<PAGE> 1
As filed with the Securities and Exchange Commission on August 22, 1997
Registration Statement No. 333-
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM S-3
----------------------
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
----------------------
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
(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
(617) 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.
<PAGE> 2
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. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Title of Shares Amount Maximum Maximum
to be Registered to be Offering Price Aggregate Amount of
Registered Per Share(1) Offering Price(1) Registration Fee
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share ..... 396,387 shares $36.875 $14,616,770.63 $4,429.33
</TABLE>
(1) Estimated solely for purposes of calculating the registration fee
pursuant to Rule 457(c) under the Securities Act of 1933, as amended,
and based upon the average of the high and low sales prices of the
Common Stock on the Nasdaq National Market on August 18, 1997.
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.
<PAGE> 3
Subject to Completion
August 22, 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. ("SDI" or 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
<PAGE> 4
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 August 21, 1997, the closing sale price of the
Common Stock on the Nasdaq National Market was $39.00 per share.
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
<PAGE> 5
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.
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
-2-
<PAGE> 6
(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: (617) 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.
-3-
<PAGE> 7
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 computer and network 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 Computer and Network 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 computer and network 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 network or computer
security could trigger a heightened awareness of computer abuse, resulting in an
increased demand for security products such as those offered by the Company.
Similarly, an actual or perceived breach of network or computer security at one
of the Company's customers, regardless of whether such breach is attributable to
the Company's products, could adversely affect the market's perception of the
Company and the Company's financial condition or results of operations. In
addition, although the effectiveness of the Company's 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"), an initiative designed to deliver enterprise-wide security
solutions to businesses. As part of ESS, 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 and key 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 ESS.
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
-4-
<PAGE> 8
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 network and computer 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 electronic security products and upon the
Company's ability, on a timely and cost-effective basis, to enhance its existing
products and to introduce new products with features that meet changing customer
requirements and with competitive prices. There can be no assurance that the
Company will be successful in doing so. Delays in product enhancement and
development or the failure of the Company's new products or enhancements to gain
market acceptance would have a material adverse effect on the Company's
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.
Risks Relating to Cryptographic Technology. Any significant advance in
techniques for attacking cryptographic systems could render some or all of the
existing products of RSA Data Security, Inc., a wholly owned subsidiary of SDI
("RSA"), 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 for prospective buyers and the need for regulatory approvals,
including antitrust approvals. There can be no assurance that the Company will
be able to complete future acquisitions or that the Company will be able to
successfully integrate any acquired business. In order to finance such
acquisitions, it may be necessary for the Company to raise additional funds
through public or private financings. Any equity or debt financings, if
available at all, may be on terms which are not favorable to the Company and, in
the case of equity financings, may result in dilution to the Company's
stockholders. There can be no assurance that the Company will be able to operate
acquired businesses profitably or otherwise implement its growth strategy
successfully. 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.
-5-
<PAGE> 9
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 successful
combination of companies in a rapidly changing high technology industry may be
more difficult to accomplish than in other industries. The combination of the
two companies will require, among other things, integration of the companies'
respective product offerings and coordination of their sales and marketing and
research and development efforts. There can be no assurance that such
integration will be accomplished smoothly or successfully. The difficulties of
such integration may be increased by the necessity of coordinating
geographically separated organizations. The integration of certain operations
following the acquisition 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 incur expenses of approximately $8.5
million 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 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.
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 -- 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 computer or network security prior to the end of the
calendar year. In addition, revenue tends to be lower in the summer months,
particularly in Europe, when businesses defer purchase decisions.
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 law,
nondisclosure agreements and technical measures to protect its proprietary
technology. The Company enters into confidentiality and/or license agreements
with all of its employees, distributors and strategic partners as well as with
its customers and potential customers seeking
-6-
<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 United States 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. A patent
developed at the Massachusetts Institute of Technology ("MIT") (U.S. Patent No.
