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As filed with the Securities and Exchange Commission on September 12, 1997
Registration Statement No. 333-34241
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
AMENDMENT NO. 1
TO
FORM S-3
----------------------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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SECURITY DYNAMICS TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
----------------------
DELAWARE 04-2916506
(State or Other Jurisdiction (I.R.S. Employer Identification Number)
of Incorporation or Organization)
20 CROSBY DRIVE
BEDFORD, MASSACHUSETTS 01730
(781) 687-7000
(Address, including zip code, and
telephone number, including area code,
of registrant's principal
executive offices)
----------------------
CHARLES R. STUCKEY, JR.
CHAIRMAN OF THE BOARD,
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SECURITY DYNAMICS TECHNOLOGIES, INC.
20 CROSBY DRIVE
BEDFORD, MASSACHUSETTS 01730
(781) 687-7000
(Name, address, including zip code, and
telephone number, including area code,
of agent for service)
COPY TO:
HAL J. LEIBOWITZ, ESQ.
HALE AND DORR LLP
60 STATE STREET
BOSTON, MASSACHUSETTS 02109
(617) 526-6000
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE HEREOF.
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If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ________.
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ] ________.
If delivery of the Prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
SHALL DETERMINE.
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Subject to Completion
September 12, 1997
PROSPECTUS
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
396,387 Shares
SECURITY DYNAMICS TECHNOLOGIES, INC.
Common Stock
The 396,387 shares of common stock, $.01 par value per share (the
"Common Stock"), of Security Dynamics Technologies, Inc. (the "Company") covered
by this Prospectus are issued and outstanding shares which may be offered and
sold, from time to time, by or on behalf of Peter C. Loux, Khris Loux and The
Peter C. Loux Charitable Remainder Unitrust, stockholders of the Company (the
"Selling Stockholders"). The shares of Common Stock covered by this Prospectus
(the "Shares") were issued to the Selling Stockholders on July 15, 1997 in
connection with the acquisition by the Company of DynaSoft AB ("DynaSoft").
Pursuant to the terms of a Registration Rights Agreement between the Company and
the Selling Stockholders, the Company has agreed to register the Shares under
the Securities Act of 1933, as amended (the "Securities Act"), and to use its
best efforts to cause the Registration Statement of which the Prospectus
constitutes a part to be declared and remain effective until the earlier of (i)
such time as all of the Shares have been sold by the Selling Stockholders, or
(ii) July 15, 1998. The Selling Stockholders have advised the Company that they
propose to sell, from time to time, all or part of the Shares covered by this
Prospectus on the Nasdaq National Market, in ordinary brokerage transactions, in
negotiated transactions, or otherwise, at market prices prevailing at the time
of sale, at prices related to such market prices or at negotiated prices. See
"Plan of Distribution."
Each of the Selling Stockholders has agreed with the Company not to
sell, exchange, transfer, distribute, pledge, dispose of or enter into any
transaction to reduce the risk of loss (by short sale or otherwise) or any
transaction which would result in a direct or indirect disposition of the Shares
until such time as the Company has published (within the meaning of Accounting
Series Release Nos. 130 and 135 published by the Securities and Exchange
Commission (the "Commission")) financial results for the Company's quarter
ending September 30, 1997 (the "Holding Period"). Notwithstanding the
foregoing, prior to the expiration of the Holding Period, the Selling
Stockholders are permitted to sell, exchange, transfer, pledge, distribute or
otherwise dispose of, or reduce interest in or risk relating to, an amount of
the Shares which does not exceed in the aggregate, together with any shares of
Common Stock disposed of during such period by any other former stockholders of
DynaSoft who agreed to comparable share restrictions, the de minimis amount
permitted by the Commission in its rules relating to pooling-of-interest
accounting treatment, subject to the advance
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concurrence of the Company, DynaSoft and the independent auditors of the
Company. See "Plan of Distribution."
The Company will not receive any of the proceeds from the sale of
Shares covered by this Prospectus. The Company will bear all expenses incurred
in effecting the registration of such Shares, including all registration and
filing fees, "blue sky" fees, printing expenses and all legal fees of one
counsel to the Selling Stockholders, but excluding underwriting discounts and
selling commissions, if any, applicable to the sale of the Shares. The Company
and the Selling Stockholders have agreed to certain indemnification arrangements
with respect to the Shares offered hereby. See "Plan of Distribution."
The Company's Common Stock is traded on the Nasdaq National Market
under the symbol "SDTI." On September 11, 1997, the closing sale price of the
Common Stock on the Nasdaq National Market was $34.44 per share.
All financial information in this Prospectus has been restated to
include the results of DynaSoft for all periods presented.
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE
OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 4.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is ___________, 1997
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
accordance therewith files reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information filed by
the Company with the Commission pursuant to the informational requirements
of the Exchange Act may be inspected and copied at the public reference
facilities maintained by the Commission at 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549 and at the Commission's regional offices located at
Seven World Trade Center, Suite 1300, New York, New York 10048, and at Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such materials also may be obtained from the Public Reference Section of the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed
rates. In addition, the Company is required to file electronic versions of
these documents through the Commission's Electronic Data Gathering, Analysis
and Retrieval system (EDGAR). The Commission maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Commission. The Common Stock of the Company is traded on the Nasdaq National
Market. Reports and other information concerning the Company may be inspected
at the Nasdaq National Market, 1735 K Street, N.W., Washington, D.C. 20006.
The Company has filed with the Commission a Registration Statement on
Form S-3 (together with all amendments, supplements, exhibits and schedules
thereto, the "Registration Statement") under the Securities Act with respect to
the shares of Common Stock offered hereby. This Prospectus does not contain all
of the information set forth in the Registration Statement, as certain items are
omitted in accordance with the rules and regulations of the Commission. For
further information pertaining to the Company and the Shares, reference is made
to the Registration Statement. Statements contained in this Prospectus regarding
the contents of any agreement or other document are not necessarily complete,
and in each instance reference is made to the copy of such agreement or document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. The Registration Statement,
including all exhibits and schedules thereto, may be inspected without charge at
the office of the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549,
and copies of all or any part thereof may be obtained from the Commission at
prescribed rates. As used in this Prospectus, the term "the Company" refers to
Security Dynamics Technologies, Inc. ("SDI") and its subsidiaries, including
without limitation RSA Data Security, Inc. ("RSA") and DynaSoft, unless the
context otherwise requires.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission are
incorporated herein by reference:
(i) The Company's Annual Report on Form 10-K for the year
ended December 31, 1996;
(ii) The Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1997;
(iii) The Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1997;
(iv) The Company's Current Report on Form 8-K, dated July
15, 1997, including the amendments thereto on Form
8-K/A filed with the Commission on July 31, 1997 and
August 4, 1997; and
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(v) The description of the Common Stock contained in the
Company's Registration Statement on Form 8-A, as
filed with the Commission on November 15, 1994.
All documents filed by the Company with the Commission pursuant to
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date
hereof and prior to the termination of the offering of the Common Stock
registered hereby shall be deemed to be incorporated by reference into this
Prospectus and to be a part hereof from the date of filing such documents. Any
statement contained in a document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to each person to whom this
Prospectus is delivered, upon written or oral request of such person, a copy of
any or all of the foregoing documents incorporated by reference into this
Prospectus (without exhibits to such documents other than exhibits specifically
incorporated by reference into such documents). All such requests shall be
directed to: Security Dynamics Technologies, Inc., 20 Crosby Drive, Bedford,
Massachusetts 01730, Attention: Investor Relations, telephone: (781) 687-7000.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH OTHER INFORMATION AND
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO
CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITIES OTHER THAN THE REGISTERED SECURITIES TO WHICH IT
RELATES. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR
SOLICITATION IS UNLAWFUL.
SPECIAL NOTE REGARDING FORWARD-LOOKING INFORMATION
Certain statements in this Prospectus and in the documents incorporated
herein constitute "forward-looking statements" within the meaning of Section 27A
of the Securities Act and Section 21E of the Exchange Act. For this purpose, any
statements contained herein or incorporated 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 important factors that could cause the results of the Company to
differ materially from those indicated by such forward-looking statements. These
factors include those set forth in "Risk Factors" herein.
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RISK FACTORS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. For this purpose, any statements contained
herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. Actual results could differ
materially from those indicated by such forward-looking statements as a result
of certain of the risk factors set forth below and elsewhere in this Prospectus.
In addition to the other information contained in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the Common
Stock offered by this Prospectus.
Dependence on Principal Products. The Company currently derives
substantially all of its revenue from sales of its enterprise network and data
security products, the licensing of encryption security software components
("encryption engines") and the provision of related services, and existing and
new versions of such products are expected to continue to represent a high
percentage of the Company's revenue for the foreseeable future. As a result, any
factor adversely affecting sales of these products and services, or any factor
impeding or delaying the Company's ability to diversify its product offerings to
lessen its dependency on those products, would have a material adverse effect on
the Company's financial condition and results of operations.
Risks Associated with Enterprise Network and Data Security Market. The
rapid development of enterprise-wide and remote computing as well as increased
use of the Internet, intranets and extranets has enhanced the ability of users
to access proprietary information and resources and has in recent years
increased demand for enterprise network and data security products. 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.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
A well-publicized actual or perceived breach of enterprise network or
data 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 enterprise network or data
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
identification and authentication 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.
In February 1997, the Company announced its Enterprise Security
Services ("ESS"), a framework designed to deliver enterprise-wide security
solutions to businesses. As part of the ESS framework, the Company intends to
introduce products and form partnerships that will enable delivery of security
services such as certificate management, key management and privilege
management. There can be no assurance, however, that the certificate management,
key management and privilege management technologies under consideration by the
Company will be adopted by the marketplace, that the Company will find
appropriate partners for developing and marketing its products or that the
Company will successfully market any products developed as part of the ESS
framework.
Technological Change and New Products. The market for security
products, especially in the Internet, intranet and extranet markets, is
characterized by rapidly changing technology, emerging and evolving industry
standards, new product introductions, relatively short product life cycles and
rapid and constant
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changes in customer requirements and preferences. To the extent that specific
methods other than those employed by the Company are adopted as standards for
implementing enterprise network and data security, sales of the Company's
existing and planned products in those market segments may be adversely
impacted, which could have a material adverse effect on the Company's financial
condition or results of operations. The Company's future success will depend in
part upon its customers' and end users' demand for enterprise network and data
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 financial condition and
results of operations. Despite testing, new products may be affected by
quality, reliability or security failure problems, 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.
Software products may also contain undetected errors or bugs when first
introduced or as new versions are released, and software products or media may
contain undetected viruses. Errors or bugs may also be present in software
licensed by the Company from third parties and incorporated into the Company's
products. Errors, bugs or viruses may result in loss of or delay in market
acceptance, recalls of hardware products incorporating the software or loss of
data. Delays or difficulties associated with new product introductions or
product enhancements could have a material adverse effect on the Company's
financial condition or results of operations.
Potential Fluctuations in Quarterly Performance; Seasonality. The
Company's quarterly operating results may vary significantly depending on a
number of factors, including the timing of the introduction or enhancement of
products by the Company or its competitors, the sizes, timing and shipment of
individual orders, market acceptance of new products, seasonality of revenue,
customer order deferrals in anticipation of new products, changes in the
Company's operating expenses, personnel changes, foreign currency exchange
rates, mix of products sold, changes in product pricing, development of the
Company's direct and indirect distribution channels and general economic
conditions. There can be no assurance that the Company will be able to grow or
sustain its profitability on a quarterly basis. 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. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Supplemental Quarterly Operating Results."
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. Revenue
has historically increased at higher rates in the last quarter of the year and
at lower rates in the next succeeding quarter. The Company believes that
revenue tends to increase at higher rates 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 enterprise network or data security prior to the end of
the calendar year. In addition, revenue tends to increase at lower rates in the
summer months, particularly in Europe, when businesses defer purchase
decisions.
Risks Relating to Cryptographic Technology. Any significant advance in
techniques for attacking cryptographic systems could render some or all of RSA's
products obsolete or unmarketable. RSA's cryptographic systems depend in part
on the application of certain mathematical principles. The security afforded by
RSA's encryption products is predicated on the assumption that the "factoring"
of the composite of large prime numbers is difficult. Should an "easy factoring
method" be developed, then the security afforded by RSA's encryption products
would be reduced or eliminated. There can be no assurance that such a
development will not occur. Moreover, even if no breakthroughs in factoring are
discovered, factoring problems can theoretically be solved by a computer system
significantly faster and more powerful than those presently available. If such
improved techniques for attacking cryptographic systems are ever developed, it
could have a material adverse impact on the Company's business or results of
operations.
Management of Growth. The Company is currently experiencing a period of
rapid growth that could place a significant strain on its management and other
resources. A component of the Company's business strategy is to seek the
acquisition of businesses, products and technologies that complement or augment
the Company's existing businesses, products and technologies. Acquisitions are
difficult to identify and complete for a number of reasons, including
competition among 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. There can be no assurance that the Company will be able to
operate acquired businesses profitably or otherwise implement its growth
strategy successfully. The successful combination of companies in a rapidly
changing high technology industry may be more difficult to accomplish than in
other industries. The Company's ability to manage its growth and integrate any
newly acquired entities 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.
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Challenges of DynaSoft Integration. On July 15, 1997, the Company
acquired DynaSoft, a leading provider of security solutions for protecting
access to corporate information and applications. Achieving the anticipated
benefits of the DynaSoft acquisition will depend in part upon whether the
integration of DynaSoft's business is accomplished in an efficient and
effective manner, and there can be no assurance that this will occur. 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 currently expects to recognize approximately $8.5
million of expenses during the third quarter of 1997, the quarter in which the
acquisition of DynaSoft was consummated, to reflect direct transaction costs,
primarily for investment banking, legal and accounting fees, and costs
associated with combining the operations of the two companies. This amount is a
preliminary estimate and is therefore subject to change. Additional
unanticipated expenses may be incurred relating to the integration of the
businesses of the Company and DynaSoft, including the integration of certain
product lines and distribution and administrative functions.
Dependence on Proprietary Technology. The Company's success and ability
to compete is dependent in part upon its proprietary technology. The Company
relies on a combination of patent, trade secret, copyright and trademark laws,
software licenses, nondisclosure agreements and technical measures to establish
and protect its proprietary technology. The Company generally enters into
confidentiality and/or license agreements with its employees, distributors and
strategic partners as well as with its customers and potential customers
seeking
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<PAGE> 10
proprietary information, and limits access to and distribution of its software,
documentation and other proprietary information. There can be no assurance that
the steps taken by the Company in this regard will be adequate to deter
misappropriation or independent third-party development of its technology.
