 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 the Company in the future or that any such claims
will not require the Company to enter into license arrangements or result in
protracted and costly litigation, regardless of the merits of such claims.
25
<PAGE> 28
Government Regulation and Export Controls
Although SDI's user authentication products are subject to export controls
under United States law, the Company believes it has obtained all necessary
export approvals for the export of SDI's user authentication products. 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 the Company to obtain
required approvals under these regulations could adversely affect the ability of
the Company to make international sales. 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 International Traffic in Arms
Regulation, 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.
Employees
At December 31, 1996, the Company employed 360 employees. Of these
employees, 84 were involved in research and development, 184 in sales, marketing
and customer support, 48 in production and information technology, and 44 in
administration and finance. No employees are covered by any collective
bargaining agreements. The Company believes that its relationships with its
employees are good.
ITEM 2. PROPERTIES
The Company's principal administrative, sales and marketing, research and
development and support facilities consist of approximately 75,000 square feet
of office space in Bedford, Massachusetts. The Company occupies these premises
under a lease expiring in August 2006. As of December 31, 1996, the annual base
rent for this facility was approximately $950,000. In support of its field sales
and support organization, the Company also leases facilities and offices in 27
other locations in the United States, four locations in Canada and one location
in each of the United Kingdom, France, Germany, Norway, Singapore and Japan.
RSA leases approximately 20,000 square feet of office space in Redwood
City, California under a lease expiring in October 1999. As of December 31,
1996, the annual base rent for this facility was approximately $390,000.
ITEM 3. LEGAL PROCEEDINGS
Schlafly Action. In July 1994, RSA was named co-defendant with Public Key
Partners ("PKP") in an action filed by an individual, Roger Schlafly, in the
U.S. District Court for the Northern District of California. In this action Mr.
Schlafly contests the validity of the RSA/MIT Patent and the Stanford Patents,
alleges causes of action for non-infringement, interference with contractual
business relationships, 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
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<PAGE> 29
business relationships have been resolved in RSA's favor, either through actions
for dismissal or through summary judgment. Cylink intervened in this action as
co-defendant in late 1995.
Cylink Settlement. Since 1994, RSA had been involved in arbitration and
litigation proceedings (collectively, the "Litigation") relating, among other
things, to (i) the validity of a U.S. patent (the "RSA/MIT Patent") developed at
MIT and licensed to RSA; (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 certain U.S.
patents (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; and (iv) the liability, if any, of RSA for
infringing or contributing to the infringement of the Stanford Patents. On
December 31, 1996, RSA, Cylink and CKC entered into a comprehensive settlement
relating to the Litigation. As part of the settlement, (a) the parties agreed to
dismiss all claims relating to the Litigation, (b) Cylink granted to RSA all
necessary rights to the Stanford Patents and (c) RSA granted to Cylink a license
to RSA's cryptographic software toolkit.
ActivCard Settlement. In December 1995, the Company, 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 infringement of certain
patents of the Company and Vasco that collectively cover a range of technology
used to secure data access. The suit sought monetary damages and an injunction
against further infringement. In February 1996, in response to the Company's
repeated infringement allegations and prior to the serving of the Company's
complaint on ActivCard, ActivCard filed a complaint against the Company in the
same court seeking a declaratory judgement of non-infringement, invalidity and
unenforceability of the Company's patents asserted in the suit brought with
Vasco.
In September 1996, Vasco, the Company and ActivCard entered into a
settlement agreement with respect to this litigation. Pursuant to the terms of
the settlement agreement, the Company and Vasco agreed to dismiss with prejudice
their claims against ActivCard and ActivCard similarly agreed to dismiss with
prejudice its claims against the Company and Vasco. In connection with this
settlement, ActivCard agreed to license certain patents from the Company and
Vasco.
The Company has been named as a defendant in other legal actions arising
from its normal business activities. The Company carries insurance against
liability for certain types of risks. Although the amount of liability that
could result from any litigation cannot be predicted, in the opinion of
management, the Company's potential liability on all known claims would not have
a material adverse effect on the consolidated financial position or results of
the Company.
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<PAGE> 30
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
Executive Officers of the Company
The executive officers of the Company and their respective ages are as
follows:
Name Age Position
---- --- --------
Charles R. Stuckey, Jr. 54 Chairman, President, Chief Executive
Officer and Director
D. James Bidzos 41 Executive Vice President and Director
Arthur W. Coviello, Jr. 43 Executive Vice President, Treasurer and
Chief Financial Officer
John Adams 55 Senior Vice President, Engineering
Gary A. Rogers 42 Senior Vice President, World Wide Sales
and Field Operations
W. David Power 43 Vice President, Marketing
Linda E. Saris 44 Vice President, Operations
Mr. Stuckey joined the Company as President in January 1987, was appointed
Chief Executive Officer and elected a director of the Company in March 1987 and
appointed Chairman of the Board in July 1996. 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. Bidzos joined SDI as an Executive Vice President in July 1996. He
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. Mr. Bidzos
became a director of SDI following the acquisition of RSA by SDI in July 1996.
Mr. Coviello joined the Company 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. Adams joined the Company as Senior Vice President, Engineering, in
March 1996 after over twenty years of diversified management, engineering and
network service for Digital Equipment Corporation. From 1976 to 1996, Mr. Adams
served in a number of diversified positions with Digital Equipment Corporation,
including Vice President and Technical Director of the company's Network
Operating Systems Division from 1991 to 1996. Prior to joining Digital Equipment
Corporation, Mr. Adams served as a structural engineer for Mitchell Systems.
28
<PAGE> 31
Mr. Rogers joined the Company as Senior Vice President, World Wide Sales
and Field Operations in February, 1997. From 1994 to 1996, Mr. Rogers served as
Vice President, International Sales and Operations with Bay Networks, Inc.
Before joining Bay Networks, Inc., from 1992 to 1994, Mr. Rogers was Vice
President, Sales and Operations - Europe with Wellfleet Communications, Inc.
Prior to joining Wellfleet Communications, Inc., Mr. Rogers served in a number
of positions with several other organizations, including managerial-level sales
and marketing positions.
Mr. Power joined the Company as Vice President, Marketing in November 1996.
Mr. Power served as Vice President with Nets, Inc. (comprising two divisions,
Industry Net and Business Net, formerly AT&T New Media Services Division) in
1995 and 1996. From 1992 to 1995, Mr. Power served as Vice President and General
Manager for two Sun Microsystems business units: SunSoft PC Desktop Integration
Products and SunSelect. Before joining Sun Microsystems, Mr. Power was a Vice
President at Mercer Management Consulting, a marketing and strategic consulting
firm, from 1980 to 1992.
Ms. Saris joined the Company 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.
29
<PAGE> 32
PART II
ITEM 5 MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock has been trading on the Nasdaq National Market
under the symbol "SDTI" since the Company's public offering on December 14,
1994. The following table sets forth for the fiscal periods indicated the high
and low sales prices per share of Common Stock as reported on the Nasdaq
National Market and after giving effect to both of the Company's two-for-one
splits of its Common Stock in the form of stock dividends, which became
effective as of October 30, 1995 and November 15, 1996, respectively.
Fiscal 1995
-----------
High Low
---- ---
First Quarter $ 9.00 $ 4.375
Second Quarter 11.625 7.00
Third Quarter 12.00 8.875
Fourth Quarter 29.125 11.00
Fiscal 1996
-----------
High Low
---- ---
First Quarter $ 33.00 $ 21.25
Second Quarter 54.00 23.125
Third Quarter 48.375 25.625
Fourth Quarter 43.00 29.75
There were 259 stockholders of record of the Company's Common Stock as of
March 20, 1997.
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support its
growth strategy and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, current and
anticipated cash needs and plans for expansion.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is contained under the caption
"Selected Consolidated Financial Data" appearing in the Company's 1996 Annual
Report to Stockholders (the "1996 Annual Report") and is incorporated herein by
this reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this item is contained under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing in the Company's 1996 Annual Report and is incorporated
herein by this reference.
30
<PAGE> 33
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in the Consolidated
Financial Statements appearing in the Company's 1996 Annual Report and is
incorporated herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part under the
caption "Executive Officers of the Company" in PART I hereof, and the remainder
is contained in the Company's Proxy Statement for the Company's Annual Meeting
of Stockholders to be held on April 24, 1997 (the "1997 Proxy Statement") under
the captions "PROPOSAL 1 ELECTION OF DIRECTORS" and "SECTION 16(a) BENEFICIAL
OWNERSHIP REPORTING COMPLIANCE" and is incorporated herein by this reference.
Officers are elected on an annual basis and serve at the discretion of the
Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained under the captions
"Director Compensation," "Compensation of Executive Officers" and "Compensation
Committee Interlocks and Insider Participation" in the Company's 1997 Proxy
Statement and is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is contained in the Company's 1997
Proxy Statement under the caption "Stock Ownership of Certain Beneficial Owners
and Management" and is incorporated herein by this reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is contained under the caption
"Certain Transactions" appearing in the Company's 1997 Proxy Statement and is
incorporated herein by this reference.
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<PAGE> 34
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Form 10-K:
1. Financial Statements. The Consolidated Financial Statements are
included in the Company's 1996 Annual Report, which is filed as
an exhibit to this Annual Report on Form 10-K. The Consolidated
Financial Statements include:
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules. The Financial Statement Schedules,
Schedule II, "Valuation and Qualifying Accounts" and the Report of Ernst & Young
LLP, Independent Auditors follow immediately after the "Exhibit Index".
3. Exhibits. The Exhibits listed in the Exhibit Index immediately
preceding such Exhibits are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K:
None.
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<PAGE> 35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Charles R. Stuckey, Jr.
------------------------------------
Charles R. Stuckey, Jr.
Chairman, President and Chief Executive Officer
Date: March 26, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ Charles R. Stuckey, Jr. Chairman, President and March 26, 1997
- --------------------------- Chief Executive Officer
Charles R. Stuckey, Jr. (Principal Executive Officer)
/s/ Arthur W. Coviello, Jr. Executive Vice President, March 26, 1997
- --------------------------- Chief Financial Officer
Arthur W. Coviello, Jr. and Treasurer
(Principal Financial and
Accounting Officer)
/s/ D. James Bidzos Director March 26, 1997
- ---------------------------
D. James Bidzos
/s/ Richard L. Earnest Director March 26, 1997
- ---------------------------
Richard L. Earnest
/s/ Joseph B. Lassiter, III Director March 26, 1997
- ---------------------------
Joseph B. Lassiter, III
/s/ George M. Middlemas Director March 26, 1997
- ---------------------------
George M. Middlemas
/s/ Marino R. Polestra Director March 26, 1997
- ---------------------------
Marino R. Polestra
/s/ Sanford M. Sherizen Director March 26, 1997
- ---------------------------
Sanford M. Sherizen
33
<PAGE> 36
Exhibit Index
-------------
Exhibit
No. Description Page
--- ----------- ----
2 Agreement and Plan of Merger, dated as of April 14, 1996,
among the Registrant, Card-Key Inc. and RSA Data Security,
Inc. ("RSA") (filed as an Annex to the Joint Proxy Statement
and Prospectus constituting a part of the Registrant's
Registration Statement on Form S-4 (File No. 333-7265) (the
"Form S-4") and incorporated herein by reference) ................. *
3.1 Third Restated Certificate of Incorporation, as amended, of
the Registrant (filed as Exhibit 3 to the Registrant's
Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 1996 and incorporated herein by reference) .......... *
3.2 Amended and Restated By-Laws, as amended, of the Registrant
(filed as Exhibit 3.3 to the Registrant's Registration
Statement on Form S-1 (File No. 33-85606) (the "Form S-1")
and incorporated herein by reference) ............................. *
4 Specimen Certificate for shares of Common Stock, $.01 par
value, of the Registrant (filed as Exhibit 4.1 to the Form
S-1 and incorporated herein by reference) ......................... *
#10.1 1986 Stock Option Plan, as amended (filed as Exhibit 10.1 to
the Form S-1 and incorporated herein by reference) ................ *
#10.2 1994 Stock Option Plan, as amended ................................
#10.3 1994 Director Stock Option Plan, as amended .......................
#10.4 1994 Employee Stock Purchase Plan, as amended .....................
#10.5 Employment Agreement between the Registrant and Charles R.
Stuckey, Jr., dated as of July 9, 1993 (filed as Exhibit
10.5 to the Form S-1 and incorporated herein by reference) ........ *
#10.6 Employment Agreement, dated as of April 14, 1996, as
amended, among the Registrant, RSA and D. James Bidzos
(filed as Exhibit 10.18 to the Form S-4 and incorporated
herein by reference) .............................................. *
#10.7 Letter Agreement between the Registrant and Arthur W.