4,405,892) and licensed to RSA (the "RSA/MIT Patent"), 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 (U.S. Patent 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 become substitutes for
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 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 technology or duplicate the Company's technology. 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, and the lithium batteries contained in the
Company's SecurID tokens are purchased from one supplier located in the United
States, Gould Electronics. 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
-7-
<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 SDI's
ACE/Server software is licensed by SDI from Progress Software Corporation
("Progress Software"). SDI 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 computer and network security products is
highly competitive and subject to rapid change. The Company believes that the
principal competitive factors affecting the market for computer and network
security products include technical features, ease of use, quality/reliability,
level of security, customer service and support, distribution channels and
price. The Company's competitors include organizations that provide computer and
network security products based upon approaches similar to and different from
those employed by the Company. There can be no assurance that the market for
computer and network security products will not ultimately be dominated by
approaches other than the approach marketed by the Company.
Many of the Company's potential competitors have significantly greater
financial, marketing, technical and other competitive resources than the
Company. As a result, they may be able to adapt more quickly to new or emerging
technologies and changes in customer requirements, or to devote greater
resources to the promotion and sale of their products than can the Company.
Competition could increase if new companies enter the market or if existing
competitors expand their product lines. Any reduction in gross margins 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
-8-
<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. Although all of the Company's products are subject to
export controls under United States law and possible foreign government
restrictions, the Company believes it has obtained necessary export approvals
for the export of its products. There can be no assurance, however, that the
list of products and countries for which export approval is required, and the
regulatory policies with respect thereto, will not be revised from time to time.
The inability of the Company to obtain required approvals under these
regulations could adversely affect the ability of the Company to make
international sales.
Exports of RSA's encryption products, or third-party products bundled
with the encryption technology of RSA, are expected to continue to be restricted
by the United States and various foreign governments. All cryptographic products
need export licenses from either the U.S. State Department, acting under the
authority of the International Traffic in Arms Regulation, or the United States
Department of Commerce, 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 United States government generally limits the export of software with
encryption capabilities to mass marketed software with limited key sizes, which
significantly constrains the security effectiveness of RSA products available
for export. As a result, RSA may 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
-9-
<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, including the
Company's Common Stock, 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 dividends have been paid on the Common Stock to date and
the Company does not anticipate paying 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>
-11-
<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 and equivalents ............ $ 3,398 $ 3,860 $ 19,862 $ 50,730 $ 11,175 $ 24,316
Marketable securities ........... 496 -- 7,966 61,637 95,320 86,437
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.
-12-
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is a leading provider of computer and network enterprise
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-wide 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 acquired DynaSoft (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.
RSA, located in Redwood City, California, is a recognized world
leader in cryptography and develops, markets and supports cryptographic and
electronic 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 electronic 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, ACM and BoKS software; licensing of B/SAFE,
TIPEM, B/CERT, S/PAY and S/MAIL encryption engines; licensing of patent
technology; 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 access control products 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
prices 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
-13-
<PAGE> 17
hardware 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 (for example, the Company's SecurVAR
program), price reductions (resulting from volume discounts or otherwise),
competition, increases in the cost of revenue (including any software license
fees or royalties payable by the Company such as those described below) and
other factors.
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.
-14-
<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%
Costs 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 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>
-15-
<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 and ACM
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 the increased use of Internet and corporate intranets 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.
-16-
<PAGE> 20
Interest and Other Income. 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 standard.
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. 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.
-18-
<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
-19-
<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. 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.
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.
-20-
<PAGE> 24
<TABLE>
<CAPTION>
QUARTERLY STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
-------------------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. DEC. 31 MAR. 31 JUNE 30
1995 1995 30 1995 1995 1996 1996
-------- -------- -------- -------- -------- --------
<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 per equivalent share ..... $ (0.01) $ 0.03 $ 0.14 $ 0.06 $ 0.06 $ 0.08
======== ======== ======== ======== ======== ========
Weighted average number of shares ... 32,411 33,699 33,951 35,445 37,777 39,039
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
QUARTERLY STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
-----------------------------------------------------------------------
SEPT. DEC. 31 MAR. 31 JUNE 30
30 1996 1996 1997 1997
-------- -------- -------- --------
<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 per equivalent share ..... $ -- $ 0.20 $ 0.12 $ 0.14
========= ======== ======== ========
Weighted average number of shares ... 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>
-21-
<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) 16.2 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 18.7 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)% 9.0% 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 computer or network 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.
