<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1997
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 0-25120
SECURITY DYNAMICS TECHNOLOGIES, INC.
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 04-2916506
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
20 CROSBY DRIVE
BEDFORD, MA 01730
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (781) 687-7000
----------------------------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
--- ---
As of October 31, 1997, there were 39,575,796 shares of the Registrant's Common
Stock, $.01 par value per share, outstanding.
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SECURITY DYNAMICS TECHNOLOGIES, INC.
FORM 10-Q
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
September 30, 1997 (unaudited) and December 31, 1996 3
Condensed Consolidated Statements of Income for the
Three and Nine Months Ended September 30, 1997 and 1996
(unaudited) 4
Condensed Consolidated Statements of Cash Flows for
the Nine Months Ended September 30, 1997 and 1996
(unaudited) 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds 16
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
Exhibit Index 19
</TABLE>
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, 1997 December 31, 1996
------------------ -----------------
(Unaudited)
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 36,988 $ 11,175
Marketable securities 70,774 95,320
Accounts receivable (less allowance for doubtful
accounts of $787 in 1997 and $527 in 1996) 20,257 16,500
Inventory 2,744 2,606
Prepaid expenses and other 5,405 4,204
Deferred taxes 1,495 --
--------- ---------
Total current assets 137,663 129,805
--------- ---------
Property and equipment - net 15,467 10,568
--------- ---------
Other:
Investments 3,186 2,924
Capitalized software cost, net and purchased technology 110 197
Deferred taxes 3,678 1,026
Other 955 1,455
--------- ---------
Total Other 7,929 5,602
--------- ---------
Total $ 161,059 $ 145,975
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 5,786 $ 5,119
Accrued payroll and related benefits 6,840 4,829
Accrued expenses and other 8,653 4,269
Income taxes payable 652 51
Deferred revenue 5,738 5,503
Deferred taxes -- 832
--------- ---------
Total current liabilities 27,669 20,603
--------- ---------
Minority interests 3,032 1,194
--------- ---------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; authorized, 80,000,000
shares; issued, 37,869,463 shares in 1997 and
37,220,893 shares in 1996; outstanding, 37,868,954
shares in 1997 and 37,220,597 shares in 1996 380 372
Additional paid-in capital 99,616 102,322
Retained earnings 30,076 17,685
Deferred stock compensation (124) (174)
Treasury stock, common, at cost,
509 shares in 1997 and 296 shares in 1996 -- --
Cumulative translation adjustment 152 493
Unrealized gain on marketable securities - net 258 3,480
--------- ---------
Total stockholders' equity 130,358 124,178
--------- ---------
Total $ 161,059 $ 145,975
========= =========
</TABLE>
See notes to condensed consolidated financial statements
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SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------- ----------------------
1997 1996 1997 1996
-------- -------- ------- -------
<S> <C> <C> <C> <C>
Revenue $ 34,828 $ 21,143 $96,202 $57,254
Cost of revenue 6,848 5,283 19,995 12,734
-------- -------- ------- -------
Gross profit 27,980 15,860 76,207 44,520
-------- -------- ------- -------
Costs and expenses:
Research and development 5,453 3,134 14,099 8,667
Purchased research and development 3,175 -- 3,175 --
Marketing and selling 10,393 5,988 29,163 16,812
General and administrative 3,834 3,208 11,443 9,269
Merger expenses 7,000 6,100 7,000 6,100
-------- -------- ------- -------
Total 29,855 18,430 64,880 40,848
-------- -------- ------- -------
Income (loss) from operations (1,875) (2,570) 11,327 3,672
Interest and other income 1,259 1,119 3,976 3,619
Gain on sale of marketable securities
and other income 4,399 4,553 4,596 4,412
-------- -------- ------- -------
Income before provision for income taxes 3,783 3,102 19,899 11,703
Provision for income taxes 1,468 3,284 7,508 6,431
-------- -------- ------- -------
Net income (loss) $ 2,315 $ (182) $12,391 $ 5,272
======== ======== ======= =======
Net income (loss) per common and
common equivalent share $ 0.06 $ 0.00 $ 0.31 $ 0.14
======== ======== ======= =======
Weighted average number of common and
common equivalent shares outstanding 39,664 39,168 39,522 38,670
======== ======== ======= =======
</TABLE>
See notes to condensed consolidated financial statements.