Coviello, Jr., dated as of August 21, 1995 (filed as Exhibit
10 to the Registrant's Quarterly Report on Form 10-Q for the
Quarter Ended September 30, 1995 and incorporated herein by
reference) ........................................................ *
34
<PAGE> 37
#10.8 Letter Agreement between the Registrant and Linda E. Saris,
dated as of May 1, 1989 (filed as Exhibit 10.7 to the Form
S-1 and incorporated herein by reference) ......................... *
10.9 Amended and Restated Registration Rights Agreement, dated as
of September 7, 1988, as amended, among the Registrant and
certain stockholders of the Registrant (filed as Exhibit
10.11 to the Form S-1 and incorporated herein by reference) ....... *
10.10 Amendment to Amended and Restated Registration Rights
Agreement, dated as of October 31, 1995, among the
Registrant and certain stockholders of the Registrant (filed
as Exhibit 10.19 to the Registrant's Registration Statement
on Form S-1 (File No. 33-98818) and incorporated herein by
reference) ........................................................ *
10.11 Stock Restriction Agreement between the Registrant Richard
L. Earnest, dated October 25, 1994 (filed as Exhibit 10.13
to the Form S-1 and incorporated herein by reference) ............. *
**10.12 Terms and Conditions of Purchase, dated January 1, 1994,
between the Registrant and Gould Electronics (filed as
Exhibit 10.15 to the Form S-1 and incorporated herein by
reference) ........................................................ *
**10.13 Letter, dated October 12, 1994, from Sanyo Electric Co.,
LTD. to the Registrant (filed as Exhibit 10.16 to the Form
S-1 and incorporated herein by reference) ......................... *
**10.14 Agreement between the Registrant and Progress Software
Corporation, dated December 1994 (filed as Exhibit 10.17 to
the Form S-1 and incorporated herein by reference) ................ *
10.15 Indenture of Lease, dated as of March 11, 1996, between the
Registrant and Beacon Properties, L.P. (filed as Exhibit
10.17 to the Form S-4 and incorporated herein by reference) ....... *
10.16 Stockholder Agreement, dated as of April 14, 1996, among the
Registrant, RSA and Addison Fischer (filed as Exhibit 10.19
to the Form S-4 and incorporated herein by reference) ............. *
10.17 Stockholder Agreement, dated as of April 14, 1996, among the
Registrant, RSA and D. James Bidzos (filed as Exhibit 10.20
to the Form S-4 and incorporated herein by reference) ............. *
35
<PAGE> 38
10.18 Stockholder Agreement, dated as of April 14, 1996, among the
Registrant, RSA and Ronald Rivest (filed as Exhibit 10.21 to
the Form S-4 and incorporated herein by reference) ................ *
11 Computation of Income Per Common Share ............................
13 Portions of the Registrant's 1996 Annual Report to
Stockholders (which is not deemed to be "filed" except to the
extent that portions thereof are expressly incorporated by
reference in this Annual Report on Form 10-K) .....................
21 Subsidiaries of the Registrant ....................................
23.1 Consent and Report on Schedule of Deloitte & Touche LLP ...........
23.2 Consent of Ernst & Young LLP, Independent Auditors ................
27 Financial Data Schedule ...........................................
- ----------
* Incorporated herein by reference.
** Confidential treatment previously granted by the Securities and
Exchange Commission as to certain portions.
# Management contract or compensatory plan or arrangement filed in
response to Item 14(a)(3) of the instructions to Form 10-K.
36
<PAGE> 39
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
RSA Data Security, Inc.
We have audited the consolidated balance sheets of RSA Data Security, Inc. as
of December 31, 1995 and the related statements of operations, shareholders'
equity and cash flows for the years ended December 31, 1995 and 1994 (not
presented separately herein). Our audits also included the financial statement
schedule of RSA Data Security, Inc. (not presented separately herein) listed in
the Index at Item 14(a). These financial statements and schedule are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedule 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 the consolidated results of its
operations and its cash flows for the years ended December 31, 1995 and 1994 in
conformity with generally accepted accounting principles. Also, in our opinion,
the related financial statement schedule, when considered in relation to the
basic financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.
Ernst & Young LLP
April 8, 1996
37
<PAGE> 40
SCHEDULE II
SECURITY DYNAMICS TECHNOLOGIES, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Charged
Balance at to Costs Balance
Beginning and at End
of Period Expenses Deductions of Period
<S> <C> <C> <C> <C>
ALLOWANCE FOR DOUBTFUL ACCOUNTS:
For the year ended December 31, 1996 $ 723,715 $ 223,120 $ 419,877 $ 526,958
For the year ended December 31, 1995 415,785 541,000 233,070 723,715
For the year ended December 31, 1994 230,000 185,785 -- 415,785
ACCRUED WARRANTY COSTS:
For the year ended December 31, 1996 $ 105,000 $ 128,000 $ 128,000 $ 105,000
For the year ended December 31, 1995 105,000 64,000 64,000 105,000
For the year ended December 31, 1994 105,000 37,000 37,000 105,000
</TABLE>
38
<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 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
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<PAGE> 2
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 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
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<PAGE> 3
"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).
(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
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<PAGE> 4
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 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.
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<PAGE> 5
(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:
(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
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<PAGE> 6
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.
(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
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<PAGE> 7
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 conditions 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.
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.
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<PAGE> 8
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 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.
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<PAGE> 9
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 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
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<PAGE> 10
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).
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.
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<PAGE> 11
(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 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
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<PAGE> 12
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 sub
sequent 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
<PAGE> 13
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> 14
Amendment No. 2
to
1994 Stock Option Plan
1. That subsection 3(b) of the 1994 Stock Option Plan be deleted and replaced in
its entirety with the following:
"(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 officer (as the terms "director" and "officer"
are defined for purposes of 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 full
Board of Directors or (ii) by a committee composed solely of two or more
"Non-Employee Directors" having full authority to act in the matter. For
the purposes of the 1994 Plan a director shall be deemed to be a
"Non-Employee Director" only if such person qualifies as a "Non-Employee
Director" within the meaning of Rule 16b-3, as such term is interpreted
from time to time."
2. That the 1994 Stock Option Plan be amended to delete in its entirety Section
9 of the 1994 Stock Option Plan and replace such Section in its entirety with
the following:
"9. Transferability of Options.
Except as the Board of Directors may otherwise determine or provide in
the applicable option agreement, options shall not be sold, assigned,
transferred, pledged or otherwise encumbered by the optionee to whom they
are granted, either voluntarily or by operation of law, except by will, the
laws of descent and distribution, or for Non-Statutory Options pursuant to
a qualified domestic relations order, and, during the life of the optionee,
shall be exercisable only by the optionee. References to an optionee, to
the extent relevant in the context, shall include references to authorized
transferees."
Adopted by the Board of Directors on February 12,
1997
<PAGE> 1
Exhibit 10.3
SECURITY DYNAMICS TECHNOLOGIES, INC.
1994 DIRECTOR STOCK OPTION PLAN
1. Purpose.
The purpose of this 1994 Director Stock Option Plan (the "Plan") of
Security Dynamics Technologies, Inc. (the "Company") is to encourage ownership
in the Company by outside directors of the Company whose continued services are
considered essential to the Company's future progress and to provide them with a
further incentive to remain as directors of the Company.
2. Administration.
The Board of Directors shall supervise and administer the Plan. Grants of
stock options under the Plan and the amount and nature of the awards to be
granted shall be automatic in accordance with Section 5. However, all questions
concerning interpretation of the Plan or any options granted under it shall be
resolved by the Board of Directors and such resolution shall be final and
binding upon all persons having an interest in the Plan.
3. Participation in the Plan.
Directors of the Company who are not full-time employees of the Company or
any subsidiary of the Company ("outside directors") shall be eligible to receive
options under the Plan.
4. Stock Subject to the Plan.
(a) The maximum number of shares of the Company's Common Stock, par value
$.01 per share ("Common Stock"), which may be issued under the Plan shall be
75,000 shares (after giving effect to the Company's one-for-two reverse stock
split effective as of October 24, 1994), subject to adjustment as provided in
Section 7.
(b) If any outstanding option under the Plan for any reason expires or is
terminated without having been exercised in full, the shares covered by the
unexercised portion of such option shall again become available for issuance
pursuant to the Plan.
(c) All options granted under the Plan shall be non-statutory options not
entitled to special tax treatment under Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code").
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<PAGE> 2
5. Terms, Conditions and Form of Options.
Each option granted under the Plan shall be evidenced by a written
agreement in such form as the Board of Directors shall from time to time
approve, which agreements shall comply with and be subject to the following
terms and conditions:
(a) Option Grant Dates. Options shall automatically be granted to all
eligible outside directors as follows:
(i) each person who is an eligible outside director on the closing
date (the "Closing Date") of the Company's initial public offering of Common
Stock pursuant to an effective registration statement under the Securities Act
of 1933, as amended, shall be granted an option to purchase the Pro Rata Number
of shares of Common Stock calculated pursuant to Section 5(b) on the Closing
Date;
(ii) each person who first becomes an eligible outside director after
the Closing Date shall be granted an option to purchase the Pro Rata Number of
shares of Common Stock calculated pursuant to Section 5(b) on the date of his or
her initial election to the Board of Directors, provided that such eligible
director is elected on a date other than the date of an Annual Meeting of
Stockholders; and
(iii) each eligible outside director shall be granted an additional
option to purchase 3,000 shares of Common Stock on the date of each Annual
Meeting of Stockholders of the Company commencing with the 1995 Annual Meeting
of Stockholders, provided that he or she continues to serve as a director
immediately following such Annual Meeting.
(b) Shares Subject to Option. Each option described in clauses (i) and (ii)
of Section 5(a) shall be for such number (and if such number is not a whole
number, rounded up to the nearest whole number) of shares of Common Stock (the
"Pro Rata Number"), if any, as is determined by multiplying (x) 3,000 by (y) the
quotient of (A) the number of whole calendar months between the applicable
Option Grant Date and the date of the next Annual Meeting of Stockholders
(which, for purposes of the Plan, shall be assumed to occur in the month of May)
and (B) 12. For example, if an eligible outside director were first elected on
October 15th, he or she would receive an option to purchase 1,500 shares of
Common Stock (3,000 x (6 (the number of whole calendar months between the Option
Grant Date and May (i.e., November through April)) / 12)).
(c) Option Exercise Price. The option exercise price per share for each
option described in clause (i) of Section 5(a) shall be equal to the reported
last sale price of the Common Stock on the Nasdaq National Market on the Closing
Date. The option exercise price per share for each option described in clauses
(ii) and (iii) of Section 5(a) shall be determined as follows: (i) if the Common
Stock is listed on the
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<PAGE> 3
Nasdaq National Market or another nationally recognized exchange or trading
system as of the Option Grant Date, the option exercise price shall be deemed to
be the lesser of (x) the reported last sale price per share of Common Stock
thereon on such date (or if no such price is reported on such date, such price
on the nearest preceding date on which such a price is reported) or (y) the
average of the reported last sales prices per share of Common Stock, as
published in The Wall Street Journal, for a period of ten consecutive trading
days prior to such date; and (ii) if the Common Stock is not listed on the
Nasdaq National Market or another nationally recognized exchange or trading
system as of the Option Grant Date, the exercise price per share shall be deemed
to be the fair market value of the Common Stock as of the Option Grant Date as
determined in good faith by the Board of Directors.
(d) Options Non-Transferable. To the extent required to qualify for the
exemption provided by Rule 16b-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), any option granted under the Plan to an optionee
shall not be transferable by the optionee other than by will or the laws of
descent and distribution or pursuant to a qualified domestic relations order as
defined by the Code or Title I of the Employee Retirement Income Security Act,
or the rules thereunder, and shall be exercisable during the optionee's lifetime
only by the optionee or the optionee's guardian or legal representative.
(e) Vesting Period.
(i) General. Each option described in clauses (i) and (ii) of Section 5(a)
shall become exercisable on the first anniversary of the Option Grant Date, and
each option described in clause (iii) of Section 5(a) shall become exercisable
on the earlier of (x) the first anniversary of the Option Grant Date or (y) the
day prior to the fist Annual Meeting of Stockholders following the Option Grant
Date; provided, however, that in each instance described herein the optionee
continue to serve as a director on such dates.
(ii) Acceleration Upon Change in Control. Notwithstanding the foregoing,
each outstanding option granted under the Plan shall immediately become
exercisable in full in the event a Change in Control (as defined in Section 8)
of the Company occurs.
(f) Termination. Each option shall terminate, and may no longer be
exercised, on the earlier of the (i) the date 10 years after the Option Grant
Date or (ii) the date 60 days after the optionee ceases to serve as a director
of the Company; provided that, in the event an optionee ceases to serve as a
director due to his or her death or disability (within the meaning of Section
22(e)(3) of the Code or any successor provision), then the exercisable portion
of the option may be exercised, within the period of 180 days following the date
the optionee ceases to serve as a director (but in no event later than 10 years
after the Option Grant Date), by the
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<PAGE> 4
optionee or by the person to whom the option is transferred by will, by the laws
of descent and distribution, or by written notice pursuant to Section 5(h).
(g) Exercise Procedure. An option may be exercised only by written notice
to the Company at its principal office accompanied by payment in cash of the
full consideration for the shares as to which the option is exercised.
(h) Exercise by Representative Following Death of Director. An optionee, by
written notice to the Company, may designate one or more persons (and from time
to time change such designation), including his or her legal representative,
who, by reason of the optionee's death, shall acquire the right to exercise all
or a portion of the option. If the person or persons so designated wish to
exercise any portion of the option, they must do so within the term of the
option as provided herein. Any exercise by a representative shall be subject to
the provisions of the Plan.
6. Limitation of Rights.
(a) No Right to Continue as a Director. Neither the Plan, nor the granting
of an option nor any other action taken pursuant to the Plan, shall constitute
or be evidence of any agreement or understanding, express or implied, that the
Company will retain the optionee as a director for any period of time.
(b) No Stockholders' Rights for Options. An optionee shall have no rights
as a stockholder with respect to the shares covered by his or her option until
the date of the issuance to him or her of a stock certificate therefor, and no
adjustment will be made for dividends or other rights (except as provided in
Section 7) for which the record date is prior to the date such certificate is
issued.
7. Adjustment Provisions for Mergers, Recapitalizations and Related
Transactions.
If, through or as a result of any merger, consolidation, 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 exchanged for a different number or kind of securities of the
Company or of another entity, or (ii) additional shares or new or different
shares or other securities of the Company or of another entity are distributed
with respect to such shares of Common Stock, the Board of Directors shall make
an appropriate and proportionate adjustment 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 then outstanding options under the Plan,
and/or (z) the price for each share subject to any then outstanding options
under the Plan (without changing the aggregate purchase price for such options),
to the end that each option shall be exercisable, for the same aggregate
exercise price, for such securities as such optionholder would have held
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<PAGE> 5
immediately following such event if he had exercised such option immediately
prior to such event. No fractional shares will be issued under the Plan on
account of any such adjustments.