-22-
<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 to certain
stockholders of DynaSoft in exchange for the remaining outstanding shares and
options. The DynaSoft Acquisition costs, which will be expensed 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 merged with
RSA. The RSA Merger costs were approximately $6.1 million. These transactions
have been accounted for as poolings of interests. 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 engaged in the resolution of
Internet security problems.
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 $686,000. 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
-23-
<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 new 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 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 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 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
-24-
<PAGE> 28
provisions of SFAS 130 or SFAS 131 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.
-25-
<PAGE> 29
THE COMPANY
The Company is a leading provider of computer and network enterprise
security solutions. The Company's products help companies conduct business
securely, protect corporate information assets and facilitate
business-to-business and business-to-consumer electronic commerce. The
Company's products include its (i) SecurID "tokens" and access control
products, which authenticate the identity of users accessing networked or
stand-alone computer resources, (ii) RSA encryption engine and other products
used to implement cryptographic electronic data security applications and (iii)
BoKS product family, which provides a broad range of security solutions,
including secure single sign-on solutions.
SDI's family of products employs a patent-protected combination of
super smart card technology and software access control products to authenticate
the identity of users accessing networked or stand-alone computing resources.
SDI's SecurID Cards and other tokens and its access control products, including
its ACE/Server software products, are designed to interface with a wide variety
of operating systems and hardware platforms on client/server, mainframe and
mid-range systems to enable enterprise-wide security coverage. SDI's customers
include Fortune 500 companies and financial institutions as well as academic
institutions, research laboratories, hospitals and federal, state and foreign
government organizations.
SDI's products are sold or licensed primarily through its direct
sales force, which is supported by a number of strategic marketing
relationships. During 1996, SDI also implemented its SecurVAR (Value Added
Reseller) program, through which SDI is able to deliver its security solutions
through value added resellers.
Through its wholly owned subsidiary, RSA, the Company also develops,
markets and supports cryptographic and electronic data security products and
provides cryptographic consulting services. RSA's encryption engine and other
products are used to implement cryptographic electronic data security
applications such as encryption and digital signatures for products and services
targeted at secure electronic commerce, secure electronic mail, communications
privacy, client/server data security, smart cards and other key information
technologies.
RSA licenses its encryption engine products to original equipment
manufacturers ("OEMs") such as Netscape Communications Corporation ("Netscape"),
Microsoft Corporation ("Microsoft"), International Business Machines Corporation
and Oracle Corporation. OEMs incorporate RSA's encryption technology into their
products. RSA's encryption technology is embedded in current versions of
Microsoft Windows, Netscape Navigator, Quicken by Intuit, Inc., 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, as well as various business, financial and electronic
commerce networks.
On July 15, 1997, the Company acquired DynaSoft, 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 in the
United States directly through its subsidiary and also through its recent
licensing agreements with Sun Microsystems and Hewlett-Packard. With the
addition of DynaSoft's expertise and technology, including its secure single
sign-on solutions, the Company is broadening its offerings to provide customers
with secure access to information wherever it resides in the enterprise.
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 (617) 687-7000. As used herein, the term the
"Company" includes Security Dynamics Technologies, Inc. and its subsidiaries.
-26-
<PAGE> 30
RECENT EVENTS
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 (the "DynaSoft Acquisition").
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
outstanding options to acquire shares of DynaSoft. The Company also paid
approximately $6 million 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. 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.
DynaSoft is based in Stockholm, Sweden and offers a range of security
solutions, including secure single sign-on (SSSO) solutions, through its BoKS
product family. DynaSoft markets its products worldwide through subsidiaries and
also through OEM licensing agreements with Sun Microsystems, Hewlett-Packard and
other companies. The Company currently intends to continue DynaSoft's business
substantially in the manner conducted by DynaSoft immediately prior to the
Effective Date.
-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.
Peter C. Loux has served as the Chairman of the Board and Chief
Executive Officer of Securix, Inc., a California corporation and wholly owned
subsidiary of DynaSoft ("Securix"), since July 1993. From July 1993 to
August 1996, Peter C. Loux also served as President of Securix. He has also
served on the Board of Directors of DynaSoft since July 1996.