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SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 12,391 $ 5,272
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Gain on sale of marketable securities (4,399) (4,546)
Deferred taxes (2,831) 54
Depreciation and amortization 2,423 1,480
Stock compensation 889 474
Increase (decrease) in cash from changes in:
Accounts receivable (4,317) (5,397)
Inventory (138) (1,272)
Prepaid expenses and other (1,214) (1,050)
Accounts payable 682 1,940
Accrued payroll and related benefits 2,075 1,577
Accrued expenses and other 4,593 (649)
Income taxes payable 604 1,094
Deferred revenue 292 416
-------- --------
Net cash provided by (used for) operating activities 11,050 (607)
-------- --------
Cash flows from investing activities:
Purchases of marketable securities (78,753) (89,957)
Sales and maturities of marketable securities 103,291 54,815
Expenditures for property and equipment (7,402) (7,447)
Investments and other (618) (539)
-------- --------
Net cash provided by (used for) investing activities 16,518 (43,128)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options and other 2,499 2,114
Payments to acquisition shareholders (6,036) --
Minority interests 1,838 --
-------- --------
Net cash provided by (used for) financing activities (1,699) 2,114
-------- --------
Effect of exchange rate changes on cash and equivalents (56) (351)
-------- --------
Net increase (decrease) in cash and equivalents 25,813 (41,972)
Cash and equivalents, beginning of period 11,175 50,730
-------- --------
Cash and equivalents, end of period $ 36,988 $ 8,758
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements
include the accounts of Security Dynamics Technologies, Inc. (the
"Company") and its wholly owned subsidiaries and have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission regarding interim financial reporting. Accordingly, they do not
include all of the information and notes required by generally accepted
accounting principles for complete financial statements and should be read
in conjunction with the audited consolidated financial statements included
in the Company's Annual Report on Form 10-K for the year ended December 31,
1996.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements have been prepared on the same basis as
the audited consolidated financial statements, and include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair
presentation of the results of the interim periods presented. The operating
results for the interim periods presented are not necessarily indicative of
the results expected for the full year.
In July 1997, the Company acquired DynaSoft AB ("DynaSoft"). The
acquisition has been accounted for as a pooling of interests, and therefore
the consolidated financial statements for all periods prior to the
acquisition have been restated to include the accounts and operations of
DynaSoft with those of the Company.
2. Income Per Common Share
Income per common share is computed using the weighted average number
of common and common equivalent shares outstanding during each period
presented.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 ("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) for the three and nine months ended
September 30, 1997 would have been $0.06 and $0.06 and $0.33 and $0.31,
respectively, and for the three and nine months ended September 30, 1996
would have been $0.00 and $0.00 and $0.15 and $0.14, respectively.
3. Income Taxes
The Company provides for income taxes at the end of each interim
period based on the estimated effective tax rate for the full year.
Cumulative adjustments to the tax provision are recorded in the interim
period in which a change in the estimated annual effective rate is
determined.
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Cash payments for income taxes were approximately $2,488 and $9,587
for the three and nine months ended September 30, 1997, respectively, and
$1,652 and $5,453 for the three and nine months ended September 30, 1996,
respectively.
4. Acquisition
On July 15, 1997, the Company acquired DynaSoft, a leading provider of
security solutions for protecting access to corporate information and
applications. The Company issued or reserved for issuance 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 also paid approximately $6 million to certain
stockholders of DynaSoft in exchange for the remaining outstanding shares
and options. These payments were recorded as a reduction in additional paid
in capital. The transaction was accounted for as a pooling of interests.
In connection with the acquisition, the consolidated condensed
statements of operations for the three and nine months ended September 30,
1997 include a charge for merger expenses of $7,000.
Adjustments to conform accounting policies of Dynasoft to those of
the Company were not material.
Revenue and net income for each of the previously separate companies
for the periods prior to the acquisition are as follows:
<TABLE>
<CAPTION>
(In thousands)
Three Months Ended Nine Months Ended Year Ended Six Months Ended
September 30, September 30, December 31, June 30,
1996 1996 1996 1997
-------- -------- ------- --------
<S> <C> <C> <C> <C>
REVENUE
Security Dynamics $ 20,363 $ 52,645 $76,148 $ 56,097
DynaSoft 780 4,609 7,669 5,277
-------- -------- ------- --------
Total $ 21,143 $ 57,254 $83,817 $ 61,374
-------- -------- ------- --------
NET INCOME (LOSS)
Security Dynamics $ 551 $ 5,604 $13,045 $ 10,231
DynaSoft (733) (332) 130 (155)
-------- -------- ------- --------
Total $ (182) $ 5,272 $13,175 $ 10,076
-------- -------- ------- --------
</TABLE>
5. Other
In October 1997, the Company sold 1,626,000 shares of Common Stock in
a follow-on offering, which generated $60.8 million of net cash proceeds to
the Company.