The Company's 15 issued U.S. patents expire at various dates ranging
from 2005 to 2016. Upon expiration of the Company's patents, competitors may
develop and sell products based on technologies similar or equivalent to those
currently covered by the Company's patents. In addition, a patent developed at
the Massachusetts Institute of Technology ("MIT") (U.S. Patent No. 4,405,829)
and licensed to RSA (the "RSA/MIT Patent"), the claims of which cover
significant elements of RSA's 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, two U.S.
Patents (Nos. 4,200,770 and 4,218,582) covering encryption technology developed
by Stanford University (the "Stanford Patents"), which have been licensed to
RSA, expire in 1997. After expiration of the Stanford Patents, competitors may
develop and sell products based on technologies covered by such patents,
including products that may be positioned as competitive with products covered
by the RSA/MIT Patent, thereby adversely impacting sales of RSA's products.
There can be no assurance that any patent owned or held by the Company or its
licensors will not be invalidated, circumvented, challenged or terminated, that
any of the Company's pending or future patent applications will be within the
scope of claims sought by the Company, if at all, or that the steps taken by
the Company to protect its rights will be adequate to prevent misappropriation
of the Company's technology or to preclude competitors from developing products
with features similar to the Company's products. Further, there can be no
assurance that others will not develop technologies that are similar or
superior to the Company's technologies or duplicate the Company's technologies.
In addition, the laws of certain countries in which the Company's products are
or may be developed or sold may not protect the Company's products and
intellectual property rights to the same extent as the laws of the United
States. The inability of the Company to protect its intellectual property
adequately could have a material adverse effect on its financial condition and
results of operations.
The Company has from time to time received correspondence alleging that
its products may infringe patents held by third parties. The Company is not
presently aware of any claims that its products infringe third-party rights,
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. The encryption industry is highly litigious, and RSA is
and has been involved in litigation relating to its intellectual property
rights and those of its competitors. Any litigation, whether or not resolved in
favor of the Company, could result in significant expense to the Company and
could divert management and other resources. In the event of an adverse ruling
in any litigation involving intellectual property, the Company might be
required to discontinue the use of certain processes, cease the manufacture,
use and sale of infringing products, expend significant resources to develop
non-infringing technology or obtain licenses to the infringing technology and
may suffer significant monetary damages, which could include treble damages.
There can be no assurance that under such circumstances a license would be
available to the Company on reasonable terms or at all. In the event of a
successful claim against the Company and the Company's failure to develop or
license a substitute technology on commercially reasonable terms, the Company's
financial condition and results of operations would be materially adversely
affected.
Dependence on Suppliers and Third-Party Manufacturers. 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., a
Japanese computer chip manufacturer, the lithium batteries contained in the
Company's SecurID tokens are purchased from one supplier located in the United
States, Gould Electronics, and the Company's SecurID Key Fob is manufactured
only by Pemstar, Inc., an assembly subcontractor located in the United States.
The inability to obtain sufficient manufactured goods or sole or limited source
components as required, or to obtain or develop alternative sources at
competitive prices and quality if and as required in the future, could result
in delays in product
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<PAGE> 11
shipments or increase the Company's material costs, either of which would
adversely affect the Company's financial condition or results of operations.
The relational database management software contained in the Company's
ACE/Server software is licensed by the Company from Progress Software
Corporation ("Progress Software"). The Company relies on Progress Software for
ongoing maintenance and support for such licensed software.
Need to Establish and Maintain Strategic Relationships. A significant
business strategy of the Company is to enter into strategic marketing alliances
or other similar collaborative relationships. There can be no assurance 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.
Competition. The market for enterprise network and data security
products is highly competitive and subject to rapid change. The Company
believes that the principal competitive factors affecting the market for
enterprise network and data security products include technical features, ease
of use, quality/reliability, level of security, customer service and support,
distribution channels and price. The Company's competitors and potential
competitors include organizations that provide or may seek to provide
enterprise network and data security products based upon approaches similar to
and different from those employed by the Company, and could in the future
include operating system or network suppliers not currently offering competitive
enterprise-wide security products. There can be no assurance that the market
for enterprise network and data security products will not ultimately be
dominated by approaches other than the approach marketed by the Company.
Certain 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 leverage an installed customer
base and/or other existing or future enterprise-wide products, adapt more
quickly to new or emerging technologies and changes in customer requirements,
or 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 resulting from competitive factors 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 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.
Dependence on Key Personnel. The Company's success depends to a
significant extent upon a number of key employees, including members of senior
management. The loss of the services of one or more of these key employees could
have a material adverse effect on the Company. The Company believes that its
future success will depend in part on its ability to attract, motivate and
retain highly skilled technical, managerial and marketing personnel. Competition
for such personnel is intense and
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<PAGE> 12
there can be no assurance that the Company will be successful in attracting,
motivating and retaining key personnel.
Risks Associated with International Sales. Sales outside the United
States accounted for approximately 27.3%, 24.2%, 28.9% and 31.5% of the
Company's revenue in the years ended December 31, 1994, 1995 and 1996 and the
six months ended June 30, 1997, 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,
Sweden 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.
Export Controls. All of the Company's products are subject to export
controls under U.S. law and applicable foreign government restrictions. The
Company believes it has obtained necessary export approvals for the export of
the products it currently exports. 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 or that the Company will be able to obtain necessary regulatory approvals
for the export of future products. 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 and various foreign governments. All
cryptographic products require export licenses from either the U.S. State
Department, acting under the authority of the International Traffic in Arms
Regulation, or the U.S. Commerce Department, acting under the authority of the
Export Administration Regulations. Regulations issued by these departments
define cryptographic devices, including software, as both defense articles and
dual-use commodities. The U.S. government generally limits the export of
software with encryption capabilities to mass marketed software with limited
key sizes, which significantly constrains the security effectiveness of RSA
products available for export. As a result, RSA may be at a disadvantage in
competing for international sales compared to companies located outside the
United States that are not subject to such restrictions.
Third-Party Claims. 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.
Although the Company attempts to reduce the risk of losses resulting from such
claims through warranty disclaimers and liability limitation clauses in its
sales agreements, 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.
Possible Volatility of Share Price. The market price of the Company's
Common Stock, which is traded on the Nasdaq National Market, may be subject to
significant fluctuations in response to operating results, announcements of
technological innovations or new products by the Company or its competitors,
patent or proprietary rights developments and market conditions for computer
industry stocks in general. In addition, the stock market in recent years has
experienced extreme price and volume fluctuations that
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<PAGE> 13
often have been unrelated or disproportionate to the operating performance of
individual companies. These market fluctuations, as well as general economic
conditions, may adversely affect the market price of the Common Stock. The
trading prices of many high technology companies' stocks are at or near their
historical highs and reflect price/earnings ratios substantially above
historical norms. There can be no assurance that the trading price of the
Common Stock will remain at or near its current level.
Dividends. No cash dividends have been paid on the Common Stock to
date and the Company does not anticipate paying cash dividends in the
foreseeable future.
Antitakeover Provisions. The Company's Third Restated Certificate of
Incorporation, as amended (the "Restated Certificate of Incorporation"),
requires that any action required or permitted to be taken by stockholders of
the Company must be effected at a duly called annual or special meeting of
stockholders and may not be effected by any consent in writing, and requires
reasonable advance notice by a stockholder of a proposal or director nomination
which such stockholder desires to present at any annual or special meeting of
stockholders. Special meetings of stockholders may be called only by the
Chairman of the Board, the Chief Executive Officer or, if none, the President of
the Company or by the Board of Directors. The Restated Certificate of
Incorporation provides for a classified Board of Directors, and members of the
Board of Directors may be removed only for cause upon the affirmative vote of
holders of at least two-thirds of the shares of capital stock of the Company
entitled to vote. These provisions, and other provisions of the Restated
Certificate of Incorporation, may have the effect of deterring hostile takeovers
or delaying or preventing changes in control or management of the Company,
including transactions in which stockholders might otherwise receive a premium
for their shares over then current market prices. In addition, these provisions
may limit the ability of stockholders to approve transactions that they may deem
to be in their best interests.
-10-
<PAGE> 14
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
The following selected supplemental consolidated financial data should
be read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Supplemental Consolidated
Financial Statements included elsewhere in this Prospectus, and with the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 and the
Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997
and June 30, 1997, which reports are incorporated by reference in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- ---------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue ............................. $ 12,574 $ 16,590 $ 23,866 $ 49,412 $ 83,817 $ 36,111 $ 61,374
Cost of revenue ..................... 2,987 3,707 4,837 8,920 18,207 7,451 13,147
-------- -------- -------- -------- -------- -------- --------
Gross profit ..................... 9,587 12,883 19,029 40,492 65,610 28,660 48,227
Costs and expenses:
Research and development ......... 2,658 2,817 4,314 6,292 12,382 5,533 8,646
Purchased research and
development ...................... -- -- -- 648 1,000 -- --
Marketing and selling ............ 4,437 5,506 8,931 14,263 24,429 10,824 18,770
General and administrative ....... 1,672 2,208 3,368 10,375 13,403 6,061 7,609
Merger expenses .................. -- -- -- -- 6,100 -- --
-------- -------- -------- -------- -------- -------- --------
Total .................... 8,767 10,531 16,613 31,578 57,314 22,418 35,025
-------- -------- -------- -------- -------- -------- --------
Income from operations .............. 820 2,352 2,416 8,914 8,296 6,242 13,202
Interest income and other ........... 185 90 166 1,843 5,004 2,500 2,717
Gain on sale of marketable securities
and other income (expense) ....... 253 73 99 62 10,872 (141) 197
-------- -------- -------- -------- -------- -------- --------
Income before provision for income
taxes, extraordinary item and
cumulative effect of change in
accounting ....................... 1,258 2,515 2,681 10,819 24,172 8,601 16,116
Provision for income taxes(1) ....... 505 908 1,453 3,369 10,997 3,147 6,040
-------- -------- -------- -------- -------- -------- --------
Income before extraordinary item
and cumulative effect of change in
accounting ....................... 753 1,607 1,228 7,450 13,175 5,454 10,076
Extraordinary item .................. 407 -- -- -- -- -- --
Cumulative effect of change in
accounting(1) .................... -- 564 -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Net income .......................... $ 1,160 $ 2,171 $ 1,228 $ 7,450 $ 13,175 $ 5,454 $ 10,076
======== ======== ======== ======== ======== ======== ========
Per share data(2):
Income before cumulative effect of
change in accounting ............. $ 0.06 $ 0.05 $ 0.22 $ 0.34 $ 0.14 $ 0.26
Cumulative effect of change
in accounting .................... 0.03 -- -- -- -- --
-------- -------- -------- -------- -------- --------
Net income ....................... $ 0.09 $ 0.05 $ 0.22 $ 0.34 $ 0.14 $ 0.26
======== ======== ======== ======== ======== ========
Weighted average number of
common and common equivalent
shares outstanding(2) ............... 25,015 25,231 34,115 38,877 38,398 39,418
======== ======== ======== ======== ======== ========
</TABLE>
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<PAGE> 15
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
---------------------------------------------------------- --------
1992 1993 1994 1995 1996 1997
-------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and
marketable securities ....... $ 3,894 $ 3,860 $ 27,828 $112,367 $106,495 $110,753
Working capital ................. 4,791 6,070 29,007 104,349 109,202 119,658
Total assets .................... 9,109 11,511 37,691 128,659 145,975 157,068
Redeemable convertible preferred
stock ....................... 9,016 8,527 -- -- -- --
Stockholders' equity (deficiency) (2,796) (2,001) 29,660 109,026 124,178 134,539
</TABLE>
- ----------
(1) 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 the Company's
Supplemental Consolidated Financial Statements.
(2) Per share and share data for years prior to 1995 are presented on a pro
forma basis. See Note 1 of Notes to the Company's Supplemental
Consolidated Financial Statements.
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<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is the leading provider of enterprise network and data
security solutions. The Company was founded in 1984, began shipping its SecurID
tokens and Access Control Module ("ACM") hardware products in 1986, and
introduced its first ACM software products for minicomputers and mainframe
computers in 1988. Prior to 1986, the Company was primarily engaged in research
and development activities. In December 1991, the Company introduced its
ACE/Server software products for enterprise information protection using
client/server architecture. The Company believes that its growth has
historically been driven by the emergence of local and wide area networks and a
corresponding increase in users with direct access to core enterprise systems
and confidential data. The Company also believes that the number of users with
such direct access is increasing because of the growth of the Internet and
corporate intranets and extranets.
On July 26, 1996, the Company completed a merger with RSA (the "RSA
Merger") and on July 15, 1997, the Company completed the DynaSoft Acquisition.
The RSA Merger has been accounted for as a pooling of interests and, after the
release of financial statements that include the date of consummation of the
DynaSoft Acquisition, the DynaSoft Acquisition will be accounted for as a
pooling of interests in the Company's historical consolidated financial
statements. All financial information included in the discussion which follows
has been restated to include the results of RSA and DynaSoft for all periods
presented. See the Company's Supplemental Consolidated Financial Statements and
the Notes thereto included elsewhere in this Prospectus.
RSA, located in Redwood City, California, is a recognized leader in
cryptography and develops, markets and supports cryptographic data security
products and provides cryptographic consulting services. Products are licensed
to original equipment manufacturers ("OEMs") that incorporate the technology
into their products. Developer toolkits and other products are used to
implement cryptographic data security applications such as electronic mail,
communications privacy, client/server data security, smart cards and other key
information technologies.
DynaSoft is based in Stockholm, Sweden and offers a range of software
security solutions, including secure single sign-on solutions, through its BoKS
product family. DynaSoft markets its products worldwide through subsidiaries and
also through OEM licensing agreements with Sun Microsystems, Inc. ("Sun
Microsystems"), Hewlett-Packard Company ("Hewlett-Packard") and other companies.
The Company's revenue is derived primarily from sales of SecurID
tokens; licensing of ACE/Server, BoKS and SecurPC software; licensing of BSAFE,
TIPEM, BCERT, S/PAY and S/MAIL encryption engines; licensing of patents; and
revenues from maintenance and professional services. Historically, the
Company's growth has been attributable to sales to new customers as well as to
existing customers. Sales to existing customers include sales of SecurID tokens
and ACE/Server software for use by different branches or divisions, 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 ACE/Server and BoKS customers are typically
associated with an increase in the number of users authorized under a license,
and the sales of additional functionality that can be added to the customer
installation. ACE/Server and BoKS software license fee prices are typically
based on the number of users authorized under a license. Sales to existing
customers also include revenue associated with amendments to encryption engine
and patent licensing agreements, usually in order to accommodate licensing of
new software or technology to the customer, to increase the field of use rights
of the customer, or both. Encryption engine software licensing terms vary by
product, and are typically composed of both initial fees plus ongoing royalties
paid as a percentage of the OEM's product or service revenues. Sales of ACM
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<PAGE> 17
hardware and software products have been decreasing relative to sales of
ACE/Server software for several years due to increased emphasis by the Company
on sales to customers with larger security needs better met by client/server
software solutions such as ACE/Server software. The Company believes that this
trend will continue.