Khris Loux has served as Vice President of Sales and Marketing and
as a member of the Board of Directors of Securix since July 1993. Khris Loux
has served on the Board of Directors of DynaSoft since July 1996. Since July
1997, Khris Loux has served as Vice President, Corporate Development of the
Company.
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>
Peter C. Loux 137,150
Khris Loux 198,194
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, DynaSoft and the independent auditors of the Company.
-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 as
stated in their report with respect to 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 as stated in their reports with respect to 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 stated in their
report included and incorporated by reference herein. 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.
The report of Ernst & Young LLP on the consolidated financial
statements of RSA has been so included and incorporated by reference in reliance
upon such report of Ernst & Young 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 sheets of RSA Data Security, Inc. as
of December 31, 1995, and the related statements of operations, shareholders'
equity and cash flows for the years ended December 31, 1995 and 1994 (not
presented separately herein). 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
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
Security Dynamics Technologies, Inc. and Subsidiaries
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------ --------
ASSETS 1995 1996 1997
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
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
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
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
Security Dynamics Technologies, Inc. and Subsidiaries
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS ENDED 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 $ .05 $ .22 $ .34 $ .14 $ .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
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Security Dynamics Technologies, Inc. and Subsidiaries
Years ended December 31, 1994, 1995 and 1996 and (unaudited) six months ended
June 30, 1997 (In thousands, except share data)
<TABLE>
<CAPTION>
Common Stock Additional Retained Deferred
------------------------ Paid-in Earnings Stock
Shares Amount Capital (Deficit) Compensation
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 11,831,489 $ 118 $ 1,778 $ (3,750) $ --
Common and Treasury stock
issued for services 52,032 -- 21 -- --
Exercise of stock options 152,376 1 41 -- --
Deferred stock compensation -- -- 360 -- (360)
Amortization of deferred stock
compensation -- -- -- -- 85
Issuance of common stock 6,276,854 63 22,041 -- --
Translation adjustment -- -- -- -- --
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)
Exercise of stock options 957,434 10 632 -- --
Tax benefit arising from exercise
of stock options -- -- 225 -- --
Deferred stock compensation -- -- 157 -- (157)
Amortization of deferred stock
compensation -- -- -- -- 140
Issuance of common stock 4,578,830 46 60,365 -- --
Translation adjustment -- -- -- -- --
Change in unrealized gain on marketable
securities -- -- -- -- --
Net income -- -- -- 7,450 --
--------------------------------------------------------------------
Balance, December 31, 1995 35,137,771 351 94,452 4,510 (292)
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 -- -- -- -- --
Change in unrealized gain on marketable
securities -- -- -- -- --
Net income -- -- -- 13,175 --
--------------------------------------------------------------------
Balance, December 31, 1996 37,220,893 372 102,322 17,685 (174)
Unaudited:
Settlement of RSA escrow (36,037) -- -- -- --
Exercise of stock options 719,033 7 1,697 -- --
Compensation expense -- -- 588 -- --
Amortization of deferred stock
compensation -- -- -- -- 33
Translation adjustment -- -- -- -- --
Change in unrealized gain on marketable
securities -- -- -- -- --
Net income -- -- -- 10,076 --
--------------------------------------------------------------------
BALANCE, JUNE 30, 1997 37,903,889 $ 379 $ 104,607 $ 27,761 $ (141)
====================================================================
</TABLE>
<TABLE>
<CAPTION>
Unrealized
Treasury Stock Cumulative Gain on Stockholders'
------------------------- Translation Marketable Equity
Shares Amount Adjustment Securities (Deficiency)
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1994 90,296 $ (1) $ (146) $ -- $ (2,001)
Common and Treasury stock
issued for services (90,000) 1 -- -- 22
Exercise of stock options -- -- -- -- 42
Deferred stock compensation -- -- -- -- --
Amortization of deferred stock
compensation -- -- -- -- 85
Issuance of common stock -- -- -- -- 22,104
Translation adjustment -- -- (347) -- (347)
Dividends accrued on preferred
stock -- -- -- -- (418)
Conversion of preferred
stock to common stock -- -- -- -- 8,945
Net income -- -- -- -- 1,228
---------------------------------------------------------------------
Balance, December 31, 1994 296 -- (493) -- 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 -- 588