In October 1997, the Company purchased 175,285 ordinary shares of
nCipher Corporation Limited ("nCipher") for an aggregate purchase price of
$502. nCipher is a company organized under the laws of England and Wales
that develops products designed to accelerate cryptographic processes on
Internet security, electronic commerce and other applications. The
Company's investment in nCipher represents a minority interest of less than
5% of nCipher's capitalization.
In August 1997, the Company purchased 877,193 Series C Preferred
Shares of Finjan Software Ltd. ("Finjan") for an aggregate purchase price
of $1,000. Finjan is an Israeli software company organized to develop and
market products for the Java Internet security market. The Company's
investment in Finjan represents a minority interest of less than 5% of
Finjan's capitalization.
In September 1997, the Company announced its SecurMessage email
security solution, which incorporates technology from Worldtalk Corporation
("Worldtalk") and Verisign, Inc. for securing already-deployed enterprise
email and groupware applications. In connection therewith, in September
1997, the Company entered into an agreement with Worldtalk pursuant to
which the Company paid to Worldtalk in October 1997 a one-time prepaid,
nonrefundable license fee of $3.0 million in order to obtain favorable
pricing.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS)
OVERVIEW
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of Section 21E of the Securities Exchange Act of 1934, as
amended. For this purpose, any statements contained herein that are not
statements of historical fact may be deemed to be forward-looking statements.
Without limiting the foregoing, the words "believes," "anticipates," "plans,"
"expects," and similar expressions are intended to identify forward-looking
statements. There are a number of factors that could cause the Company's actual
results to differ materially from those indicated by such forward-looking
statements. These factors include, without limitation, those set forth below
under the caption "Certain Factors that May Affect Future Results."
The acquisition of Dynasoft was completed on July 15, 1997, and has been
accounted for as a pooling of interests. Therefore, the results of operations
for all periods discussed below have been restated to include the financial
results of Dynasoft. See Note 4 of Notes to Condensed Consolidated Financial
Statements.
RESULTS OF OPERATIONS
The following table sets forth income and expense items as a percentage of
total revenue, and the percentage change in dollar amounts of such items, for
the three and nine months ended September 30, 1997 and 1996. These amounts have
been restated for the acquisition of DynaSoft, which has been accounted for as a
pooling of interests.
<TABLE>
<CAPTION>
Percentage of Total Period-to-Period Percentage of Total Period-to-Period
Revenue Change Revenue Change
------- ------ ------- ------
Three months Ended September Nine months Ended September
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Revenue 100.0% 100.0% 64.7% 100.0% 100.0% 68.0%
Cost of revenue 19.7 25.0 29.6 20.8 22.2 57.0
----- ----- ------ ----- ----- -----
Gross profit 80.3 75.0 76.4 79.2 77.8 71.2
----- ----- ------ ----- ----- -----
Costs and expenses:
Research and development 15.7 14.8 74.0 14.6 15.1 62.7
Purchased research and development 9.1 -- -- 3.3 -- --
Marketing and selling 29.8 28.3 73.6 30.3 29.4 73.5
General and administrative 11.0 15.2 19.5 11.9 16.2 23.5
Merger expenses 20.1 28.9 14.8 7.3 10.7 14.8
----- ----- ------ ----- ----- -----
Total 85.7 87.2 62.0 67.4 71.4 58.8
----- ----- ------ ----- ----- -----
Income (loss) from operations (5.4) (12.2) (27.0) 11.8 6.4 208.5
Interest income and other 3.6 5.3 12.5 4.1 6.3 9.9
Gain on sale of marketable
securities and other income 12.6 21.5 (3.4) 4.8 7.7 4.2
----- ----- ------ ----- ----- -----
Income before provision for
income taxes 10.8 14.6 22.0 20.7 20.4 70.0
Provision for income taxes 4.2 15.5 (55.3) 7.8 11.2 16.7
----- ----- ------ ----- ----- -----
Net income (loss) 6.6 % (0.90)% 1372.0% 12.9% 9.2% 135.0%
===== ===== ====== ===== ===== =====
</TABLE>
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REVENUE
The Company's revenue is derived primarily from the sales of SecurID
tokens, licensing of ACE/Server, BoKS and SecurPC software, licensing of BSAFE,
TIPEM, BCERT, S/PAY and S/MAIL encyption engines, licensing of patents and
revenues from maintenance and professional services.
Total revenue increased 64.7% in the third quarter of 1997 to $34,828 from
$21,143 in the third quarter of 1996. Total revenue increased 68.0% in the first
nine months of 1997 to $96,202 from $57,254 in the first nine 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
third quarter and first nine months of 1997, approximately 37% and 38%,
respectively, of the increase in revenue was attributable to increased sales of
SecurID tokens, approximately 26% and 26%, respectively, of the increase in
revenue was attributable to increased sales of encryption engine licenses, and
approximately 34% and 25%, respectively, of the increase in revenue 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 revenue was
attributable in part to growth of the information security market, with
increased use of the Internet and corporate intranets and extranets continuing
to play significant roles in developing new opportunities for the Company.