The Company's direct sales to customers in countries outside of the
United States 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 the Company's
Supplemental Consolidated Financial Statements.
The Company's cost of revenue consists primarily of costs associated
with the manufacture and delivery of SecurID tokens and hardware products. The
Company utilizes assembly contractors for most manufacturing. Cost of revenue
also includes royalty fees incurred on the sale of ACE/Server software, royalty
fees payable on the licensing of patent technology and royalties payable under
certain OEM agreements. Cost of revenue includes customer support costs and
production costs, which include labor costs associated with the programming of
SecurID tokens, inspection and quality control functions and shipping costs. In
the future, gross profit may be affected by several factors, including changes
in product mix and distribution channels, price reductions (resulting from
volume discounts or otherwise), competition, increases in the cost of revenue
(including any software license fees or royalties payable by the Company) and
other factors.
Operating expenses are incurred for research and development,
marketing and selling and general and administrative activities. Research and
development expenses consist primarily of personnel costs as well as fees for
development services provided by consultants. From time to time the Company has
also purchased, and expensed, research and development technology. Marketing
and selling expenses consist primarily of salaries, commissions and travel
expenses of direct sales and marketing personnel and marketing program
expenses. General and administrative expenses consist primarily of personnel
costs for administration, finance, human resources, general management and
legal and accounting fees.
Interest and other income consists primarily of interest earned on
the Company's cash balances and marketable securities.
The Company has been profitable for each of the years in the
seven-year period ended December 31, 1996 and for the six months ended June 30,
1997.
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<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth certain supplemental consolidated
financial data as a percentage of revenue for the years ended December 31, 1994,
1995 and 1996 and the six months ended June 30, 1996 and 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------- ------------------------
PERCENTAGE OF REVENUE 1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue 20.3 18.1 21.7 20.6 21.4
----- ----- ----- ----- -----
Gross profit 79.7 81.9 78.3 79.4 78.6
----- ----- ----- ----- -----
Costs and expenses:
Research and development 18.1 12.7 14.8 15.3 14.1
Purchased research and
development -- 1.3 1.2 -- --
Marketing and selling 37.4 28.9 29.1 30.0 30.6
General and administrative 14.1 21.0 16.0 16.8 12.4
Merger expenses -- -- 7.3 -- --
----- ----- ----- ----- -----
Total 69.6 63.9 68.4 62.1 57.1
----- ----- ----- ----- -----
Income from operations 10.1 18.0 9.9 17.3 21.5
Interest income and other 0.7 3.7 5.9 6.9 4.4
Gain on sale of marketable securities
and other income (expense) 0.4 0.2 13.0 (0.4) 0.3
----- ----- ----- ----- -----
Income before provision for income
taxes 11.2 21.9 28.8 23.8 26.2
Provision for income taxes 6.1 6.8 13.1 8.7 9.8
----- ----- ----- ----- -----
Net income 5.1% 15.1% 15.7% 15.1% 16.4%
===== ===== ===== ===== =====
</TABLE>
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<PAGE> 19
Six Months Ended June 30, 1997 Compared With Six Months Ended June 30, 1996
Revenue. Total revenue increased 70.0% in the first six months of
1997 to $61.4 million from $36.1 million in the first six months of 1996. This
increase in revenue reflected increases in unit sales of all of the Company's
products, except ACM/400 and ACM/1600 hardware products. During the first six
months of 1997, approximately 42% of the increase in revenue was attributable
to increased sales of SecurID tokens, approximately 26% of the increase was
attributable to increased sales of encryption engine licenses and approximately
17% of the increase was attributable to increased sales of ACE/Server software
licenses. The balance of the increase in revenue primarily resulted from sales
of BoKS software licenses, patent licenses and maintenance revenue, offset by
decreased hardware revenue. The Company believes that the overall increase in
sales was attributable in part to growth of the information security market,
with increased use of the Internet and corporate intranets and extranets
continuing to play significant roles in developing new opportunities for the
Company.
International revenue (excluding Canada) increased 83.0% in the first
six months of 1997 to $15.7 million from $8.6 million in the first six months of
1996. International revenue accounted for 25.6% and 23.7% of total revenue in
the first six months of 1997 and 1996, respectively. The 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.
Cost of Revenue and Gross Profit. The Company's gross profit
increased 68.3% in the first six months of 1997 to $48.2 million, from $28.7
million in the first six months of 1996, and remained relatively constant as a
percentage of revenue at 78.6% in 1997 compared to 79.4% in 1996. Approximately
40% of the increase in gross profit during the first six months of 1997 was
attributable to increased unit sales of SecurID tokens, approximately 30% to
increased licensing sales of encryption engine technology, approximately 19% to
increased licensing sales of ACE/Server software and approximately 4% to sales
of BoKS software products. In addition, gross profit increased due to increased
patent licensing sales, royalties and maintenance revenue, offset by reduced
sales of ACM/400 and ACM/1600 hardware products.
Research and Development. Research and development expenses increased
56.3% in the first six months of 1997 to $8.6 million from $5.5 million in the
first six months of 1996. Research and development expenses decreased as a
percentage of revenue in the first six months of 1997 to 14.1% from 15.3% in the
first six months of 1996. During the first six months of 1997, approximately 82%
of the increase in research and development expenses resulted from employment of
additional staff. The remainder of the increase in research and development was
attributable to purchases of computer equipment, resulting in higher
depreciation charges, occupancy expenses and consulting expenses.
Marketing and Selling. Marketing and selling expenses increased 73.4%
in the first six months of 1997 to $18.8 million from $10.8 million in the first
six months of 1996. Marketing and selling expenses increased as a percentage of
revenue in the first six months of 1997 to 30.6% from 30.0% in the first six
months of 1996. During the first six months of 1997, approximately 42% of the
increase in marketing and selling expenses resulted from employment of
additional staff, approximately 11% of the increase was attributable to sales
commissions on increased revenues, and approximately 16% of the increase
resulted from increased travel expenses and marketing program expenses.
General and Administrative. General and administrative expenses
increased 25.5% in the first six months of 1997 to $7.6 million, from $6.1
million in the first six months of 1996, but decreased as a percentage of
revenue to 12.4% in 1997 compared to 16.8% in 1996. The increase in general and
administrative expenses was due to the employment of additional staff offset by
reduced legal expenses. Legal expenses decreased approximately $1.3 million from
the first six months of 1996 compared to the first six months of 1997 due to the
settlement of certain of the Company's legal proceedings in 1996.
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<PAGE> 20
Interest Income and Other. Interest income increased 8.7% in the
first six months of 1997 to $2.7 million from $2.5 million in the first six
months of 1996 due to interest earned on higher cash and marketable securities
balances.
Provision for Income Taxes. The provision for income taxes increased
to $6.0 million during the first six months of 1997 from $3.1 million in the
first six months of 1996 due to higher pre-tax income and a higher effective tax
rate during the first six months of 1997. The Company's estimated effective tax
rate increased to 37.5% in the first half of 1997 from 36.6% in the first half
of 1996 due to higher tax rates associated with certain foreign income, which
increased relative to domestic income.
Net Income. As a result of the above factors, net income in the first
six months of 1997 increased to $10.1 million, or 16.4% of revenue, from $5.5
million, or 15.1% of revenue, in the first six months of 1996.
1996 Compared With 1995
Revenue. Total revenue increased 69.6% in 1996 to $83.8 million from
$49.4 million in 1995. This increase in revenue reflected increases in unit
sales and licensed use of substantially all of the Company's products.
Approximately 42%, 22% and 11% 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 licenses and the issuance of additional encryption engine
and patent licenses, respectively.
International revenue (excluding Canada) increased 114.0% in 1996 to
$19.7 million from $9.2 million in 1995 and accounted for 23.4% and 18.6% 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.
Cost of Revenue and Gross Profit. The Company's gross profit
increased 62.0% in 1996 to $65.6 million, or 78.3% of revenue, from $40.5
million, or 81.9% of revenue, in 1995. Approximately 46% 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 26% of the increase in gross
profit was attributable to increased sales of ACE/Server software licenses.
Approximately 9% of the increase in gross profit was attributable to increased
sales of patent and encryption engine licenses. 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 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, which are charged to
cost of revenue, under the Progress Software agreement upon the commercial
introduction of ACE/Server software version 2.0 in October 1995. These royalties
have decreased gross margins.
Research and Development. Research and development expenses increased
96.8% in 1996 to $12.4 million from $6.3 million in 1995, and increased as a
percentage of revenue to 14.8% in 1996 from 12.7% in 1995. Approximately 54% of
the increase in research and development expenses resulted from an increase in
compensation costs associated primarily with the employment of additional staff.
Approximately 15% of the increase in research and development expenses in 1996
was related to general overhead costs. Approximately 9% of the increase was
attributable to increases in consulting services contracted to develop
enhancements to the Company's ACE/Server software line.
-17-
<PAGE> 21
Purchased Research and Development. During the fourth quarter of
1996, the Company purchased, and recorded as purchased research and development
expense, technology from Worldtalk Corporation for $1.0 million. The technology
was incorporated into the Company's S/MAIL developer kit, a standards-based
secure messaging solution for third-party software developers designed to
provide a secure messaging infrastructure based on the S/MIME protocol.
During 1995, the Company purchased, and recorded as purchased
research and development expense, SecurADM technology for $0.6 million. The
technology was incorporated into products designed to provide secure single
sign-on capability in heterogeneous networked data processing environments.
Marketing and Selling. Marketing and selling expenses increased 71.3%
in 1996 to $24.4 million from $14.3 million in 1995, and increased as a
percentage of revenue to 29.1% in 1996 from 28.9% in 1995. Approximately 36% 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 16% 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. Approximately 15% 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 12% 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 sales offices in Europe and Asia.
General and Administrative. General and administrative expenses
increased 29.2% in 1996 to $13.4 million, or 16.0% of revenue, from $10.4
million, or 21.0% of revenue, in 1995. Approximately 29% 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 17% of the increase in general and administrative
expense was from an increase in consulting and temporary administrative
services. In addition, approximately 10% of the increase in general and
administrative expenses consisted of moving costs incurred in relocating to the
Company's new corporate offices.
Merger Expenses. Merger expenses incurred in connection with the RSA
Merger were $6.1 million in the third quarter of 1996. See Note 2 of Notes to
the Company's Supplemental Consolidated Financial Statements.
Interest Income and Other. Interest income increased to $5.0 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 $11.0 million in 1996 from $3.4 million in 1995. This increase was primarily
the result of higher pre-tax income during 1996. The Company's effective tax
rate increased to 45.5% in 1996 from 31.1% in 1995. The increase in the
effective tax rate was caused principally by the non-deductibility of certain
RSA 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 the Company's Supplemental Consolidated Financial
Statements.
Net Income. As a result of the above factors, net income in 1996
increased to $13.2 million, or 15.7% of revenue, from $7.5 million, or 15.1% of
revenue, in 1995.
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<PAGE> 22
1995 Compared With 1994
Revenue. Total revenue increased 107.0% in 1995 to $49.4 million from
$23.9 million in 1994. This increase in revenue reflected increases in unit
sales of all of the Company's products except the ACM/1600 hardware product.
Approximately 39%, 32% and 22% of the increase in revenue was attributable to
the increases in unit sales of SecurID tokens, encryption engine and patent
licenses and sales of ACE/Server software licenses, respectively, offset by a
decrease in unit sales of ACM/1600 hardware products.
International revenue (excluding Canada) increased 74.0% in 1995 to
$9.2 million from $5.3 million in 1994 and accounted for 18.6% and 22.2% of
total revenue in 1995 and 1994, respectively. This increase in international
revenue was primarily attributable to 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 112.8% in 1995 to $40.5 million, or 81.9% of revenue, from $19.0
million, or 79.7% of revenue, in 1994. Approximately 36% of the increase in
gross profit was attributable to an increase in the unit sales of SecurID
tokens. Approximately 36% of the increase in gross profit was attributable to an
increase in the number of patent and encryption engine licenses sold.
Approximately 25% of the increase in gross profit was attributable to an
increase in the number of ACE/Server software licenses sold. 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
45.9% in 1995 to $6.3 million from $4.3 million in 1994, but decreased as a
percentage of revenue to 12.7% in 1995 from 18.1% in 1994. Approximately 69% of
the increase in research and development expenses resulted from an increase in
payroll costs associated primarily with the employment of additional staff.
Approximately 20% 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 encryption engine product lines.
Purchased Research and Development. During 1995, the Company
purchased, and recorded as purchased research and development expense, SecurADM
technology for $0.6 million. The technology was incorporated into products
designed to provide secure single sign-on capability in heterogeneous networked
data processing environments.
Marketing and Selling. Marketing and selling expenses increased 59.7%
in 1995 to $14.3 million from $8.9 million in 1994, but decreased as a
percentage of revenue to 28.9% in 1995 from 37.4% in 1994. Approximately 36% 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 27% 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. Approximately 14% 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, French and
Swedish sales offices and the opening of the Company's office in Singapore.
General and Administrative. General and administrative expenses
increased 208.0% in 1995 to $10.4 million, or 21.0% of revenue, from $3.4
million, or 14.1% of revenue, in 1994. Approximately 52% of the increase in
general and administrative expenses was attributable to increases in legal costs
and also
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<PAGE> 23
accounting and investor relations expenses resulting from the additional costs
incurred in connection with being a public company. Approximately 29% of the
increase was due to increases in executive compensation and to increased
payroll expenses associated with the growth in the Company's staff to support
increased operations.
Interest Income and Other. Interest income increased to $1.8 million
in 1995 from $0.2 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 $3.4 million in 1995 from $1.5 million in 1994. This increase was primarily
the result of higher pre-tax income during 1995. The Company's effective tax
rate decreased to 31.1% in 1995 from 54.2% 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 1995, the valuation allowance was
reduced by approximately $0.9 million and for 1994 the valuation allowance was
increased by approximately $0.3 million. See Notes 1 and 6 of Notes to the
Company's Supplemental Consolidated Financial Statements.
Net Income. As a result of the above factors, net income in 1995
increased to $7.5 million, or 15.1% of revenue, from $1.2 million, or 5.1% of
revenue, in 1994.