Change in unrealized gain on marketable
securities -- -- -- 9,910 9,910
Net income -- -- -- -- 7,450
---------------------------------------------------------------------
Balance, December 31, 1995 296 -- 95 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 -- 398
Change in unrealized gain on marketable
securities -- -- -- (6,430) (6,430)
Net income -- -- -- -- 13,175
---------------------------------------------------------------------
Balance, December 31, 1996 296 -- 493 3,480 124,178
Unaudited:
Settlement of RSA escrow 213 -- -- -- --
Exercise of stock options 1,704
Compensation expense -- -- -- -- 588
Amortization of deferred stock
compensation -- -- -- -- 33
Translation adjustment -- -- (687) -- (687)
Change in unrealized gain on marketable
securities -- -- -- (1,353) (1,353)
Net income -- -- -- -- 10,076
---------------------------------------------------------------------
BALANCE, JUNE 30, 1997 509 $ -- $ (194) $ 2,127 $ 134,539
=====================================================================
</TABLE>
See notes to supplemental consolidated financial statements.
F-6
<PAGE> 40
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
Security Dynamics Technologies, Inc. and Subsidiaries
(In thousands)
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 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
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
Security Dynamics Technologies, Inc. and Subsidiaries
(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 computer and network enterprise 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 access control products, which
authenticate the identity of users accessing networked or stand-alone computer
resources, RSA developer toolkits and other products used to implement
cryptographic electronic 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 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.
F-8
<PAGE> 42
WARRANTY POLICY - The Company's standard practice is to provide a warranty on
all SecurID tokens for the customer-selected programmed life of the token and to
replace any damaged tokens (other than tokens damaged by a user's negligence or
alteration) free of charge. The Company generally sells each of its other
products to customers with a 90-day warranty. The Company provides a reserve for
warranties based upon historical experience.
INVENTORY - Inventory 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, JUNE 30, 1997
---------------------------------------------------------------
1995 1996
---- ----
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 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
F-9
<PAGE> 43
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 $.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 $.05 $.23 $.36 $.15 $.27
Diluted .05 .22 .34 .14 .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. 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.
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.
F-10
<PAGE> 44
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 that the provisions
of SFAS 130 or SFAS 131 will not, when adopted, have a material impact on the
Company's financial statements.
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 recognized world leader in
cryptography and develops, markets and supports cryptographic and electronic
data security products and provides cryptographic 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 electronic 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.
F-11
<PAGE> 45
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.
Pursuant to escrow agreements entered into with the Company by DynaSoft and 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 cancelled.
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.
F-12
<PAGE> 46
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 to 11,288,756 shares of common stock upon the closing of the IPO on
December 21, 1994. At December 31, 1994, all shares of preferred stock had been
canceled and retired.
5. STOCK OPTION AND PURCHASE PLANS
1986 STOCK OPTION PLAN ("1986 PLAN") - The Company's 1986 Plan terminated by its
terms in 1996 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.
F-13
<PAGE> 47
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.
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 for
Number of Exercise Currently Average Contractual Life Currently
Options Prices Exercisable Exercise Price (Years) Exercisable
- --------- ------------- ----------- -------------- ------- -----------
<S> <C> <C> <C> <C> <C>
324,800 $0.05 - 0.06 324,800 $ 0.05 0.6 $ 0.05
384,000 0.10 384,000 0.10 3.2 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 38.00 - 44.21 -- 40.34 9.7 --
- --------- ---------
4,722,457 0.05 - 44.21 2,127,928 15.71 7.8 1.69
========= =========
</TABLE>
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.
F-14
<PAGE> 48
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 earnings 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 $ .22 $ .34
Pro forma .21 .28
</TABLE>
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.
