<PAGE> 1
SCHEDULE 14A
(RULE 14a - 101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
FILED BY THE REGISTRANT [X] FILED BY A PARTY OTHER THAN THE REGISTRANT [ ]
- --------------------------------------------------------------------------------
Check the appropriate box:
[ ] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
SECURITY DYNAMICS TECHNOLOGIES, INC.
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
PAYMENT OF FILING FEE (CHECK THE APPROPRIATE BOX):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1) Title of each class of securities to which transaction applies:
2) Aggregate number of securities to which transaction applies:
3) Per unit price or other underlying value of transaction computed pursuant
to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
4) Proposed maximum aggregate value of transaction:
5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
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<PAGE> 2
SECURITY DYNAMICS TECHNOLOGIES, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 24, 1997
NOTICE IS HEREBY GIVEN that the Annual Meeting of the Stockholders of
Security Dynamics Technologies, Inc., a Delaware corporation (the "Company"),
will be held on Thursday, April 24, 1997 at 10:00 a.m. at the offices of Hale
and Dorr LLP, 60 State Street, Boston, Massachusetts 02109 (the "Meeting") for
the purpose of considering and voting upon the following matters:
1. To elect two Class III Directors for the ensuing three years;
2. To approve (i) an amendment to the Company's 1994 Stock Option Plan (the
"1994 Plan") increasing from 4,820,000 to 6,570,000 the number of shares
of Common Stock authorized under the 1994 Plan and (ii) the continuance
of the 1994 Plan, as amended;
3. To ratify the appointment of Deloitte & Touche LLP as independent
auditors of the Company for the current year; and
4. To transact such other business as may properly come before the Meeting
or any adjournment thereof.
The Board of Directors has no knowledge of any other business to be
transacted at the Meeting.
The Board of Directors has fixed the close of business on Thursday, March
20, 1997 as the record date for the determination of stockholders entitled to
notice of and to vote at the Meeting and at any adjournments thereof.
A copy of the Company's Annual Report to Stockholders for the year ended
December 31, 1996, which contains consolidated financial statements and other
information of interest to stockholders, accompanies this Notice and the
enclosed Proxy Statement.
By Order of the Board of Directors,
Arthur W. Coviello, Jr.,
Secretary
April 2, 1997
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE PROMPTLY COMPLETE,
DATE, SIGN AND RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. NO
POSTAGE NEED BE AFFIXED IF THE PROXY IS MAILED IN THE UNITED STATES.
<PAGE> 3
SECURITY DYNAMICS TECHNOLOGIES, INC.
20 CROSBY DRIVE
BEDFORD, MASSACHUSETTS 01730
-------------------------------
PROXY STATEMENT
-------------------------------
FOR ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 24, 1997
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Security Dynamics Technologies, Inc. (the
"Company") at the Annual Meeting of Stockholders to be held on Thursday, April
24, 1997 at 10:00 a.m. at the offices of Hale and Dorr LLP, 60 State Street,
Boston, Massachusetts 02109 and at any adjournments thereof (the "Meeting").
All proxies will be voted in accordance with the instructions of the
stockholder. If no choice is specified, the proxies will be voted in favor of
the matters set forth in the accompanying Notice of Meeting. Any proxy may be
revoked by a stockholder at any time before its exercise by delivery of a
written revocation to the Secretary of the Company. Attendance at the Meeting
will not itself be deemed to revoke a Proxy unless the stockholder gives
affirmative notice at the Meeting that the stockholder intends to revoke the
Proxy and vote in person.
On March 20, 1997, the record date for determination of stockholders
entitled to vote at the Meeting, there were outstanding and entitled to vote an
aggregate of 34,956,261 shares of Common Stock of the Company, $.01 par value
per share (the "Common Stock"). Each share entitles the record holder to one
vote on each of the matters to be voted upon at the Meeting.
THE NOTICE OF MEETING, THIS PROXY STATEMENT, THE ENCLOSED PROXY AND THE
COMPANY'S ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1996 ARE
BEING MAILED TO STOCKHOLDERS ON OR ABOUT APRIL 2, 1997. THE COMPANY WILL, UPON
WRITTEN REQUEST OF ANY STOCKHOLDER, FURNISH WITHOUT CHARGE A COPY OF ITS ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1996, AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION, WITHOUT EXHIBITS. PLEASE ADDRESS ALL SUCH
REQUESTS TO THE COMPANY, ATTENTION OF ARTHUR W. COVIELLO, JR., EXECUTIVE VICE
PRESIDENT, 20 CROSBY DRIVE, BEDFORD, MASSACHUSETTS 01730. EXHIBITS WILL BE
PROVIDED UPON WRITTEN REQUEST AND PAYMENT OF AN APPROPRIATE PROCESSING FEE.
<PAGE> 4
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of January 31, 1997
with respect to the beneficial ownership of shares of Common Stock by (i) each
person known to the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) the directors and director nominees of the Company,
(iii) the Chief Executive Officer and the four other most highly compensated
executive officers who were serving as executive officers on December 31, 1996
as well as one additional person who would have been included among the four
most highly compensated executive officers if he were serving as an executive
officer on December 31, 1996 (the "Named Executive Officers"), and (iv) the
directors and executive officers of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL OWNERSHIP(1)
-------------------------------
NAME AND ADDRESS PERCENT OF
OF BENEFICIAL OWNER NUMBER OF SHARES CLASS
------------------- ---------------- ----------
<S> <C> <C>
5% STOCKHOLDERS
Putnam Investments, Inc........................................... 3,571,601(2) 10.3%
One Post Office Square
Boston, Massachusetts 02109
Pilgrim Baxter & Associates, Ltd.................................. 3,532,400(3) 10.1%
1255 Drummers Lane
Suite 300
Wayne, Pennsylvania 19087
Addison M. Fischer................................................ 3,230,936(4) 9.3%
3506 Mercantile Avenue
Naples, FL 34104-3310
Kenneth P. Weiss.................................................. 2,583,516 7.4%
59 Sargent Street
Newton, MA 02158
DIRECTORS
Charles R. Stuckey, Jr............................................ 932,472(5) 2.7%
D. James Bidzos................................................... 1,224,146(6) 3.5%
Richard L. Earnest................................................ 52,516(7) *
George M. Middlemas............................................... 237,792(8) *
Joseph B. Lassiter, III........................................... 0 0
Marino R. Polestra................................................ 0 0
Sanford M. Sherizen............................................... 40,250 *
OTHER NAMED EXECUTIVE OFFICERS
Arthur W. Coviello, Jr............................................ 177,864(9) *
Linda E. Saris.................................................... 140,334(10) *
Robert W. Fine.................................................... 25,986 *
James M. Geary.................................................... 186,220 *
All executive officers and directors,
as a group (13 Persons)......................................... 3,077,580(11) 8.6%
</TABLE>
- ---------------
* Less than 1%
(1) The number of shares beneficially owned by each director and executive
officer is determined under rules promulgated by the Securities and
Exchange Commission (the "SEC"), and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under such rules,
beneficial
2
<PAGE> 5
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 January 31, 1997 through the
exercise of any stock option or other right. The inclusion herein of such
shares, however, does not constitute an admission that the named
stockholder is a direct or indirect beneficial owner of such shares. Unless
otherwise indicated, each person or entity named in the table has sole
voting power and investment power (or shares such power with his or her
spouse) with respect to all shares of capital stock listed as owned by such
person or entity.
(2) Putnam Investments, Inc. has shared voting power with respect to 101,000
shares and shared dispositive power with respect to 3,571,601 shares.
Putnam Investment Management, Inc. has shared dispositive power over
3,390,601 shares. The Putnam Advisory Company, Inc. has shared voting power
over 101,000 shares and shared dispositive power over 181,000 shares. The
Putnam New Opportunities Fund has shared dispositive power over 1,772,000
shares. Putnam Investments, Inc., a wholly-owned subsidiary of the Marsh &
McLennan Companies, Inc., is the sole stockholder of Putnam Investment
Management, Inc. and The Putnam Advisory Company, Inc. This information is
derived from a Schedule 13G/A filed with the SEC on January 27, 1997.
(3) This information is derived from a Schedule 13G/A filed with the SEC on
February 14, 1997.
(4) Excludes 166,112 shares held by Kairdos L.L.C., a Delaware limited
liability company, of which Mr. Fischer is a stockholder and director. Mr.
Fischer disclaims beneficial ownership of these shares except to the extent
of his proportionate pecuniary interest therein. Includes 321,400 shares
held by a grantor retained annuity trust of which Mr. Fischer is the
trustee and over which he has sole voting and investment control. This
information is taken from a Schedule 13G filed with the SEC on January 27,
1997.
(5) Includes 50,000 shares held by the Stuckey Family Charitable Remainder
Unitrust. Also includes 350,000 shares which may be acquired pursuant to
stock options exercisable within 60 days after January 31, 1997.
(6) Includes 156,112 shares held by Kairdos L.L.C. Mr. Bidzos disclaims
beneficial ownership of these shares except to the extent of his
proportionate pecuniary interest therein. Also includes 498,336 shares
which may be acquired pursuant to stock options exercisable within 60 days
after January 31, 1997.
(7) Includes 16,000 shares which may be acquired pursuant to stock options
exercisable within 60 days after January 31, 1997.
(8) Includes 200,000 shares owned of record by Apex Investment Fund II, L.P.
("Apex"). Mr. Middlemas is a director of the Company and a general partner
of Apex Management Partnership, the sole general partner of Apex. Mr.
Middlemas disclaims beneficial ownership of shares owned of record by Apex.
Also includes 16,000 shares which may be acquired pursuant to stock options
exercisable within 60 days after January 31, 1997.
(9) Includes 177,500 shares which may be acquired pursuant to stock options
exercisable within 60 days after January 31, 1997.
(10) Includes 119,917 shares held jointly by Ms. Saris and Brian T. Watson and
7,500 shares which may be acquired pursuant to stock options exercisable
within 60 days after January 31, 1997.
(11) Includes 1,115,336 shares which may be acquired pursuant to stock options
exercisable within 60 days after January 31, 1997.
VOTES REQUIRED
The holders of a majority of the shares of Common Stock issued and
outstanding and entitled to vote at the Meeting shall constitute a quorum for
the transaction of business at the Meeting. Shares of Common Stock present in
person or represented by proxy (including shares which abstain or do not vote
with respect to one or more of the matters presented for stockholder approval)
will be counted for purposes of determining whether a quorum exists at the
Meeting.
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<PAGE> 6
The affirmative vote of the holders of a plurality of the votes cast by the
stockholders entitled to vote at the Meeting is required for the election of
directors. The affirmative vote of the holders of a majority of the shares of
Common Stock present or represented by proxy and voting on the matter is
required to approve the continuance of, and amendment to, the 1994 Stock Option
Plan and to ratify the appointment of the Company's independent auditors.
Shares which abstain from voting as to a particular matter, and shares held
in "street name" by brokers or nominees who indicate on their proxies that they
do not have discretionary authority to vote such shares as to a particular
matter, will not be counted as votes in favor of such matter, and will also not
be counted as votes cast or shares voting on such matter. Accordingly,
abstentions and "broker non-votes" will have no effect on the voting on a matter
that requires the affirmative vote of a certain percentage of the votes cast or
shares voting on a matter.