International revenue (excluding Canada) increased 158.7% in the third
quarter of 1997 to $9,509 from $3,676 in the third quarter of 1996 and
increased 88.0% in the first nine months of 1997 to $26,364 from $14,022 in the
first nine months of 1996. International revenue accounted for 27.3% and 17.4%
of total revenue in the third quarters of 1997 and 1996, respectively, and
27.4% and 24.5% of total revenue in the first nine months of 1997 and 1996,
respectively. The increases in international revenue are 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 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 roylties 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.
The Company's gross profit increased 76.4% in the third quarter of 1997 to
$27,980, or 80.3% of revenue, from $15,860, or 75.0% of revenue, in the third
quarter of 1996, and increased 71.2% in the first nine months of 1997 to
$76,207, or 79.2% of revenue, from $44,520, or 77.8% of revenue, in the first
nine months of 1996. During the third quarter and first nine months of 1997,
approximately 32% and 34%, respectively, of the increases in gross profit were
attributable to increased unit sales of SecurID tokens, approximately 30% and
I30%, respectively, of the increases in gross profit were attributable to
increased licensing sales of encryption engine technology, and approximately 35%
and 28%, respectively, of the increases in gross profit were attributable to
increased licensing sales of ACE/Server software and sales of BoKS software
products. The balance of the increase in gross profit was primarily due to
increased patent licensing sales, royalties and maintenance revenues, offset by
reduced sales of ACM/400 and ACM/1600 hardware products. Gross profit as a
percentage of revenue increased primarily due to increased sales of software
products and patent licensing fees, which have higher margins, relative to sales
of hardware products.
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In the future, gross profit may continue to be affected by several factors,
including changes in product mix and distribution channels, price reductions
(resulting from volume discounts or otherwise), competition, increases in the
cost of revenue (including any software license fees or royalties payable by the
Company) and other factors.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of personnel costs as
well as fees for development services provided by consultants.
Research and development expenses increased 74.0% in the third quarter of
1997 to $5,453 from $3,134 in the third quarter of 1996, and increased 62.7% in
the first nine months of 1997 to $14,099 from $8,667 in the first nine months of
1996. Research and development expenses increased as a percentage of revenue in
the third quarter of 1997 to 15.7% from 14.8% in the third quarter of 1996, but
decreased as a percentage of revenue in the first nine months of 1997 to 14.6%
from 15.1% in the first nine months of 1996. During the third quarter and first
nine months of 1997, approximately 75.9% and 79.4%, respectively, of the
increases in research and development expenses resulted from an increase of
payroll costs associated with the employment of additional staff. The remainder
of the increases in research and development are attributable to purchases of
computer equipment, resulting in higher depreciation charges, occupancy expenses
and consulting expenses.
PURCHASED RESEARCH AND DEVELOPMENT
During the third quarter of 1997, the Company purchased, and recorded as
purchased research and development expense, technology from VeriSign, Inc. for
$2.7 million, and from Baltimore Technologies for $0.5 million. The Company
plans to incorporate the technologies, respectively, into products which are
expected to offer electronic signature and certificate authority and a
Java-based developer encryption engine.
MARKETING AND SELLING
Marketing and selling expenses consist primarily of salaries, commissions
and travel expenses of direct sales and marketing personnel and marketing
program expenses.
Marketing and selling expenses increased 73.6% in the third quarter of 1997
to $10,393 from $5,988 in the third quarter of 1996, and increased 73.5% in the
first nine months of 1997 to $29,163 from $16,812 in the first nine months of
1996. Marketing and selling expenses increased as a percentage of revenue in the
third quarter of 1997 to 29.8% from 28.3% in the third quarter of 1996, and
increased as a percentage of revenue in the first nine months of 1997 to 30.3%
from 29.4% in the first nine months of 1996. During the third quarter and first
nine months of 1997, approximately 46% and 43%, respectively, of the increases
in marketing and selling expenses resulted from an increase in payroll costs
associated with the employment of additional staff, approximately 12% and 12%,
respectively, of the increases in marketing and selling expenses were
attributable to sales commissions on increased revenues, and approximately 25%
and 19%, respectively, of the increases in marketing and selling expenses
resulted from increased travel expenses and marketing program expenses.
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GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of personnel costs
for administration, finance, human resources and general management and legal
and accounting fees.