F-15
<PAGE> 49
6. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1994 1995 1996
---- ---- ----
Current:
<S> <C> <C> <C>
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>
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 carry forwards -- 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) (.3) .3
Change in valuation allowance 16.5 (8.8) --
Foreign expenses without tax benefit 8.5 -- --
Other (2.3) .8 (1.3)
-------------------------
Effective income tax rate 54.2% 31.1% 45.5%
=========================
</TABLE>
F-16
<PAGE> 50
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 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
January 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 $1047 and $2,370 for the six months ended June 30, 1996 and 1997,
respectively.
F-17
<PAGE> 51
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, the
DynaSoft had approximately $25 due to a stockholder payable upon demand.
12. 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.
F-18
<PAGE> 52
<TABLE>
<CAPTION>
QUARTERLY STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
-------------------------------------------------------------------------
MAR. 31 JUNE 30 SEPT. DEC. 31 MAR. 31 JUNE 30
1995 1995 30 1995 1995 1996 1996
-------- -------- -------- -------- -------- --------
<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 per equivalent share ..... $ (0.01) $ 0.03 $ 0.14 $ 0.06 $ 0.06 $ 0.08
======== ======== ======== ======== ======== ========
Weighted average number of shares ... 32,411 33,699 33,951 35,445 37,777 39,039
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
QUARTERLY STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED
-----------------------------------------------------------------------
SEPT. DEC. 31 MAR. 31 JUNE 30
30 1996 1996 1997 1997
-------- -------- -------- --------
<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 per equivalent share ..... $ -- $ 0.20 $ 0.12 $ 0.14
========= ======== ======== ========
Weighted average number of shares ... 39,168 39,563 39,299 39,527
========= ======== ======== ========
</TABLE>
F-19
<PAGE> 53
================================================================================
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> 54
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> 55
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).
II-2
<PAGE> 56
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> 57
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> 58
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Bedford, Commonwealth of Massachusetts, on this 22nd
day of August, 1997.
SECURITY DYNAMICS TECHNOLOGIES, INC.
By: /s/ Charles R. Stuckey, Jr.
---------------------------------------
Charles R. Stuckey, Jr.
Chairman of the Board, President
and Chief Executive Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Security Dynamics
Technologies, Inc., hereby severally constitute and appoint Charles R. Stuckey,
Jr., Arthur W. Coviello, Jr. and Hal J. Leibowitz, and each of them singly, our
true and lawful attorneys with full power to them, and each of them singly, to
sign for us and in our names in the capacities indicated below, the Registration
Statement on Form S-3 filed herewith and any and all pre-effective and
post-effective amendments to said Registration Statement and generally to do all
such things in our names and on our behalf in our capacities as officers and
directors to enable Security Dynamics Technologies, Inc. to comply with the
provisions of the Securities Act of 1933, as amended, and all requirements of
the Securities and Exchange Commission, hereby ratifying and confirming our
signatures as they may be signed by our said attorneys, or any of them, to said
Registration Statement and any and all amendments thereto.
II-5
<PAGE> 59
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Charles R. Stuckey, Jr. Chairman of the Board, President and August 22, 1997
- --------------------------- Chief Executive Officer (Principal
Charles R. Stuckey, Jr. Executive Officer)
/s/ Arthur W. Coviello, Jr. Executive Vice President, Treasurer, August 22, 1997
- --------------------------- Chief Operating Officer and Chief
Arthur W. Coviello, Jr. Financial Officer (Principal Financial
and Accounting Officer)
/s/ D. James Bidzos Director August 22, 1997
- -------------------
D. James Bidzos
Director
- ----------------------
Richard L. Earnest
/s/ Joseph B. Lassiter, III Director August 22, 1997
- ---------------------------
Joseph B. Lassiter, III
/s/ George M. Middlemas Director August 22, 1997
- -----------------------
George M. Middlemas
/s/ Marino R. Polestra Director August 22, 1997
- ----------------------
Marino R. Polestra
/s/ Sanford M. Sherizen Director August 22, 1997
- -----------------------
Sanford M. Sherizen
</TABLE>
II-6
<PAGE> 1
EXHIBIT 5
HALE AND DORR LLP
Counsellors at Law
60 State Street
Boston, MA 02109
617-526-6000 * FAX 617-526-5000
August 22, 1997
Security Dynamics Technologies, Inc.