8. Change in Control. For purposes of the Plan, a "Change in Control" shall be
deemed to have occurred only if any of the following events occurs: (i) any
"person", as such term is used in Sections 13(d) and 14(d) of the Exchange Act
(other than the Company, any trustee or other fiduciary holding securities under
an employee benefit plan of the Company, or any corporation owned directly or
indirectly by the stockholders of the Company in substantially the same
proportion as their ownership of stock of the Company), is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 50% or more of the
combined voting power of the Company's then outstanding securities; (ii) the
stockholders of the Company approve a merger or consolidation of the Company
with any other corporation, other than a merger or consolidation which would
result in the voting securities of the Company outstanding immediately prior
thereto continuing to represent (either by remaining outstanding or by being
converted into voting securities of the surviving entity) more than 50% of the
combined voting power of the voting securities of the Company or such surviving
entity outstanding immediately after such merger or consolidation; (iii) the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets; or (iv) individuals who, on the date
on which the Plan was adopted by the Board of Directors, constituted the Board
of Directors of the Company, together with any new director whose election by
the Board of Directors or nomination for election by the Company's stockholders
was approved by a vote of at least a majority of the directors then still in
office who were directors on the date on which the Plan was adopted by the Board
of Directors or whose election or nomination was previously so approved, cease
for any reason to constitute at least a majority of the Board of Directors.
9. Modification, Extension and Renewal of Options.
The Board of Directors shall have the power to modify or amend outstanding
options; provided, however, that no modification or amendment may (i) have the
effect of altering or impairing any rights or obligations of any option
previously granted without the consent of the optionee, or (ii) modify the
number of shares of Common Stock subject to the option (except as provided in
Section 7).
10. Termination and Amendment of the Plan.
The Board of Directors may suspend, terminate or discontinue the Plan or
amend it in any respect whatsoever; provided, however, that without approval of
the stockholders of the Company, no amendment may (i) increase the number of
shares
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<PAGE> 6
subject to the Plan (except as provided in Section 7), (ii) materially modify
the requirements as to eligibility to receive options under the Plan, or (iii)
materially increase the benefits accruing to participants in the Plan; and
provided further that the Board of Directors may not amend the provisions of
Sections 3, 5(a), 5(b) or 5(c) more frequently than once every six months, other
than to comply with changes in the Code or the rules thereunder.
11. Notice.
Any written notice to the Company required by any of the provisions of the
Plan shall be addressed to the Controller of the Company and shall become
effective when it is received.
12. Governing Law.
The Plan and all determinations made and actions taken pursuant hereto
shall be governed by the laws of the State of Delaware.
13. Stockholder Approval.
The Plan is conditional upon stockholder approval of the Plan within one
year from its date of adoption by the Board of Directors. No option under the
Plan may be exercised until such stockholder approval is obtained, and the Plan
and all options granted under the Plan shall be null and void if the Plan is not
so approved by the Company's stockholders.
Adopted by the Board of Directors on
October 4, 1994
Approved by the stockholders on October 24,
1994
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<PAGE> 7
Amendment No. 1
to
1994 Director Stock Option Plan
1. That the 1994 Director Stock Option Plan be amended to delete subsection 5(d)
thereof and replace such subsection in its entirety with the following:
"(d) Transferability of Options. Except as the Board of Directors may
otherwise determine or provide in the applicable option agreement, options
shall not be sold, assigned, transferred, pledged or otherwise encumbered
by the optionee 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. References to an optionee, to the extent relevant in the context,
shall include references to authorized transferees."
2. That the Director Plan be further amended to delete the phrase
"; and provided further that the Board of Directors may not amend the
provisions of Sections 3, 5(a), 5(b) or 5(c) more frequently than once
every six months, other than to comply with changes in the Code or the
rules thereunder"
appearing at the end of Section 10 of the Director Plan.
Adopted by the Board of Directors on
February 12, 1997
<PAGE> 1
Exhibit 10.4
SECURITY DYNAMICS TECHNOLOGIES, INC.
1994 EMPLOYEE STOCK PURCHASE PLAN
The purpose of this Plan is to provide eligible employees of Security
Dynamics Technologies, Inc. (the "Company") and certain of its subsidiaries with
opportunities to purchase shares of the Company's Common Stock, $.01 par value
(the "Common Stock"). One Hundred Thousand (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 in the aggregate have been approved for this purpose.
1. Administration. The Plan will be administered by the Company's Board of
Directors (the "Board") or by a Committee appointed by the Board (the
"Committee"). The Board or the Committee has authority to make rules and
regulations for the administration of the Plan and its interpretation and
decisions with regard thereto shall be final and conclusive.
2. Eligibility. Participation in the Plan will neither be permitted nor
denied contrary to the requirements of Section 423 of the Internal Revenue Code
of 1986, as amended (the "Code"), and regulations promulgated thereunder. All
employees of the Company, including directors who are employees, and all
employees of any subsidiary of the Company (as defined in Section 424(f) of the
Code) designated by the Board or the Committee from time to time (a "Designated
Subsidiary"), are eligible to participate in any one or more of the offerings of
Options (as defined below) to purchase Common Stock under the Plan, provided
that:
(a) they are regularly employed by the Company or a Designated
Subsidiary for more than 20 hours a week and for more than five months in a
calendar year; and
(b) they have been employed by the Company or a Designated Subsidiary
for at least three months prior to enrolling in the Plan; and
(c) they are employees of the Company or a Designated Subsidiary on
the first day of the applicable Plan Period (as defined below).
No employee may be granted an option hereunder if such employee,
immediately after the option is granted, owns 5% or more of the total combined
voting power or value of the stock of the Company or any subsidiary. For
purposes of the preceding sentence, the attribution rules of Section 424(d) of
the Code shall apply in determining the stock ownership of an employee, and all
stock which the
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<PAGE> 2
employee has a contractual right to purchase shall be treated as stock owned by
the employee.
3. Offerings. The Company will make one or more offerings ("Offerings") to
employees to purchase Common Stock under this Plan. The Board or the Committee
shall determine the commencement dates of each of the Offerings (the "Offering
Commencement Dates"). Each Offering Commencement Date will begin a period (a
"Plan Period") during which payroll deductions will be made and held for the
purchase of Common Stock at the end of the Plan Period. The Board or the
Committee shall choose a Plan Period of twelve (12) months or less for each of
the Offerings and may, at its discretion, choose a different Plan Period for
each Offering.
4. Participation. An employee eligible on the Offering Commencement Date of
any Offering may participate in such Offering by completing and forwarding a
payroll deduction authorization form to the Controller of the Company at least
14 days prior to the applicable Offering Commencement Date. The form will
authorize a regular payroll deduction from the Compensation received by the
employee during the Plan Period. Unless an employee files a new form or
withdraws from the Plan, his deductions and purchases will continue at the same
rate for future Offerings under the Plan as long as the Plan remains in effect.
The term "Compensation" means the amount of money reportable on the employee's
Federal Income Tax Withholding Statement, excluding overtime, shift premium,
incentive or bonus awards, allowances and reimbursements for expenses such as
relocation allowances for travel expenses, income or gains on the exercise of
Company stock options or stock appreciation rights, and similar items, whether
or not shown on the employee's Federal Income Tax Withholding Statement, but
including, in the case of salespersons, sales commissions to the extent
determined by the Board or the Committee.
5. Deductions.
(a) The Company will maintain payroll deduction accounts for all
participating employees. With respect to any Offering made under this Plan, an
employee may authorize a payroll deduction in any dollar amount up to a maximum
of 10% of the Compensation he or she receives during the Plan Period or such
shorter period during which deductions from payroll are made. Payroll deductions
may be at the rate of 1%, 2%, 3%, 4%, 5%, 6%, 7%, 8%, 9% or 10% of Compensation.
(b) No employee may be granted an Option which permits his rights to
purchase Common Stock under this Plan and any other stock purchase plan of the
Company and its subsidiaries, to accrue at a rate which exceeds $25,000 of the
fair market value of such Common Stock (determined at the Offering Commencement
Date of the Plan Period) for each calendar year in which the Option is
outstanding at any time.
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<PAGE> 3
6. Deduction Changes. An employee may decrease or discontinue his payroll
deduction once during any Plan Period by filing a new payroll deduction
authorization form. However, an employee may not increase his payroll deduction
during a Plan Period. If an employee elects to discontinue his payroll
deductions during a Plan Period, but does not elect to withdraw his funds
pursuant to Section 8 hereof, funds deducted prior to his election to
discontinue will be applied to the purchase of Common Stock on the Exercise Date
(as defined below).
7. Interest. Interest will not be paid on any employee payroll deduction
accounts, except to the extent that the Board or its Committee, in its sole
discretion, elects to credit such accounts with interest at such per annum rate
as it may from time to time determine.
8. Withdrawal of Funds. An employee may on any one occasion during a Plan
Period and for any reason withdraw all or part of the balance accumulated in the
employee's payroll deduction account. Any such withdrawal must be effected prior
to the close of business on the last day of the Plan Period. If the employee
withdraws all of such balance, the employee shall thereby withdraw from
participation in the Offering and may not begin participation again during the
remainder of the Plan Period. Any employee withdrawing all or part of such
balance may participate in any subsequent Offering in accordance with terms and
conditions established by the Board or the Committee, except that, unless
otherwise permitted under Section 16 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and the rules promulgated thereunder, any employee
who is also a director and/or officer of the Company within the meaning of
Section 16 of the Exchange Act may not (a) withdraw less than all of the balance
accumulated in such employee's payroll deduction account or (b) participate
again for a period of at least six months as provided in Rule 16b-3(d)(2)(i) or
any successor provision under the Exchange Act.
9. Purchase of Shares.
(a) On the Offering Commencement Date of each Plan Period, the Company
will grant to each eligible employee who is then a participant in the Plan an
option (an "Option") to purchase on the last business day of such Plan Period
(the "Exercise Date"), at the Option Price hereinafter provided for, such number
of whole shares of Common Stock of the Company reserved for the purposes of the
Plan as does not exceed the number of shares determined by dividing 15% of such
employee's annualized Compensation for the immediately prior six-month period by
the price determined in accordance with the formula set forth in the following
paragraph but using the closing price on the Offering Commencement Date of such
Plan Period.
(b) The Option Price for each share purchased will be 85% of the
closing price of the Common Stock on (i) the first business day of such Plan
Period or
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<PAGE> 4
(ii) the Exercise Date, whichever closing price shall be less. Such closing
price shall be (A) the closing price of the Common Stock on any national
securities exchange on which the Common Stock is listed, or (B) the closing
price of the Common Stock on the Nasdaq National Market ("Nasdaq") or (C) the
average of the closing bid and asked prices in the over-the-counter market,
whichever is applicable, as published in The Wall Street Journal. If no sales of
Common Stock were made on such a day, the price of the Common Stock for purposes
of clauses (A) and (B) above shall be the reported price for the next preceding
day on which sales were made.
(c) Each employee who continues to be a participant in the Plan on the
Exercise Date shall be deemed to have exercised his Option at the Option Price
on such date and shall be deemed to have purchased from the Company the number
of full shares of Common Stock reserved for the purpose of the Plan that his
accumulated payroll deductions on such date will pay for pursuant to the formula
set forth above (but not in excess of the maximum number determined in the
manner set forth above).
(d) Any balance remaining in an employee's payroll deduction account
at the end of a Plan Period will be automatically refunded to the employee,
except that any balance which is less than the purchase price of one share of
Common Stock will be carried forward into the employee's payroll deduction
account for the following Offering, unless the employee elects not to
participate in the following Offering under the Plan, in which case the balance
in the employee's account shall be refunded.
10. Issuance of Certificates. Certificates representing shares of Common
Stock purchased under the Plan may be issued only in the name of the employee,
in the name of the employee and another person of legal age as joint tenants
with rights of survivorship, or (in the Company's sole discretion) in the street
name of a brokerage firm, bank or other nominee holder designated by the
employee.
11. Rights on Retirement, Death or Termination of Employment. In the event
of a participating employee's termination of employment prior to the last
business day of a Plan Period (whether as a result of the employee's voluntary
or involuntary termination, retirement, death or otherwise), no payroll
deduction shall be taken from any pay due and owing to the employee and the
balance in the employee's payroll deduction account shall be paid to the
employee or, in the event of the employee's death, (a) to a beneficiary
previously designated in a revocable notice signed by the employee (with any
spousal consent required under state law) or (b) in the absence of such a
designated beneficiary, to the executor or administrator of the employee's
estate or (c) if no such executor or administrator has been appointed to the
knowledge of the Company, to such other person(s) as the Company may, in its
discretion, designate. If, prior to the last business day of the Plan Period,
the Designated Subsidiary by which an employee is employed shall
-4-
<PAGE> 5
cease to be a subsidiary of the Company, or if the employee is transferred to a
subsidiary of the Company that is not a Designated Subsidiary, the employee
shall be deemed to have terminated employment for the purposes of this Plan.
12. Optionees Not Stockholders. Neither the granting of an Option to an
employee nor the deductions from his pay shall constitute such employee a
stockholder of the shares of Common Stock covered by an Option under this Plan
until such shares have been purchased by and issued to him.
13. Rights Not Transferable. Rights under this Plan are not transferable by
a participating employee other than by will or the laws of descent and
distribution, and are exercisable during the employee's lifetime only by the
employee.
14. Application of Funds. All funds received or held by the Company under
this Plan may be combined with other corporate funds and may be used for
any corporate purpose.
15. Adjustment in Case of Changes Affecting Common Stock. In the event of a
subdivision of outstanding shares of Common Stock, or the payment of a dividend
in Common Stock, the number of shares approved for this Plan, and the share
limitation set forth in Section 9, shall be increased proportionately, and such
other adjustment shall be made as may be deemed equitable by the Board or the
Committee. In the event of any other change affecting the Common Stock (other
than the Company's one-for-two reverse stock split effective as of October 24,
1994), such adjustment shall be made as may be deemed equitable by the Board or
the Committee to give proper effect to such event.