PROPOSAL 1 -- ELECTION OF DIRECTORS
The Company has a classified Board of Directors consisting of two Class I
directors, three Class II directors, and two Class III directors. The Class I,
Class II and Class III Directors will serve until the annual meeting of
stockholders to be held in 1998, 1999 and 1997, respectively, and until their
respective successors are elected and qualified. At each annual meeting of
stockholders, directors are elected for a full term of three years to succeed
those whose terms are expiring.
The persons named in the enclosed proxy will vote to elect, as Class III
directors, George M. Middlemas and Marino R. Polestra, the two director nominees
named below, unless the proxy is marked otherwise. Messrs. Middlemas and
Polestra are both currently directors of the Company.
Each Class III director will be elected to hold office until the 2000
annual meeting of stockholders and until his successor is elected and qualified.
Each of the nominees has indicated his willingness to serve, if elected;
however, if any nominee should be unable to serve, the person acting under the
proxy may vote the proxy for a substitute nominee. The Board of Directors has no
reason to believe that any of the nominees will be unable to serve if elected.
For each member of the Board of Directors, including those who are nominees
for election as Class III directors, there follows information given by each
concerning his principal occupation and business experience for the past five
years, the names of other publicly held companies of which he serves as a
director and his age and length of service as a director of the Company.
<TABLE>
<CAPTION>
DIRECTOR PRINCIPAL OCCUPATION, OTHER BUSINESS EXPERIENCE
NAME AGE SINCE DURING PAST FIVE YEARS AND OTHER DIRECTORSHIPS
---- --- -------- -------------------------------------------------
NOMINEES FOR TERMS EXPIRING IN 2000 (CLASS III DIRECTORS)
<S> <C> <C> <C>
George M. Middlemas.... 50 1992* General Partner of Apex Management Partnership
("AMP"), the General Partner of Apex, a venture
capital fund and a stockholder of the Company,
since January 1991. Mr. Middlemas serves on the
Board of Directors of PureCycle Corporation, a
publicly traded company located in Commerce City,
Colorado, and American Communications Services,
Inc., a publicly traded company located in
Annapolis Junction, Maryland.
</TABLE>
4
<PAGE> 7
<TABLE>
<CAPTION>
DIRECTOR PRINCIPAL OCCUPATION, OTHER BUSINESS EXPERIENCE
NAME AGE SINCE DURING PAST FIVE YEARS AND OTHER DIRECTORSHIPS
- ----------------------- --- -------- -------------------------------------------------
<S> <C> <C> <C>
Marino R. Polestra..... 39 1993 General Partner of Alta Partners, a venture
capital firm, since February 1996. Vice President
and Partner of Burr, Egan, Deleage & Co., a
venture capital firm, from February 1989 to
December 1996. Mr. Polestra is a director of
Premisys Communications Holdings, Inc., a
telecommunications equipment supplier located in
Freemont, California, and of Individual Inc., a
provider of customized information services
located in Burlington, Massachusetts.
DIRECTORS WHOSE TERMS EXPIRE IN 1998 (CLASS I DIRECTORS)
Joseph B. Lassiter, Senior Lecturer at the Harvard University
III.................. 49 1996 Graduate School of Business Administration since
September 1996. President of Wildfire
Communications, Inc., a telecommunications
software company, from July 1994 to February
1996. Prior to February 1994 Mr. Lassiter was
Vice President of Teradyne, Inc., a manufacturer
of automatic test equipment.
Charles R. Stuckey, Chairman of the Board of Directors since July
Jr................... 54 1987 1996; President of the Company since January
1987; Chief Executive Officer of the Company
since March 1987.
DIRECTORS WHOSE TERMS EXPIRE IN 1999 (CLASS II DIRECTORS)
D. James Bidzos........ 41 1996 Executive Vice President of the Company since
July 1996; President and Chief Executive Officer
of RSA Data Security, Inc. since 1986.
Richard L. Earnest..... 54 1993 Chief Executive Officer of Tudor Publishing
Company in San Diego, California since April
1995; independent consultant to start-up
companies from June 1994 to March 1995; Chief
Executive Officer of DEMAX Software, a provider
of centralized security management software, from
June 1993 to June 1994; Chief Executive Officer
of Advant Edge Systems Group, a software company,
from April 1991 to June 1993.
Sanford M. Sherizen.... 56 1989 President of Data Security Systems, Inc., a
computer security consulting firm, since 1983.
</TABLE>
- ---------------
* Mr. Middlemas also served on the Board of Directors of the Company from May
1986 to June 1991.
For information relating to shares of Common Stock owned by each of the
directors, see "Security Ownership of Certain Beneficial Owners and Management."
BOARD AND COMMITTEE MEETINGS
The Board of Directors met 13 times (including by telephone conference)
during 1996. All directors attended at least 75% of the meetings of the Board of
Directors and of the committees on which they served.
The Board of Directors has a Compensation Committee, which makes
recommendations concerning salaries and incentive compensation for employees of
and consultants to the Company and administers and grants stock options pursuant
to the Company's stock option plans. The Compensation Committee held 3 meetings
during 1996. The members of the Compensation Committee are Messrs. Middlemas,
Lassiter and Sherizen.
5
<PAGE> 8
The Board of Directors has an Audit Committee, which reviews the results
and scope of the audit and other services provided by the Company's independent
public accountants. The Audit Committee held 5 meetings during 1996. The members
of the Audit Committee are Messrs. Earnest and Polestra.
In January 1997 the Company established a Nominating Committee of the Board
of Directors. The Nominating Committee's function is to make recommendations to
the Board of Directors concerning all facets of the director selection process.
Stockholders wishing to propose director candidates for consideration by the
Nominating Committee may do so by writing to the Secretary of the Company and
providing information specified in the Company's Bylaws, including the
candidate's name, biographical data and qualifications. The Company's Bylaws set
forth further requirements for stockholders wishing to nominate director
candidates for consideration by stockholders including, among other things, that
a stockholder must give written notice of an intent to make such a nomination
complying with the Bylaws of the Company to the Secretary of the Company not
less than 60 days nor more than 90 days prior to the stockholders' meeting. The
members of the Nominating Committee are Messrs. Earnest and Lassiter.
DIRECTOR COMPENSATION
All of the directors are reimbursed for expenses incurred in connection
with their attendance at Board and committee meetings. Each non-employee
director is paid $2,000 for attendance at each meeting of the Board or for each
telephonic meeting of the Board in which he participates. Each non-employee
director is further entitled to $1,000 for each meeting of a committee of the
Board attended by the director which is held on a day other than the day of, or
the day before or after, the date of any meeting of the full Board of Directors.
Other directors are not entitled to compensation in their capacities as
directors.
In July 1990, the Board of Directors voted to award Mr. Sherizen 12,500
shares of Common Stock in each of October 1990, 1991, 1992 and 1993, subject to
Mr. Sherizen's continued service as a director on each such date, in
consideration for his services as a member of the Company's Board of Directors.
In October 1993, the Board voted to award Mr. Earnest 12,500 shares of Common
Stock in each of October 1994, 1995, 1996 and 1997, subject to continued service
on the Board of Director on each such date, in consideration for his services as
a member of the Board of Directors.
In October 1994, the Board of Directors awarded Mr. Sherizen an additional
12,500 shares of Common Stock in consideration for services on the Board of
Directors and voted to issue Mr. Earnest 26,016 restricted shares of Common
Stock, at a purchase price of $.0025 per share, in lieu of the awards of Common
Stock which would have issued in 1995, 1996 and 1997. These restricted shares
vest over a period ending on the day preceding the Company's 1997 Annual Meeting
of Stockholders. Under the terms of the restricted stock agreement entered into
with Mr. Earnest, if Mr. Earnest ceases to serve as a director at any time prior
to the day preceding the Company's 1997 Annual Meeting of Stockholders, the
Company may repurchase a percentage of the restricted shares at a price of
$.0025 per share.
1994 Director Stock Option Plan
The 1994 Director Stock Option Plan (the "Director Plan") was adopted by
the Board of Directors and approved by the stockholders of the Company in
October 1994. Under the terms of the Director Plan, directors of the Company who
are not employees of the Company or any subsidiary of the Company are eligible
to receive non-statutory options to purchase shares of Common Stock. A total of
300,000 shares of Common Stock may be issued upon exercise of options granted
under the Director Plan.
Initial options to purchase 4,000 shares of Common Stock at an exercise
price of $4.22 per share were granted pursuant to the Director Plan to each of
Messrs. Earnest, Sherizen, Middlemas and Polestra upon the closing of the
Company's initial public offering on December 21, 1994. Options will also be
granted to each eligible director upon his or her initial election to the Board
of Directors. Such options will cover the number of shares of Common Stock
determined by multiplying (i) 12,000 by (ii) the quotient of (x) the number of
whole calendar months between the option grant date and the date of the next
annual meeting of stockholders and (y) 12. In connection with his initial
election to the Board of Directors, Mr. Lassiter was granted an option to
purchase 9,000 shares of Common Stock at an exercise price of $39.00 on July 17,
1996.
6
<PAGE> 9
Options to purchase 12,000 shares of Common Stock at an exercise price of
$10.77 per share were granted to each of Messrs. Earnest, Sherizen, Middlemas
and Polestra on June 13, 1995, the date of the Company's 1995 Annual Meeting of
Stockholders, options to purchase 12,000 shares of Common Stock at an exercise
price of $44.21 per share were granted to each of Messrs. Earnest, Sherizen,
Middlemas and Polestra on May 22, 1996, the date of the Company's 1996 Annual
Meeting of Stockholders and each eligible director will receive annual options
to purchase 12,000 shares of Common Stock on the date of each subsequent annual
meeting of stockholders.
All options granted under the Director Plan will vest on the first
anniversary of the date of grant (or, in the case of annual options, the day
prior to the first annual meeting of stockholders of the Company following the
date of grant, if earlier). With the exception of the options granted on the
closing of the Company's initial public offering, the exercise price of options
granted under the Director Plan will equal the lesser of (i) the closing price
of the Common Stock on the date of grant or (ii) the average of the closing
prices of the Common Stock on the Nasdaq National Market (or such other
nationally recognized exchange or trading system if the Common Stock is no
longer traded on the Nasdaq National Market) for a period of ten consecutive
trading days prior to such date.
Options granted under the Director Plan generally are not transferrable by
the optionee except by will or by the laws of descent and distribution. In the
event an optionee ceases to serve as a director, each option may be exercised by
the optionee for the portion then exercisable at any time within 60 days after
the optionee ceases to serve as a director; provided, however, that in the event
that the optionee ceases to serve as a director due to his death or disability,
then the optionee, or his or her administrator, executor or heirs may exercise
the exercisable portion of the option for up to 180 days following the date the
optionee ceased to serve as a director. No option is exercisable after the
expiration of ten years from the date of grant.
COMPENSATION OF EXECUTIVE OFFICERS
Employment Agreements
The Company was a party to an employment agreement with Mr. Stuckey for the
period commencing July 9, 1993 and ending July 8, 1996. Under this agreement,
Mr. Stuckey served as President and Chief Executive Officer of the Company. As
of the date of the mailing of this proxy statement negotiations between the
Company and Mr. Stuckey concerning a new employment agreement are ongoing.
The Company is also a party to a letter agreement, dated August 21, 1995,
with Arthur W. Coviello, Jr. Under the agreement, Mr. Coviello serves as
Executive Vice President, Treasurer and Chief Financial Officer of the Company
and is responsible for the Company's engineering, administrative, operational
and financial organizations. Mr. Coviello's annual base salary is $175,000.