20 Crosby Drive
Bedford, MA 01730
Ladies and Gentlemen:
We have assisted in the preparation of the Registration Statement on
Form S-3 (the "Registration Statement") filed with the Securities and Exchange
Commission (the "Commission") under the Securities Act of 1933, as amended (the
"Securities Act"), relating to the registration for resale by Peter C. Loux,
Khris Loux and The Peter C. Loux Charitable Remainder Unitrust of an aggregate
of 396,387 shares of common stock, $.01 par value per share (the "Shares"), of
Security Dynamics Technologies, Inc., a Delaware corporation (the "Company").
We have examined the Third Restated Certificate of Incorporation, as
amended, and the Amended and Restated By-Laws of the Company and all amendments
thereto and have examined and relied on the originals, or copies certified to
our satisfaction, of such records of meetings, written actions in lieu of
meetings, or resolutions adopted at meetings, of the directors and stockholders
of the Company, all as provided to us by the Company, and such other documents
and instruments as in our judgment are necessary or appropriate to enable us to
render the opinions expressed below.
In our examination of the foregoing documents, we have assumed (i) the
genuineness of all signatures and the authenticity of all documents submitted to
us as originals, (ii) the conformity to the originals of all documents submitted
to us as certified, facsimile or photostatic copies, (iii) the authenticity of
the originals of such latter documents, and (iv) the legal competence of all
signatures to such documents.
We express no opinion herein as to the laws of any state or
jurisdiction other than the state laws of the Commonwealth of Massachusetts, the
Delaware General Corporation Law statute and the federal laws of the United
States of America.
Based upon and subject to the foregoing, we are of the opinion that the
Shares have been duly authorized and are validly issued, fully paid and
non-assessable.
It is our understanding that this opinion is to be used only in
connection with the offer and sale of the Shares while the Registration
Statement is in effect.
Please note that we are opining only as to the matters set forth
herein, and no opinion should be inferred as to any other matters.
We hereby consent to the filing of this opinion with the Commission as
an exhibit to the Registration Statement in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act and to the use of our
name therein and in the related Prospectus under the caption "Legal Matters." In
giving such consent, we do not hereby admit that we are in the category of
persons
<PAGE> 2
whose consent is required under Section 7 of the Securities Act or the rules and
regulations of the Commission.
Very truly yours,
/s/ Hale and Dorr LLP
HALE AND DORR LLP
<PAGE> 1
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this 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
August 21, 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 the Registration Statement (Form S-3) of Security Dynamics
Technologies, Inc. for the registration of 396,387 shares of its common stock.
Ernst & Young LLP
Palo Alto, California
August 21, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000932064
<NAME> SECURITY DYNAMICS TECHNOLOGIES INC.
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<EXCHANGE-RATE> 1
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 24,316
<SECURITIES> 86,437
<RECEIVABLES> 20,321
<ALLOWANCES> 802
<INVENTORY> 3,189
<CURRENT-ASSETS> 139,609
<PP&E> 18,035
<DEPRECIATION> 5,151
<TOTAL-ASSETS> 157,068
<CURRENT-LIABILITIES> 19,951
<BONDS> 0
0
0
<COMMON> 379
<OTHER-SE> 134,160
<TOTAL-LIABILITY-AND-EQUITY> 157,068
<SALES> 61,374
<TOTAL-REVENUES> 61,374
<CGS> 13,147
<TOTAL-COSTS> 48,172
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 275
<INTEREST-EXPENSE> (2,914)
<INCOME-PRETAX> 16,116
<INCOME-TAX> 6,040
<INCOME-CONTINUING> 10,076
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,076
<EPS-PRIMARY> 0.256
<EPS-DILUTED> 0.254
<FN>
FOOTNOTES:
RESTATED FINANCIALS FOR SIX MONTHS ENDED JUNE 30, 1997 TO REFLECT THE
ACQUISITION OF DYNASOFT AB.
TOTAL LIABILITY AND EQUITY INCLUDES $2,578 MINORITY INTERESTS.
</FN>
</TABLE>