SUPPLEMENTAL QUARTERLY OPERATING RESULTS
The following table sets forth unaudited supplemental quarterly
results of operations of the Company for each of the quarters in the years ended
December 31, 1995 and 1996 and the six months ended June 30, 1997. The Company
believes that this information has been prepared on the same basis as the
Company's audited Supplemental Consolidated Financial Statements and that all
necessary adjustments, consisting only of normal recurring adjustments, have
been included in the amounts stated below to present fairly, in accordance with
generally accepted accounting principles, the quarterly information when read
in conjunction with the Company's audited Supplemental Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus. The quarterly operating results are not necessarily indicative of
future results of operations.
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<PAGE> 24
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. DEC. 31 MAR. 31 JUNE 30
1995 1995 30 1995 1995 1996 1996
-------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenue ............................. $ 7,387 $ 11,698 $ 14,849 $ 15,478 $ 16,290 $ 19,821
Cost of revenue ..................... 1,373 2,111 2,357 3,079 3,671 3,780
-------- -------- -------- -------- -------- --------
Gross profit ............. 6,014 9,587 12,492 12,399 12,619 16,041
Costs and expenses:
Research and development .......... 1,348 1,595 1,509 1,840 2,342 3,191
Purchased research and development -- -- 648 -- -- --
Marketing and selling ............. 3,084 3,445 3,495 4,239 5,004 5,820
General and administrative ........ 1,629 2,650 2,307 3,789 2,901 3,160
Merger expenses ................... -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Total .................... 6,061 7,690 7,959 9,868 10,247 12,171
-------- -------- -------- -------- -------- --------
Income (loss) from operations ....... (47) 1,897 4,533 2,531 2,372 3,870
Interest income and other ........... 396 447 379 621 1,274 1,226
Gain on sale of marketable securities
and other income (expense) ........ 86 (157) 46 87 1 (142)
-------- -------- -------- -------- -------- --------
Income before provision for income
taxes ............................. 435 2,187 4,958 3,239 3,647 4,954
Provision for income taxes .......... 667 1,134 338 1,230 1,304 1,843
-------- -------- -------- -------- -------- --------
Net income (loss) ................... $ (232) $ 1,053 $ 4,620 $ 2,009 $ 2,343 $ 3,111
======== ======== ======== ======== ======== ========
Net income (loss) per equivalent
share ............................. $ (0.01) $ 0.03 $ 0.14 $ 0.06 $ 0.06 $ 0.08
======== ======== ======== ======== ======== ========
Weighted average number of
common and common equivalent
shares outstanding ................ 32,411 33,699 33,951 35,445 37,777 39,039
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------------------------------
SEPT. DEC. 31 MAR. 31 JUNE 30
30 1996 1996 1997 1997
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenue ............................. $ 21,143 $ 26,563 $ 28,419 $ 32,955
Cost of revenue ..................... 5,283 5,473 6,417 6,730
-------- -------- -------- --------
Gross profit ............. 15,860 21,090 22,002 26,225
Costs and expenses:
Research and development .......... 3,134 3,715 3,848 4,798
Purchased research and development -- 1,000 -- --
Marketing and selling ............. 5,988 7,617 8,669 10,101
General and administrative ........ 3,208 4,134 3,389 4,220
Merger expenses ................... 6,100 -- -- --
-------- -------- -------- --------
Total .................... 18,430 16,466 15,906 19,119
-------- -------- -------- --------
Income (loss) from operations ....... (2,570) 4,624 6,096 7,106
Interest income and other ........... 1,119 1,385 1,271 1,446
Gain on sale of marketable securities
and other income (expense) ........ 4,553 6,460 (25) 222
-------- -------- -------- --------
Income before provision for income
taxes ............................. 3,102 12,469 7,342 8,774
Provision for income taxes .......... 3,284 4,566 2,781 3,259
-------- -------- -------- --------
Net income (loss) ................... $ (182) $ 7,903 $ 4,561 $ 5,515
========= ======== ======== ========
Net income (loss) per equivalent
share ............................. $ (0.00) $ 0.20 $ 0.12 $ 0.14
========= ======== ======== ========
Weighted average number of common
and common equivalent shares
outstanding ........................ 39,168 39,563 39,299 39,527
========= ======== ======== ========
</TABLE>
The following table sets forth supplemental consolidated financial data as
a percentage of revenue for each of the quarters in the years ended December 31,
1995 and 1996 and the six months ended June 30, 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30 SEPT. 30 DEC. 31 MAR. 31 JUNE 30
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
------- ------- -------- ------- ------- ------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue .............. 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%
Cost of revenue ...... 18.6 18.0 15.9 19.9 22.5 19.1 25.0 20.6 22.6 20.4
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Gross profit ... 81.4 82.0 84.1 80.1 77.5 80.9 75.0 79.4 77.4 79.6
</TABLE>
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<PAGE> 25
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Costs and expenses:
Research and development ............ 18.2 13.6 10.2 11.9 14.4 16.1 14.8 14.0 13.5 14.6
Purchased research and development .. -- -- 4.4 -- -- -- -- 3.8 -- --
Marketing and selling ............... 41.7 29.4 23.5 27.4 30.7 29.4 28.3 28.6 30.5 30.6
General and administrative .......... 22.1 22.7 15.5 24.5 17.8 15.9 15.2 15.6 12.0 12.8
Merger expenses ..................... -- -- -- -- -- -- 28.9 -- -- --
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Total .................... 82.0 65.7 53.6 63.8 62.9 61.4 87.2 62.0 56.0 58.0
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Income (loss) from operations ....... (0.6) 16.3 30.5 16.3 14.6 19.5 (12.2) 17.4 21.4 21.6
Interest income and other ........... 5.4 3.8 2.6 4.0 7.8 6.2 5.3 5.2 4.5 4.4
Gain on sale of marketable securities
and other income (expense) ........ 1.1 (1.3) 0.3 0.6 -- (0.7) 21.5 24.3 (0.1) 0.6
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Income before provision for income
taxes ............................. 5.9 18.8 33.4 20.9 22.4 25.0 14.6 46.9 25.8 26.6
Provision for income taxes .......... 9.0 9.7 2.3 7.9 8.0 9.3 15.5 17.2 9.8 9.9
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
Net income (loss) ................... (3.1)% 9.1% 31.1% 13.0% 14.4% 15.7% (0.9)% 29.7% 16.0% 16.7%
==== ==== ==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
The Company's total revenue and operating results have varied
substantially from quarter to quarter and should not be relied upon as an
indication of future results. Quarterly revenue and operating results can be
difficult to forecast because the Company's sales cycle can be relatively long
and depends on factors such as the size and timing of individual transactions,
changes in customer budget authorizations, the level of research and development
expenditures and general economic conditions. The Company has historically
allowed customers to place large order commitments to secure volume price
discounts with deliveries specified at a later time, typically within a 12-month
period. As a result, it is difficult to forecast when the customer will request
delivery of these orders. Gross profit levels are affected by sales volume and
mix, and gross margins are different for SecurID tokens, software licenses,
patent licenses and maintenance and professional services.
The Company's revenue has increased in each of the quarters in the
period January 1, 1995 to June 30, 1997. Future revenue, however, may not
increase on a quarterly basis or may not increase at the same rate in comparison
to prior quarters. The Company has experienced, and expects to continue to
experience, significant seasonality in its business, and the Company's financial
condition or results of operations may be affected by such trends in the future.
Revenue has historically increased at higher rates in the last quarter of the
year and at lower rates in the next succeeding quarter. The Company believes
that revenue tends to increase at higher rates in the last quarter due to the
Company's quota-based compensation policies, year-end budgetary pressures on the
Company's customers and the tendency of certain of the Company's customers to
implement changes in enterprise network or data security prior to the end of the
calendar year. In addition, revenue tends to increase at lower rates 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.
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<PAGE> 26
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had cash and marketable securities of
$110.8 million and working capital of $119.7 million. The Company has
historically funded its operations primarily from cash generated from its
operating activities. During 1996 and 1997, the Company used the cash provided
by operations principally for working capital needs and to finance certain costs
in connection with the RSA Merger. The Company believes that working capital
will be sufficient to meet its anticipated cash requirements through at least
1998.
On July 15, 1997, the Company acquired approximately 95% of the
outstanding shares and certain of the outstanding options to acquire shares of
DynaSoft in exchange for approximately 2.7 million shares of the Company's
Common Stock. The Company also paid approximately $6.0 million in cash to
certain stockholders of DynaSoft in exchange for the remaining outstanding
shares and options. The DynaSoft Acquisition costs, which will be recognized
during the quarter ending September 30, 1997, are estimated to be approximately
$8.5 million. On July 26, 1996, a wholly owned subsidiary of the Company
acquired RSA. The RSA Merger costs were approximately $6.1 million. The RSA
Merger has been accounted for as a pooling of interests and, after the release
of financial statements that include the date of consummation of the DynaSoft
Acquisition, the DynaSoft Acquisition will be accounted for as a pooling of
interests in the Company's historical consolidated financial statements. See
Note 2 of Notes to the Company's Supplemental Consolidated Financial
Statements.
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.
In August 1997, the Company purchased 877,193 Series C Preferred
Shares of Finjan Software Ltd. ("Finjan") for an aggregate purchase price of
$1.0 million. Finjan is an Israeli software company organized to develop and
market products for the Java Internet security market. The Company's investment
in Finjan represents a minority interest of less than 5% of Finjan's
capitalization.
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.
On April 17, 1995 and February 20, 1996, the Company purchased
425,000 shares of Series A and 72,091 shares of Series B Convertible Preferred
Stock, respectively, of VeriSign, Inc. ("VeriSign") of Redwood City, California
for an aggregate purchase price of $687,000. VeriSign 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 VeriSign in connection
with VeriSign's incorporation and received 4,000,000 shares of VeriSign common
stock. The Company's voting interest in VeriSign was approximately 44%, 24% and
24% at December 31, 1995 and 1996 and June 30, 1997, respectively.
Two of the companies in which the Company has equity positions had
initial public offerings in 1996. The Company now considers these investments to
be available for sale marketable securities and the investment cost of $737,000
is classified with marketable securities at June 30, 1997. See Note 1 of Notes
to the Company's Supplemental Consolidated Financial Statements.
The Company's capital expenditures for the first six months of 1997
were $4.6 million and were for additional leasehold improvements, office
furniture and equipment, as well as computer equipment
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<PAGE> 27
for product development, testing and support to accommodate the Company's
continued growth. The Company generated $1.7 million of cash from the exercise
of stock options and generated $1.4 million of cash from the sale of minority
interests in RSA's Japan subsidiary in the first six months of 1997. The Company
currently anticipates that it will expend approximately $3.1 million for
purchased research and development during the quarter ending September 30, 1997.
In March 1996, the Company entered into a noncancelable operating
lease expiring in 2006 for corporate executive offices in Bedford,
Massachusetts. The Company commenced its tenancy in August 1996. The facility
consists of approximately 75,000 square feet of office space, and the annual
base rent for the first year is $956,000 increasing annually up to $1.2 million
for years five through ten. In June 1997, the Company entered into a
noncancelable operating lease expiring in 2006 for additional facilities in
Bedford, Massachusetts. The Company commenced its tenancy in August 1997. The
new facility consists of approximately 32,000 square feet of office space, and
the annual base rent for the first four years is $599,000, increasing up to
$662,000 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. In order to obtain favorable
pricing the Company pre-paid $1.5 million and $1.25 million during the first and
fourth quarters of 1996, respectively, and pre-paid $2.5 million during the
first quarter of 1997.
The Company intends to seek acquisitions of businesses, products and
technologies that are complementary to those of the Company. The Company is
continuing to identify and prioritize additional security technologies which it
may wish to develop, either internally or through the licensing or acquisition
of products from third parties. While the Company engages from time to time in
discussions with respect to potential acquisitions, there can be no assurances
that any such acquisitions will be made or that the Company will be able to
successfully integrate any acquired business. In order to finance such
acquisitions, it may be necessary for the Company to raise additional funds
through public or private financings. Any equity or debt financings, if
available at all, may be on terms which are not favorable to the Company and, in
the case of equity financings, may result in dilution to the Company's
stockholders.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per
Share," which is required to be adopted in the fourth quarter of 1997. At that
time, the Company will be required to change the method currently used to
compute earnings per share and to restate all prior periods. SFAS 128
supersedes Accounting Principles Board Opinion No. 15 and is intended to
simplify the computation of earnings per share and to make the U.S.
computations more comparable with international computations. See Note 1 of
Notes to the Company's Supplemental Consolidated Financial Statements.
In June 1997, the Financial Accounting Standards Board issued
Statements of Financial Accounting Standards Nos. 130 and 131, "Reporting
Comprehensive Income" and "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 130" and "SFAS 131," respectively). The Company
will be required to adopt the provisions of these statements in fiscal 1998.
SFAS 130 provides standards for reporting items considered to be "comprehensive
income" and uses the term "other comprehensive income" to refer to revenues,
expenses, gains and losses that are included in comprehensive income under
generally accepted accounting principles but excluded from net income.
Currently the only items presented in the Company's consolidated financial
statements that would be considered other comprehensive income as defined in
SFAS 130 are the unrealized gains and losses on marketable securities and
cumulative translation adjustments, which are recorded as components of
stockholders' equity. SFAS 131 establishes new standards for reporting
information about operating segments. The Company believes that the segment
information required to be disclosed under SFAS 131 will be more comprehensive
than previously provided, including expanded disclosure of income statement
and balance sheet items for each reportable operating segment. The Company has
not yet completed its analysis of which operating segments it will report on.
The Company believes that the
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<PAGE> 28
provisions of SFAS 130 will not, when adopted, have a material impact on the
Company's financial statements.
ACCOUNTING FOR CERTAIN STOCK OPTIONS
On October 18, 1995, January 24, 1996, April 1, 1996 and April 24,
1996, the Company's Board of Directors or the Compensation Committee of the
Company's Board 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 Statement of Financial Accounting
Standard No. 123, which became effective on January 1, 1996, the Company has
elected to continue to apply the intrinsic value method of Accounting Principles
Board 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.
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<PAGE> 29
THE COMPANY
The Company is the leading provider of enterprise network and data
security solutions. The Company's products help organizations conduct business
securely, protect corporate information assets and facilitate business-to-
business and business-to-consumer electronic commerce. Historically, the
Company has delivered security solutions that provide secure remote access to
corporate networks. Through its ESS framework, partnerships and acquisitions,
the Company intends to expand its addressable market by delivering solutions
that provide secure access to information wherever it resides in an enterprise.
The Company has built its business through the development and
delivery of security solutions, partnerships with leading industry vendors and
acquisitions of companies delivering complementary technologies and products.
In July 1996, the Company acquired RSA, a leading provider of cryptographic
technology, and in July 1997, the Company acquired DynaSoft, a leading security
company providing solutions for secure access to information. Through the
combination of SDI, RSA and DynaSoft, the Company believes that it is well
positioned to take advantage of the range of opportunities in the market for
enterprise network security products.