General and administrative expenses increased 19.5% in the third quarter of
1997 to $3,834 from $3,208 in the third quarter of 1996, and increased 23.5% in
the first nine months of 1997 to $11,443 from $9,269 in the first nine months of
1996. General and administrative expenses decreased as a percentage of revenue
in the third quarter of 1997 to 11.0% from 15.2% in the third quarter of 1996,
and decreased as a percentage of revenue in the first nine months of 1997 to
11.9% from 16.2% in the first nine months of 1996. The increases in general and
administrative expenses were due to the employment of additional staff offset by
reduced legal expenses. Legal expenses decreased approximately $220 and $1,479
from the third quarter and first nine months of 1996, respectively, compared to
the third quarter and first nine months of 1997 due to the settlement of certain
of the Company's legal proceedings in 1996.
MERGER EXPENSES
During the third quarter of the 1997, the Company incurred a charge of
$7,000 for expenses in connection with the acquisition of DynaSoft, which was
completed during the quarter. See Note 4 of Notes to Condensed Consolidated
Financial Statements. During the third quarter of 1996, the Company incurred a
charge of $6,100 for expenses in connection with the acquisition of RSA, which
was completed during the quarter.
INTEREST AND OTHER INCOME
Interest and other income consists primarily of interest earned on the
Company's cash balances and marketable securities.
Interest income increased 12.5% in the third quarter of 1997 to $1,259 from
$1,119 in the third quarter of 1996, and increased 9.9% in the first nine months
of 1997 to $3,976 from $3,619 in the first nine months of 1996.
PROVISION FOR INCOME TAXES
The provision for income taxes decreased to $1,468 during the third quarter
of 1997 from $3,284 in the third quarter of 1996. The third quarter 1996 income
tax provision was higher than the third quarter 1997 income tax provision due to
the non-deductability of expenses associated with the acquisition of RSA. The
provision for income taxes increased to $7,508 during the first nine months of
1997 from $6,431 in the first nine months of 1996 due to higher pre-tax income,
excluding minority interests included in other income, and a higher effective
tax rate during the first nine months of 1997. The Company's estimated effective
tax rate increased to 37.5% for three and nine months ended September 30, 1997
from 36.5% for the three and nine months ended September 30, 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 third quarter and the
first nine months of 1997 increased to $2,315 and $12,391, or 6.6% and 12.9% of
revenue, respectively, from $(182) and $5,272, or (0.9)% and 9.2% of revenue,
respectively, in the third quarter and the first nine months of 1996.
Net income for the three months ended September 30, 1997 included expenses
incurred in connection with the DynaSoft Acquisition of $7.0 million, gains on
sales of marketable securities of $4.4 million and purchased research and
development expense of $3.2 million. Net loss for the three months ended
September 30, 1996 included expenses incurred in connection with the RSA Merger
of $6.1 million and gains on sales of marketable securities of $4.6 million.
Excluding the effects of these transactions, net income and net income per share
were $5.9 million and $0.15, respectively, for the three months ended September
30, 1997 and $2.8 million and $0.07, respectively, for the three months ended
September 30, 1996. Excluding the effects of these transactions, net income and
net income per share were $15.9 million and $0.40, respectively, for the nine
months ended September 30, 1997 and $8.4 million and $0.22, respectively, for
the nine months ended September 30, 1996.
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<PAGE> 12
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had cash and marketable securities of
$107,762 and working capital of $109,994. The Company has historically funded
its operations primarily from cash generated from its operating activities.
During the first nine months of 1996, the Company used the cash provided by
operations principally for purchasing marketable securities and to finance
certain costs incurred in connection with the RSA merger. During the first nine
months of 1997 the Company used cash provided by operations and cash provided
from the sale of marketable securities to finance the acquisition of DynaSoft
and for purchases of property and equipment. The Company believes that cash
provided by operations 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 for
approximately 2.7 million shares of the Company's Common Stock. The Company also
paid approximately $6 million in cash to certain stockholders of DynaSoft in
exchange for the remaining outstanding shares and options. These payments were
recorded as a reduction in additional paid in capital. The transaction is being
accounted for as a pooling of interests. See Note 4 of Notes to Condensed
Consolidated Financial Statements. See Part II, Item 2.
On July 26, 1996, the Company acquired RSA in a transaction that was
accounted for as a pooling of interests. The RSA merger costs were
approximately $6.1 million.
In October 1997, the Company sold 1,626,000 shares of Common Stock in a
follow-on offering, which generated $60.8 million of net cash proceeds to the
Company.