Under the agreement, Mr. Coviello received a bonus of $85,968 for services
rendered in 1996. Mr. Coviello is also entitled to severance of six months'
salary and benefits in the event that his employment is terminated by the
Company. In addition, for each full year of service with the Company (up to a
maximum of six years), Mr. Coviello will receive an additional one month of
severance (aggregating up to 12 months of severance). On September 1, 1995, the
Compensation Committee of the Board of Directors granted Mr. Coviello options to
purchase 600,000 shares of Common Stock at an exercise price of $9.97 per share.
As of the date of the mailing of this proxy statement negotiations between
the Company and Mr. Coviello concerning a new employment agreement, to replace
the above described letter agreement, are ongoing.
Messrs. Stuckey and Coviello have also entered into noncompetition
agreements with the Company. Mr. Stuckey has agreed, for a period of three years
following termination of his association with the Company, not to engage in any
business activity that directly or indirectly competes with the Company or to
provide any service to the Company's competition or its clients. Mr. Coviello
has agreed, through the first anniversary of the date of termination of his
employment with the Company, not to engage in any business activity that is
directly or indirectly in competition with the Company in the United States or
with any of the products or services being developed, provided or sold by the
Company at such time. Mr. Coviello further agreed that he
7
<PAGE> 10
will not, directly or indirectly, employ any person who is employed by the
Company at any time during the term of the noncompetition agreement.
Concurrently with the execution of the Merger Agreement relating to the
Company's acquisition of RSA Data Security, Inc. ("RSA") on April 14, 1996, RSA
entered into an employment agreement with Mr. Bidzos for a two year period
beginning July 26, 1996. Under the agreement, which was amended on June 6, 1996,
Mr. Bidzos serves as President of RSA (or such other position as RSA's Board of
Directors determines). Mr. Bidzos' compensation consists of: (i) an annual base
salary of $200,000, subject to adjustment after the first year as determined by
RSA's Board, provided that in no event may Mr. Bidzos' aggregate annual
compensation (including bonus) be less than $250,000; (ii) an annual bonus if
Mr. Bidzos satisfies certain revenue objectives for RSA; and (iii) an option to
purchase 300,000 shares of the Company's Common Stock at an exercise price of
$32.28 per share.
The agreement with Mr. Bidzos is terminable (i) at the end of the two year
term, (ii) at the election of RSA for cause, (iii) upon Mr. Bidzos' death or
disability, or (iv) at RSA's election upon thirty days' written notice. In the
event that Mr. Bidzos' employment is terminated for cause or upon death or
disability, RSA will pay Mr. Bidzos, or his estate, compensation and benefits
through the last day of his actual employment. If RSA terminates Mr. Bidzos'
employment without cause, RSA will pay Mr. Bidzos the compensation otherwise
payable to him through the last day of the period covered by the noncompetition
agreement described below.
Mr. Bidzos has agreed that, subject to certain exceptions, during the term
of his employment by RSA and for a period extending through the later of July
27, 1998 or the first anniversary after the date on which he ceases to be
employed by RSA, the Company, or any affiliate of the Company, he will not
directly or indirectly engage in any business which offers products or services
that are competitive with the products and services of RSA, the Company or any
of their respective affiliates. In addition, Mr. Bidzos has agreed not to
solicit the employees or customers of RSA, the Company or any affiliate during
the noncompetition period described above. The devotion of not more than 10% of
Mr. Bidzos' business time, attention and energies to certain investments with
which Mr. Bidzos has historically been associated is expressly excluded from the
non-compete provisions of the employment agreement.
The Company also has a severance agreement with Ms. Saris. Under this
agreement, if there is a change in control (as defined) of the Company, and,
within one year of such change in control, Ms. Saris leaves the employ of the
Company because of involuntary termination, a reduction of salary and/or
available bonus or a reduction in job responsibilities, Ms. Saris is entitled to
severance in an amount equal to six months' salary. In addition, following any
such event, Ms. Saris' options will fully vest.
The Company has entered a noncompetition agreement with Mr. Fine under
which Mr. Fine has agreed, through the first anniversary of the date of the
termination of his employment with the Company, not to engage in any business
activity that is directly or indirectly in competition with the Company in the
United States or with any of the products or services being developed, provided
or sold by the Company at such time.
In connection with the termination of his employment with the Company Mr.
Geary entered into a Severance and Settlement Agreement and Release with the
Company dated November 13, 1996. This agreement provided that the Company would
continue to pay Mr. Geary's base salary and provide Mr. Geary with medical and
dental benefits through the earlier to occur of (i) June 30, 1997 or (ii) Mr.
Geary's acceptance of new employment in a position comparable to the one which
he held with the Company. The Company further agreed to pay Mr. Geary his bonus
for 1996 as if he had remained employed with the Company through December 31,
1996. Pursuant to a separate noncompetition agreement with the Company Mr. Geary
has agreed, through the first anniversary of the date of termination of his
employment with the Company, not to engage in any business activity that is
directly or indirectly in competition with the Company in the United States or
with any of the products or services being developed, provided or sold by the
Company at such time. Mr. Geary further agreed that he will not, directly or
indirectly, employ any person who is employed by the Company at any time during
the term of the noncompetition agreement.
8
<PAGE> 11
Summary Compensation
The following table sets forth certain information with respect to the
annual and long-term compensation of the Named Executive Officers for the three
years ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION NUMBER OF
------------------------------- SHARES ALL OTHER
NAME AND SALARY BONUS UNDERLYING COMPENSATION
PRINCIPAL POSITION YEAR ($) ($)(1) STOCK OPTIONS ($)(2)
- ------------------ ---- --------- --------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Charles R. Stuckey, Jr............ 1996 $219,471 $170,918 200,000 $ 5,202
Chairman of the Board, 1995 192,356 281,078 0 5,000
President and Chief 1994 184,865 93,750 0 5,080
Executive Officer
D. James Bidzos(3)................ 1996 165,778 125,858 300,000 9,902
Executive Vice President and
President of RSA Data Security,
Inc.
Arthur W. Coviello, Jr............ 1996 175,000 85,968 0 4,087
Executive Vice President, 1995 54,519 20,000 600,000 1,043
Chief Financial Officer, Chief
Operating Officer, Treasurer and
Secretary
Robert W. Fine(4)................. 1996 141,596 119,871 40,000 5,144
Vice President, North 1995 119,269 153,704 0 4,789
American Sales 1994 113,750 128,579 0 4,786
James Geary(5).................... 1996 133,885 62,497 0 28,243
1995 127,481 60,200 0 4,837
1994 122,399 56,961 0 4,916
Linda E. Saris.................... 1996 123,004 41,322 30,000 5,121
Vice President, Operations and 1995 112,469 27,250 0 4,732
Customer Support 1994 107,227 28,220 0 4,688
</TABLE>
- ---------------
(1) Amounts in this column represent bonuses earned under the Company's
executive compensation program for the respective fiscal years.
(2) Amounts shown in this column represent the aggregate value of the Company's
contributions on behalf of the executives to Group Term Life Insurance ($202
for Mr. Stuckey, $102 for Mr. Bidzos, $177 for Mr. Coviello, $144 for Mr.
Fine, $136 for Mr. Geary and $132 for Ms. Saris), the Company's 401(k)
savings plan ($3,000 for Mr. Stuckey, $1,800 for Mr. Bidzos, $1,910 for Mr.
Coviello, $3,000 for Mr. Fine, $3,000 for Mr. Geary and $2,989 for Ms.
Saris), the Company's Profit Sharing Plan ($2,000 for each of Mr. Stuckey,
Mr. Bidzos, Mr. Coviello, Mr. Fine and Ms. Saris) and any vacation that was
cashed out ($6,000 for Mr. Bidzos and $23,107 for Mr. Geary).
(3) Mr. Bidzos became Executive Vice President of the Company in July 1996.
(4) Mr. Fine served as Vice President, North American Sales of the Company until
January 24, 1997. He now serves as Vice President -- Business Development.
(5) Mr. Geary served as Vice President, Marketing of the Company until leaving
the Company in November 1996.
9
<PAGE> 12
Option Grants
The following table sets forth certain information concerning grants of
stock options during the year ended December 31, 1996 to each of the Named
Executive Officers.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------ POTENTIAL REALIZABLE
NUMBER PERCENT OF VALUE AT ASSUMED
OF SHARES TOTAL OPTIONS ANNUAL RATES OF STOCK
UNDERLYING GRANTED TO EXERCISE PRICE APPRECIATION FOR
OPTIONS EMPLOYEES IN PRICE PER EXPIRATION OPTION TERM(2)
GRANTED FISCAL YEAR SHARE(1) DATE 5% 10%
---------- ------------- --------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Stuckey, Jr. ... 200,000 8.8% $ 24.76 1/24/2006 $3,114,000 $ 7,892,000
D. James Bidzos............ 300,000 13.2% $ 32.28 7/26/2006 6,088,500 15,430,500
Arthur W. Coviello, Jr. ... 0 0 N/A N/A N/A N/A
Robert W. Fine............. 40,000 1.76% $ 24.76 1/24/2006 622,800 1,578,400
James Geary................ 0 0 N/A N/A N/A N/A
Linda E. Saris............. 30,000 1.32% $ 24.76 1/24/2006 467,100 1,183,800
</TABLE>
- ---------------
(1) Options become exercisable over a four-year period and generally terminate
three months following termination of the executive officer's employment
with the Company or the expiration date, whichever occurs earlier. The
exercise price of each option was determined to be equal to the fair market
value per share of the Common Stock on the date of grant.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date. The gains shown are net of the option exercise price,
but do not include deductions for taxes or other expenses associated with
the exercise of the option or the sale of the underlying shares. The actual
gains, if any, on the exercises of stock options will depend on the future
performance of the Common Stock, the optionholder's continued employment
through the option period, and the date on which the options are exercised.
10
<PAGE> 13
Aggregated Option Exercises and Year-End Option Table
The following table summarizes certain information regarding stock options
exercised during the year ended December 31, 1996 and stock options held as of
December 31, 1996 by each of the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING
NUMBER UNEXERCISED VALUE OF UNEXERCISED
OF SHARES OPTIONS AT IN- THE-MONEY OPTIONS
ACQUIRED FISCAL YEAR-END AT FISCAL YEAR-END
ON VALUE (EXERCISABLE/ (EXERCISABLE/
EXERCISED REALIZED UNEXERCISABLE) UNEXERCISABLE)
NAME (#) ($)(1) (#) ($)(2)
- ---------------------------- --------- ---------- ---------------- ----------------------
<S> <C> <C> <C> <C>
Charles R. Stuckey, Jr. .... 0 $ 0 589,800/200,000 $18,534,210/$1,347,500
D. James Bidzos............. 0 0 498,336/300,000 15,247,587/0
Arthur W. Coviello, Jr. .... 110,000 3,174,436 146,250/343,750 3,148,945/7,401,367
Robert W. Fine.............. 0 0 0/40,000 0/269,500
James Geary................. 244,000 6,396,110 0/0 0/0
Linda E. Saris.............. 43,000 1,347,295 107,000/30,000 3,360,880/ 202,125
</TABLE>
- ---------------
(1) Represents the difference between the exercise price and the fair market
value of the Common Stock on the date of exercise.