16. Merger.
(a) If the Company shall at any time merge or consolidate with another
corporation and the holders of the capital stock of the Company immediately
prior to such merger or consolidation continue to hold at least 80% by voting
power of the capital stock of the surviving corporation ("Continuity of
Control"), the holder of each Option then outstanding will thereafter be
entitled to receive at the next Exercise Date upon the exercise of such Option
for each share as to which such Option shall be exercised the securities or
property which a holder of one share of the Common Stock was entitled to upon
and at the time of such merger, and the Board or the Committee shall take such
steps in connection with such merger as the Board or the Committee shall deem
necessary to assure that the provisions of Section 15 shall thereafter be
applicable, as nearly as reasonably may be, in relation to the said securities
or property as to which such holder of such Option might thereafter be entitled
to receive thereunder.
-5-
<PAGE> 6
(b) In the event of a merger or consolidation of the Company with or
into another corporation which does not involve Continuity of Control, or of a
sale of all or substantially all of the assets of the Company while unexercised
Options remain outstanding under the Plan, (i) subject to the provisions of
clauses (ii) and (iii), after the effective date of such transaction, each
holder of an outstanding Option shall be entitled, upon exercise of such Option,
to receive in lieu of shares of Common Stock, shares of such stock or other
securities as the holders of shares of Common Stock received pursuant to the
terms of such transaction; or (ii) all outstanding Options may be cancelled by
the Board or the Committee as of a date prior to the effective date of any such
transaction and all payroll deductions shall be paid out to the participating
employees; or (iii) all outstanding Options may be cancelled by the Board or the
Committee as of the effective date of any such transaction, provided that notice
of such cancellation shall be given to each holder of an Option, and each holder
of an Option shall have the right to exercise such Option in full based on
payroll deductions then credited to his account as of a date determined by the
Board or the Committee, which date shall not be less than ten (10) days
preceding the effective date of such transaction.
17. Amendment of the Plan. The Board may at any time, and from time to
time, amend this Plan in any respect, except that (a) if the approval of any
such amendment by the stockholders of the Company is required by Section 423 of
the Code or by Rule 16b-3 under the Exchange Act, such amendment shall not be
effected without such approval, and (b) in no event may any amendment be made
which would cause the Plan to fail to comply with Section 16 of the Exchange Act
and the rules promulgated thereunder, as in effect from time to time, or Section
423 of the Code.
18. Insufficient Shares. In the event that the total number of shares of
Common Stock specified in elections to be purchased under any Offering plus the
number of shares purchased under previous Offerings under this Plan exceeds the
maximum number of shares issuable under this Plan, the Board or the Committee
will allot the shares then available on a pro rata basis.
19. Termination of the Plan. This Plan may be terminated at any time by the
Board. Upon termination of this Plan all amounts in the payroll deduction
accounts of participating employees shall be promptly refunded.
20. Governmental Regulations.
(a) The Company's obligation to sell and deliver Common Stock under
this Plan is subject to listing on a national stock exchange or quotation on
Nasdaq and the approval of all governmental authorities required in connection
with the authorization, issuance or sale of such stock.
-6-
<PAGE> 7
(b) The Plan shall be governed by the laws of the State of Delaware
except to the extent that such law is preempted by federal law.
(c) The Plan is intended to comply with the provisions of Rule 16b-3
promulgated under the Exchange Act. Any provision inconsistent with such Rule
shall to that extent be inoperative and shall not affect the validity of the
Plan.
21. Issuance of Shares. Shares may be issued upon exercise of an Option
from authorized but unissued Common Stock, from shares held in the treasury of
the Company, or from any other proper source.
22. Notification upon Sale of Shares. Each employee agrees, by entering the
Plan, to promptly give the Company notice of any disposition of shares purchased
under the Plan where such disposition occurs within two years after the date of
grant of the Option pursuant to which such shares were purchased.
23. Effective Date and Approval of Stockholders. The Plan shall take effect
upon the closing of the Company's initial public offering of Common Stock
pursuant to an effective registration statement under the Securities Act of
1933, as amended, subject to approval by the stockholders of the Company as
required by Rule 16b-3 under the Exchange Act and by Section 423 of the Code,
which approval must occur within twelve months of the adoption of the Plan by
the Board.
Adopted by the Board of Directors on
October 4, 1994
Approved by the stockholders on October 24,
1994
-7-
<PAGE> 8
Amendment No. 1
to
1994 Employee Stock Purchase Plan
1. That the Company's 1994 Employee Stock Purchase Plan (the "Purchase Plan") be
amended to delete the phrase
", except that, unless otherwise permitted under Section 16 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and the
rules promulgated thereunder, any employee who is also a director and/or
officer of the Company within the meaning of Section 16 of the Exchange Act
may not (a) withdraw less than all of the balance accumulated in such
employee's payroll deduction account or (b) participate again for a period
of at least six months as provided in Rule 16b-3(d)(2)(i) or any successor
provision under the Exchange Act"
appearing at the end of Section 8 of the 1994 Employee Stock Purchase Plan.
2. That the 1994 Employee Stock Purchase Plan be further amended to delete in
its entirety Section 13 thereof (pertaining to the nontransferability of rights
under the 1994 Employee Stock Purchase Plan) and to renumber the remaining
Sections of the 1994 Employee Stock Purchase Plan, and any and all cross
references thereto contained in the 1994 Employee Stock Purchase Plan,
accordingly.
3. That the 1994 Employee Stock Purchase Plan be further amended to define the
term "Exchange Act" first appearing in Section 17 of the 1994 Employee Stock
Purchase Plan (renumbered as Section 16 pursuant to the preceding resolution) as
"the Securities Exchange Act of 1934, as amended."
Adopted by the Board of Directors on
February 12, 1997
<PAGE> 1
EXHIBIT 11
SECURITY DYNAMICS TECHNOLOGIES, INC.
AND SUBSIDIARIES
COMPUTATION OF INCOME PER COMMON EQUIVALENT SHARE
YEARS ENDED DECEMBER 31, 1996 AND 1995
(In thousands except per share data)
- --------------------------------------------------------------------------------
1996 1995
------ ------
Weighted average number of common and
common equivalent shares outstanding:
Common stock 34,029 30,227
Common equivalent shares resulting from
stock options (treasury stock method) 2,486 2,323
------ ------
Total 36,515 32,550
====== ======
Net income per common equivalent share $ .36 $ .21
====== ======
39
<PAGE> 1
EXHIBIT 13
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------
1996 1995 1994 1993 1992
- -------------------------------------------------------------------------------------------------------------------------------
(In thousands, except share data)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA (1):
Revenue $76,148 $ 45,404 $20,649 $15,112 $10,979
Cost of revenue 17,568 8,507 4,606 3,582 2,847
------- -------- ------- ------- -------
Gross profit 58,580 36,897 16,043 11,530 8,132
------- -------- ------- ------- -------
Costs and expenses:
Research and development 11,216 5,727 3,261 2,206 1,845
Marketing and selling 21,725 13,171 8,134 5,023 3,738
General and administrative 11,674 9,870 3,067 1,975 1,398
Merger expenses 6,100 -- -- -- --
------- -------- ------- ------- -------
Total 50,715 28,768 14,462 9,204 6,981
------- -------- ------- ------- -------
Income from operations 7,865 8,129 1,581 2,326 1,151
Interest income 4,932 1,755 115 54 100
Gain on sale of marketable securities
and other income (expense) 11,046 (20) 97 67 265
------- -------- ------- ------- -------
Income before provision for income taxes,
extraordinary item and cumulative effect
of change in accounting 23,843 9,864 1,793 2,447 1,516
Provision for income taxes (2) 10,798 3,102 1,205 889 577
------- -------- ------- ------- -------
Income before extraordinary item and
cumulative effect of change in accounting 13,045 6,762 588 1,558 939
Extraordinary item -- -- -- -- 407
Cumulative effect of change in accounting (2) -- -- -- 564 --
------- -------- ------- ------- -------
Net income $13,045 $ 6,762 $ 588 $ 2,122 $ 1,346
======= ======== ======= ======= =======
Per share data (3):
Income before cumulative effect
of change in accounting .36 $ .21 $ .02 $ .07
Cumulative effect of change in accounting -- -- -- .02
------- -------- ------- -------
Net income $ .36 $ .21 $ .02 $ .09
======= ======== ======= =======
Weighted average number of common and
common equivalent shares outstanding (3) 36,515 32,550 23,666 23,450
======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1996 1995 1994 1993 1992
- --------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (1):
Cash and equivalents $ 9,512 $ 49,285 $18,340 $ 3,545 $ 2,858
Marketable securities 95,320 61,637 7,966 -- 496
Working capital 107,633 103,407 27,884 5,609 4,528
Total assets 139,942 125,874 35,679 10,527 8,229
Redeemable convertible preferred stock -- -- -- 8,527 9,016
Stockholders' equity (deficiency) 121,446 107,827 29,696 (1,672) (3,335)
</TABLE>
(1) Results for all periods prior to July 26, 1996 have been restated for the
merger with RSA Data Security, Inc., which has been accounted for as a
pooling of interests. See Note 2 of Notes to Consolidated Financial
Statements.
(2) Effective January 1, 1993, the Company adopted, prospectively, the
provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." See Note 6 of Notes to Consolidated
Financial Statements.
(3) Per share and share data for years prior to 1995 are presented on a pro
forma basis. See Note 1 of Notes to Consolidated Financial Statements.
PAGE 5
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Security Dynamics Technologies, Inc. and Subsidiaries
OVERVIEW
Security Dynamics Technologies, Inc. ("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.
In July 1996, SDI completed a merger (the "Merger") with RSA Data Security, Inc.
("RSA"), a recognized world leader in cryptography located in Redwood City,
California. The Merger has been accounted for as a pooling of interests and,
therefore, the consolidated financial statements for all periods prior to the
Merger have been restated to include the accounts and operations of RSA with
those of SDI. RSA develops, markets and supports cryptographic and electronic
data security products and provides cryptographic consulting services. RSA was
incorporated in Delaware in 1982 and primarily licenses its products to original
equipment manufacturers which incorporate RSA's encryption technology into their
products. RSA's developer toolkits and other products are used to implement
cryptographic electronic data security applications such as electronic mail,
communications privacy, client/server data security, smart cards and other key
information technologies. SDI, together with RSA and its other subsidiaries, is
referred to herein as the "Company." The Company has been profitable for each of
the years in the seven-year period ended December 31, 1996.
The Company's revenue is derived principally from sales of SecurID tokens,
software license fees from developer toolkit products and ACE/Server and ACM
software products, patent licenses fees, sales of ACM hardware products, sales
of maintenance services and royalty income. Historically, the Company's growth
has been augmented by sales to new customers as well as additional sales to
existing customers. Sales to new and existing customers include sales of SecurID
tokens and access control products for use by different branches or divisions of
the Company'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 the Company's customers. Sales to existing customers also include
revised developer toolkit and patent licensing agreements, usually in order to
accommodate an increase in the number of licensed users of the toolkit
technology.
This Annual Report 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, for the periods indicated, certain consolidated
financial data as a percentage of revenue for the years ended December 31, 1996,
1995 and 1994:
<TABLE>
<CAPTION>
PERCENTAGE OF REVENUE 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
Cost of revenue 23.1 18.7 22.3
----- ----- -----
Gross profit 76.9 81.3 77.7
----- ----- -----
Costs and expenses:
Research and development 14.7 12.6 15.8
Marketing and selling 28.5 29.1 39.4
General and administrative 15.4 21.7 14.8
Merger expenses 8.0 -- --
----- ----- -----
Total 66.6 63.4 70.0
----- ----- -----
Income from operations 10.3 17.9 7.7
Interest income 6.5 3.8 0.6
Gain on sale of marketable securities and other income (expense) 14.5 -- 0.4
----- ----- -----
Income before provision for income taxes 31.3 21.7 8.7
Provision for income taxes 14.2 6.8 5.8
----- ----- -----
Net income 17.1% 14.9% 2.9%
===== ===== ====
</TABLE>
PAGE 6
<PAGE> 3
1996 COMPARED WITH 1995
REVENUE
The Company's revenue is derived principally from sales of SecurID tokens,
software license fees from developer toolkit products and ACE/Server and ACM
software products, patent license fees, sales of ACM hardware products, sales of
maintenance services and royalty income. Total revenue increased 67.7% in 1996
to $76.1 million from $45.4 million in 1995. This increase in revenue reflected
increases in unit sales and licensed use of substantially all of the Company's
products. Approximately 47%, 18% and 13% of the increase in revenue was
attributable to the increases in unit sales of SecurID tokens, the increase in
unit sales of ACE/Server software products and the issuance of additional
developer toolkit and patent licenses, respectively. Approximately 7% of the
increase in revenue was attributable to an increase in the average price of
ACE/Server licenses issued. The ACE/Server license price is based on the number
of authorized users under the license. The Company believes that the continuing
increase in unit sales of tokens and the number of ACE/Server software and
developer toolkit licenses issued 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.
International revenue (excluding Canada) increased 146% in 1996 to $14.0 million
from $5.7 million in 1995 and accounted for 18% and 13% of total revenue in 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.
The Company's direct sales in Canada, the United Kingdom, France, Germany,
Norway and Japan are denominated in the local currency. As a result,
fluctuations in currency exchange rates could affect the profitability in U.S.
dollars of the Company's products sold in these markets. See Note 9 of Notes to
Consolidated Financial Statements.
COST OF REVENUE AND GROSS PROFIT
The Company's cost of revenue consists 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, comprising royalty fees incurred
on the sale of ACE/Server software and royalty fees payable on the licensing of
patent technology; customer installation, support and production costs, which
include labor costs associated with the programming of SecurID tokens,
inspection and quality control functions; and shipping costs are also included
in cost of revenue. The Company's gross profit increased in 1996 to $58.6
million, or 76.9% of revenue, from $36.9 million, or 81.3% of revenue, in 1995.