The Company's products include: (i) its remote access security
solution, including SecurID "tokens" and ACE/Server software, which
authenticates the identity of users accessing networked or stand-alone computer
resources, (ii) RSA encryption products used to implement cryptographic data
security applications for assuring the confidentially and integrity of user's
data and (iii) the BoKS product family, which provides a broad range of
security solutions for accessing applications and information.
SDI is a world leader in user identification and authentication,
having sold more than two million SecurID tokens to over 2,000 customers
worldwide. SDI's customers include Fortune 500 companies and financial
institutions as well as academic institutions, research laboratories, hospitals
and federal, state and foreign government organizations. SDI's products are
sold or licensed primarily through its direct sales force, which is supported
by a number of strategic marketing relationships, as well as through value
added resellers and dealers. 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.
Through its wholly owned subsidiary, RSA, the Company also develops,
markets and supports cryptographic data security products and related consulting
services. RSA is the leading brand name for cryptography, with more than 80
million copies of RSA encryption and data authentication technologies installed
and in use worldwide. RSA's encryption engines and other software products are
used to implement cryptographic data security applications targeted at secure
electronic commerce, secure electronic mail, communications privacy,
client/server data security, smart cards and other key information technologies.
RSA licenses its encryption engine products to OEMs which incorporate RSA
encryption technology into their products, and also licenses its products
directly to certain customers that incorporate RSA products and technologies
into their business, financial and electronic commerce networks. RSA's
encryption technology is embedded in current versions of Microsoft Corporation
Windows NT, Netscape Communications Corporation Navigator, Quicken by Intuit,
Inc., Lotus Development Corporation Notes and numerous other products. RSA
technologies are part of existing and proposed standards for the Internet and
World Wide Web, CCITT, ISO, ANSI and IEEE.
DynaSoft is a leading provider of security solutions for protecting
access to corporate information and applications. Based in Stockholm, Sweden,
DynaSoft offers a broad range of security solutions through its flagship
product family, BoKS, and sells through direct and indirect distribution
channels, as well as through its recent licensing agreements with Sun
Microsystems and Hewlett-Packard. The Company plans to integrate the
technologies, products and staff of SDI and DynaSoft, rather than operate
DynaSoft as a separate division.
The Company is a Delaware corporation. The Company's principal
executive offices are located at 20 Crosby Drive, Bedford, Massachusetts, 01730
and its telephone number is (781) 687-7000. As used herein, the term the
"Company" includes Security Dynamics Technologies, Inc. and its subsidiaries.
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<PAGE> 30
RECENT EVENTS
DynaSoft Acquisition
On July 15, 1997 (the "Effective Date"), the Company acquired
DynaSoft pursuant to Stock Purchase Agreements, dated as of July 12 and 15, 1997
(the "Stock Purchase Agreements"), by and among the Company, DynaSoft and the
stockholders of DynaSoft.
Pursuant to the Stock Purchase Agreements, the Company issued or
reserved for issuance approximately 2.7 million shares of the Company's Common
Stock in exchange for approximately 95% of the outstanding shares and certain
of the outstanding options to acquire shares of DynaSoft. The Company also paid
approximately $6 million in cash to certain stockholders of DynaSoft in
exchange for the remaining outstanding shares and options. Based on the closing
price of the Company's Common Stock on the Nasdaq National Market on July 14,
1997, the transaction is valued at approximately $115 million. The transaction
will be accounted for as a pooling of interests in the Company's historical
consolidated financial statements. The Company used authorized, but previously
unissued, shares of Common Stock in the DynaSoft Acquisition. The number of
shares of the Company's Common Stock issued in exchange for DynaSoft's shares
was determined in an "arm's length" negotiation and the transaction was
unanimously approved by the Boards of Directors of the Company and DynaSoft.
In connection with the Stock Purchase Agreements, the Company and the
Selling Stockholders entered into a Registration Rights Agreement, dated as of
July 15, 1997, pursuant to which the Company has agreed to file a Registration
Statement on Form S-3, on or prior to the 40th day following the Effective Date,
for the purpose of registering the Shares under the Securities Act.
In addition, the Company, certain stockholders of DynaSoft, the
representative of such DynaSoft stockholders and State Street Bank and Trust
Company, as escrow agent, have entered into an Escrow Agreement, dated as of
July 15, 1997, providing, among other things, that 10% of the shares of the
Company's Common Stock received by such DynaSoft stockholders pursuant to the
Stock Purchase Agreements will be held in escrow to reimburse the Company in
connection with breaches of representations, warranties or covenants made by
such DynaSoft stockholders in the Stock Purchase Agreements.
Security Dynamics Technologies, Inc. Public Offering
On September 5, 1997, the Company filed a Registration Statement
with the Commission with respect to a proposed underwritten public offering
(the "Underwritten Offering") of 2,500,000 shares of Common Stock. Of these
shares, 676,000 are being offered by the Company and 1,824,000 are being
offered by certain stockholders of the Company, including an aggregate of
218,206 shares offered by the Selling Stockholders. In addition, the Company
has granted the Underwriters an option to purchase up to an additional 375,000
shares of Common Stock to cover over-allotments, if any. Neither the
Underwritten Offering nor this offering is conditioned upon the closing of the
other.
-27-
<PAGE> 31
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Common
Stock by the Selling Stockholders.
THE SELLING STOCKHOLDERS
The Selling Stockholders acquired the Shares from the Company on July
15, 1997 in connection with the DynaSoft Acquisition.
Khris Loux has served as Vice President of Sales and Marketing
of Securix, Inc., a California corporation and wholly owned subsidiary of
DynaSoft ("Securix"), since July 1993. He served on the Board of Directors of
Securix from July 1993 until its acquisition by the Company in July 1997. Khris
Loux also served on the Board of Directors of DynaSoft from July 1996 until
its acquisition by the Company in July 1997. Since July 1997, Khris Loux has
served as Vice President, Corporate Development of the Company. Khris Loux is
the nephew of Peter C. Loux.
Peter C. Loux served as the Chairman of the Board and Chief
Executive Officer of Securix from July 1993 until its acquisition by the
Company in July 1997. From July 1993 to August 1996, Peter C. Loux also served
as President of Securix. He also served on the Board of Directors of DynaSoft
from July 1996 until its acquisition by the Company in July 1997. He currently
serves as a consultant to the Company. Peter C. Loux is the uncle of
Khris Loux.
The following table sets forth the name and the number of shares of
Common Stock beneficially owned by each of the Selling Stockholders as of the
date of this Prospectus, all of which shares are offered hereby by each of the
respective Selling Stockholders. If all of the Shares offered hereby are sold as
described herein, each of the Selling Stockholders will beneficially own no
shares of Common Stock after completion of the offering.
<TABLE>
<CAPTION>
Number of Shares of Common Stock
Name of Beneficially Owned
Selling Stockholder Prior to Offering(1)
--------------------------- --------------------------------
<S> <C>
Khris Loux 198,194
Peter C. Loux 137,150
The Peter C. Loux Charitable 61,043
Remainder Unitrust(2)
</TABLE>
- --------------------
(1) The number of shares beneficially owned is determined under rules
promulgated by the Commission, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under such
rules, beneficial ownership includes any shares as to which the
individual has sole or shared voting power or investment power and also
any shares which the individual has the right to acquire within 60 days
after the date of this Prospectus through the exercise of any stock
option or other right. The inclusion herein of such shares, however,
does not constitute an admission that such Selling Stockholder is a
direct or indirect beneficial owner of such shares. Each Selling
Stockholder has sole voting power and investment power with respect to
all shares of capital stock listed as owned by such Selling
Stockholder.
(2) Peter C. Loux is the sole trustee of The Peter C. Loux Charitable
Remainder Unitrust.
-28-
<PAGE> 32
PLAN OF DISTRIBUTION
The Selling Stockholders have advised the Company that the Shares
covered hereby may be offered and sold by the Selling Stockholders, or by
pledgees, donees, transferees or other successors in interest, in private or
public transactions, in transactions involving principals, in transactions
involving brokers, or by any other lawful methods. Sales through brokers may be
made by any method of trading authorized by any stock exchange or market on
which the Shares may be listed, including block trading in negotiated
transactions. Without limiting the foregoing, such brokers may act as dealers by
purchasing any or all of the Shares covered by this Prospectus, either as agents
for others or as principals for their own accounts, and reselling such Shares
pursuant to this Prospectus. Sales of Shares are, in general, expected to be
made at the market price prevailing at the time of each such sale; however,
prices in negotiated transactions may differ considerably. The Selling
Stockholders may also offer to sell and sell the Shares in options transactions.
Each of the Selling Stockholders has advised the Company that he or it does not
anticipate paying any consideration other than usual and customary broker's
commissions in connection with sales of the Shares. Each of the Selling
Stockholders is acting independently of the Company in making decisions with
respect to the timing, manner and size of each sale. In addition, any Shares
covered by this Prospectus which qualify for sale pursuant to Rule 144 under the
Securities Act may be sold under Rule 144 rather than pursuant to this
Prospectus.
In offering the Shares covered by this Prospectus, each of the
Selling Stockholders and any broker-dealers who execute sales for such Selling
Stockholder may be considered to be "underwriters" within the meaning of the
Securities Act, and any profits realized by such Selling Stockholder and the
compensation of such broker-dealers may be deemed to be underwriting discounts
and commissions.
The Company has agreed to indemnify in certain circumstances each of
the Selling Stockholders and any underwriter and certain control and other
persons related to the foregoing persons against certain liabilities, including
liabilities under the Securities Act. Each of the Selling Stockholders has
agreed to indemnify in certain circumstances the Company and certain related
persons against certain liabilities, including liabilities under the Securities
Act.
The Company has agreed with each of the Selling Stockholders to keep
the Registration Statement of which this Prospectus constitutes a part effective
until the earlier of (i) such time as all of the Shares have been sold by the
Selling Stockholders, or (ii) July 15, 1998. The Company intends to deregister
any of the Shares not sold by the Selling Stockholders at the end of such
period.
Each of the Selling Stockholders has agreed with the Company not to
sell, exchange, transfer, distribute, pledge, dispose of or enter into any
transaction to reduce the risk of loss (by short sale or otherwise) or any
transaction which would result in a direct or indirect disposition of the Shares
until such time as the Company has published (within the meaning of Accounting
Series Release Nos. 130 and 135 published by the Commission) financial results
for the Company's quarter ending September 30, 1997 (the "Holding Period").
Notwithstanding the foregoing, prior to the expiration of the Holding Period,
the Selling Stockholders are permitted to sell, exchange, transfer, pledge,
distribute or otherwise dispose of, or reduce interest in or risk relating to,
an amount of the Shares which does not exceed in the aggregate, together with
any shares of Common Stock disposed of during such period by any other former
stockholders of DynaSoft who agreed to comparable share restrictions, the de
minimis amount permitted by the Commission in its rules relating to
pooling-of-interest accounting treatment, subject to the advance concurrence of
the Company and DynaSoft.
-29-
<PAGE> 33
LEGAL MATTERS
The validity of the shares offered hereby will be passed upon for the
Company by Hale and Dorr LLP, Boston, Massachusetts.
EXPERTS
The supplemental and historical consolidated financial statements of
the Company as of December 31, 1995 and 1996 and for each of the three years in
the period ended December 31, 1996, except as they relate to the consolidated
financial statements of RSA as of December 31, 1995 and for each of the two
years in the period ended December 31, 1995, included in, or incorporated by
reference in, this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports with respect to (i) the
Supplemental Consolidated Financial Statements dated July 15, 1997 (which
expresses an unqualified opinion and includes explanatory paragraphs relating to
the restatement of the historical consolidated financial statements for a
pooling of interests and a change in the Company's method of accounting for
option grants requiring stockholder approval in 1996) included herein and (ii)
the Company's historical consolidated financial statements and schedule dated
January 22, 1997 (the report on the historical consolidated financial statements
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) incorporated by reference herein. The consolidated
financial statements of RSA as of December 31, 1995 and for each of the two
years in the period ended December 31, 1995, (not presented separately herein)
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein and incorporated by reference
herein. Such financial statements, to the extent they have been included in the
consolidated financial statements of the Company, have been so included in
reliance upon such report given upon the authority of such firm as experts in
accounting and auditing. The supplemental and historical financial statements of
the Company have been so included and incorporated by reference in reliance upon
the reports of Deloitte & Touche LLP given upon its authority as experts in
accounting and auditing.
-30-
<PAGE> 34
SECURITY DYNAMICS TECHNOLOGIES, INC.
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Deloitte & Touche LLP, independent auditors................... F-2
Report of Ernst & Young LLP, independent auditors....................... F-3
Supplemental Consolidated Balance Sheets as of
December 31, 1995 and 1996 and (Unaudited) June 30, 1997............ F-4
Supplemental Consolidated Statements of Income for the
Years Ended December 31, 1994, 1995 and 1996 and (Unaudited)
the Six Months Ended June 30, 1996 and 1997.......................... F-5
Supplemental Consolidated Statements of Stockholders'
Equity for the Years Ended December 31, 1994, 1995 and 1996
and (Unaudited) the Six Months Ended June 30, 1997................... F-6
Supplemental Consolidated Statements of Cash Flows for the
Years Ended December 31, 1994, 1995 and 1996 and
(Unaudited) the Six Months Ended June 30, 1996 and 1997.............. F-7
Notes to Supplemental Consolidated Financial Statements................. F-8
F-1
<PAGE> 35
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Security Dynamics Technologies, Inc. and Subsidiaries:
We have audited the accompanying supplemental consolidated balance
sheets of Security Dynamics Technologies, Inc. (the "Company") and subsidiaries
as of December 31, 1995 and 1996, and the related supplemental 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 these financial statements based on our audits. The supplemental
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 notes to the supplemental 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, 1994 and 1995, which consolidated
statements reflect total assets of $24,793,000 as of December 31, 1995, and
total revenues of $3,077,000 and $11,600,000 for the years ended December 31,
1994 and 1995, 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 1994 and 1995,
is based solely on the report of such other auditors.
The supplemental consolidated financial statements also give
retroactive effect to the acquisition of DynaSoft AB as of July 15, 1997, which
has been accounted for as a pooling of interests as described in Note 2 of notes
to the supplemental consolidated financial statements. Generally accepted
accounting principles proscribe giving effect to a consummated business
combination accounted for by the pooling of interests method in financial
statements that do not cover the date of consummation. These supplemental
consolidated financial statements do not extend through the date of
consummation; however, they will become the historical consolidated financial
statements of the Company after financial statements covering the date of
consummation of the business combination are issued.
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 supplemental 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, 1995 and 1996,
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 for financial statements that are issued for a
period which includes the date of consummation of the DynaSoft AB business
combination.