(2) Value based on the last sales price per share ($31.50) of the Company's
Common Stock on December 31, 1996, as reported on the Nasdaq National
Market, less the exercise price.
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee of the Company's Board of Directors (the
"Compensation Committee") is responsible for recommending compensation policies
with respect to the Company's executive officers, and for making decisions about
awards under certain of the Company's stock-based compensation plans. Each
member of the Compensation Committee is a "non-employee director" within the
meaning of Rule 16b-3 under the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and an "outside director" within the meaning of Section 162(m)
of the Internal Revenue Code. This report addresses the Company's compensation
policies for 1996 as they affected the Chief Executive Officer and the Company's
other executive officers, including the Named Executive Officers.
COMPENSATION POLICIES
The Compensation Committee's executive compensation policies are designed
to provide competitive compensation opportunities, reward executives consistent
with the Company's performance, recognize individual performance and
responsibility, underscore the importance of shareholder value creation, and
assist the Company in attracting and retaining qualified executives. The
principal elements of compensation employed by the Compensation Committee to
meet these objectives are base salaries, annual cash incentives, and long-term
stock-based incentives.
All compensation decisions are determined following a detailed review of
many factors that the Compensation Committee believes are relevant, including
external competitive data, the Company's achievements over the past year, the
individual's contributions to the Company's success, any significant changes in
role or responsibility, and the internal equity of compensation relationships.
In general, the Compensation Committee intends that the overall total
compensation opportunities provided to the executive officers should reflect
competitive compensation for executives with corresponding responsibilities in
comparable firms providing similar products and services. To the extent
determined to be appropriate, the Compensation Committee also considers general
economic conditions, the Company's
11
<PAGE> 14
financial performance, and the individual's performance in establishing the
compensation opportunities of the executive officers. Total compensation
opportunities for the executive officers are adjusted over time as necessary to
meet this objective. Actual compensation earned by the executive officers
reflects both their contributions to the Company's actual shareholder value
creation and the Company's actual financial performance.
The competitiveness of the Company's total compensation
program -- including base salaries, annual cash incentives, and long-term
stock-based incentives -- is regularly assessed with the assistance of the
Compensation Committee's outside compensation consultant. Data for external
comparisons are drawn from a number of sources, including the publicly available
disclosures of selected comparable firms with similar products and national
compensation surveys of information technology firms of similar size.
To present a better comparison of the Company's performance versus its
peers, the Board of Directors in 1997 changed the index employed in the
Comparative Stock Performance Graph. The firms included in the new index are
more similar to the Company in terms of size, product type, and complexity. Many
of the firms included in the new index are employed in the peer group used by
the Compensation Committee to assess the external competitiveness of
compensation levels.
While the targeted total compensation levels for the executive officers are
intended to be competitive, compensation paid in any particular year may be more
or less than the average, depending upon the Company's actual performance.
Base Salary
Base salaries for all executive officers, including the Chief Executive
Officer, are reviewed by the Compensation Committee on an annual basis. In
determining appropriate base salaries, the Compensation Committee considers
external competitiveness, the roles and responsibilities of the individual, the
internal equity of compensation relationships, and the contributions of the
individual to the Company's success.
Annual Cash Incentive Opportunities
The Company believes that executives should be rewarded for their
contributions to the success and profitability of the business and, as such,
approves the annual cash incentive awards. Incentive awards are linked to the
achievement of revenue and net income goals by the Company and/or specific
business units, and the achievement by the executives of certain assigned
objectives. The individual objectives set for executive officers of the Company
are generally objective in nature and include such goals as revenue, profit and
budget objectives, increased departmental productivity, and improved quality
control. The Compensation Committee believes that these arrangements tie the
executive's performance closely to key measures of success of the Company or the
executive's business unit. All executive officers, including the Chief Executive
Officer, are eligible to participate in this program.
Long-Term Stock-Based Incentives
The Compensation Committee also believes that it is essential to link
executive and shareholder interests. As such, from time to time the Compensation
Committee grants stock options to executive officers and other employees under
the Company's 1994 Stock Option Plan. In determining actual awards, the
Compensation Committee considers the externally competitive market, the
contributions of the individual to the success of the Company, and the need to
retain the individual over time. All executive officers, including the Chief
Executive Officer, are eligible to participate in this program.
Section 162(m) of the Internal Revenue Code generally disallows a tax
deduction to public companies for compensation over $1,000,000 paid to its Named
Executive Officers. Qualifying performance-based compensation will not be
subject to the deduction limit if certain requirements are met. Although no
Named Executive Officer received compensation exceeding this limit in 1996, the
Company has limited the number of shares subject to stock options which may be
granted to Company employees in a manner that complies with the
performance-based requirements of Section 162(m) and has submitted the 1994
Stock Option Plan to its
12
<PAGE> 15
stockholders to approve the continuance of the 1994 Stock Option Plan in
accordance with Section 162(m). While the Compensation Committee does not
currently intend to qualify its annual incentive awards as a performance-based
plan, it will continue to monitor the impact of Section 162(m) on the Company.
1996 COMPENSATION
Base salaries paid in 1996, for all executive officers other than the Chief
Executive Officer, reflect the Compensation Committee's review of external
competitiveness, the roles and responsibilities of the individuals, the internal
equity of compensation relationships, and the contributions of the individual.
For a portion of 1996, the Chief Executive Officer's base salary was established
in accordance with a multi-year employment agreement. The agreement expired in
July 1996. The Compensation Committee believes that the base salary paid the
Chief Executive Officer in 1996 was approximately competitive with base salaries
paid to chief executive officers at comparable firms.
Following the end of fiscal 1996, the Compensation Committee determined
that base salary levels for certain executive officers should be increased to
better reflect competitive practice, and to recognize their contributions to the
success of the Company. The Compensation Committee has recommended and the Board
has approved a base salary of $231,000 for the Chief Executive Officer for 1997.
Annual cash incentives paid to all executive officers, including the Chief
Executive Officer, for 1996 were determined in conjunction with the Compensation
Committee's assessment of the Company's performance with respect to
predetermined objectives as outlined above.
Stock options awarded in 1996 to all executive officers, including the
Chief Executive Officer, were based on an assessment of individual contribution,
Company success, and competitive practice, and were intended to help retain the
executives over time and to provide rewards consistent with shareholder returns.
As such, all options granted in 1996 vest ratably over a predetermined period of
time, with an exercise price equal to the fair market value on the date of the
grant. With respect to these grants, no compensation will be earned unless the
share price increases beyond the grant price, thereby creating shareholder
returns.
Joseph B. Lassiter, III
George M. Middlemas
Sanford M. Sherizen
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The current members of the Company's Compensation Committee are Messrs.
Lassiter, Middlemas and Sherizen. No executive officer of the Company has served
as a director or member of the compensation committee (or other committee
serving an equivalent function) of any other entity, whose executive officers
served as a director of or member of the Compensation Committee of the Company.
CERTAIN TRANSACTIONS
In December 1996 the Company purchased $1,500,000 of the Series B
Convertible Preferred Stock, $.001 par value per share, of VPNet Technologies,
Inc. ("VPNet"). Mr. Middlemas, who is a member of the Company's Board of
Directors, is a general partner of Apex Management III, LLC ("Apex III"). Apex
III owns 25% of the outstanding capital stock of VPNet.
On July 26, 1996, the Company completed its acquisition of RSA Data
Security, Inc. ("RSA") pursuant to an Agreement and Plan of Merger, dated as of
April 14, 1996 (the "Merger Agreement"), among the Company, RSA and Card-Key
Inc., a wholly-owned subsidiary of the Company (the "Merger Subsidiary").
Pursuant to the Merger Agreement, the Merger Subsidiary was merged with and into
RSA (the "Merger"), whereupon RSA became a wholly-owned subsidiary of the
Company. At that time, each outstanding share of capital stock of RSA (other
than shares of RSA stock owned beneficially by the Company or the Merger
Subsidiary, shares of RSA stock for which demands for appraisal under the
Delaware General Corporation Law were duly and timely delivered and shares of
RSA stock held in RSA's treasury) was converted into the right to receive
0.83056 shares of Common Stock of the Company (1.66112 shares of Common Stock
after
13
<PAGE> 16
giving effect to the Company's two-for-one stock split on November 1, 1996). In
the aggregate 4,023,267 shares of stock of RSA were converted into 6,683,144
shares of the Company's Common Stock. In addition, as part of the Merger, each
outstanding option to purchase RSA stock was converted into an option to
purchase shares of Common Stock of the Company.
In connection with the Merger, James D. Bidzos, a director and President
and Chief Executive Officer of RSA at the time of the Merger, received 589,698
shares of the Company's Common Stock and options to purchase 498,336 shares of
the Company's Common Stock upon conversion of 355,000 shares of RSA stock and
options to purchase 300,000 shares of RSA stock, respectively. Mr. Bidzos is
currently a director and Executive Vice President of the Company and President
of RSA. Also, in connection with the Merger, Addison M. Fischer, a 5%
stockholder of the Company, received 3,595,944 shares of the Company's Common
Stock upon conversion of 2,164,767 shares of stock of RSA.
Concurrently with the execution of the Merger Agreement each of Messrs.
Bidzos and Fischer entered into a stockholder agreement with the Company and
RSA. Under these stockholder agreements Messrs. Bidzos and Fischer agreed to
vote their shares of RSA stock in favor of the Merger and the Company granted to
Messrs. Bidzos and Fischer registration rights with respect to the shares of the
Company's Common Stock they received pursuant to the Merger (the "Registrable
Shares"). Beginning 90 days after the Company has published financial results
covering at least 30 days of combined operations of the Company and RSA (the
"Registration Rights Commencement Date"), upon the request of either of Messrs.
Bidzos or Fischer, the Company will file a registration statement on Form S-3
with respect to Registrable Shares; provided, however that the Company will not
be required to file a registration statement if the aggregate offering price of
the Registrable Shares is less that $1 million. Each of Messrs. Bidzos and
Fischer may request one such registration on Form S-3. In addition, if the
Company files a registration statement on its own behalf after the Registration
Rights Commencement Date it must give Messrs. Bidzos and Fischer notice and use
its best efforts to include any requested Registrable Shares in such
registration statement. These registration rights expire on the earliest to
occur of (i) with respect to either stockholder, the date on which all
Registrable Shares held by such stockholder are eligible for sale pursuant to
Rule 144 under the Securities Act of 1933, as amended, within a three-months
period or (ii) July 26, 2001.
For a description of the employment agreement entered between Mr. Bidzos
and RSA in connection with the Merger see "Compensation of Executive Officers --
Employment Agreements."
14
<PAGE> 17
COMPARATIVE STOCK PERFORMANCE
The graph below compares the cumulative total stockholder return on the
Common Stock of the Company for the period from December 14, 1994 through
December 31, 1996 with the cumulative total return on (i) Standard and Poor's
SmallCap 600 index, (ii) Standard and Poor's MidCap Computer Software index and
(iii) Hambrecht & Quist's Growth Index. The comparison assumes the investment of
$100 on December 14, 1994 in the Company's Common Stock and in each of the
indices and, in each case, assumes reinvestment of all dividends. Prior to
December 14, 1994, the Company's Common Stock was not registered under the
Exchange Act.