Approximately 53% of the increase in gross profit was attributable to an
increase in the unit sales and gross margin from the sale of SecurID tokens.
Approximately 30% of the increase in gross profit was attributable to an
increase in the number of licenses issued for the Company's ACE/Server software
products. Approximately 11% of the increase in gross profit was attributable to
an increase in the number of patent and developer toolkit licenses issued by
RSA. Overall, gross margins were lower due primarily to the higher royalty costs
associated with the ACE/Server software and patent license products and
additional investment in the Company's customer support infrastructure.
In the future, gross profit may be affected by several factors, including
changes in product mix and distribution channels (for example, the Company's
SecurVAR program), price reductions (resulting from volume discounts or
otherwise), competition, increases in the cost of revenue (including any
software license fees or royalties payable by the Company such as those
described below) and other factors.
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. Although the Company raised the
prices of its ACE/Server software in June 1995 to help offset the expected cost
of these royalties, amounts payable by the Company under this agreement, which
constitute part of cost of revenue, lowers gross margins on its ACE/Server
software.
PAGE 7
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
continued
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of personnel costs as well
as fees for development services provided by consultants. In 1996 and 1995 such
expenses also included costs associated with purchased research and development.
Research and development expenses increased 95.9% in 1996 to $11.2 million from
$5.7 million in 1995, and increased as a percentage of revenue to 14.7% in 1996
from 12.6% in 1995. Approximately 53% of the increase in research and
development expenses resulted from an increase in compensation 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 the Company's product lines, primarily the Company's ACE/Server
software line. Approximately 15% of the increase in research and development
expenses in 1996 was related to general overhead costs. Approximately 6% of the
increase in research and development expenses in 1996 was related to the
increase in purchased technology costs described below.
During the fourth quarter of 1996, the Company recorded a non-recurring expense
of $1.0 million for purchased research and development associated with the
acquisition of technology from Worldtalk Corporation. The technology acquired is
intended to be used in RSA's S/MAIL developer kit, a standards-based secure
messaging solution for third-party software developers. The S/MAIL developer kit
is designed to provide a secure messaging infrastructure based on the S/MIME
standard.
During 1995, the Company recorded a non-recurring expense of $0.6 million for
purchased research and development associated with the acquisition of SecurADM
technology designed to provide secure single sign-on capability in heterogeneous
networked data processing environments. In connection with the acquisition, the
Company also capitalized $0.3 million for purchased technology, which was
amortized in the amounts of $0.2 million and $0.1 million during 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 64.9% in 1996
to $21.7 million from $13.2 million in 1995, but decreased as a percentage of
revenue to 28.5% in 1996 from 29.1% in 1995. Approximately 42% 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. Approximately 19% of the increase in marketing and selling
expenses was attributable to the increase in commissions on products sold by the
Company's direct sales force. The Company's commissions on sales to new
customers are higher than its commissions on sales to existing customers.
Approximately 16% of the increase in marketing and selling expenses was due to
an increase in travel-related costs and marketing programs, such as direct mail
and seminar activities, trade shows and public relations campaigns.
Approximately 14% of the increase in marketing and selling expenses in 1996 was
related to general overhead costs.
During 1996, international sales expenses increased due to the continued
development of the Company's United Kingdom, German, French and Singaporean
sales offices and the opening of offices in Norway and Japan.
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 18.3% in
1996 to $11.7 million, or 15.4% of revenue, from $9.9 million, or 21.7% of
revenue, in 1995. Approximately 50% of the increase was due to an increase in
payroll and recruitment costs associated primarily with the growth in the
Company's staff needed to support the continuing expansion of operations.
Approximately 29% of the increase in general and administrative expense was from
an increase in consulting and temporary administrative services. In addition,
approximately 17% of the increase in general and administrative expenses
consisted of moving costs incurred in relocating to the Company's new corporate
offices.
PAGE 8
<PAGE> 5
MERGER EXPENSES
During the third quarter of 1996, the Company recorded a charge of $6.1 million
for expenses in connection with the Merger with RSA, which was completed during
the quarter. See Note 2 of Notes to Consolidated Financial Statements.
INTEREST INCOME
Interest income consists of interest earned on the Company's cash and investment
balances. Interest income increased to $4.9 million in 1996 from $1.8 million in
1995. This increase was due primarily to higher average daily balances in
invested cash resulting from the Company's follow-on public offering in November
1995.
GAIN ON SALE OF MARKETABLE SECURITIES
The Company realized a gain of approximately $11.0 million in 1996 on the sale
of marketable securities.
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $10.8 million in 1996 from $3.1
million in 1995. This increase was primarily the result of higher income during
1996. The Company's effective tax rate increased to 45.3% in 1996 from 31.4% in
1995. The increase in the effective tax rate was caused principally by the
non-deductibility of certain Merger expenses in the third quarter of 1996. For
the year ended December 31, 1995, the valuation allowance was reduced by
approximately $0.9 million, which resulted in a decrease in the provision for
income taxes for 1995. See Notes 1 and 6 of Notes to Consolidated Financial
Statements.
NET INCOME
As a result of the above factors, net income in 1996 increased to $13.0 million,
or 17.1% of revenue, from $6.8 million, or 14.9% of revenue, in 1995.
PAGE 9
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
continued
1995 COMPARED WITH 1994
REVENUE
Total revenue increased 119.9% in 1995 to $45.4 million from $20.7 million in
1994. This increase in revenue reflected increases in unit sales and licensed
use of all of the Company's products (other than the Company's ACM/1600 hardware
product). Approximately 44%, 33% and 16% of the increase in revenue was
attributable to the increases in unit sales of SecurID tokens, developer toolkit
and patent licenses and licensed use of the Company's ACE/Server software
products, respectively, offset by a decrease in unit sales of the Company's
ACM/1600 hardware products. The Company believes that the continuing increase in
unit sales and licenses issued 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 159% in 1995 to $5.7 million
from $2.2 million in 1994 and accounted for 13% and 11% of total revenue in 1995
and 1994, respectively. This increase in international revenue was primarily
attributable to an expansion of the Company's direct sales force and increased
market acceptance of the Company's products.
COST OF REVENUE AND GROSS PROFIT
The Company's gross profit increased 130.0% in 1995 to $36.9 million, or 81.3%
of revenue, from $16.0 million, or 77.7% of revenue, in 1994. Approximately 37%
of the increase in gross profit was attributable to an increase in the unit
sales of SecurID tokens. Approximately 38% of the increase in gross profit was
attributable to an increase in the number of patent and developer toolkit
licenses issued by RSA. Approximately 25% of the increase in gross profit was
attributable to an increase in the number of the Company's ACE/Server software
product licenses issued. Developer toolkit and patent license revenue as a
percentage of total revenue in 1995 increased to 23.7% of revenue from 12.2% of
revenue in 1994. These factors, which contributed to an improvement in the gross
margin in 1995, were partially offset by ongoing increases in production costs
associated with quality management programs and continued increases in customer
support costs in Europe.
RESEARCH AND DEVELOPMENT
Research and development expenses increased 75.6% in 1995 to $5.7 million from
$3.3 million in 1994, but decreased as a percentage of revenue to 12.6% in 1995
from 15.8% in 1994. Approximately 44% of the increase in research and
development expenses resulted from an increase in payroll costs associated
primarily with the employment of additional staff. Approximately 26% of the
increase in research and development expenses in 1995 was related to the
technology purchase described below. Approximately 16% 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 and
developer toolkit product lines.
During 1995, the Company recorded a non-recurring expense of $0.6 million for
purchased research and development associated with the acquisition of SecurADM
technology from Infratel S.A.R.L.
MARKETING AND SELLING
Marketing and selling expenses increased 61.9% in 1995 to $13.2 million from
$8.1 million in 1994, but decreased as a percentage of revenue to 29.1% in 1995
from 39.4% in 1994. Approximately 35% 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. Approximately 29%
of the increase in marketing and selling expenses was attributable to the
increase in commissions on products sold by the Company's direct sales force.
The Company's commissions on sales to new customers are higher than its
commissions on sales to existing customers. 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 the Company's United Kingdom, German and French sales offices and
the opening of the Company's office in Singapore.
PAGE 10
<PAGE> 7
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 221.8% in 1995 to $9.9 million, or
21.7% of revenue, from $3.1 million, or 14.8% of revenue, in 1994. Approximately
54% of the increase in general and administrative expenses was attributable to
increases in legal costs and also accounting and investor relation expenses
resulting from the additional costs incurred in connection with being a public
company. Approximately 28% of the increase was due to an increase in executive
compensation costs and to an increase in payroll costs associated primarily with
the growth in the Company's staff needed to support increased levels of
operation.
INTEREST INCOME
Interest income increased to $1.8 million in 1995 from $0.1 million in 1994.
This increase was due primarily to higher average daily balances in invested
cash resulting from the Company'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 $3.1 million in 1995 from $1.2
million in 1994. This increase was primarily the result of higher income during
1995. The Company's effective tax rate decreased to 31.4% in 1995 from 67.2% in
1994. The decrease in the effective tax rate resulted primarily from the change
in the recorded valuation allowance and a decrease in state taxes. For the year
ended December 31, 1995, the valuation allowance was reduced by approximately
$0.9 million and for the year ended December 31, 1994 the valuation allowance
was increased by approximately $0.3 million. See Notes 1 and 6 of Notes to
Consolidated Financial Statements.
NET INCOME
As a result of the above factors, net income in 1995 increased to $6.8 million,
or 14.9% of revenue, from $0.6 million, or 2.9% of revenue, in 1994.
LIQUIDITY AND CAPITAL RESOURCES
In December 1994, the Company sold 6,000,000 shares of Common Stock in its
initial public offering, which generated $21.6 million of net cash proceeds to
the Company. In January 1995, the Company sold 1,020,000 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 $3.8 million in net
cash proceeds. In November 1995, the Company sold an additional 3,120,000 shares
of Common Stock in a follow-on offering, which generated $55.9 million of net
cash proceeds to the Company.
At December 31, 1996, the Company had cash and marketable securities of $104.8
million and working capital of $107.6 million. The Company has generally funded
its operations primarily with cash generated from its operating activities. The
Company generated $10.1 million of cash from its operating activities in the
year ended December 31, 1995. During 1996, the Company used cash generated by
operations principally to finance the merger expenses incurred to complete the
Merger with RSA and to pay taxes on the $11.0 million gain on sale of marketable
securities. The Company also used cash generated by operations to finance the
relocation of its corporate offices. As a result of the foregoing, the Company's
net cash used for operating activities in 1996 was $0.8 million.
The Company's capital expenditures for 1996 approximated $9.2 million, including
additional computer equipment for product development and testing and support,
leasehold improvements and additional office furniture and equipment to
accommodate the Company's continued growth.
On July 26, 1996, a wholly-owned subsidiary of the Company merged with RSA.
Merger costs were approximately $6.1 million. See Note 2 of Notes to
Consolidated Financial Statements.
In December 1996, the Company purchased 250,000 shares of Series B Preferred
Stock of VPNet Technologies, Inc. ("VPNet") of San Jose, California, for an
aggregate purchase price of $1.5 million. VPNet was organized to develop and
market products and technologies for implementing high-performance virtual
private networks. The Company's investment in VPNet represents a minority
interest of less than 10% of VPNet's capitalization. The Company is accounting
for its investment at cost. See Note 3 of Notes to Consolidated Financial
Statements.
PAGE 11
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
continued
In March 1996, the Company entered into a non-cancelable operating lease
expiring in 2006 for new corporate executive offices in Bedford, Massachusetts.
The Company commenced its tenancy in August 1996. The new facility consists of
approximately 75,000 square feet of office space, and the annual base rent for
the first year is $1.0 million, increasing annually up to $1.2 million for years
five through ten.
In November 1996, the Company amended its 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, prepaid $1.5 million and $1.25 million in March 1996
and December 1996, respectively. In addition, the Company also prepaid a further
$2.5 million during the first quarter of 1997. See Note 8 of Notes to
Consolidated Financial Statements.
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, the Company currently has no
plans, commitments or agreements with respect to any such acquisitions, and
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 working capital will be sufficient to meet its
anticipated cash requirements through at least 1998.
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 the Company's
Board of Directors granted stock options to employees to purchase 32,000,
605,600, 200,000 and 38,900 shares of the Company's Common Stock at exercise
prices of $14.25, $24.76, $24.30 and $38.20, 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, 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 an aggregate compensation expense of
approximately $4.5 million 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 approximately $0.7 million in
1996.
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 Annual Report 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.
PAGE 12
<PAGE> 9
The Company's success is dependent in part on its ability to complete its
integration of 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 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 also dependent on the success of its Enterprise
Security Services, which is a security solution being developed by the Company
that would enable organizations to support and manage the growing use of public
and private keys, digital signatures and digital certificates for assuring
confidentiality and privacy on an enterprise-wide scale. The success of
Enterprise Security Services is dependent on a number of factors, including
without limitation delays in product development, undetected software errors or
bugs, competitive pressures, technical difficulties, market acceptance of new
technologies, including without limitation the use and implementation of various
certificate management and key management technologies, changes in customer
requirements and government regulations, delays in developing strategic
partnerships and general economic conditions.
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 and the licensing of toolkits and patent
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 and signing of licensing agreements, 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
foreign accounts receivable, tariff regulations and difficulties in obtaining
export licenses.