The Company's capital expenditures for the first nine months of 1997 were
$7,402 and related primarily to additional leasehold improvements, office
furniture and equipment, as well as computer equipment for product development,
testing and support to accommodate the Company's continued growth. The Company
generated $2,470 of cash from the exercise of stock options and from stock
purchase plans and generated $1,838 of cash from the sale of minority interests
in RSA's Japan subsidiary in the first nine months of 1997. The Company
expended $3.2 million for purchased research and development during the quarter
ended September 30, 1997.
In October 1997, the Company purchased 175,285 Ordinary Shares of nCipher
Corporation Limited ("nCipher") for an aggregate purchase price of $502. nCipher
is a company organized under the laws of England and Wales that develops
products designed to accelerate cryptographic processess in Internet security,
electronic commerce and other applications. The Company's investment in nCipher
represents a minority interest of less than 5% of nCipher's capitalization.
In August 1997, the Company purchased 877,193 Series C Preferred Shares of
Finjan Software Ltd. ("Finjan") for an aggregate purchase price of $1.0 million.
Finjan is an Israeli software company organized to develop and market products
for the Java Internet security market. The Company's investment in Finjan
represents a minority interest of less than 5% of Finjan's capitalization.
In March 1996, the Company entered into a noncancelable operating lease
expiring in 2006 for corporate executive offices in Bedford, Massachusetts. The
Company commenced its tenancy in August 1996. The new facility consists of
approximately 75,000 square feet of office space, and the annual base rent for
the first year is $956, increasing annually up to $1,180 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, increasing up to $662 for years five through ten.
Two of the companies in which the Company has equity positions had initial
public offerings in 1996. The Company now considers those investments to be
available for sale marketable securities and the investment cost of $737 is
classified with marketable securities at September 30, 1997. See Note 1 of Notes
to Condensed Consolidated Financial Statements.
In September 1997, the Company announced its SecurMessage email security
solution, which incorporates technology from Worldtalk Corporation ("Worldtalk")
and VeriSign, Inc. for securing already-deployed enterprise email and groupware
applications. In connection therewith, in September 1997, the Company entered
into an agreement with Worldtalk pursuant to which the Company paid to
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<PAGE> 13
Worldtalk in October 1997 a one-time prepaid, nonrefundable license fee of $3.0
million in order to obtain favorable pricing.
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 $1,500 and $1,250 during the first and fourth quarters of 1996,
respectively, and pre-paid $2,500 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.
ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128 ("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. See
Note 2 to Notes to Condensed 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 No. 130" and "SFAS No. 131," respectively). The Company will
be required to adopt the provisions of these statements in fiscal 1998. SFAS No.
130 provides standards for reporting items considered to be "comprehensive
income" and uses the term "other comprehensive income" to refer to revenues,
expenses, gains and losses that are included in comprehensive income under
generally accepted accounting principles but excluded from net income. Currently
the only items presented in the Company's consolidated financial statements that
would be considered other comprehensive income as defined in SFAS No. 130 are
the unrealized gains and losses on marketable securities and cumulative
translation adjustments, which are recorded as components of stockholders'
equity. SFAS No. 131 establishes new standards for reporting information about
operating segments. The Company believes the segment information required to be
disclosed under SFAS No. 131 will be more comprehensive than previously
provided, including expanded disclosure of income statement and balance sheet
items for each reportable operating segment. The Company has not yet completed
its analysis of which operating segments it will report on. The Company believes
that the provisions of SFAS No. 130 will not, when adopted, have a material
impact on the Company's financial statements.
13
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<PAGE> 14
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results
to differ materially from those indicated by forward-looking statements made in
this Quarterly Report on Form 10-Q and presented elsewhere by management from
time to time.
A number of uncertainties exist that could affect the Company's future
operating results, including, without limitation, general economic conditions,
the Company's continued ability to develop and introduce products, the
introduction of new products by competitors, pricing practices of competitors,
expansion of the Company's sales distribution capability, the cost and
availability of components and the Company's ability to control costs.
The Company's success is dependent in part on its ability to complete its
integration of the operations of DynaSoft and RSA in an efficient and effective
manner. The successful combination of the Company, DynaSoft and RSA in a rapidly
changing high technology industry may be more difficult to accomplish than in
other industries. The combination of the three companies will require, among
other things, integration of the companies' respective product offerings and
coordination of their sales and marketing and research and development efforts.
There can be no assurance that such integration will be accomplished smoothly or
successfully. The difficulties of such integration may be increased by the
necessity of coordinating geographically separated organizations. The
integration of certain operations will require the dedication of management
resources which may temporarily distract attention from the day-to-day business
of the combined company. The inability of management to successfully integrate
the operations of the three companies could have a material adverse effect on
the business and results of operations of the Company.