As discussed in Note 5 of the notes to the supplemental consolidated
financial statements, in 1996 the Company changed its method of accounting for
option grants requiring stockholder approval in 1996.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
July 15, 1997
F-2
<PAGE> 36
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors
RSA Data Security, Inc.
We have audited the consolidated balance sheet 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 (none of
which are presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of RSA Data Security,
Inc. as of 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.
ERNST & YOUNG LLP
Palo Alto, California
April 8, 1996
F-3
<PAGE> 37
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents.......................................... $ 50,730 $ 11,175 $ 24,316
Marketable securities......................................... 61,637 95,320 86,437
Accounts receivable (less allowance for doubtful accounts of
$724 in 1995, $527 in 1996 and $802 in 1997)................ 8,633 16,500 19,519
Inventory..................................................... 1,445 2,606 3,189
Prepaid expenses and other.................................... 1,537 4,204 6,069
Deferred taxes................................................ -- -- 79
-------- -------- --------
TOTAL CURRENT ASSETS................................... 123,982 129,805 139,609
-------- -------- --------
PROPERTY AND EQUIPMENT
Customer support equipment.................................... 187 294 294
Office furniture and equipment................................ 4,147 11,007 14,562
Leasehold improvements........................................ 309 2,863 3,179
-------- -------- --------
TOTAL PROPERTY AND EQUIPMENT........................... 4,643 14,164 18,035
Less accumulated depreciation and amortization................ (1,998) (3,596) (5,151)
-------- -------- --------
PROPERTY AND EQUIPMENT -- NET.......................... 2,645 10,568 12,884
-------- -------- --------
OTHER ASSETS:
Investments................................................... 872 2,924 2,187
Purchased technology and capitalized software costs -- net.... 446 197 247
Deferred taxes................................................ 414 1,026 1,026
Other......................................................... 300 1,455 1,115
-------- -------- --------
TOTAL OTHER ASSETS..................................... 2,032 5,602 4,575
-------- -------- --------
TOTAL........................................................... $128,659 $145,975 $ 157,068
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................. $ 2,860 $ 5,119 $ 4,481
Accrued payroll and related benefits.......................... 3,187 4,829 5,520
Accrued expenses and other.................................... 2,618 4,269 5,098
Income taxes payable.......................................... 349 51 --
Deferred revenue.............................................. 4,520 5,503 4,852
Deferred taxes................................................ 6,099 832 --
-------- -------- --------
TOTAL CURRENT LIABILITIES.............................. 19,633 20,603 19,951
-------- -------- --------
MINORITY INTERESTS.............................................. -- 1,194 2,578
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 8 AND 10)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized, 80,000,000 shares;
issued, 35,137,771, 37,220,893 and 37,903,889 shares in
1995, 1996 and 1997; outstanding, 35,137,475, 37,220,597,
and 37,903,380 shares in 1995, 1996 and 1997................ 351 372 379
Additional paid-in capital.................................... 94,452 102,322 104,607
Retained earnings............................................. 4,510 17,685 27,761
Deferred stock compensation................................... (292) (174) (141)
Treasury stock, common, at cost, 296 shares in 1995 and 1996,
509 shares in 1997.......................................... -- -- --
Cumulative translation adjustment............................. 95 493 (194)
Unrealized gain on marketable securities -- net............... 9,910 3,480 2,127
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY............................. 109,026 124,178 134,539
-------- -------- --------
TOTAL........................................................... $128,659 $145,975 $ 157,068
======== ======== ========
</TABLE>
See notes to supplemental consolidated financial statements.
F-4
<PAGE> 38
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------- -------------------
1994 1995 1996 1996 1997
--------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE............................ $ 23,866 $49,412 $83,817 $36,111 $61,374
COST OF REVENUE.................... 4,837 8,920 18,207 7,451 13,147
------- ------- ------- ------- -------
GROSS PROFIT....................... 19,029 40,492 65,610 28,660 48,227
COSTS AND EXPENSES:
Research and development......... 4,314 6,292 12,382 5,533 8,646
Purchased research and
development................... -- 648 1,000 -- --
Marketing and selling............ 8,931 14,263 24,429 10,824 18,770
General and administrative....... 3,368 10,375 13,403 6,061 7,609
Merger expenses.................. -- -- 6,100 -- --
------- ------- ------- ------- -------
Total.................... 16,613 31,578 57,314 22,418 35,025
------- ------- ------- ------- -------
INCOME FROM OPERATIONS............. 2,416 8,914 8,296 6,242 13,202
Interest income and other.......... 166 1,843 5,004 2,500 2,717
Gain on sale of marketable
securities and other income
(expense)........................ 99 62 10,872 (141) 197
------- ------- ------- ------- -------
Income before provision for income
taxes............................ 2,681 10,819 24,172 8,601 16,116
Provision for income taxes......... 1,453 3,369 10,997 3,147 6,040
------- ------- ------- ------- -------
NET INCOME......................... $ 1,228 $ 7,450 $13,175 $ 5,454 $10,076
======= ======= ======= ======= =======
Pro Forma
Net income per common and common
equivalent share................. $ 0.05 $ 0.22 $ 0.34 $ 0.14 $ 0.26
======= ======= ======= ======= =======
Weighted average number of common
and common equivalent shares
outstanding...................... 25,231 34,115 38,877 38,398 39,418
======= ======= ======= ======= =======
</TABLE>
See notes to supplemental consolidated financial statements.
F-5
<PAGE> 39
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED DEFERRED TREASURY STOCK CUMULATIVE
------------------- PAID-IN EARNINGS STOCK ---------------- TRANSLATION
SHARES AMOUNT CAPITAL (DEFICIT) COMPENSATION SHARES AMOUNT ADJUSTMENT
---------- ------ ---------- -------- ------------ ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994............. 11,831,489 $118 $ 1,778 $(3,750) $ -- 90,296 $ (1) $ (146)
Common and Treasury stock
issued for services............... 52,032 -- 21 -- -- (90,000) 1 --
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 -- -- -- -- --
Translation adjustment.............. -- -- -- -- -- -- -- (347)
Dividends accrued on preferred
stock............................. -- -- -- (418) -- -- -- --
Conversion of preferred stock to
common stock...................... 11,288,756 113 8,832 -- -- -- -- --
Net income.......................... -- -- -- 1,228 -- -- -- --
---------- ---- -------- ------- ----- ------- --- -----
Balance, December 31, 1994.......... 29,601,507 295 33,073 (2,940) (275) 296 -- (493)
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.............. -- -- -- -- -- -- -- 588
Change in unrealized gain on
marketable securities............. -- -- -- -- -- -- -- --
Net income.......................... -- -- -- 7,450 -- -- -- --
---------- ---- -------- ------- ----- ------- --- -----
Balance, December 31, 1995........... 35,137,771 351 94,452 4,510 (292) 296 -- 95
Exercise of stock options........... 817,123 8 2,598 -- -- -- -- --
Tax benefit arising from exercise
of stock options.................. -- -- 3,702 -- -- -- -- --
Compensation expense................ -- -- 1,049 -- -- -- -- --
Amortization of deferred stock
compensation...................... -- -- -- -- 118 -- -- --
Issuance of common stock............ 1,265,999 13 521 -- -- -- -- --
Translation adjustment.............. -- -- -- -- -- -- -- 398
Change in unrealized gain on
marketable securities............. -- -- -- -- -- -- -- --
Net income.......................... -- -- -- 13,175 -- -- -- --
---------- ---- -------- ------- ----- ------- --- -----
Balance, December 31, 1996........... 37,220,893 372 102,322 17,685 (174) 296 -- 493
Unaudited:
Settlement of RSA escrow.......... (36,037) -- -- -- -- 213 -- --
Exercise of stock options......... 719,033 7 1,697 -- -- -- -- --
Compensation expense.............. -- -- 588 -- -- -- -- --
Amortization of deferred stock
compensation.................... -- -- -- -- 33 -- -- --
Translation adjustment............ -- -- -- -- -- -- -- (687)
Change in unrealized gain
on marketable securities........ -- -- -- -- -- -- -- --
Net income........................ -- -- -- 10,076 -- -- -- --
---------- ---- -------- ------- ----- ------- --- -----
Balance, June 30, 1997 (unaudited)... 37,903,889 $379 $104,607 $27,761 $ (141) 509 $ -- $ (194)
========== ==== ======== ======= ====== ======= ==== ======
<CAPTION>
UNREALIZED
GAIN ON STOCKHOLDERS'
MARKETABLE EQUITY
SECURITIES (DEFICIENCY)
---------- -------------
<S> <C> <C>
Balance, January 1, 1994............. $ -- $ (2,001)
Common and Treasury stock
issued for services............... -- 22
Exercise of stock options........... -- 42
Deferred stock compensation......... -- --
Amortization of deferred stock
compensation...................... -- 85
Issuance of common stock............ -- 22,104
Translation adjustment.............. -- (347)
Dividends accrued on preferred
stock............................. -- (418)
Conversion of preferred stock to
common stock...................... -- 8,945
Net income.......................... -- 1,228
------- --------
Balance, December 31, 1994.......... -- 29,660
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.............. -- 588
Change in unrealized gain on
marketable securities............. 9,910 9,910
Net income.......................... -- 7,450
------- --------
Balance, December 31, 1995........... 9,910 109,026
Exercise of stock options........... -- 2,606
Tax benefit arising from exercise
of stock options.................. -- 3,702
Compensation expense................ -- 1,049
Amortization of deferred stock
compensation...................... -- 118
Issuance of common stock............ -- 534
Translation adjustment.............. -- 398
Change in unrealized gain on
marketable securities............. (6,430) (6,430)
Net income.......................... -- 13,175
------- --------
Balance, December 31, 1996........... 3,480 124,178
Unaudited:
Settlement of RSA escrow.......... -- --
Exercise of stock options......... -- 1,704
Compensation expense.............. -- 588
Amortization of deferred stock
compensation.................... -- 33
Translation adjustment............ -- (687)
Change in unrealized gain
on marketable securities........ (1,353) (1,353)
Net income........................ -- 10,076
------- --------
Balance, June 30, 1997 (unaudited)... $ 2,127 $ 134,539
======== =========
</TABLE>
See notes to supplemental consolidated financial statements.
F-6
<PAGE> 40
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
--------------------------------- ---------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................. $ 1,228 $ 7,450 $ 13,175 $ 5,454 $ 10,076
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities:
Gain on sale of marketable
securities......................... -- -- (11,027) -- --
Deferred taxes........................ 57 (746) (1,548) (50) 224
Purchased research and development.... -- 648 1,000 -- --
Depreciation and amortization......... 633 1,085 1,815 845 1,465
Provision for notes receivable........ -- 200 -- -- --
Stock compensation.................... 48 181 1,167 166 621
Equity in (profits) losses of
investees and minority interest.... (97) 20 (19) -- --
Increase (decrease) in cash from
changes in:
Accounts receivable................ (182) (3,281) (7,950) (3,979) (3,563)
Inventory.......................... (629) (309) (1,161) (920) (583)
Prepaid expenses and other......... (539) (1,125) (2,666) (1,721) (777)
Accounts payable................... 1,021 1,553 2,260 2,392 (611)
Accrued payroll and related
benefits......................... 494 1,808 1,652 (805) 764
Accrued expenses and other......... 99 824 1,938 589 877
Income taxes payable............... 101 265 (298) (373) (946)
Deferred revenue................... 899 2,320 1,000 (764) (573)
------- -------- -------- -------- --------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES........... 3,133 10,893 (662) 834 6,974
------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities....... (7,966) (64,730) (119,619) (75,052) (48,027)
Sales and maturities of marketable
securities............................ -- 27,842 85,975 36,382 55,628
Expenditures for property and
equipment............................. (981) (1,891) (9,418) (2,597) (4,018)
Notes receivable........................ (228) (274) -- -- --
Capitalized software costs and purchased
technology............................ (118) (924) (1,061) 20 (112)
Investments and other................... 9 (734) (3,224) (1,477) 323
------- -------- -------- -------- --------
NET CASH PROVIDED BY (USED FOR)
INVESTING ACTIVITIES........... (9,284) (40,711) (47,347) (42,724) 3,794
------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net
of issuance costs..................... 22,104 60,411 534 536 133
Proceeds from exercise of stock options
and from stock purchase plans......... 42 642 2,606 541 1,704
Tax benefit from exercise of stock
options............................... -- 225 3,702 -- --
Minority interests...................... -- -- 1,213 -- 1,384
Other................................... (81) (786) 537 (111) (502)
------- -------- -------- -------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES..................... 22,065 60,492 8,592 966 2,719
------- -------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND EQUIVALENTS......................... 88 195 (138) (35) (346)
------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS............................. 16,002 30,869 (39,555) (40,959) 13,141
CASH AND EQUIVALENTS, BEGINNING OF
PERIOD.................................. 3,859 19,861 50,730 50,730 11,175
------- -------- -------- -------- --------
CASH AND EQUIVALENTS, END OF PERIOD....... $19,861 $ 50,730 $ 11,175 $ 9,771 $ 24,316
======= ======== ======== ======== ========
</TABLE>
See notes to supplemental consolidated financial statements.
F-7
<PAGE> 41
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS -- Security Dynamics Technologies, Inc. ("SDI," which,
together with its subsidiaries, is referred to as the "Company") is a leading
provider of enterprise network and data security solutions. The Company's
products help companies conduct business securely, protect corporate information
assets and facilitate business-to-business electronic commerce. The Company's
products include its SecurID "tokens" and ACE/Server software, which
authenticate the identity of users accessing networked or stand-alone computer
resources, RSA developer toolkits and other products used to implement
cryptographic data security applications and the BoKS product family, which
provides a broad range of security solutions, including secure single sign-on
solutions.
The principal markets for the Company's products are the United States,
Canada, Latin America, Europe and the Far East, with the United States, Europe
and Canada currently being the largest.
BASIS OF PRESENTATION -- The supplemental consolidated financial statements
have been prepared to give retroactive effect to the acquisition of DynaSoft AB
("DynaSoft") on July 15, 1997 (see Note 2), which has been accounted for as a
pooling of interests ("pooling"). Generally accepted accounting principles
proscribe giving effect to a merger or business combination accounted for as a
pooling in financial statements that do not include the date of consummation.
Although these supplemental consolidated financial statements do not extend
through the date of consummation, they will become the Company's historical
consolidated financial statements after financial statements including the
consummation date are issued.
PRINCIPLES OF CONSOLIDATION -- The supplemental consolidated financial
statements include all accounts of SDI and its subsidiaries. Strategic equity
investments for which the Company does not have the ability to exercise
significant influence are carried at cost. Investments in partnerships are
accounted for in accordance with the allocation of profits and losses under the
partnership agreements.