In prior years the Company's stock performance graph has compared the
Company's stock performance with the performance of (i) Standard and Poor's
SmallCap 600 index and (ii) Standard and Poor's MidCap Computer Software index.
For subsequent years the Company will substitute the Hambrecht & Quist Growth
Index (the "H&Q Index") for the Standard and Poor's MidCap Computer Software
index (the "S&P MidCap Index"). This change is being made because the Company's
Board of Directors has determined that (i) the H&Q Index presents a better
comparison of the performance of the Company's Common Stock against the capital
stock of its peers than the S&P MidCap Index, (ii) the firms included in the H&Q
Index are more similar to the Company in size, product type and complexity than
the firms included in the S&P MidCap Index, and (iii) a number of the firms
included in the H&Q Index are also included in the peer group used by the
Company's Compensation Committee to assess the external competitiveness of the
Company's compensation levels.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
12/14/94 12/31/94 12/31/95 12/31/96
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Securities Dynamics Technologies, Inc. 100 116.44 681.27 787.52
- -------------------------------------------------------------------------------
S&P MidCap Computer Software Index* 100 100.64 175.28 189.25
- -------------------------------------------------------------------------------
S&P SmallCap 600 Index* 100 102.43 133.12 161.50
- -------------------------------------------------------------------------------
Hambrecht & Quist Growth Index 100 106.58 172.48 191.26
- -------------------------------------------------------------------------------
</TABLE>
- ---------------
* Partial returns are not available for the S&P MidCap Computer Software Index
and the S&P SmallCap 600 Index and therefore returns for these two indices
were measured from December 1, 1994.
15
<PAGE> 18
PROPOSAL 2 -- APPROVAL OF AMENDMENT TO THE 1994 STOCK OPTION PLAN
INCREASING SHARES AUTHORIZED FOR ISSUANCE THEREUNDER AND CONTINUANCE OF THE PLAN
On February 12, 1997 the Board of Directors adopted, subject to stockholder
approval, an amendment (the "Plan Amendment") to the Company's 1994 Stock Option
Plan (the "1994 Plan") increasing the number of shares of Common Stock
authorized for issuance pursuant to the 1994 Plan from 4,820,000 to 6,570,000 in
the aggregate. The Plan Amendment was adopted because the Company believes that
available shares under the 1994 Plan will not be sufficient to satisfy the
Company's incentive compensation needs through fiscal 1997. The Board of
Directors believes that grants of stock options under the 1994 Plan have been
and will continue to be an important element in attracting and retaining key
employees who are expected to contribute to the Company's growth and success.
Subject to stockholder approval of the continuance of the 1994 Plan as described
below, if the Plan Amendment is approved, the Company will have additional
authorized shares of Common Stock available for future grants, including grants
in connection with any merger, consolidation or acquisition by the Company.
Section 162(m) of the Internal Revenue Code of 1986, as amended (the
"Code"), enacted in 1993, generally disallows a tax deduction to public
companies for compensation over $1 million paid to the company's Chief Executive
Officer and four other most highly compensated executive officers. Qualifying
performance-based compensation is not subject to the deduction limit if certain
requirements are met. In particular, income recognized upon the exercise of a
stock option is not subject to the deduction limit if the option was issued
under a plan approved by stockholders that provides a limit to the number of
shares that may be issued under the plan to any individual.
In order for options granted under the 1994 Plan, as amended by the Plan
Amendment, to comply with Section 162(m), the continuance of the 1994 Plan must
be approved by the stockholders of the Company. Accordingly, on February 12,
1997, the Board of Directors voted, subject to stockholder approval, to continue
the 1994 Plan as amended by the Plan Amendment. If the stockholders do not vote
to continue the 1994 Plan, the Company will not grant any further options under
the 1994 Plan.
THE BOARD OF DIRECTORS BELIEVES THAT THE APPROVAL OF THE PLAN AMENDMENT AND
CONTINUANCE OF THE 1994 PLAN AS AMENDED BY THE PLAN AMENDMENT IS IN THE BEST
INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE IN FAVOR OF
THIS PROPOSAL.
Summary of the 1994 Plan
The following is a summary of the material provisions of the 1994 Plan.
The 1994 Plan provides for the grant of stock options to employees,
officers and directors of, and consultants or advisers to, the Company and its
subsidiaries. Under the 1994 Plan, the Company may grant options that are
intended to qualify as incentive stock options within the meaning of Section 422
of the Code ("incentive stock options"), or options not intended to qualify as
incentive stock options ("non-statutory options"). Incentive stock options may
only be granted to employees of the Company.
The 1994 Plan is administered by the Compensation Committee. Subject to the
provisions of the 1994 Plan, the Compensation Committee has the authority to
select the employees to whom options are granted and determine the terms of each
option, including (i) the number of shares at Common Stock subject to the
option, (ii) when the option becomes exercisable, (iii) the option exercise
price, which, in the case of incentive stock options and options intended to
qualify as performance-based compensation under Section 162(m) of the Code, must
be at least 100% (110% in the case of options granted to a stockholder owning in
excess of 10% of the voting power of the Company) of the fair market value of
the Common Stock as of the date of grant, and (iv) the duration of the option
(which, in the case of incentive stock options, may not exceed ten years).
As of January 31, 1997, the Company had approximately 383 employees, all of
whom were eligible to participate in the 1994 Plan. The number of individuals
receiving stock options varies from year to year depending on various factors,
such as the number of promotions and the Company's hiring needs during the
16
<PAGE> 19
year, and thus the Company cannot now determine award recipients. As of January
31, 1997, the Company had granted options under the 1994 Plan to purchase an
aggregate of 2,964,250 shares of Common Stock. Options for 1,620,000 shares have
been granted to the current executive officers of the Company as a group. No
options have been granted under the 1994 Plan to current directors who are not
executive officers of the Company. As of January 31, 1997, subject to
stockholder approval of the Plan Amendment, 1,855,750 shares remained available
for future issuance under the 1994 Plan.
The Compensation Committee may, in its sole discretion, include additional
provisions in any option or award granted or made under the 1994 Plan, including
without limitation restrictions on transfer, repurchase rights, commitments to
pay cash bonuses, to make, arrange for or guaranty loans or to transfer other
property to optionees upon exercise of options, or such other provisions as
shall be determined by the Compensation Committee, so long as not inconsistent
with the 1994 Plan or applicable law. The Compensation Committee may also, in
its sole discretion, accelerate or extend the date or dates on which all or any
particular option or options granted under the 1994 Plan may be exercised.
Payment of the option exercise price may be made in cash, shares of Common
Stock, a combination of cash or stock or by any other method (including delivery
of a promissory note payable on terms specified by the Compensation Committee)
approved by the Compensation Committee consistent with Section 422 of the Code
and Rule 16b-3 ("Rule 16b-3") under the Exchange Act. Generally options are not
assignable or transferable except by will or the laws of descent and
distribution and, in the case of non-statutory options, pursuant to a qualified
domestic relations order (as defined in the Code).
The 1994 Plan will remain in effect until October 3, 2004 (except that it
will continue in effect as to equity-related securities outstanding on that
date), unless earlier terminated by the Board of Directors. The Board of
Directors may amend, suspend or terminate the 1994 Plan or any portion thereof
at any time, provided that no amendment shall be made without stockholder
approval if such approval is necessary to comply with any applicable tax or
regulatory requirement.
Federal Income Tax Consequences
The following is a summary of the United States federal income tax
consequences that generally will arise with respect to options granted under the
1994 Plan and with respect to the sale of Common Stock acquired under the 1994
Plan.
Incentive Stock Options
In general, an optionee will not recognize taxable income upon the grant or
exercise of an incentive stock option. Instead, an optionee will recognize
taxable income with respect to an incentive stock option only upon the sale of
Common Stock acquired through the exercise of the option ("ISO Stock"). The
exercise of an incentive stock option, however, may subject the optionee to the
alternative minimum tax.
Generally, the tax consequences of selling ISO Stock will vary with the
length of time that the optionee has owned the ISO Stock at the time it is sold.
If the optionee sells ISO Stock after having owned it for at least two years
from the date the option was granted (the "Grant Date") and one year from the
date the option was exercised (the "Exercise Date"), then the optionee will
recognize long-term capital gain in an amount equal to the excess of the sale
price of the ISO Stock over the exercise price.
If the optionee sells ISO Stock for more than the exercise price prior to
having owned it for at least two years from the Grant Date and one year from the
Exercise Date (a "Disqualifying Disposition"), then all or a portion of the gain
recognized by the optionee will be ordinary compensation income and the
remaining gain, if any, will be a capital gain. This capital gain will be a
long-term capital gain if the optionee has held the ISO Stock for more than one
year prior to the date of sale.
If an optionee sells ISO Stock for less than the exercise price, then the
optionee will recognize capital loss equal to the excess of the exercise price
over the sale price of the ISO Stock. This capital loss will be a long-term
capital loss if the optionee has held the ISO Stock for more than one year prior
to the date of sale.
17
<PAGE> 20
Non-statutory Stock Options
As in the case of an incentive stock option, an optionee will not recognize
taxable income upon the grant of a non-statutory stock option. Unlike the case
of an incentive stock option, however, an optionee who exercises a nonstatutory
stock option generally will recognize ordinary compensation income in an amount
equal to the excess of the fair market value of the Common Stock acquired
through the exercise of the option ("NSO Stock") on the Exercise Date over the
exercise price.
With respect to any NSO Stock, an optionee will have a tax basis equal to
the exercise price plus any income recognized upon the exercise of the option.
Upon selling NSO Stock, an optionee generally will recognize capital gain or
loss in an amount equal to the excess of the sale price of the NSO Stock over
the optionee's tax basis in the NSO Stock. This capital gain or loss will be a
long-term gain or loss if the optionee has held the NSO Stock for more than one
year prior to the date of the sale.
Tax Consequences to the Company
The grant of an option under the 1994 Plan will have no tax consequences to
the Company. Moreover, in general, neither the exercise of an incentive stock
option nor the sale of any Common Stock acquired under the 1994 Plan will have
any tax consequences to the Company. The Company generally will be entitled to a
business-expense deduction, however, with respect to any ordinary compensation
income recognized by an optionee under the 1994 Plan, including as a result of
the exercise of a non-statutory stock option or a Disqualifying Disposition. Any
such deduction will be subject to the limitations of Section 162(m) of the Code.
The Company will have a withholding obligation with respect to any ordinary
compensation income recognized by optionees under the 1994 Plan who are
employees or are otherwise subject to withholding.
PROPOSAL 3 -- RATIFICATION OF THE APPOINTMENT OF AUDITORS
The Board of Directors has selected Deloitte & Touche LLP as auditors of
the Company for the year ending December 31, 1997, subject to ratification by
stockholders at the Meeting. If the stockholders do not ratify the selection of
Deloitte & Touche LLP, the Board of Directors will reconsider the matter. A
representative of Deloitte & Touche LLP, which served as auditors for the year
ended December 31, 1996, is expected to be present at the Meeting to respond to
appropriate questions, and to make a statement if he or she so desires.