PAGE 13
<PAGE> 10
CONSOLIDATED BALANCE SHEETS
Security Dynamics Technologies, Inc. and Subsidiaries
December 31, 1996 and 1995
<TABLE>
<CAPTION>
(In thousands, except share data)
ASSETS 1996 1995
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents (Note 1) $ 9,512 $ 49,285
Marketable securities (Note 1) 95,320 61,637
Accounts receivable (less allowance for doubtful accounts of $527
in 1996 and $724 in 1995) 13,293 7,425
Inventory (Note 1) 2,606 1,445
Prepaid expenses and other 4,204 1,662
-------- --------
TOTAL CURRENT ASSETS 124,935 121,454
-------- --------
Property and Equipment (Note 1):
Customer support equipment 294 187
Office furniture and equipment 10,197 3,675
Leasehold improvements 2,863 309
-------- --------
Total property and equipment 13,354 4,171
Less accumulated depreciation and amortization (3,246) (1,763)
-------- --------
PROPERTY AND EQUIPMENT -- NET 10,108 2,408
-------- --------
OTHER ASSETS:
Investments (Notes 1 and 3) 2,924 872
Purchased technology and capitalized software costs -- net (Note 1) 197 426
Deferred taxes (Notes 1 and 6) 1,026 414
Other 752 300
-------- --------
TOTAL OTHER ASSETS 4,899 2,012
-------- --------
TOTAL $139,942 $125,874
======== ========
</TABLE>
See notes to consolidated financial statements
PAGE 14
<PAGE> 11
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 5,119 $ 2,733
Accrued payroll and related benefits 4,465 2,958
Accrued expenses and other (Note 7) 2,187 2,005
Income taxes payable (Notes 1 and 6) 51 190
Deferred revenue (Note 1) 4,877 4,219
Deferred taxes (Notes 1 and 6) 603 5,942
-------- --------
TOTAL CURRENT LIABILITIES 17,302 18,047
-------- --------
Minority Interest (Note 1) 1,194 --
-------- --------
Commitments and Contingencies (Notes 8 and 10)
STOCKHOLDERS' EQUITY (Notes 1, 4 and 5):
Common stock, $.01 par value; authorized, 80,000,000 shares; issued,
34,389,593 and 33,572,470 shares in 1996 and 1995;
outstanding, 34,389,297 and 33,572,174 shares in 1996 and 1995 344 336
Additional paid-in capital 101,424 94,457
Retained earnings 16,420 3,375
Deferred stock compensation (174) (292)
Treasury stock, common, at cost, 296 shares in 1996 and 1995 -- --
Cumulative translation adjustment (48) 41
Unrealized gain on marketable securities -- net 3,480 9,910
-------- --------
TOTAL STOCKHOLDERS' EQUITY 121,446 107,827
-------- --------
TOTAL $139,942 $125,874
======== ========
</TABLE>
PAGE 15
<PAGE> 12
CONSOLIDATED STATEMENTS OF INCOME
Security Dynamics Technologies, Inc. and Subsidiaries
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(In thousands, except per share data)
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE (Notes 1, 2 and 9) $76,148 $45,404 $20,649
COST OF REVENUE (Note 1) 17,568 8,507 4,606
------- ------- -------
GROSS PROFIT 58,580 36,897 16,043
------- ------- -------
COSTS AND EXPENSES:
Research and development (Note 1) 11,216 5,727 3,261
Marketing and selling 21,725 13,171 8,134
General and administrative 11,674 9,870 3,067
Merger expenses 6,100 -- --
------- ------- -------
TOTAL 50,715 28,768 14,462
------- ------- -------
INCOME FROM OPERATIONS 7,865 8,129 1,581
Interest income 4,932 1,755 115
Gain on sale of marketable securities and other income (expense) 11,046 (20) 97
------- ------- -------
Income before provision for income taxes 23,843 9,864 1,793
Provision for income taxes (Notes 1 and 6) 10,798 3,102 1,205
------- ------- -------
NET INCOME $13,045 $ 6,762 $ 588
======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
Pro Forma
(Note 1)
--------
<S> <C> <C> <C>
NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE (Note 1) $ .36 $ .21 $ .02
======== ======== ========
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING (Note 1) 36,515 32,550 23,666
======== ======== ========
</TABLE>
See notes to consolidated financial statements
PAGE 16
<PAGE> 13
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Security Dynamics Technologies, Inc. and Subsidiaries
Years ended December 31, 1996, 1995 and 1994
(In thousands, except share data)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED DEFERRED
------------------------- PAID-IN EARNINGS STOCK
SHARES AMOUNTS CAPITAL (DEFICIT) COMPENSATION
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 10,266,188 $103 $ 1,783 $(3,557) $ --
Common and Treasury stock
issued for services 52,032 -- 21 -- --
Exercise of stock options 152,376 1 41 -- --
Deferred stock compensation -- -- 360 -- (360)
Amortization of deferred stock
compensation -- -- -- -- 85
Issuance of common stock 6,276,854 63 22,041 -- --
Dividends accrued on
preferred stock -- -- -- (418) --
Conversion of preferred
stock to common stock 11,288,756 113 8,832 -- --
Net income -- -- -- 588 --
----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 28,036,206 280 33,078 (3,387) (275)
Exercise of stock options 957,434 10 632 -- --
Tax benefit arising from
exercise of stock options -- -- 225 -- --
Deferred stock compensation -- -- 157 -- (157)
Amortization of deferred stock
compensation -- -- -- -- 140
Issuance of common stock 4,578,830 46 60,365 -- --
Translation adjustment -- -- -- -- --
Change in unrealized gain on
marketable securities -- -- -- -- --
Net income -- -- -- 6,762 --
----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 33,572,470 336 94,457 3,375 (292)
Exercise of stock options 817,123 8 2,598 -- --
Tax benefit arising from
exercise of stock options -- -- 3,702 -- --
Compensation expense -- -- 667 -- --
Amortization of deferred stock
compensation -- -- -- -- 118
Translation adjustment -- -- -- -- --
Change in unrealized gain on
marketable securities -- -- -- -- --
Net income -- -- -- 13,045 --
----------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 34,389,593 $344 $101,424 $16,420 $(174)
============================================================================
</TABLE>
<TABLE>
<CAPTION>
UNREALIZED
TREASURY STOCK CUMULATIVE GAIN ON STOCKHOLDERS'
--------------------- TRANSLATION MARKETABLE EQUITY
SHARES AMOUNT ADJUSTMENT SECURITIES (DEFICIENCY)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1994 90,296 $(1) $ -- $ -- $ (1,672)
Common and Treasury stock
issued for services (90,000) 1 -- -- 22
Exercise of stock options -- -- -- -- 42
Deferred stock compensation -- -- -- -- --
Amortization of deferred stock
compensation -- -- -- -- 85
Issuance of common stock -- -- -- -- 22,104
Dividends accrued on
preferred stock -- -- -- -- (418)
Conversion of preferred
stock to common stock -- -- -- -- 8,945
Net income -- -- -- -- 588
--------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1994 296 -- -- -- 29,696
Exercise of stock options -- -- -- -- 642
Tax benefit arising from
exercise of stock options -- -- -- -- 225
Deferred stock compensation -- -- -- -- --
Amortization of deferred stock
compensation -- -- -- -- 140
Issuance of common stock -- -- -- -- 60,411
Translation adjustment -- -- 41 -- 41
Change in unrealized gain on
marketable securities -- -- -- 9,910 9,910
Net income -- -- -- -- 6,762
--------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 296 -- 41 9,910 107,827
Exercise of stock options -- -- -- -- 2,606
Tax benefit arising from
exercise of stock options -- -- -- -- 3,702
Compensation expense -- -- -- -- 667
Amortization of deferred stock
compensation -- -- -- -- 118
Translation adjustment -- -- (89) -- (89)
Change in unrealized gain on
marketable securities -- -- -- (6,430) (6,430)
Net income -- -- -- -- 13,045
--------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 296 $-- $(48) $ 3,480 $121,446
==========================================================================
</TABLE>
See notes to consolidated financial statements
PAGE 17
<PAGE> 14
CONSOLIDATED STATEMENTS OF CASH FLOWS
Security Dynamics Technologies, Inc. and Subsidiaries
Years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
(In thousands)
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 13,045 $ 6,762 $ 588
Adjustments to reconcile net income to net cash (used for)
provided by operating activities:
Gain on sale of marketable securities (11,027) -- --
Deferred taxes (1,393) (803) 12
Purchased research and development 1,000 648 --
Depreciation and amortization 1,793 940 614
Provision for notes receivable -- 200 --
Stock compensation 785 181 48
Equity in (profits) losses of investees and minority interest (19) 20 (97)
Increase (decrease) in cash from changes in:
Accounts receivable (5,868) (2,555) (440)
Inventory (1,161) (309) (629)
Prepaid expenses and other (2,542) (1,241) (539)
Accounts payable 2,386 1,637 914
Accrued payroll and related benefits 1,507 1,596 494
Accrued expenses and other 182 741 39
Income taxes payable (139) 251 (22)
Deferred revenue 658 2,041 899
-----------------------------------------------
NET CASH (USED FOR) PROVIDED BY OPERATING ACTIVITIES (793) 10,109 1,881
-----------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (119,619) (64,730) (7,966)
Sales and maturities of marketable securities 85,975 27,842 --
Expenditures for property and equipment (9,183) (1,813) (904)
Notes receivable -- (274) (228)
Capitalized software costs and purchased technology (1,081) (906) (118)
Investments (2,052) (510) --
Service income from partnership venture -- 16 24
Other assets (452) (26) (5)
-----------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (46,412) (40,401) (9,197)
-----------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of issuance costs -- 60,370 22,104
Proceeds from exercise of stock options 2,606 642 42
Tax benefit from exercise of stock options 3,702 225 --
Minority interest 1,213 -- --
Other -- (30) (34)
-----------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 7,521 61,207 22,112
-----------------------------------------------
Effect of exchange rate changes on cash and equivalents (89) 30 --
-----------------------------------------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS (39,773) 30,945 14,796
CASH AND EQUIVALENTS, BEGINNING OF YEAR 49,285 18,340 3,544
-----------------------------------------------
CASH AND EQUIVALENTS, END OF YEAR $ 9,512 $ 49,285 $18,340
===============================================
</TABLE>
See notes to consolidated financial statements
PAGE 18
<PAGE> 15
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Security Dynamics Technologies, Inc. and Subsidiaries
Years ended December 31, 1996, 1995 and 1994
(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. ("SDI," which,
together with its subsidiaries, is referred to as the "Company") designs,
develops, markets and supports a family of security products used to protect and
manage access to computer-based information resources. Through its wholly-owned
subsidiary, RSA Data Security, Inc. ("RSA"), the Company also develops, markets
and supports cryptographic and electronic data security products and provides
cryptographic consulting services.
PRINCIPAL PRODUCTS AND MARKETS - The Company's principal business is computer
security and it derives its revenue from the sale of its ACE/Server computer
network security products, which are currently used with the Company's SecurID
token technology, and the licensing of its developer toolkits and patents to
original equipment manufacturers that incorporate RSA's encryption technology
into their own products. The principal markets for the Company's products
include the United States, Canada, Latin America, Europe and the Far East, with
the United States, Europe and Canada currently being the largest.
STOCK SPLITS - In October 1996 and October 1995, the Board of Directors declared
two-for-one splits of the Company's common stock effected in the form of stock
dividends. All share and per share data have been adjusted to reflect the
two-for-one stock splits of the Company's common stock.
PRINCIPLES OF CONSOLIDATION - The consolidated financial statements include all
accounts of SDI and its subsidiaries. The Company's 24% interest in VSI (Note 3)
is 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. In the fourth quarter of 1996, RSA sold a 15% interest in its
Japanese subsidiary to third parties for $1,213. The minority interest in the
subsidiary's net income (losses) since the purchase date is included in other
income in the consolidated statement of income for 1996.
REVENUE RECOGNITION - Revenue from software license fees, developer toolkits,
patent 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,
----------------------------
1996 1995
----------------------------
<S> <C> <C>
Raw materials $ 125 $ 114
Finished products 2,481 1,331
----------------------------
Total $2,606 $1,445
============================
</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).
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.
Capitalized amounts are reported at the lower of unamortized cost or net
realizable value and are amortized to cost of revenue over the estimated useful
lives (two to three years) starting at the general release of the software
product to customers. Amortization expense approximated $102, $228 and $176 for
1996, 1995 and 1994, respectively. Purchased technology consists of acquired
software and is recorded at cost. Amortization is provided over estimated lives
of two years. Amortization expense approximated $208, $70 and $0 for 1996, 1995
and 1994, respectively. During the fourth quarter of 1996 and the third quarter
of 1995, the Company recorded expenses of $1,000 and $648, respectively, for
purchased research and development.
CASH EQUIVALENTS - The Company considers all highly liquid investments purchased
with a remaining maturity of three months or less to be cash equivalents.
PAGE 19
<PAGE> 16
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
continued
MARKETABLE SECURITIES - The Company classifies its marketable securities as
"available for sale," and, accordingly, carries such securities at aggregate
fair value. Unrealized gains and losses are included as a component of
stockholders' equity, net of tax effect. The Company's marketable securities at
December 31 consisted of the following:
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------------------------
AGGREGATE AGGREGATE
FAIR VALUE COST FAIR VALUE COST
-----------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government obligations $88,171 $88,161 $43,796 $43,632
Corporate equity securities 5,809 20 16,680 60
Tax-exempt securities -- -- 1,013 1,013
Corporate debt securities 1,340 1,340 148 145
----------------------------------------------------------
Total $95,320 $89,521 $61,637 $44,850
==========================================================
</TABLE>
At December 31, 1996, substantially all of the Company's U. S. Government
obligations and corporate debt securities had contractual maturities of two
years or less. Proceeds from the sale of marketable securities for 1996 amounted
to $11,067. The specific identified cost basis of the securities was used to
determine the gain. There were no sales of marketable securities for 1995 and
1994. Unrealized gross gains at December 31, 1996 and 1995 were $5,799 and
$16,787, respectively.
ADVERTISING - Advertising costs are expensed as incurred. Total advertising
expense was approximately $366, $217 and $221 for 1996, 1995 and 1994,
respectively.
INCOME TAXES - The Company utilizes the liability method of accounting for
income taxes. 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.