The Company's success is also dependent on the success of its Enterprise
Security Services, which is a security solution being developed by the Company
that would enable organizations to support and manage the growing use of public
and private keys, digital signatures and digital certificates for assuring
confidentiality and privacy on an enterprise-wide scale. The success of
Enterprise Security Services is dependent on a number of factors, including
without limitation delays in product development, undetected software errors or
bugs, competitive pressures, technical difficulties, market acceptance of new
technologies, including without limitation the use and implementation of various
certificate management and key management technologies, changes in customer
requirements and government regulations, delays in developing strategic
partnerships and general economic conditions.
The Company's success is highly dependent on its ability to enhance its
existing products and to develop and introduce new products in a timely manner.
If the Company were to fail to introduce new products on a timely basis, the
Company's operating results could be adversely affected. To date, substantially
all of the Company's revenues have been attributable to sales of its enterprise
network and data security products, the licensing of 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 could have a material adverse effect on
the Company's financial condition and results of operations.
Certain components of the Company's products are currently purchased from a
single or limited sources and any interruption in the supply of such components
could adversely affect the Company's operating results.
The Company's quarterly operating results may vary significantly depending
on a number of factors, including the timing of the introduction or enhancement
of products by the Company or its competitors, the sizes, timing and shipment of
individual orders, market acceptance of new products, changes in the Company's
operating expenses, personnel changes, mix of products sold, changes in
14
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<PAGE> 15
product pricing, development of the Company's direct and indirect distribution
channels and general economic conditions.
International sales have represented a significant portion of the Company's
sales. The international business and financial performance of the Company may
be affected by fluctuations in foreign exchange rates, difficulties in managing
accounts receivable, tariff regulations and difficulties in obtaining export
licenses.
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<PAGE> 16
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On July 15, 1997, the Company acquired DynaSoft pursuant to Stock Purchase
Agreements, dated as of July 12 and 15, 1997 (the "Stock Purchase Agreements"),
by and among the Company, DynaSoft and the stockholders of DynaSoft. Pursuant
to the Stock Purchase Agreements, the Company issued or reserved for issuance
approximately 2.7 million shares of its Common Stock (the "Shares") to certain
stockholders of DynaSoft in exchange for approximately 95% of the outstanding
shares and certain of the outstanding options to acquire shares of DynaSoft. The
Company also paid approximately $6 million to certain stockholders of DynaSoft
in exchange for the remaining outstanding shares and options. Of the Shares, an
aggregate of 396,387 shares of Common Stock were issued and sold in reliance on
Section 4(2) of the Securities Act of 1933, as amended (the "Act"), to three
U.S. stockholders of DynaSoft. The remaining 2,292,641 shares of Common Stock
issued and sold pursuant to the Stock Purchase Agreements were issued and sold
in reliance on Rule 903 of Regulation S under the Act to certain stockholders of
DynaSoft, each of whom was deemed not to be a "U.S. person" as defined in
Regulation S. No underwriters were involved with such issuances and sales of
Common Stock.
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<PAGE> 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
The Exhibits listed in the Exhibit Index immediately preceding such
Exhibits are filed as part of this Quarterly Report on Form 10-Q.
b) Reports on Form 8-K:
On July 30, 1997, July 31, 1997 and August 4, 1997, the Company filed a
Current Report on Form 8-K, dated July 15, 1997, an Amendment No. 1 on Form
8-K/A and an Amendment No. 2 on Form 8-K/A, respectively, announcing under Item
5 (Other Events) and Item 9 (Sales of Equity Securities Pursuant to Regulation
S) that the Company had acquired DynaSoft pursuant to Stock Purchase
Agreements, dated as of July 12 and 15, 1997, by and among the Company,
DynaSoft and the stockholders of DynaSoft. No financial statements were
required to be filed with such reports.
17
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<PAGE> 18
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SECURITY DYNAMICS TECHNOLOGIES, INC.