STOCKHOLDER PROPOSALS FOR 1998 ANNUAL MEETING
Any proposal that a stockholder intends to present at the 1998 Annual
Meeting of Stockholders must be submitted to the Secretary of the Company at its
offices, 20 Crosby Drive, Bedford, Massachusetts 01730, no later than December
3, 1997 in order to be considered for inclusion in the Proxy Statement relating
to that meeting.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and holders of more than 10% of the Company's Common Stock to
file with the Securities and Exchange Commission initial reports of ownership
and reports of changes in ownership of Common Stock and other equity securities
of the Company. Except as described below, and based solely on its review of
copies of Section 16(a) reports furnished to the Company, the Company believes
that during 1996 its officers, directors and holders of more than 10% of the
Company's Common Stock complied with all Section 16(a) filing requirements.
Gary Rogers, Senior Vice President of Worldwide Sales and Field Operations
of the Company, filed his Initial Statement of Beneficial Ownership of
Securities on Form 3 five days after the required filing date. Linda Saris, Vice
President, Operations and Customer Support reported two option exercises which
occurred during July 1996 on an amended Form 4 filed November 8, 1996.
18
<PAGE> 21
OTHER MATTERS
The Board of Directors knows of no other business which will be presented
for consideration at the Meeting other than that described above. However, if
any other business should come before the Meeting, it is the intention of the
persons named in the enclosed Proxy to vote, or otherwise act, in accordance
with their best judgment on such matters.
The Company will bear the costs of soliciting proxies. In addition to
solicitations by mail, the Company's directors, officers and regular employees
may, without additional remuneration, solicit proxies by telephone, telegraph,
facsimile and personal interviews. The Company will also request brokerage
houses, custodians, nominees and fiduciaries to forward copies of the proxy
materials to those persons for whom they hold shares and request instructions
for voting the Proxies. The Company will reimburse such brokerage houses and
other persons for their reasonable expenses in connection with this
distribution. The Company has also retained MacKenzie Partners, Inc., at an
estimated expense of $4,000 plus reimbursement of expenses, to assist in the
solicitation of proxies by telephone and mail.
THE BOARD OF DIRECTORS HOPES THAT STOCKHOLDERS WILL ATTEND THE MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, DATE, SIGN AND
RETURN THE ENCLOSED PROXY IN THE ACCOMPANYING ENVELOPE. PROMPT RESPONSE WILL
GREATLY FACILITATE ARRANGEMENTS FOR THE MEETING AND YOUR COOPERATION IS
APPRECIATED. STOCKHOLDERS WHO ATTEND THE MEETING MAY VOTE THEIR STOCK PERSONALLY
EVEN THOUGH THEY HAVE SENT IN THEIR PROXIES.
By Order of the Board of Directors,
Arthur W. Coviello, Jr.,
Secretary
April 2, 1997
19
<PAGE> 22
APPENDIX A
SECURITY DYNAMICS TECHNOLOGIES, INC.
PROXY SOLICITED BY THE BOARD OF DIRECTORS
ANNUAL MEETING OF STOCKHOLDERS - APRIL 24, 1997
Those signing on the reverse side, revoking any prior proxies, hereby appoint(s)
Charles R. Stuckey, Jr. and Arthur W. Coviello, Jr., and each of them with full
power of substitution, as proxies for those signing on the reverse side to act
and vote at the 1997 Annual Meeting of Stockholders of Security Dynamics
Technologies, Inc. and at any adjournments thereof as indicated upon all matters
referred to on the reverse side and described in the Proxy Statement for the
Meeting, and in their discretion, upon any other matters which may properly come
before the Meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY THE
UNDERSIGNED STOCKHOLDER(S). IF NO OTHER INDICATION IS MADE, THE PROXIES SHALL
VOTE "FOR" PROPOSAL NUMBERS 1, 2 AND 3.
PLEASE VOTE, DATE AND SIGN ON REVERSE
AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE.
Please sign this Proxy exactly as your name appears hereon. Joint owners should
each sign personally. Trustees and other fiduciaries should indicate the
capacity in which they sign, and where more than one name appears, a majority
must sign. If a corporation or partnership, the signature should be that of an
authorized officer who should indicate his or her title.
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
_________________________________ _________________________________
_________________________________ _________________________________
_________________________________ _________________________________
<PAGE> 23
[X] PLEASE MARK VOTES
AS IN THIS EXAMPLE
SECURITY DYNAMICS
TECHNOLOGIES, INC.
1. ELECTION OF CLASS III DIRECTORS
For Withhold For All Except
/ / / / / /
GEORGE M. MIDDLEMAS AND MARINO R. POLESTRA
NOTE: IF YOU DO NOT WISH YOUR SHARES VOTED "FOR" A PARTICULAR NOMINEE, MARK THE
"FOR ALL EXCEPT" BOX AND STRIKE A LINE THROUGH THE NOMINEE'S NAME. YOUR SHARES
WILL BE VOTED FOR THE REMAINING NOMINEE.
2. Approval of (i) an amendment to 1994 Stock Option Plan increasing from
4,820,000 to 6,570,000 the number of shares of Common Stock authorized under the
1994 Stock Option Plan and (ii) the continuance of the 1994 Stock Option Plan,
as amended.
For Against Abstain
/ / / / / /
3. Ratification of appointment of independent auditors.
For Against Abstain
/ / / / / /
RECORD DATE SHARES:
A VOTE FOR THE DIRECTOR NOMINEES AND FOR PROPOSAL NUMBERS 2 AND 3 IS RECOMMENDED
BY THE BOARD OF DIRECTORS.
IN THEIR DISCRETION THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS
AS MAY PROPERLY COME BEFORE THE MEETING OR ANY ADJOURNMENT THEREOF.
Mark box at right if an address change or comment has been noted on the reverse
side of this card. / /
Please be sure to sign and date this Proxy. Date
- --------------------------------------------------------
Shareholder sign here Co-owner sign here
<PAGE> 24
DETACH CARD DETACH CARD
SECURITY DYNAMICS TECHNOLOGIES, INC.
Dear Stockholder:
Please take note of the important information enclosed with this Proxy Ballot.
There are a number of issues related to the management and operation of your
Company that require your immediate attention and approval. These are discussed
in detail in the enclosed proxy materials.
Your vote counts, and you are strongly encouraged to exercise your right to vote
your shares.
Please mark the boxes on the proxy card to indicate how your shares shall be
voted. Then sign the card, detach it and return your proxy vote in the enclosed
postage paid envelope.
Your vote must be received prior to the Annual Meeting of Stockholders,
April 24, 1997.
Thank you in advance for your prompt consideration of these matters.
Sincerely,
Security Dynamics Technologies, Inc.
<PAGE> 25
APPENDIX B
SECURITY DYNAMICS TECHNOLOGIES, INC.
1994 STOCK OPTION PLAN
1. Purpose.
-------
The purpose of this plan (the "Plan") is to secure for Security Dynamics
Technologies, Inc. (the "Company") and its stockholders the benefits arising
from capital stock ownership by employees, officers and directors of, and
consultants or advisors to, the Company and its subsidiary corporations who are
expected to contribute to the Company's future growth and success. Except where
the context otherwise requires, the term "Company" shall include all present and
future subsidiaries of the Company as defined in Sections 424(e) and 424(f) of
the Internal Revenue Code of 1986, as amended or replaced from time to time (the
"Code"). Those provisions of the Plan which make express reference to Section
422 shall apply only to Incentive Stock Options (as that term is defined in the
Plan).
2. Type of Options and Administration.
----------------------------------
(a) TYPES OF OPTIONS. Options granted pursuant to the Plan may be either
incentive stock options ("Incentive Stock Options") meeting the requirements of
Section 422 of the Code or Non-Statutory Options which are not intended to meet
the requirements of Section 422 of the Code ("Non-Statutory Options").
(B) Administration.
--------------
(i) The Plan will be administered by the Board of Directors of the
Company, whose construction and interpretation of the terms and provisions of
the Plan shall be final and conclusive. The Board of Directors may in its sole
discretion grant options to purchase shares of the Company's Common Stock
("Common Stock") and issue shares upon exercise of such options as provided in
the Plan. The Board shall have authority, subject to the express provisions of
the Plan, to construe the respective option agreements and the Plan, to
prescribe, amend and rescind rules and regulations relating to the Plan, to
determine the terms and provisions of the respective option agreements, which
need not be identical, and to make all other determinations which are, in the
judgment of the Board of Directors, necessary or desirable for the
administration of the Plan. The Board of Directors may correct any defect,
supply any omission or reconcile any inconsistency in the Plan or in any option
agreement in the manner and to the extent it shall deem expedient to carry the
Plan into effect and it shall be the sole and final judge of such expediency. No
<PAGE> 26
director or person acting pursuant to authority delegated by the Board of
Directors shall be liable for any action or determination under the Plan made in
good faith.
(ii) The Board of Directors may, to the full extent permitted by or
consistent with applicable laws or regulations and Section 3(b) of this Plan
delegate any or all of its powers under the Plan to a committee (the
"Committee") appointed by the Board of Directors, and if the Committee is so
appointed all references to the Board of Directors in the Plan shall mean and
relate to such Committee.
(c) APPLICABILITY OF RULE 16B-3. Those provisions of the Plan which make
express reference to Rule 16b-3 promulgated under the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or any successor rule ("Rule 16b-3"), or
which are required in order for certain option transactions to qualify for
exemption under Rule 16b-3, shall apply only to such persons as are required to
file reports under Section 16(a) of the Exchange Act (a "Reporting Person").
3. Eligibility.
-----------
(a) GENERAL. Options may be granted to persons who are, at the time of
grant, employees, officers or directors of, or consultants or advisors to, the
Company; PROVIDED, that the class of employees to whom Incentive Stock Options
may be granted shall be limited to all employees of the Company. A person who
has been granted an option may, if he or she is otherwise eligible, be granted
additional options if the Board of Directors shall so determine. Subject to
adjustment as provided in Section 15 below, the maximum number of shares with
respect to which options may be granted to any employee under the Plan shall not
exceed 100,000 shares (after giving effect to the Company's one-for-two reverse
stock split effective as of October 24, 1994) of Common Stock during any
calendar year during the term of the Plan. For the purpose of calculating such
maximum number, (a) an option shall continue to be treated as outstanding
notwithstanding its repricing, cancellation or expiration and (b) the repricing
of an outstanding option or the issuance of a new option in substitution for a
cancelled option shall be deemed to constitute the grant of a new additional
option separate from the original grant of the option that is repriced or
cancelled.
(b) GRANT OF OPTIONS TO DIRECTORS AND OFFICERS. From and after the
registration of the Common Stock of the Company under the Exchange Act, the
selection of a director or an officer (as the terms "director" and "officer" are
defined for purposes of Rule 16b-3) as a recipient of an option, the timing of
the option grant, the exercise price of the option and the number of shares
subject to the option shall be determined either (i) by the Board of Directors,
of which all members shall be "disinterested persons" (as hereinafter defined),
or (ii) by two or more directors having full authority to act in the matter,
each of whom shall be a "disinterested person." For the purposes of the Plan, a
director shall be deemed to be a
-2-
<PAGE> 27
"disinterested person" only if such person qualifies as a "disinterested person"
within the meaning of Rule 16b-3, as such term is interpreted from time to time.
4. Stock Subject to Plan.
---------------------
Subject to adjustment as provided in Section 15 below, the maximum number
of shares of Common Stock which may be issued and sold under the Plan is 150,000
shares (after giving effect to the Company's one-for-two reverse stock split
effective as of October 24, 1994). If an option granted under the Plan shall
expire or terminate for any reason without having been exercised in full, the
unpurchased shares subject to such option shall again be available for
subsequent option grants under the Plan. If shares issued upon exercise of an
option under the Plan are tendered to the Company in payment of the exercise
price of an option granted under the Plan, such tendered shares shall again be
available for subsequent option grants under the Plan; provided, that in no
event shall such shares be made available for issuance to Reporting Persons or
pursuant to exercise of Incentive Stock Options.