FOREIGN CURRENCY - 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 stockholders' equity.
INCOME PER SHARE - Income per share is based on the weighted average number of
common shares outstanding which assumes on a pro forma basis for 1994 that all
series of convertible preferred stock had been converted to common stock as of
the original issuance dates. All series of the Company's preferred stock were
converted into shares of common stock 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 shares of common stock 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. For 1994, historical income per
share, which excludes the assumed conversions of the convertible preferred, was
$.01.
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 Statement of Financial Accounting Standards ("SFAS")
No. 115. The Company has investments of $2,924 and $872 at December 31, 1996 and
1995, respectively. These investments include equity positions in two companies
(which had initial public common stock offerings in 1996) aggregating $738 and
$0 at December 31, 1996 and 1995, respectively. These securities are restricted
through 1998 under Rule 144 of the Securities and Exchange Commission, and
accordingly, are carried at cost. As of December 31, 1996, the quoted market
value of these securities was $1,768. In addition, investments aggregating $686
and $510 at December 31, 1996 and 1995, respectively, are accounted for under
the equity method. The remaining investments are carried at the lower of cost or
estimated realizable value. It is not practicable to measure the estimated fair
value of such investments.
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 licenses its ACE/Server software and
token technology to various customers in a diverse industry range. Toolkit and
patent licenses are issued primarily to companies in the computer and software
industries. 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.
STOCK-BASED COMPENSATION - The Company applies Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for stock option grants
to employees (and non-employees prior to January 1, 1996). Effective January 1,
1996, the Company applies SFAS No. 123, "Accounting for Stock-Based
Compensation" in accounting for stock option grants to non-employees. This
change did not have an effect on the Company's consolidated financial
statements.
PAGE 20
<PAGE> 17
LONG-LIVED ASSETS - Effective January 1, 1996, the Company adopted the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," for 1996. The adoption of SFAS No.
121 did not have an impact on the Company's consolidated financial statements.
2. MERGER
Effective July 26, 1996, the Company completed a merger (the "Merger") with RSA.
As a result of the Merger, the Company issued a total of 6,683,078 shares of its
common stock to RSA shareholders and options to purchase a total of 1,316,922
shares of the Company's common stock to optionholders of RSA. The Merger has
been accounted for as a pooling of interests and, therefore, the consolidated
financial statements for all periods prior to the Merger have been restated to
include the accounts and operations of RSA with those of the Company.
In connection with the Merger, the consolidated statement of income for 1996
includes a one-time charge for Merger expenses of $6,100, including amounts
relating to investment banking, professional fees and other direct expenses
related to effecting the Merger.
No adjustments to conform accounting policies were required. Certain amounts
have been reclassified with regard to the presentation of the financial
information of the two companies. Revenue and net income for each of the
previously separate companies were as follows:
<TABLE>
<CAPTION>
SIX MONTHS YEARS ENDED
ENDED DECEMBER 31,
JUNE 30, 1996 --------------------------
(UNAUDITED) 1995 1994
-------- ------- --------
<S> <C> <C> <C>
REVENUE
SDI $ 26,240 $33,804 $ 17,572
RSA 6,043 11,600 3,077
-------- ------- --------
Total $ 32,283 $45,404 $ 20,649
======== ======= ========
NET INCOME (LOSS)
SDI $ 5,436 $ 5,812 $ 2,315
RSA (383) 950 (1,727)
-------- ------- --------
Total $ 5,053 $ 6,762 $ 588
======== ======= ========
</TABLE>
Pursuant to an escrow agreement (the "Escrow Agreement") entered into by the
Company and RSA in connection with the Merger, 1,000,000 shares of the Company's
common stock issued to holders of RSA stock and issuable to holders of RSA
options were deposited in escrow (the "Escrow Shares"). Such shares are
available to indemnify the Company in connection with breaches of
representations, warranties or convenants, if any, made by RSA in the Merger
Agreement and in connection with certain litigation (the "Litigation") (Note
10). The former RSA stockholders are eligible to vote the Escrow shares. In
connection with the Cylink settlement (Note 10), the Company anticipates making
a claim for approximately 40,000 shares to be returned to the Company. The
remaining shares are expected to be released to the former RSA stockholders.
3. INVESTMENTS
VeriSign, Inc. - On April 17, 1995, and February 20, 1996, SDI purchased 425,000
shares of Series A and 72,091 shares of Series B Convertible Preferred Stock,
respectively, 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. During 1995, RSA granted certain
rights and privileges in certain technology to VSI in connection with its
incorporation and received 4,000,000 shares of common stock. At December 31,
1996 and 1995, the Company's voting interest was approximately 24% and 44%,
respectively. The Company's investment, which is accounted for under the equity
method, was $686 and $510, as of December 31, 1996 and 1995, respectively.
VPNet Technologies, Inc. - On December 2, 1996, the Company purchased 250,000
shares of Series B Preferred Stock of VPNet Technologies, Inc. ("VPNet") of San
Jose, California, for an aggregate purchase price of $1,500. VPNet was organized
to develop and market products and technologies for implementing
high-performance virtual private networks. The Company's investment in VPNet
represents a minority interest of less than 10% of VPNet's voting stock and is
carried at cost at December 31, 1996.
PAGE 21
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
continued
4. PREFERRED STOCK
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 the Company's Series A, B and C preferred stock were
converted to 11,288,756 shares of common stock upon the closing of the IPO on
December 21, 1994. At December 31, 1994, all shares of preferred stock had been
canceled and retired.
5. STOCK OPTION AND PURCHASE PLANS
1986 STOCK OPTION PLAN ("1986 PLAN") - The Company's 1986 Plan terminated by its
terms in 1996. In general, options granted under the 1986 Plan become
exercisable in equal annual installments over four years and expire ten years
from the date of grant.
1994 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 options granted under the 1994 Plan may not be less
than 100% of the fair market value of the shares. At December 31, 1996, 870,284
shares of common stock were available for option grants. On February 12, 1997
the Board of Directors adopted, subject to stockholder approval, an amendment to
the Company's 1994 Plan increasing the number of shares of common stock
authorized for issuance from 4,820,000 to 6,570,000 shares in the aggregate.
1994 DIRECTOR STOCK OPTION PLAN ("DIRECTOR PLAN") - In October 1994, the Board
of Directors adopted the Company's Director Plan. The Director Plan permits the
granting of options to purchase up to a maximum of 300,000 shares of common
stock to non-employee 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 December 31, 1996, 163,000 shares of common stock were available
for option grant.
1994 EMPLOYEE STOCK PURCHASE PLAN ("PURCHASE PLAN") - In October 1994, the Board
of Directors adopted the Company's Purchase Plan. The Purchase Plan provides for
sales to participating employees of up to 400,000 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 December 31, 1996 and
1995, 91,408 and 35,716 shares, respectively, had been purchased under this
Plan.
ASSUMPTION OF RSA OPTIONS - At the effective date of the Merger, the
then-outstanding options to purchase shares of RSA common stock, issued under
RSA's 1987 Stock Option Plan (the "RSA Option Plan"), were exchanged for options
to purchase an aggregate of 1,316,922 shares of the Company's common stock. All
option activity data have been retroactively adjusted to give effect to the
conversion of the RSA options. Incentive stock options and nonqualified stock
options were awarded to employees, officers, directors, consultants and
independent contractors and were generally immediately 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. At December 31, 1996, 31,972 shares were subject to repurchase.
A summary of stock option activity under all plans, including converted RSA
options, is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE
SHARES PRICE PER SHARE
------ ---------------
<S> <C> <C>
Outstanding at January 1, 1994 2,181,990 $ 0.29
Granted 666,082 1.11
Exercised (152,376) 0.06
---------
Outstanding at December 31, 1994 2,695,696 0.47
Granted 1,485,486 5.25
Exercised (921,718) 0.47
Canceled (80,269) 0.95
---------
Outstanding at December 31, 1995 3,179,195 2.69
Granted 2,272,556 29.86
Exercised (761,633) 2.33
Canceled (27,317) 21.57
---------
Outstanding at December 31, 1996 4,662,801 15.90
=========
Exercisable at December 31, 1994 2,293,266 0.31
=========
Exercisable at December 31, 1995 2,261,327 0.40
=========
Exercisable at December 31, 1996 2,100,210 $ 1.70
=========
</TABLE>
PAGE 22
<PAGE> 19
The following table sets forth information regarding stock options outstanding
at December 31, 1996 under all plans:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED AVERAGE
WEIGHTED REMAINING NUMBER EXERCISE PRICE FOR
NUMBER OF RANGE OF EXERCISE AVERAGE CONTRACTUAL CURRENTLY CURRENTLY
OPTIONS PRICES EXERCISE PRICE LIFE (YEARS) EXERCISABLE EXERCISABLE
--------- -------------- -------------- ------------ ----------- ------------------
<S> <C> <C> <C> <C> <C>
324,800 $0.05 - $0.06 $ 0.05 0.6 324,800 $0.05
384,000 0.10 0.10 3.2 384,000 0.10
28,000 0.25 - 0.35 0.29 5.8 -- --
76,800 0.45 0.45 7.0 15,200 0.45
985,414 0.85 - 0.90 0.90 7.8 975,874 0.90
39,450 1.75 - 2.55 2.25 7.6 11,650 2.28
197,185 2.95 - 4.22 3.32 8.9 187,185 3.34
23,252 6.62 6.62 9.2 23,252 6.62
546,000 9.97 - 14.31 10.26 8.6 178,249 10.27
1,315,600 24.30 - 35.63 27.91 9.3 -- --
742,300 38.00 - 44.21 40.34 9.7 -- --
--------- -------------- ------ --- --------- -----
4,662,801 $0.05 - $44.21 $15.90 7.8 2,100,210 $1.70
========= ============== ====== === ========= =====
</TABLE>
ACCOUNTING FOR STOCK OPTIONS - For certain options and stock awards granted in
1996, 1995 and 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 $118, $140 and $85 for 1996, 1995 and 1994, respectively.
Unrecognized compensation expense at December 31, 1996, 1995 and 1994 was $174,
$292 and $275, respectively.
On April 1, 1996 and April 24, 1996, options to purchase 200,000 shares and
38,900 shares of common stock were granted at exercise prices of $24.30 and
$38.20, respectively, subject to stockholder approval of an amendment to the
1994 Plan increasing the number of shares available for grant. 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 is recognizing 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 $667 in 1996.
PRO FORMA DISCLOSURE - Had the Company recognized compensation costs for the
employee and director stock option and purchase plans based on the fair value of
awards under those plans after January 1, 1995, in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," net income and net income per share
would have been $10,629 and $.29, respectively, in 1996 and $6,342 and $.19,
respectively, in 1995.
The fair values used to compute pro forma net income and net income per share
were estimated fair value at grant date using the Black-Scholes option-pricing
model with the following weighted average assumptions for 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
STOCK OPTION PLANS
Risk-free interest rate 6.0% 6.0%
Expected life of option grants (years) 4.4 4.4
Expected volatility of underlying stock 57.5% 57.5%
Expected dividend payment rate 0.0% 0.0%
Expected forfeiture rate 4.1% 4.1%
EMPLOYEE STOCK PURCHASE PLAN
Risk-free interest rate 5.2% 5.9%
Expected life of option grants (years) 0.5 0.5
Expected volatility of underlying stock 57.5% 57.5%
Expected dividend payment rate 0.0% 0.0%
</TABLE>
The weighted average fair value of stock options granted, calculated using the
Black-Scholes option-pricing model, during 1996 and 1995 was $15.67 and $2.74,
respectively. The weighted fair value of stock purchase rights granted under the
Purchase Plan, calculated using the Black-Scholes option-pricing model, during
1996 and 1995 was $25.26 and $6.72, respectively.
PAGE 23
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
continued
6. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
1996 1995 1994
-------- ------- -------
<S> <C> <C> <C>
Current:
Federal $ 7,359 $ 3,049 $ 882
State 930 781 281
Foreign 200 35 17
-------- ------- -------
Total 8,489 3,865 1,180
Deferred:
Federal (1,219) (93) (256)
State (174) (26) (15)
Change in valuation allowance -- (869) 296
-------- ------- -------
Total (1,393) (988) 25
Tax benefit from exercise of stock options:
Federal 3,452 179 --
State 250 46 --
-------- ------- -------
Total 3,702 225 --
-------- ------- -------
Total $ 10,798 $ 3,102 $ 1,205
======== ======= =======
</TABLE>
Significant components of the Company's deferred tax assets and liabilities at
December 31 are as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Deferred tax assets (liabilities) -- current:
Marketable securities $(2,319) $(6,877)
Deferred revenue 854 98
Allowance for doubtful accounts 211 293
Compensation 205 146
Inventory reserves 66 66
Warranty obligation 42 42
Commissions 42 80
Net operating loss carryforwards -- 81
Other 296 129
------- -------
Net deferred tax liabilities -- current $ (603) $(5,942)
======= =======
Deferred tax assets (liabilities) -- non current:
Acquisition of technology $ 733 $ 249
Compensation 326 --
Capitalized software development costs (79) (89)
Net operating loss carryforwards 32 --
Other 14 254
------- -------
Net deferred tax assets -- non current $ 1,026 $ 414
======= =======
</TABLE>
A reconciliation between the statutory and effective income tax rates follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory tax rate 35.0% 34.0% 34.0%
State income taxes net of federal benefit 3.2 5.4 10.5
Merger expenses 8.3 -- --
Change in valuation allowance -- (8.8) 16.5
Foreign expenses without tax benefit -- -- 8.5
Other (1.2) 0.8 (2.3)
---- ---- ----
Effective income tax rate 45.3% 31.4% 67.2%
==== ==== ====
</TABLE>
Cash payments for income taxes amounted to approximately $8,112, $3,934 and
$1,237 for 1996, 1995 and 1994, respectively.