In the fourth quarter of 1996 and the first half of 1997, RSA sold minority
interests, which aggregate 24% as of June 30, 1997, in its Japanese subsidiary
to third parties for $1,213 and $1,384, respectively. The minority interests in
the subsidiary's profits and losses since the purchase dates are not material
and are included in interest income and other income in the supplemental
consolidated statements of income.
INTERIM RESULTS (UNAUDITED) -- In the opinion of management, the
accompanying interim unaudited supplemental consolidated financial statements as
of June 30, 1997 and for the six-month periods ended June 30, 1996 and 1997 have
been prepared on the same basis as the audited supplemental consolidated
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and operating results of the Company for such periods.
STOCK SPLITS -- In October 1995 and October 1996, 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.
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
F-8
<PAGE> 42
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 warranty for a specified period. The Company
provides a reserve for warranties based upon historical experience.
INVENTORY -- Inventory consists primarily of finished SecurID tokens and
ACM hardware products and is stated at the lower of cost (first-in, first-out
method) or market.
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, including purchased research and
development, 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.
Purchased technology consists of acquired software and is recorded at cost.
Amortization is provided over estimated lives of two years. Amortization expense
for capitalized software and purchased technology approximated $176, $298 and
$330 for 1994, 1995 and 1996, respectively, and $135 and $166 for the six months
ended June 30, 1996 and 1997, respectively.
CASH EQUIVALENTS -- The Company considers all highly liquid investments
purchased with a remaining maturity of three months or less to be cash
equivalents.
MARKETABLE SECURITIES -- 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
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1995 1996 JUNE 30, 1997
-------------------- -------------------- --------------------
AGGREGATE AGGREGATE AGGREGATE
FAIR VALUE COST FAIR VALUE COST FAIR VALUE COST
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
obligations.......... $ 43,796 $43,632 $ 88,171 $88,161 $ 69,710 $69,672
Corporate equity
securities........... 16,680 60 5,809 20 4,512 983
Tax-exempt
securities........... 1,013 1,013 -- -- -- --
Corporate debt
securities........... 148 145 1,340 1,340 12,215 12,227
------- ------- ------- ------- ------- -------
Total......... $ 61,637 $44,850 $ 95,320 $89,521 $ 86,437 $82,882
======== ======= ======== ======= ======== =======
</TABLE>
At December 31, 1996 and June 30, 1997, substantially all of the Company's
U.S. Government obligations and corporate debt securities had contractual
maturities of two years or less. There were no sales of marketable securities
for 1994, 1995 or the six months ended June 30, 1997. Proceeds from the sale of
marketable securities for 1996 amounted to $11,067. The specific identified cost
F-9
<PAGE> 43
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
basis of the securities was used to determine the gain. Unrealized gross gains
at December 31, 1995, 1996 and June 30, 1997 were $16,687, $5,799 and $3,555,
respectively.
ADVERTISING -- Advertising costs are expensed as incurred. Total
advertising expense was approximately $424, $501 and $561 for 1994, 1995 and
1996, respectively, and $218 and $145 for the six months ended June 30, 1996 and
1997, 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. The Company
provides for taxes on the undistributed earnings of foreign subsidiaries which
are ultimately expected to be remitted to the parent company. Unrecognized
provisions for taxes on undistributed earnings of foreign subsidiaries which are
considered permanently invested are not material to the Company's consolidated
financial position or results of operations.
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 equity.
NET INCOME PER SHARE -- Net 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 $0.01.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share," which
is required to be adopted in the fourth quarter of 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. SFAS No. 128 supersedes Accounting
Principles Board Opinion No. 15 and is intended to simplify the computation of
earnings per share and to make the U.S. computations more comparable with
international computations. The pro forma basic and diluted earnings per share
(as defined by SFAS No. 128) would have been as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Basic................................... $0.05 $0.23 $0.36 $0.15 $0.27
Diluted................................. 0.05 0.22 0.34 0.14 0.26
</TABLE>
FINANCIAL INSTRUMENTS -- The carrying values of cash and equivalents,
accounts receivable and accounts payable approximate fair value due to the
short-term nature of these instruments. Marketable securities are carried at
aggregate fair value. The Company's 24% interest in VeriSign, Inc. ("VeriSign")
(Note 3) is accounted for under the equity method. Other investments represent
strategic equity positions in companies and are stated at cost. It is not
practicable to measure the estimated fair value of such investments.
F-10
<PAGE> 44
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Two of the companies in which the Company has equity positions had initial
public offerings in 1996. In April 1997, an amendment to Rule 144 under the
Securities Act of 1933, became effective, which, among other things, shortened
the holding periods for sales of restricted securities under Rule 144. As a
result of this amendment, the Rule 144 holding-period requirements for certain
restricted securities (including shares of common stock of the two companies
which completed initial public offerings in 1996) currently held by the Company
will be met in 1997. Accordingly, these restricted securities, which have a cost
of $737, have been reclassified in 1997 from investments to marketable
securities as of June 30, 1997.
USE OF ESTIMATES -- The preparation of the Company's supplemental
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
periods. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK -- The Company licenses its ACE/Server and
BoKS 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). Since January 1,
1996, the Company applies SFAS No. 123, "Accounting for Stock-Based
Compensation" and related interpretations for accounting for stock option grants
to non-employees.
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 supplemental consolidated financial
statements.
RECENT ACCOUNTING PRONOUNCEMENTS -- In June 1997, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standards Nos. 130 and
131, "Reporting Comprehensive Income" and "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 130" and "SFAS 131", respectively).
The Company will be required to adopt the provisions of these statements in
fiscal 1998. SFAS 130 provides standards for reporting items considered to be
"comprehensive income" and uses the term "other comprehensive income" to refer
to revenue, expenses, gains and losses that are included in comprehensive income
under generally accepted accounting principles but excluded from net income.
Currently the only items considered other comprehensive income, as defined in
SFAS 130 are the unrealized gains and losses on marketable securities and
cumulative translation adjustments, which are recorded as components of
stockholders' equity. SFAS 131 establishes new standards for reporting
information about operating segments. The Company believes the segment
information required to be disclosed under SFAS 131 will be more comprehensive
than previously provided, including expanded disclosure of income statement and
balance sheet items for each reportable operating segment. The Company has not
yet completed its analysis of which operating segments it will report on. The
Company believes that the provisions of SFAS 130 will not, when adopted, have a
material impact on the Company's financial statements.
F-11
<PAGE> 45
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. MERGER AND ACQUISITION
On July 15, 1997, SDI acquired DynaSoft AB (the "Acquisition" and
"DynaSoft," respectively). On July 26, 1996, SDI completed a merger with RSA
Data Security, Inc. (the "Merger" and "RSA," respectively). The Acquisition and
the Merger have been accounted for as poolings of interests and therefore the
supplemental consolidated financial statements for all periods prior to the
Merger and the Acquisition have been restated to include the accounts and
operations of RSA and DynaSoft with those of SDI. Expenses related to these
transactions for investment banking, professional fees and other direct expenses
are recorded at the respective dates of the Acquisition and Merger.
RSA, located in Redwood City, California, is a leader in cryptography and
develops, markets and supports cryptographic data security products and provides
related consulting services. Products are licensed to original equipment
manufacturers ("OEMs"), which incorporate the technology into their products.
Developer toolkits and other products are used to implement cryptographic data
security applications such as electronic mail, communications privacy,
client/server data security, smart cards and other key information technologies.
DynaSoft is based in Stockholm, Sweden and offers a range of software
security solutions, including secure single sign-on ("SSSO") solutions, through
its BoKS product family. Products are sold worldwide through direct sales and
through OEM licensing agreements with Sun Microsystems, Hewlett-Packard, and
other companies.
Under the terms of the Merger, each share of RSA common stock was exchanged
for 1.66112 shares of the Company's common stock and the Company issued a total
of 6,683,078 shares of its common stock to RSA stockholders and options to
purchase a total of 1,316,922 shares of the Company's common stock to option
holders of RSA.
Under the terms of the Acquisition, the Company issued approximately 2.7
million shares of common stock in exchange for approximately 95% of the
outstanding shares and certain of the outstanding options to acquire shares of
DynaSoft. The Company paid $6,035 to certain stockholders of DynaSoft in
exchange for the remaining outstanding shares and options.
Investment banking, professional fees and other direct expenses incurred in
connection with the Merger were approximately $6,100 in 1996. The Company
anticipates expenses in connection with the Acquisition will approximate $8,500
and will be expensed in the third quarter of 1997.
No adjustments to conform accounting policies of the Company and RSA were
required. Adjustments to conform accounting policies of DynaSoft to those of the
Company were not material.
Revenue and net income (loss) for the previously separate companies were:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
REVENUE
SDI............................ $17,572 $33,804 $70,105 $26,240 $56,097
RSA............................ 3,077 11,600 6,043(a) 6,043(a) --
DynaSoft....................... 3,217 4,008 7,669 3,828 5,277
------- ------- ------- ------- -------
Total.................. $23,866 $49,412 $83,817 $36,111 $61,374
======= ======= ======= ======= =======
NET INCOME (LOSS)
SDI............................ $ 2,315 $ 5,812 $13,428 $ 5,435 $10,231
RSA............................ (1,727) 950 (383)(a) (383)(a) --
DynaSoft....................... 640 688 130 402 (155)
------- ------- ------- ------- -------
Total.................. $ 1,228 $ 7,450 $13,175 $ 5,454 $10,076
======= ======= ======= ======= =======
</TABLE>
- ---------------
(a) Revenue and net loss of RSA for 1996 include only the six month period prior
to the consummation of the Merger.
F-12
<PAGE> 46
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to escrow agreements entered into with the Company by certain of
the stockholders of DynaSoft and by RSA in connection with the Acquisition and
the Merger, respectively, 10.0% of the shares of the Company's common stock
issued to holders of DynaSoft's stock and 12.5% of the shares of the Company's
common stock issued to holders of RSA stock and issuable to holders of RSA
options were placed in escrow, pending settlement of any breaches of
representations, warranties or covenants to the Acquisition and Merger
agreements. In June 1997, the Company and the holders of the RSA shares reached
settlement with respect to claims against the escrow shares and 36,250 shares
were distributed to the Company and 837,957 shares were distributed to the
holders of the RSA shares. Of the shares received by the Company, 213 shares
were accounted for as treasury stock and the remainder were canceled.
3. INVESTMENTS
Investments were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------- --------
1995 1996 1997
---- ------ --------
<S> <C> <C> <C>
VeriSign, Inc............................................... $510 $ 687 $ 687
VPNet Technologies, Inc..................................... -- 1,500 1,500
Other....................................................... 362 737 --
---- ------ ------
Total............................................. $872 $2,924 $2,187
==== ====== ======
</TABLE>
Prior to 1997, other investments were carried at the lower of cost or
estimated realizable value (See Note 1, "Financial Instruments".)
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 of Redwood City, California for an aggregate
purchase price of $687. VeriSign 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 VeriSign in connection with VeriSign's
incorporation and received 4,000,000 shares of VeriSign common stock. The
Company's voting interest was approximately 44% and 24%, at December 31, 1995
and 1996, respectively and 24% at June 30, 1997.
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.
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 into 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.
F-13
<PAGE> 47
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCK OPTION AND PURCHASE PLANS
1986 STOCK OPTION PLAN ("1986 PLAN") -- The Company's 1986 Plan terminated
by its terms in 1996 although options remain outstanding at June 30, 1997. 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. In general,
options granted under the 1994 Plan become exercisable in equal annual
installments over four years and expire ten years from the date of grant. On
April 24, 1997, at the Annual Meeting of Stockholders of the Company, the
stockholders adopted an amendment increasing the number of shares authorized for
issuance under the 1994 Plan from 4,820,000 to 6,570,000. Shares of common stock
available for option grants were 1,801,185 at June 30, 1997.
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. Options granted under the Director Plan become exercisable at
the earlier of the date of the next Annual Meeting of Stockholders or one year
from the date of grant and expire ten years from the date of grant. Shares of
common stock available for option grant were 103,000 at June 30, 1997.
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. Shares purchased
under the Plan were 35,716, and 91,408 and 119,779 at December 31, 1995 and 1996
and at June 30, 1997, respectively.
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 has been retroactively adjusted to the earliest period presented to give
effect to the conversion of the RSA options. Incentive stock options and
non-statutory 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 June 30, 1997, options as to 955,108
shares were subject to repurchase rights, and a total of 69,844 shares were
subject to repurchase which were previously issued upon the exercise of stock
options.
DYNASOFT OPTIONS -- In connection with the Acquisition of DynaSoft, the
Company exchanged options to purchase 44,931 shares of the Company's common
stock for all of the then outstanding options to purchase shares of DynaSoft.
F-14
<PAGE> 48
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of stock option activity under all plans, including converted RSA
and DynaSoft 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............................................... 2,332,212 29.12
Exercised............................................. (761,633) 2.33
Canceled.............................................. (27,317) 21.57
---------
OUTSTANDING AT DECEMBER 31, 1996........................ 4,722,457 15.71
Granted............................................... 957,383 29.35
Exercised............................................. (690,662) 1.45
Canceled.............................................. (81,796) 26.10
---------
OUTSTANDING AT JUNE 30, 1997............................ 4,907,382 20.26
=========
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...................... 2,127,928 1.69
=========
Exercisable at June 30, 1997.......................... 1,851,971 6.16
=========
</TABLE>
The following table sets forth information regarding stock options
outstanding at December 31, 1996 under all plans:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF NUMBER WEIGHTED REMAINING EXERCISE PRICE
NUMBER OF EXERCISE CURRENTLY AVERAGE CONTRACTUAL LIFE FOR CURRENTLY
OPTIONS PRICES EXERCISABLE EXERCISE PRICE (YEARS) EXERCISABLE
- --------- ----------- ----------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
324,800 $0.05-0.06 324,800 $ 0.05 1.1 $ 0.05
384,000 0.10 384,000 0.10 3.3 0.10
28,000 0.25-0.35 -- 0.29 5.8 --
76,800 0.45 15,200 0.45 7.0 0.45
59,656 0.76 27,718 0.76 9.9 0.76
985,414 0.85-0.90 975,874 0.90 7.8 0.90
39,450 1.75-2.55 11,650 2.25 7.6 2.28
197,185 2.95-4.22 187,185 3.32 8.9 3.34
23,252 6.62 23,252 6.62 9.2 6.62
546,000 9.97-14.31 178,249 10.26 8.6 10.27
1,315,600 24.30-35.63 -- 27.91 9.3 --
742,300 8.00-44.21 -- 40.34 9.7 --
- --------- ---------
4,722,457 0.05-44.21 2,127,928 15.71 7.8 1.69
========= =========
</TABLE>
F-15
<PAGE> 49
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING FOR STOCK OPTIONS
For certain options and stock awards granted in 1994, 1995, 1996 and 1997,
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 periods.