5. Forms of Option Agreements.
--------------------------
As a condition to the grant of an option under the Plan, each recipient of
an option shall execute an option agreement in such form not inconsistent with
the Plan as may be approved by the Board of Directors. Such option agreements
may differ among recipients.
6. Purchase Price.
--------------
(a) GENERAL. Subject to Section 3(b), the purchase price per share of stock
deliverable upon the exercise of an option shall be determined by the Board of
Directors, PROVIDED, HOWEVER, that in the case of an Incentive Stock Option, the
exercise price shall not be less than 100% of the fair market value of such
stock, as determined by the Board of Directors, at the time of grant of such
option, or less than 110% of such fair market value in the case of options
described in Section 11(b).
(b) PAYMENT OF PURCHASE PRICE. Options granted under the Plan may provide
for the payment of the exercise price by delivery of cash or a check to the
order of the Company in an amount equal to the exercise price of such options,
or, to the extent provided in the applicable option agreement, (i) by delivery
to the Company of shares of Common Stock of the Company already owned by the
optionee having a fair market value equal in amount to the exercise price of the
options being exercised or (ii) by any other means (including, without
limitation, by delivery of a promissory note of the optionee payable on such
terms as are specified by the Board of Directors) which the Board of Directors
determines are consistent with the purpose of the Plan and with applicable laws
and regulations (including, without limitation, the provisions of Regulation T
promulgated by the Federal
-3-
<PAGE> 28
Reserve Board). The fair market value of any shares of the Company's Common
Stock or other non-cash consideration which may be delivered upon exercise of an
option shall be determined by the Board of Directors.
7. Option Period.
-------------
Each option and all rights thereunder shall expire on such date as shall be
set forth in the applicable option agreement, except that, in the case of an
Incentive Stock Option, such date shall not be later than ten years after the
date on which the option is granted and, in all cases, options shall be subject
to earlier termination as provided in the Plan.
8. Exercise of Options.
-------------------
Each option granted under the Plan shall be exercisable either in full or
in installments at such time or times and during such period as shall be set
forth in the agreement evidencing such option, subject to the provisions of the
Plan.
9. Nontransferability of Options.
-----------------------------
Options shall not be assignable or transferable by the person to whom they
are granted, either voluntarily or by operation of law, except by will or the
laws of descent and distribution, and, during the life of the optionee, shall be
exercisable only by the optionee; provided, however, that Non-Statutory Options
may be transferred pursuant to a qualified domestic relations order (as defined
in Rule 16b-3).
10. Effect of Termination of Employment or Other Relationship.
---------------------------------------------------------
Except as provided in Section 11(d) with respect to Incentive Stock
Options, and subject to the provisions of the Plan, the Board of Directors shall
determine the period of time during which an optionee may exercise an option
following (i) the termination of the optionee's employment or other relationship
with the Company or (ii) the death or disability of the optionee. Such periods
shall be set forth in the agreement evidencing such option.
11. Incentive Stock Options.
-----------------------
Options granted under the Plan which are intended to be Incentive Stock
Options shall be subject to the following additional terms and conditions:
(a) EXPRESS DESIGNATION. All Incentive Stock Options granted under the Plan
shall, at the time of grant, be specifically designated as such in the option
agreement covering such Incentive Stock Options.
-4-
<PAGE> 29
(b) 10% STOCKHOLDER. If any employee to whom an Incentive Stock Option is
to be granted under the Plan is, at the time of the grant of such option, the
owner of stock possessing more than 10% of the total combined voting power of
all classes of stock of the Company (after taking into account the attribution
of stock ownership rules of Section 424(d) of the Code), then the following
special provisions shall be applicable to the Incentive Stock Option granted to
such individual:
(i) The purchase price per share of the Common Stock subject to such
Incentive Stock Option shall not be less than 110% of the fair market value
of one share of Common Stock at the time of grant; and
(ii) the option exercise period shall not exceed five years from the
date of grant.
(c) DOLLAR LIMITATION. For so long as the Code shall so provide, options
granted to any employee under the Plan (and any other incentive stock option
plans of the Company) which are intended to constitute Incentive Stock Options
shall not constitute Incentive Stock Options to the extent that such options, in
the aggregate, become exercisable for the first time in any one calendar year
for shares of Common Stock with an aggregate fair market value (determined as of
the respective date or dates of grant) of more than $100,000.
(d) TERMINATION OF EMPLOYMENT, DEATH OR DISABILITY. No Incentive Stock
Option may be exercised unless, at the time of such exercise, the optionee is,
and has been continuously since the date of grant of his or her option, employed
by the Company, except that:
(i) an Incentive Stock Option may be exercised within the period of
three months after the date the optionee ceases to be an employee of the
Company (or within such lesser period as may be specified in the applicable
option agreement), PROVIDED, that the agreement with respect to such option
may designate a longer exercise period and that the exercise after such
three-month period shall be treated as the exercise of a non-statutory
option under the Plan;
(ii) if the optionee dies while in the employ of the Company, or
within three months after the optionee ceases to be such an employee, the
Incentive Stock Option may be exercised by the person to whom it is
transferred by will or the laws of descent and distribution within the
period of one year after the date of death (or within such lesser period as
may be specified in the applicable option agreement); and
(iii) if the optionee becomes disabled (within the meaning of Section
22(e)(3) of the Code or any successor provision thereto) while in the
-5-
<PAGE> 30
employ of the Company, the Incentive Stock Option may be exercised within
the period of one year after the date the optionee ceases to be such an
employee because of such disability (or within such lesser period as may be
specified in the applicable option agreement).
For all purposes of the Plan and any option granted hereunder, "employment"
shall be defined in accordance with the provisions of Section 1.421-7(h) of the
Income Tax Regulations (or any successor regulations). Notwithstanding the
foregoing provisions, no Incentive Stock Option may be exercised after its
expiration date.
12. Additional Provisions.
---------------------
(a) ADDITIONAL OPTION PROVISIONS. The Board of Directors may, in its sole
discretion, include additional provisions in option agreements covering options
granted under the Plan, including without limitation restrictions on transfer,
repurchase rights, commitments to pay cash bonuses, to make, arrange for or
guaranty loans or to transfer other property to optionees upon exercise of
options, or such other provisions as shall be determined by the Board of
Directors; PROVIDED THAT such additional provisions shall not be inconsistent
with any other term or condition of the Plan and such additional provisions
shall not cause any Incentive Stock Option granted under the Plan to fail to
qualify as an Incentive Stock Option within the meaning of Section 422 of the
Code.
(b) ACCELERATION, EXTENSION, ETC. The Board of Directors may, in its sole
discretion, (i) accelerate the date or dates on which all or any particular
option or options granted under the Plan may be exercised or (ii) extend the
dates during which all, or any particular, option or options granted under the
Plan may be exercised.
13. General Restrictions.
--------------------
(a) INVESTMENT REPRESENTATIONS. The Company may require any person to whom
an option is granted, as a condition of exercising such option, to give written
assurances in substance and form satisfactory to the Company to the effect that
such person is acquiring the Common Stock subject to the option for his or her
own account for investment and not with any present intention of selling or
otherwise distributing the same, and to such other effects as the Company deems
necessary or appropriate in order to comply with federal and applicable state
securities laws, or with covenants or representations made by the Company in
connection with any public offering of its Common Stock.
(b) COMPLIANCE WITH SECURITIES LAWS. Each option shall be subject to the
requirement that if, at any time, counsel to the Company shall determine that
the listing, registration or qualification of the shares subject to such option
upon any
-6-
<PAGE> 31
securities exchange or under any state or federal law, or the consent or
approval of any governmental or regulatory body, or that the disclosure of
non-public information or the satisfaction of any other condition is necessary
as a condition of, or in connection with, the issuance or purchase of shares
thereunder, such option may not be exercised, in whole or in part, unless such
listing, registration, qualification, consent or approval, or satisfaction of
such condition shall have been effected or obtained on conditions acceptable to
the Board of Directors. Nothing herein shall be deemed to require the Company to
apply for or to obtain such listing, registration or qualification, or to
satisfy such condition.
14. Rights as a Stockholder.
-----------------------
The holder of an option shall have no rights as a stockholder with respect
to any shares covered by the option (including, without limitation, any rights
to receive dividends or non-cash distributions with respect to such shares)
until the date of issue of a stock certificate to him or her for such shares. No
adjustment shall be made for dividends or other rights for which the record date
is prior to the date such stock certificate is issued.
15. Adjustment Provisions for Recapitalizations and Related Transactions.
--------------------------------------------------------------------
(a) GENERAL. If, through or as a result of any merger, consolidation, sale
of all or substantially all of the assets of the Company, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split (other than the Company's one-for-two reverse stock split effective as of
October 24, 1994) or other similar transaction, (i) the outstanding shares of
Common Stock are increased, decreased or exchanged for a different number or
kind of shares or other securities of the Company, or (ii) additional shares or
new or different shares or other securities of the Company or other non-cash
assets are distributed with respect to such shares of Common Stock or other
securities, an appropriate and proportionate adjustment may be made in (x) the
maximum number and kind of shares reserved for issuance under the Plan, (y) the
number and kind of shares or other securities subject to any then outstanding
options under the Plan, and (z) the price for each share subject to any then
outstanding options under the Plan, without changing the aggregate purchase
price as to which such options remain exercisable. Notwithstanding the
foregoing, no adjustment shall be made pursuant to this Section 15 if such
adjustment would cause the Plan to fail to comply with Section 422 of the Code.
(b) BOARD AUTHORITY TO MAKE ADJUSTMENTS. Any adjustments under this Section
15 will be made by the Board of Directors, whose determination as to what
adjustments, if any, will be made and the extent thereof will be final, binding
and conclusive. No fractional shares will be issued under the Plan on account of
any such adjustments.
-7-
<PAGE> 32
16. Merger, Consolidation, Asset Sale, Liquidation, etc.
---------------------------------------------------
(a) GENERAL. In the event of a consolidation or merger or sale of all or
substantially all of the assets of the Company in which outstanding shares of
Common Stock are exchanged for securities, cash or other property of any other
corporation or business entity or in the event of a liquidation of the Company,
the Board of Directors of the Company, or the board of directors of any
corporation assuming the obligations of the Company, may, in its discretion,
take any one or more of the following actions, as to outstanding options: (i)
provide that such options shall be assumed, or equivalent options shall be
substituted, by the acquiring or succeeding corporation (or an affiliate
thereof), PROVIDED that any such options substituted for Incentive Stock Options
shall meet the requirements of Section 424(a) of the Code, (ii) upon written
notice to the optionees, provide that all unexercised options will terminate
immediately prior to the consummation of such transaction unless exercised by
the optionee within a specified period following the date of such notice, (iii)
in the event of a merger under the terms of which holders of the Common Stock of
the Company will receive upon consummation thereof a cash payment for each share
surrendered in the merger (the "Merger Price"), make or provide for a cash
payment to the optionees equal to the difference between (A) the Merger Price
times the number of shares of Common Stock subject to such outstanding options
(to the extent then exercisable at prices not in excess of the Merger Price) and
(B) the aggregate exercise price of all such outstanding options in exchange for
the termination of such options, and (iv) provide that all or any outstanding
options shall become exercisable in full immediately prior to such event.