Dated: November 14, 1997 /s/ Marian G. O'Leary
----------------------------------------------
Marian G. O'Leary
Senior Vice President,
Finance, Chief Financial Officer and Treasurer
(Principal Financial and Accounting Officer)
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<PAGE> 19
EXHIBIT INDEX
<TABLE>
<CAPTION>
ITEM DESCRIPTION
<S> <C>
10.1 Stock Purchase Agreement by and among Security Dynamics
Technologies, Inc., DynaSoft AB and the stockholders of
DynaSoft named on Schedule I thereto, dated July 12, 1997, is
incorporated herein by reference to Exhibit 2.1 to the
Company's Current Report on Form 8-K, dated July 15, 1997
(File No. 0-25120) (the "Form 8-K")
10.2 Stock Purchase Agreement by and among Security Dynamics
Technologies, Inc., DynaSoft AB and the stockholders of
DynaSoft named on Schedule I thereto, dated July 15, 1997, is
incorporated herein by reference to Exhibit 2.2 to the Form
8-K
10.3 Stock Purchase Agreement by and among Security Dynamics
Technologies, Inc., DynaSoft AB and the stockholders of
DynaSoft named on Schedule I thereto, dated July 15, 1997, is
incorporated herein by reference to Exhibit 2.3 to the Form
8-K
10.4 Stock Purchase Agreement by and between Security Dynamics
Technologies, Inc. and Ian Anderson, dated July 15, 1997, is
incorporated herein by reference to Exhibit 2.4 to the Form
8-K
10.5 Stock Purchase Agreement by and between Security Dynamics
Technologies, Inc. and Joakim Borell, dated July 15, 1997,
is incorporated herein by reference to Exhibit 2.5 to the
Form 8-K
10.6 Stock Purchase Agreement by and between Security Dynamics
Technologies, Inc. and Jean Paul Link, dated July 15, 1997,
is incorporated herein by reference to Exhibit 2.6 to the
Form 8-K
10.7 Stock Purchase Agreement by and between Security Dynamics
Technologies, Inc. and Sten Sorenson, dated July 15, 1997,
is incorporated herein by reference to Exhibit 2.7 to the
Form 8-K
10.8 Registration Rights Agreement by and among Security
Dynamics Technologies, Inc. and the parties named on
Schedule I thereto, dated July 15, 1997, is incorporated
herein by reference to Exhibit 10.1 to be Form 8-K
11 Computation of Income Per Common and Common Equivalent
Share.
27 Financial Data Schedule.
</TABLE>
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<PAGE> 1
EXHIBIT 11
SECURITY DYNAMICS TECHNOLOGIES, INC
AND SUBSIDIARIES
COMPUTATION OF INCOME PER COMMON AND COMMON EQUIVALENT SHARE THREE AND NINE
MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS
SEPTEMBER 30, ENDED SEPTEMBER 30,
1997 1996(a) 1997 1996(a)
------- -------- ------- -------
<S> <C> <C> <C> <C>
PRIMARY
Weighted average number of common and
common equivalent shares outstanding:
Common stock 37,845 36,684 37,815 36,127
Common equivalent shares resulting from
stock options (treasury stock method) 1,819 2,484 1,707 2,543
------- -------- ------- -------
Total 39,664 39,168 39,522 38,670
======= ======== ======= =======
Net income (loss) $ 2,315 $ (182) $12,391 $ 5,272
======= ======== ======= =======
Net income per common and common equivalent share $ .06 $ .00 $ .31 $ .14
======= ======== ======= =======
FULLY DILUTED
Weighted average number of common and
common equivalent shares outstanding:
Common stock 37,845 36,684 37,815 36,127
Common equivalent shares resulting from
stock options (treasury stock method) 1,819 2,496 1,841 2,570
------- -------- ------- -------
Total 39,664 39,180 39,656 38,697
======= ======== ======= =======
Net income (loss) $ 2,315 $ (182) $12,391 $ 5,272
======= ======== ======= =======
Net income (loss) per common and common equivalent share $ .06 $ .00 $ .31 $ .14
======= ======== ======= =======
</TABLE>
(a) Reflects the acquisition of DynaSoft completed in July 1997.
20
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<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<CIK> 0000932064
<NAME> SECURITY DYNAMICS TECHNOLOGIES INC.
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 36,988
<SECURITIES> 70,774
<RECEIVABLES> 20,257
<ALLOWANCES> 787
<INVENTORY> 2,744
<CURRENT-ASSETS> 137,663
<PP&E> 21,290
<DEPRECIATION> 5,823
<TOTAL-ASSETS> 161,059
<CURRENT-LIABILITIES> 27,669
<BONDS> 0
0
0
<COMMON> 380
<OTHER-SE> 129,978
<TOTAL-LIABILITY-AND-EQUITY> 161,059<F1>
<SALES> 96,202
<TOTAL-REVENUES> 96,202
<CGS> 19,995
<TOTAL-COSTS> 84,875
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 327
<INTEREST-EXPENSE> (3,976)
<INCOME-PRETAX> 19,899
<INCOME-TAX> 7,508
<INCOME-CONTINUING> 12,391
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,391
<EPS-PRIMARY> 0.314
<EPS-DILUTED> 0.312
<FN>
<F1>TOTAL LIABILITY AND EQUITY INCLUDES $3,032 MINORITY INTERESTS
</FN>
</TABLE>