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 to 4,820,000
shares. On May 22, 1996, the stockholders approved the amendment to the 1994
Plan.
For options granted prior to April 1, 1996, because approval of the
stockholders was required and considered perfunctory, the Company measured
compensation expense on the date of grant by the Board of Directors or the
Compensation Committee of the Board of Directors. As a result of discussions
with the Staff of the Securities and Exchange Commission, the Company changed
its accounting policy on options requiring stockholder approval to measure
compensation expense on the approval date. This change resulted in an aggregate
compensation expense of approximately $4,500 relating to the April 1, 1996 and
April 24, 1996 option grants, which the Company 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 the year
ended December 31, 1996. Total compensation expense relating to certain options
and stock awards amounted to $48, $181 and $1,167 for the years ended December
31, 1994, 1995 and 1996, respectively, and $166 and $621 for the six months
ended June 30, 1996 and 1997, respectively.
PRO FORMA DISCLOSURE -- Had the Company recognized compensation costs for
the employee and director stock option and purchase plans based on the fair
value for 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 as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1995 1996
------ -------
<S> <C> <C>
Net income
As reported........................................... $7,450 $13,175
Pro forma............................................. 7,026 10,745
Net income per share
As reported........................................... $0.22 $0.34
Pro forma............................................. 0.21 0.28
</TABLE>
F-16
<PAGE> 50
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------
1995 1996
---- ----
<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................................... 5.9% 5.2%
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, was $2.74 and $15.67 during the years ended
December 31, 1995 and 1996, respectively. The weighted fair value of stock
options granted under the Purchase Plan, calculated using the Black-Scholes
option-pricing model was $6.72 and $25.26 during 1995 and 1996, respectively.
6. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Current:
Federal............................................. $ 882 $3,049 $ 7,359
State............................................... 281 781 930
Foreign............................................. 265 302 399
------- ------- --------
Total....................................... 1,428 4,132 8,688
Deferred:
Federal............................................. (256) (93) (1,219)
State............................................... (15) (26) (174)
Change in valuation allowance....................... 296 (869) --
------- ------- --------
Total....................................... 25 (988) (1,393)
Tax benefit from exercise of stock options:
Federal............................................. -- 179 3,452
State............................................... -- 46 250
------- ------- --------
Total....................................... -- 225 3,702
------- ------- --------
Total................................................. $1,453 $3,369 $10,997
======= ======= ========
</TABLE>
F-17
<PAGE> 51
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
were as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
-----------------------
1995 1996
------- -------
<S> <C> <C>
Deferred tax assets (liabilities) -- current:
Marketable securities.................................... $(6,877) $(2,319)
Deferred revenue......................................... 98 854
Allowance for doubtful accounts.......................... 293 211
Compensation............................................. 146 205
Inventory reserves....................................... 66 66
Warranty obligation...................................... 42 42
Commissions.............................................. 80 42
Net operating loss carryforwards......................... 81 --
Other.................................................... (28) 67
------- -------
Net deferred tax liabilities -- current.................... $(6,099) $ (832)
======= =======
Deferred tax assets (liabilities) -- non current:
Acquisition of technology................................ 249 733
Compensation............................................. -- 326
Capitalized software development costs................... (89) (79)
Net operating loss carryforwards......................... -- 32
Other.................................................... 254 14
------- -------
Net deferred tax assets -- non current..................... $ 414 $ 1,026
======= =======
</TABLE>
A reconciliation between the statutory and effective income tax rates
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Statutory tax rate......................................... 34.0% 34.0% 35.0%
State income taxes net of federal benefit.................. 10.5 5.4 3.2
Merger expenses............................................ -- -- 8.3
Foreign income taxes....................................... (13.0) (0.3) 0.3
Change in valuation allowance.............................. 16.5 (8.8) --
Foreign expenses without tax benefit....................... 8.5 -- --
Other...................................................... (2.3) 0.8 (1.3)
----- ----- -----
Effective income tax rate.................................. 54.2% 31.1% 45.5%
===== ===== =====
</TABLE>
The income tax provision for the six months ended June 30, 1996 and 1997 is
based upon the estimated effective tax rates of 37.5% and 37.6%, respectively,
for the full years.
Cash payments for income taxes were approximately $1,323, $4,140 and $8,384
for 1994, 1995 and 1996, respectively, and $3,801 and $7,099 for the six months
ended June 30, 1996 and 1997, respectively.
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
F-18
<PAGE> 52
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1995 and 1996, the Company had accrued, and the Board of Directors
had approved, profit-sharing contributions approximating $78 and $305,
respectively. The Board of Directors also approved for 1995 and 1996 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 $88, $112 and $261 for 1994,
1995 and 1996, 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........................................................ $2,306
1998........................................................ 2,126
1999........................................................ 2,025
2000........................................................ 1,256
2001........................................................ 1,300
Balance thereafter.......................................... 5,934
</TABLE>
Net rent expense for 1994, 1995 and 1996 was approximately $618, $1,026 and
$2,004, respectively, and for the six months ended June 30, 1996 and 1997 was
approximately $788 and $1,359, respectively. Rent collected from a sublease of
the Company's former headquarters was $0, $0 and $108 in 1994, 1995 and 1996,
respectively, and $0 and $216 for the six months ended June 30, 1996 and 1997,
respectively.
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.
As of June 30, 1997, DynaSoft had approximately $673 due to a bank. The
amount, payable upon demand, bears interest at 13% and is included in accrued
expenses and other.
In December 1994, the Company entered into an agreement with Progress
Software Corporation ("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 November 1996, and at
December 31, 1996, the Company had prepaid $1,040 under this agreement. In the
first quarter of 1997, in accordance with the terms of the agreement, and in
order to obtain favorable pricing, the Company prepaid a further $2,500.
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 $118, $706 and $2,009 for 1994, 1995 and 1996,
respectively, and $1,047 and $2,370 for the six months ended June 30, 1996 and
1997, respectively.
F-19
<PAGE> 53
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SEGMENT INFORMATION
The Company operates in only one industry segment. Export sales are
summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------- ------------------
1994 1995 1996 1996 1997
------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Europe..................................... $2,005 $5,116 $11,616 $4,963 $ 9,205
Canada..................................... 1,230 2,772 4,511 2,038 3,636
Asia/Pacific............................... 176 571 2,518 921 2,574
Latin America.............................. -- -- 198 -- 204
------ ------ ------- ------ -------
$3,411 $8,459 $18,843 $7,922 $15,619
====== ====== ======= ====== =======
</TABLE>
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, after consulting with legal counsel, 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
A stockholder provides consulting services to the Company and received $81,
$91 and $97 in 1994, 1995 and 1996, respectively, and $41 and $56 during the six
months ended June 30, 1996 and 1997, respectively. As of June 30, 1997, DynaSoft
had approximately $25 due to a stockholder payable upon demand.
F-20
<PAGE> 54
================================================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING
STOCKHOLDERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF ANY OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION OF AN OFFER WOULD
BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY OR THAT THE INFORMATION CONTAINED
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C>
Available Information................................ 2
Incorporation of Certain Documents
By Reference..................................... 2
Special Note Regarding
Forward-Looking Information........................ 3
Risk Factors......................................... 4
Selected Supplemental Consolidated
Financial Data..................................... 11
Management's Discussion and
Analysis of Financial Condition and
Results of Operations.............................. 13
The Company.......................................... 26
Recent Events........................................ 27
Use of Proceeds...................................... 28
The Selling Stockholders............................. 28
Plan of Distribution................................. 29
Legal Matters........................................ 30
Experts.............................................. 30
Index to Supplemental Consolidated
Financial Statements............................... F-1
</TABLE>
================================================================================
SECURITY DYNAMICS
TECHNOLOGIES, INC.
396,387 SHARES
COMMON STOCK
--------------
PROSPECTUS
--------------
_____________, 1997
================================================================================
<PAGE> 55
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses to be incurred in
connection with the sale and distribution of the securities being registered
hereby, all of which will be borne by the Registrant. All amounts shown are
estimates except for the Securities and Exchange Commission registration fee.
SEC Registration Fee................................... $ 4,429.33
Blue Sky Fees and Expenses............................. --
Accounting Fees and Expenses........................... 150,000.00
Legal Fees and Expenses................................ 15,000.00
Miscellaneous.......................................... 5,570.67
-----------
Total............................................. $175,000.00
===========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article EIGHTH of the Registrant's Third Restated Certificate of
Incorporation, as amended (the "Restated Certificate of Incorporation"),
provides that no director of the Registrant shall be personally liable for any
monetary damages for any breach of fiduciary duty as a director, except to the
extent that the Delaware General Corporation Law prohibits the elimination or
limitation of liability of directors for breach of fiduciary duty.
Article NINTH of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement incurred in connection with any litigation
or other legal proceeding (other than an action by or in the right of the
Registrant) brought against him by virtue of his position as a director or
officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
Registrant, unless a court determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his request, provided that he undertakes to repay the amount advanced
if it is ultimately determined that he is not entitled to indemnification for
such expenses.
Indemnification is required to be made unless the Registrant determines
that the applicable standard of conduct required for indemnification has not
been met. In the event of a determination by the Registrant that the director or
officer did not meet the applicable standard of conduct required for
indemnification, or if the Registrant fails to make an indemnification payment
within 60 days after such payment is claimed by such person, such person is
permitted to petition the court to make an independent determination as to
whether such person is entitled to indemnification. As a condition precedent to
the right of indemnification, the director or officer must give the Registrant
notice of the
II-1
<PAGE> 56
action for which indemnity is sought and the Registrant has the right to
participate in such action or assume the defense thereof.
Article NINTH of the Registrant's Restated Certificate of Incorporation
further provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is amended
to expand the indemnification permitted to directors or officers the Registrant
must indemnify those persons to the fullest extent permitted by such law as so
amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
ITEM 16. EXHIBITS
EXHIBIT
NO. DESCRIPTION
*4.1 Specimen Certificate for shares of Common Stock, $.01 par
value per share, of the Registrant.
** 5 Opinion of Hale and Dorr LLP with respect to the validity
of the securities being offered.
**23.1 Consent of Hale and Dorr LLP (included in Exhibit 5).
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Ernst & Young LLP, independent auditors.
**24 Powers of Attorney (included on page II-5).
**27 Financial Data Schedule.
- ---------------------
* Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1 (File No. 33-85606).
** Previously filed.
II-2
<PAGE> 57
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this Registration Statement:
(i) To include any prospectus required by Section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of this Registration Statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in this Registration Statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any derivation from the low or high and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than 20
percent change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the Registration Statement;
and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in this Registration
Statement or any material change to such information in this
Registration Statement;
provided, however, that paragraphs (1)(i) and (1)(ii) do not apply if
the information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the Company pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in this Registration Statement.
(2) That, for the purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
The Registrant hereby undertakes that, for purposes of determining any
liability under the Securities Act of 1933, each filing of the Company's annual
report pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
(and, where applicable, each filing of an employee benefit plan's annual report
pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in this Registration Statement shall be deemed to be a
new registration statement relating to the securities offered therein and the
offering of such securities at the time shall be deemed to be the initial bona
fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the indemnification provisions described herein, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered,
II-3
<PAGE> 58
the Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
II-4
<PAGE> 59
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the Town
of Bedford, Commonwealth of Massachusetts, on this 12th day of September, 1997.
SECURITY DYNAMICS TECHNOLOGIES, INC.
By: /s/ Charles R. Stuckey, Jr.
---------------------------------------
Charles R. Stuckey, Jr.
Chairman of the Board, President
and Chief Executive Officer
II-5
<PAGE> 60
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Charles R. Stuckey, Jr. Chairman of the Board, September 12, 1997
- --------------------------- President and Chief
Charles R. Stuckey, Jr. Executive Officer
(Principal Executive
Officer)
/s/ Marian G. O'Leary Senior Vice President, September 12, 1997
- --------------------------- Finance, Chief Financial
Marian G. O'Leary Officer and Treasurer
(Principal Financial and
Accounting Officer)
* Director September 12, 1997
- ---------------------------
D. James Bidzos
Director
- ---------------------------
Richard L. Earnest
* Director September 12, 1997
- ---------------------------
Joseph B. Lassiter, III
* Director September 12, 1997
- ---------------------------
George M. Middlemas
* Director September 12, 1997
- ---------------------------
Marino R. Polestra
* Director September 12, 1997
- ---------------------------
Sanford M. Sherizen
* By: /s/ Charles R. Stuckey, Jr.
-----------------------------
Charles R. Stuckey, Jr.
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 61
EXHIBIT INDEX
EXHIBIT
NO. DESCRIPTION
*4.1 Specimen Certificate for shares of Common Stock, $.01 par
value per share, of the Registrant.
** 5 Opinion of Hale and Dorr LLP with respect to the validity
of the securities being offered.
**23.1 Consent of Hale and Dorr LLP (included in Exhibit 5).
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Ernst & Young LLP, independent auditors.
**24 Powers of Attorney (included on page II-5).
**27 Financial Data Schedule.
- ---------------------
* Incorporated herein by reference to the Registrant's Registration
Statement on Form S-1 (File No. 33-85606).
** Previously filed.
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement
No. 333-34241 (the "Registration Statement") of Security Dynamics Technologies,
Inc. (the "Company") on Form S-3 of our report dated July 15, 1997 on the
Company's supplemental consolidated financial statements as of December 31, 1995
and 1996 and for each of the three years in the period ended December 31, 1996
(which expresses an unqualified opinion and includes explanatory paragraphs
relating to the restatement of the historical consolidated financial statements
for a pooling-of-interests and a change in accounting for option grants
requiring stockholder approval in 1996) appearing in the Prospectus, which is
part of this Registration Statement.
We also consent to the incorporation by reference in this Registration
Statement of our reports dated January 22, 1997 (the report on the historical
consolidated financial statements expresses an unqualified opinion and includes
an explanatory paragraph relating to a change in accounting for option grants
requiring stockholder approval in 1996) appearing in and incorporated by
reference in the Annual Report on Form 10-K of the Company for the year ended
December 31, 1996.
We also consent to the references to our firm under the heading
"Experts" in the Prospectus, which is part of this Registration Statement.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
September 12, 1997
<PAGE> 1
Exhibit 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the
use of our report dated April 8, 1996 with respect to the consolidated financial
statements of RSA Data Security, Inc. (not presented separately herein) in
Amendment No. 1 to the Registration Statement (Form S-3 No. 333-34241) of
Security Dynamics Technologies, Inc. for the registration of 396,387 shares of
its common stock.
Ernst & Young LLP
Palo Alto, California
September 12, 1997