(b) SUBSTITUTE OPTIONS. The Company may grant options under the Plan in
substitution for options held by employees of another corporation who become
employees of the Company, or a subsidiary of the Company, as the result of a
merger or consolidation of the employing corporation with the Company or a
subsidiary of the Company, or as a result of the acquisition by the Company, or
one of its subsidiaries, of property or stock of the employing corporation. The
Company may direct that substitute options be granted on such terms and
conditions as the Board of Directors considers appropriate in the circumstances.
17. No Special Employment Rights.
----------------------------
Nothing contained in the Plan or in any option shall confer upon any
optionee any right with respect to the continuation of his or her employment by
the Company or interfere in any way with the right of the Company at any time to
terminate such employment or to increase or decrease the compensation of the
optionee.
-8-
<PAGE> 33
18. Other Employee Benefits.
-----------------------
Except as to plans which by their terms include such amounts as
compensation, the amount of any compensation deemed to be received by an
employee as a result of the exercise of an option or the sale of shares received
upon such exercise will not constitute compensation with respect to which any
other employee benefits of such employee are determined, including, without
limitation, benefits under any bonus, pension, profit-sharing, life insurance or
salary continuation plan, except as otherwise specifically determined by the
Board of Directors.
19. Amendment Of The Plan.
---------------------
(a) The Board of Directors may at any time, and from time to time, modify
or amend the Plan in any respect, except that if at any time the approval of the
stockholders of the Company is required under Section 422 of the Code or any
successor provision with respect to Incentive Stock Options, or under Rule
16b-3, the Board of Directors may not effect such modification or amendment
without such approval.
(b) The termination or any modification or amendment of the Plan shall not,
without the consent of an optionee, affect his or her rights under an option
previously granted to him or her. With the consent of the optionee affected, the
Board of Directors may amend outstanding option agreements in a manner not
inconsistent with the Plan. The Board of Directors shall have the right to amend
or modify (i) the terms and provisions of the Plan and of any outstanding
Incentive Stock Options granted under the Plan to the extent necessary to
qualify any or all such options for such favorable federal income tax treatment
(including deferral of taxation upon exercise) as may be afforded incentive
stock options under Section 422 of the Code and (ii) the terms and provisions of
the Plan and of any outstanding option to the extent necessary to ensure the
qualification of the Plan under Rule 16b-3.
20. Withholding.
-----------
(a) The Company shall have the right to deduct from payments of any kind
otherwise due to the optionee any federal, state or local taxes of any kind
required by law to be withheld with respect to any shares issued upon exercise
of options under the Plan. Subject to the prior approval of the Company, which
may be withheld by the Company in its sole discretion, the optionee may elect to
satisfy such obligations, in whole or in part, (i) by causing the Company to
withhold shares of Common Stock otherwise issuable pursuant to the exercise of
an option or (ii) by delivering to the Company shares of Common Stock already
owned by the optionee. The shares so delivered or withheld shall have a fair
market value equal to such withholding
-9-
<PAGE> 34
obligation. The fair market value of the shares used to satisfy such withholding
obligation shall be determined by the Company as of the date that the amount of
tax to be withheld is to be determined. An optionee who has made an election
pursuant to this Section 20(a) may only satisfy his or her withholding
obligation with shares of Common Stock which are not subject to any repurchase,
forfeiture, unfulfilled vesting or other similar requirements.
(b) Notwithstanding the foregoing, in the case of a Reporting Person, no
election to use shares for the payment of withholding taxes shall be effective
unless made in compliance with any applicable requirements of Rule 16b-3 (unless
it is intended that the transaction not qualify for exemption under Rule 16b-3).
21. Cancellation and New Grant of Options, etc.
------------------------------------------
The Board of Directors shall have the authority to effect, at any time and
from time to time, with the consent of the affected optionees, (i) the
cancellation of any or all outstanding options under the Plan and the grant in
substitution therefor of new options under the Plan covering the same or
different numbers of shares of Common Stock and having an option exercise price
per share which may be lower or higher than the exercise price per share of the
cancelled options or (ii) the amendment of the terms of any and all outstanding
options under the Plan to provide an option exercise price per share which is
higher or lower than the then-current exercise price per share of such
outstanding options.
22. Effective Date and Duration of the Plan.
---------------------------------------
(a) EFFECTIVE DATE. The Plan shall become effective when adopted by the
Board of Directors, but no option granted under the Plan shall become
exercisable unless and until the Plan shall have been approved by the Company's
stockholders. If such stockholder approval is not obtained within twelve months
after the date of the Board's adoption of the Plan, options previously granted
under the Plan shall not vest and shall terminate and no options shall be
granted thereafter. Amendments to the Plan not requiring stockholder approval
shall become effective when adopted by the Board of Directors; amendments
requiring stockholder approval (as provided in Section 19) shall become
effective when adopted by the Board of Directors, but no option granted after
the date of such amendment shall become exercisable (to the extent that such
amendment to the Plan was required to enable the Company to grant such option to
a particular person) unless and until such amendment shall have been approved by
the Company's stockholders. If such stockholder approval is not obtained within
twelve months of the Board's adoption of such amendment, any options granted on
or after the date of such amendment shall terminate to the extent that such
amendment was required to enable the Company to grant such option to a
particular optionee. Subject to this limitation, options may be granted under
the Plan
-10-
<PAGE> 35
at any time after the effective date and before the date fixed for termination
of the Plan.
(b) TERMINATION. Unless sooner terminated in accordance with Section 16,
the Plan shall terminate, with respect to Incentive Stock Options, upon the
earlier of (i) the close of business on the day next preceding the tenth
anniversary of the date of its adoption by the Board of Directors, or (ii) the
date on which all shares available for issuance under the Plan shall have been
issued pursuant to the exercise or cancellation of options or the final vesting
of awards granted under the Plan. Unless sooner terminated in accordance with
Section 16, the Plan shall terminate with respect to options which are not
Incentive Stock Options and awards on the date specified in (ii) above. If the
date of termination is determined under (i) above, then options outstanding on
such date shall continue to have force and effect in accordance with the
provisions of the instruments evidencing such options.
23. Provision for Foreign Participants.
----------------------------------
The Board of Directors may, without amending the Plan, modify awards or
options granted to participants who are foreign nationals or employed outside
the United States to recognize differences in laws, rules, regulations or
customs of such foreign jurisdictions with respect to tax, securities, currency,
employee benefit or other matters.
Adopted by the Board of Directors on October 4, 1994
Approved by the stockholders on October 24, 1994
-11-
<PAGE> 36
AMENDMENT NO. 1
TO
1994 STOCK OPTION PLAN
1. Section 3(a) of the 1994 Stock Option Plan be and hereby is deleted in
its entirety and replaced by the following:
"(a) GENERAL. Options may be granted to persons who are, at the time
of grant, employees, officers or directors of, or consultants or advisors
to, the Company; PROVIDED, that the class of employees to whom Incentive
Stock Options may be granted shall be limited to all employees of the
Company. A person who has been granted an option may, if he or she is
otherwise eligible, be granted additional options if the Board of Directors
shall so determine. Subject to adjustment as provided in Section 15 below,
the maximum number of shares with respect to which options may be granted
to any employee under the Plan shall not exceed 300,000 shares of Common
Stock during any calendar year during the term of the Plan. For the purpose
of calculating such maximum number, (a) an option shall continue to be
treated as outstanding notwithstanding its repricing, cancellation or
expiration and (b) the repricing of an outstanding option or the issuance
of a new option in substitution for a cancelled option shall be deemed to
constitute the grant of a new additional option separate from the original
grant of the option that is repriced or cancelled."
2. Section 4 of the 1994 Stock Option Plan be and hereby is deleted in its
entirety and replaced by the following:
"4. Stock Subject to Plan.
---------------------
Subject to adjustment as provided in Section 15 below, the maximum
number of shares of Common Stock which may be issued and sold under the
Plan is 2,410,000 shares. If an option granted under the Plan shall expire
or terminate for any reason without having been exercised in full, the
unpurchased shares subject to such option shall again be available for sub
sequent option grants under the Plan. If shares issued upon exercise of an
option under the Plan are tendered to the Company in payment of the
exercise price of an option granted under the Plan, such tendered shares
shall again be
<PAGE> 37
available for subsequent option grants under the Plan; provided, that in no
event shall such shares be made available for issuance to Reporting Persons
or pursuant to exercise of Incentive Stock Options."
Adopted by the Board of Directors on
October 18, 1995 and April 12, 1996
Approved by the Stockholders on
May 22, 1996
<PAGE> 38
AMENDMENT NO. 2
TO
1994 STOCK OPTION PLAN
1. That subsection 3(b) of the 1994 Stock Option Plan be deleted and
replaced in its entirety with the following:
"(b) GRANT OF OPTIONS TO DIRECTORS AND OFFICERS. From and after the
registration of the Common Stock of the Company under the Exchange Act, the
selection of a director or officer (as the terms "director" and "officer"
are defined for purposes of Rule 16b-3) as a recipient of an option, the
timing of the option grant, the exercise price of the option and the number
of shares subject to the option shall be determined either (i) by the full
Board of Directors or (ii) by a committee composed solely of two or more
"Non-Employee Directors" having full authority to act in the matter. For
the purposes of the 1994 Plan a director shall be deemed to be a
"Non-Employee Director" only if such person qualifies as a "Non-Employee
Director" within the meaning of Rule 16b-3, as such term is interpreted
from time to time."
2. That the 1994 Stock Option Plan be amended to delete in its entirety
Section 9 of the 1994 Stock Option Plan and replace such Section in its entirety
with the following:
"9. Transferability of Options.
--------------------------
Except as the Board of Directors may otherwise determine or provide in
the applicable option agreement, options shall not be sold, assigned,
transferred, pledged or otherwise encumbered by the optionee to whom they
are granted, either voluntarily or by operation of law, except by will, the
laws of descent and distribution, or for Non-Statutory Options pursuant to
a qualified domestic relations order, and, during the life of the optionee,
shall be exercisable only by the optionee. References to an optionee, to
the extent relevant in the context, shall include references to authorized
transferees."
Adopted by the Board of Directors on
February 12, 1997
<PAGE> 39
AMENDMENT NO. 3
TO
1994 STOCK OPTION PLAN
1. Section 4 of the 1994 Stock Option Plan be and hereby is deleted in its
entirety and replaced by the following:
"4. Stock Subject to Plan.
---------------------
Subject to adjustment as provided in Section 15 below, the maximum
number of shares of Common Stock which may be issued and sold under the
Plan is 6,570,000 shares. If an option granted under the Plan shall expire
or terminate for any reason without having been exercised in full, the
unpurchased shares subject to such option shall again be available for sub
sequent option grants under the Plan. If shares issued upon exercise of an
option under the Plan are tendered to the Company in payment of the
exercise price of an option granted under the Plan, such tendered shares
shall again be available for subsequent option grants under the Plan;
provided, that in no event shall such shares be made available for issuance
to Reporting Persons or pursuant to exercise of Incentive Stock Options."
Adopted by the Board of Directors on
February 12, 1997
Being considered by the Stockholders at
the April 24, 1997 annual meeting