PAGE 24
<PAGE> 21
7. 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 December 31, 1996 and 1995,
the Company had accrued, and the Board of Directors had approved, profit-sharing
contributions approximating $305 and $78, respectively. The Board of Directors
also approved for 1996 and 1995 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 $261, $112 and $88 for 1996, 1995 and 1994, respectively.
8. COMMITMENTS
The Company leases office facilities and automobiles under non-cancelable
operating leases expiring through 2006. Future minimum rental payments are as
follows for years ending December 31:
<TABLE>
<S> <C>
1997 $2,133
1998 1,780
1999 1,679
2000 1,256
2001 1,300
Balance thereafter 5,934
</TABLE>
Rent expense for 1996, 1995 and 1994 was approximately $1,849, $886 and $545,
respectively. Rent collected from a 1996 sublease of the Company's former
headquarters amounted to $108 in 1996.
During 1996, the Company issued an unsecured irrevocable standby letter of
credit in the amount of $750 to the landlord of its corporate headquarters in
lieu of a security deposit.
During 1996, the Company entered into commitments to purchase a minimum number
of SecurID tokens at a total cost of $3,904 over a one-year period. At December
31, 1996, the Company's remaining commitment was $3,296.
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. The Company renewed this
agreement in March and November 1996 and prepaid royalties aggregating $2,750.
At December 31, 1996, the Company had a prepaid royalty of $1,040 remaining
under this amended agreement. In addition, the Company also agreed to prepay a
further $2,500 during the first quarter of 1997.
RSA has a license for cryptographic communication technology and devices from
the Massachusetts Institute of Technology (MIT) which granted to RSA, through
September 2000, an exclusive right to use, lease or sell technology, subject to
payment of royalties.
Royalty expense was $2,009, $706 and $118 for 1996, 1995 and 1994, respectively.
9. SEGMENT INFORMATION
The Company operates in only one industry segment. Export sales are summarized
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------
1996 1995 1994
------- ------ ------
<S> <C> <C> <C>
Europe $11,616 $5,116 $2,005
Canada 4,511 2,772 1,230
Other 2,407 552 176
------- ------ ------
Total $18,534 $8,440 $3,411
======= ====== ======
</TABLE>
PAGE 25
<PAGE> 22
10. LITIGATION
The Cylink Settlement - Since 1994, RSA had been involved in arbitration and
litigation proceedings (collectively, the "Litigation") relating, among other
things, to (i) the validity of a U.S. patent (the "RSA/MIT Patent") developed at
MIT and licensed to RSA; (ii) the rights of Cylink Corporation ("Cylink") and
its subsidiary Caro Kann Corporation ("CKC"), competitors of RSA, to use and
sub-license the RSA/MIT Patent; (iii) the validity and scope of certain U.S.
patents (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; and (iv) the liability, if any, of RSA for
infringing or contributing to the infringement of the Stanford Patents. On
December 31, 1996, RSA, Cylink and CKC entered into a comprehensive settlement
relating to the Litigation. As part of the settlement, (a) the parties agreed to
dismiss all claims relating to the Litigation, (b) Cylink granted to RSA all
necessary rights to the Stanford Patents and (c) RSA granted to Cylink a license
to RSA's cryptographic software toolkit.
The ActivCard Settlement - In December 1995, the Company, 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 infringement of certain
patents of the Company and Vasco that collectively cover a range of technology
used to secure data access. The suit sought monetary damages and an injunction
against further infringement. In February 1996, in response to the Company's
repeated infringement allegations and prior to the serving of the Company's
complaint on ActivCard, ActivCard filed a complaint against the Company in the
same court seeking a declaratory judgment of non-infringement, invalidity and
unenforceability of the Company's patents asserted in the suit brought with
Vasco. In October 1996, Vasco, the Company and ActivCard entered into a
settlement agreement with respect to this litigation. Pursuant to the terms of
the settlement agreement, the Company and Vasco agreed to dismiss with prejudice
their claims against ActivCard and ActivCard similarly agreed to dismiss with
prejudice its claims against the Company and Vasco. In connection with this
settlement, ActivCard agreed to license certain patents from the Company and
Vasco.
The Company has been named as a defendant in other legal actions arising from
its normal business activities. The Company carries insurance against liability
for certain types of risks. Although the amount of liability that could result
from any litigation cannot be predicted, in the opinion of management, the
Company's potential liability on all known claims would not have a material
adverse effect on the consolidated financial position or results of operations
of the Company.
11. RELATED PARTY TRANSACTIONS
For 1996, 1995 and 1994, the Company expensed approximately $97, $91 and $81,
respectively, in consulting services performed by a stockholder of the Company.
Certain officers and members of the Board of Directors are stockholders of VSI
(Note 3).
PAGE 26
<PAGE> 23
[DELOITTE & TOUCHE LLP LETTERHEAD]
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Security Dynamics Technologies, Inc. and Subsidiaries:
We have audited the consolidated balance sheets of Security Dynamics
Technologies, Inc. (the "Company") and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of income, stockholders' equity,
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on the financial
statements based on our audits. The consolidated financial statements give
retroactive effect to the merger of the Company and RSA Data Security, Inc.,
which has been accounted for as a pooling of interests as described in Note 2 of
the notes to the consolidated financial statements. We did not audit the
consolidated balance sheet of RSA Data Security, Inc. as of December 31, 1995,
or the related consolidated statements of income, stockholders' equity, and cash
flows of RSA Data Security, Inc. for the years ended December 31, 1995 and 1994,
which consolidated statements reflect total assets of $24,793,000 as of December
31, 1995, and total revenues of $11,600,000 and $3,077,000 for the years ended
December 31, 1995 and 1994, respectively. Those consolidated statements were
audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for RSA Data Security,
Inc. for 1995 and 1994, is based solely on the report of such other auditors.
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 and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Security Dynamics Technologies,
Inc. and subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 5 of the notes to consolidated financial statements, in
1996 the Company changed its method of accounting for option grants requiring
stockholder approval.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
January 22, 1997
PAGE 27
<PAGE> 24
CORPORATE OFFICERS,
BOARD OF DIRECTORS AND SHAREHOLDER INFORMATION
CORPORATE OFFICERS
Charles R. Stuckey, Jr.
Chairman of the Board,
President and Chief Executive Officer
D. James Bidzos
Executive Vice President,
President, RSA Data Security, Inc.
Arthur W. Coviello, Jr.
Executive Vice President,
Treasurer, Secretary and
Chief Financial Officer
John Adams
Senior Vice President -- Engineering
Gary A. Rogers
Senior Vice President --
World Wide Sales
and Field Operations
W. David Power
Senior Vice President -- Marketing
and Corporate Development
Linda E. Saris
Vice President -- Customer Support
and Operations
OTHER SALES AND
MARKETING EXECUTIVES
S. Lionel Beckett
Managing Director -- Operations,
Europe, Middle East and Africa
Robert W. Fine
Vice President -- Business Development
Thomas R. Jones
Vice President -- Sales, The Americas
Scott T. Schnell
Vice President -- Marketing
RSA Data Security, Inc.
Roger K. Nichols
Vice President -- Sales and Strategic Planning
RSA Data Security, Inc.
BOARD OF DIRECTORS
Charles R. Stuckey, Jr.
Chairman of the Board,
President and Chief Executive Officer
D. James Bidzos
Executive Vice President,
President, RSA Data Security, Inc.
George M. Middlemas (1)
Partner
Apex Investment Partners
Marino R. Polestra (2)
Partner
Alta Partners
Sanford M. Sherizen (1)
President
Data Security Systems, Inc.
Joseph B. Lassiter, III (1)
Senior Lecturer
Harvard Business School
Richard L. Earnest (2)
Chief Executive Officer
Tudor Publishing Company
(1) Compensation Committee
(2) Audit Committee
Legal Counsel
Hale and Dorr LLP
Boston, MA
Independent Accountants
Deloitte & Touche LLP
Boston, MA
Patent Counsel
Wolf, Greenfield & Sacks, P.C.
Boston, MA
Registrar and Transfer Agent
Boston EquiServe Limited Partnership
Boston, MA
ANNUAL MEETING AND
SHAREHOLDER INFORMATION
The Annual Meeting of Stockholders of Security Dynamics Technologies, Inc. will
be held at 10:00 A.M. on Thursday, April 24, 1997 at the offices of Hale and
Dorr LLP, 60 State Street, Boston, MA 02109
A copy of the Company's Form 10-K filed with the Securities and Exchange
Commission and additional copies of this Report may be obtained without charge
upon written request to:
Security Dynamics Technologies, Inc.
20 Crosby Drive
Bedford, MA 01730
Telephone: 617 687-7000
Fax: 617 687-7010
MARKET PRICE OF COMMON STOCK
The Company's Common Stock has been traded on the Nasdaq National Market under
the symbol SDTI since its initial public offering on December 14, 1994.
The following table sets forth, for the fiscal quarters indicated, the high and
low sale prices of the Common Stock as reported by the Nasdaq National Market
(rounded to the nearest 1/8). The Company has never paid dividends on its Common
Stock.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1996
First Quarter $33 $21 1/4
Second Quarter $54 $23 1/8
Third Quarter $48 3/8 $25 5/8
Fourth Quarter $43 $29 3/4
</TABLE>
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1995
First Quarter $ 9 $ 4 3/8
Second Quarter $11 5/8 $ 7
Third Quarter $12 $ 8 7/8
Fourth Quarter $29 1/8 $11
</TABLE>
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1994
Fourth Quarter $ 5 1/8 $ 3 1/2
(from December 14, 1994)
</TABLE>
Security Dynamics, SecurID and ACE/Server are registered trademarks, and the
Security Dynamics logo, PASSCODE, Enterprise Security Services, SoftID, WebID
and PINPAD are trademarks of Security Dynamics Technologies, Inc. SecurPC,
BSAFE, TIPEM, BCERT, S/PAY and S/MAIL are trademarks of RSA Data Security, Inc.
All other trademarks or trade names referenced in this Annual Report are the
property of their respective owners.
PAGE 28
<PAGE> 1
Exhibit 21
Subsidiaries of the Registrant
Subsidiary Name Jurisdiction of Organization
- --------------- ----------------------------
SD Securities Corp. Massachusetts
SD Investments Corp. Massachusetts
Security Dynamics (France) S.A.R.L. * France
Security Dynamics Technologies GmbH* Germany
Security Dynamics International Pte. Ltd.* Singapore
Security Dynamics Nordic A.S.* Norway
RSA Data Security, Inc.** Delaware
Nihon RSA Company, Ltd.** Japan
RSA Technology Holdings, Inc.** Delaware
- ----------
* Doing business as "Security Dynamics."
** Doing business as "RSA."
40
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
To the Board of Directors and Stockholders of
Security Dynamics Technologies, Inc. and Subsidiaries:
We consent to incorporation by reference in Registration Statements Nos.
33-87916, 33-88506, 33-88508, 33-88510, and 333-08939 of Security Dynamics
Technologies, Inc. (the "Company") on Forms S-8 of our report dated January 22,
1997 (which report expresses an unqualified opinion and includes an explanatory
paragraph referring to a change in the Company's method of accounting for option
grants requiring stockholder approval in 1996), appearing in this Annual Report
on Form 10-K of Security Dynamics Technologies, Inc. for the year ended December
31, 1996.
Our audits of the consolidated financial statements referred to in the
aforementioned report also included the consolidated financial statement
schedule of Security Dynamics Technologies, Inc. listed in ITEM 14.(a)2. This
consolidated financial statement schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based upon our audits.
The consolidated financial statement schedule gives retroactive effect to the
merger of the Company and RSA Data Security, Inc., which has been accounted for
as a pooling of interests as described in Note 2 to the consolidated financial
statements. We did not audit the consolidated financial statement schedule of
RSA Data Security, Inc. for 1995 and 1994. That financial statement schedule of
RSA was audited by other auditors whose report has been furnished to us, and our
opinion, insofar as it relates to the amounts included for RSA Data Security,
Inc. for 1995 and 1994, is based solely on the report of such other auditors.
In our opinion, based on our audits and the report of the other auditors, such
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
March 27, 1997
41
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the use of our report dated April 8, 1996 with respect to the
financial statement and schedule of RSA Data Security, Inc. as of and for the
periods indicated therein, not presented separately in the Annual Report (Form
10K) of Security Dynamics Technologies, Inc. for the year ended December 31,
1996.
We also consent to the incorporation by reference in the Registration Statements
on Form S-8 (Nos. 33-87916, 33-88506, 33-88508, 33-88510, and 333-08939)
pertaining to the 1986 Stock Option Plan, the 1994 Stock Option Plan, the 1994
Employee Stock Purchase Plan, the 1994 Director Stock Option Plan, and the
Amended 1994 Stock Option Plan of Security Dynamics Technologies, Inc. of our
report dated April 8, 1996 referred to in the preceding paragraph.
/s/ Ernst & Young LLP
Palo Alto, California
March 27, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US $
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 9,512
<SECURITIES> 95,320
<RECEIVABLES> 13,820
<ALLOWANCES> 527
<INVENTORY> 2,606
<CURRENT-ASSETS> 124,935
<PP&E> 13,354
<DEPRECIATION> 3,246
<TOTAL-ASSETS> 139,942
<CURRENT-LIABILITIES> 17,302
<BONDS> 0
0
0
<COMMON> 344
<OTHER-SE> 121,102
<TOTAL-LIABILITY-AND-EQUITY> 139,942
<SALES> 76,148
<TOTAL-REVENUES> 76,148
<CGS> 17,568
<TOTAL-COSTS> 62,183
<OTHER-EXPENSES> 6,100<F1>
<LOSS-PROVISION> 223
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 23,843
<INCOME-TAX> 10,798
<INCOME-CONTINUING> 13,045
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,045
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.36
<FN>
<F1>OTHER COSTS REFER TO MERGER EXPENSES INCURRED UPON ACQUISITION OF RSA DATA
SECURITY, INC.
</FN>
</TABLE>
