<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 5, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SECURITY DYNAMICS TECHNOLOGIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C>
DELAWARE 04-2916506
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
</TABLE>
------------------------
20 CROSBY DRIVE
BEDFORD, MASSACHUSETTS 01730
(781) 687-7000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
CHARLES R. STUCKEY, JR.
CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER
SECURITY DYNAMICS TECHNOLOGIES, INC.
20 CROSBY DRIVE
BEDFORD, MASSACHUSETTS 01730
(781) 687-7000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
HAL J. LEIBOWITZ, ESQ. DANIEL S. EVANS, ESQ.
HALE AND DORR LLP ROPES & GRAY
60 STATE STREET ONE INTERNATIONAL PLACE
BOSTON, MASSACHUSETTS 02109 BOSTON, MASSACHUSETTS 02110
TELEPHONE: (617) 526-6000 TELEPHONE: (617) 951-7000
TELECOPY: (617) 526-5000 TELECOPY: (617) 951-7050
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the effective date hereof.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ---------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration number of the earlier effective registration statement for the same
offering. [ ]
- ---------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
======================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $.01 par value per share..... 2,875,000 shares $37.75 $108,531,250 $32,889
======================================================================================================================
</TABLE>
(1) Includes 375,000 shares which the Underwriters have the option to purchase
from the Company to cover over-allotments, if any. See "Underwriting."
(2) Estimated solely for the purpose of calculating the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act of 1933,
as amended, and based on the average of the high and low sales prices per
share of the Common Stock on the Nasdaq National Market on September 3,
1997.
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
SEPTEMBER 5, 1997
2,500,000 SHARES
[SECURITYDYNAMICS LOGO]
COMMON STOCK
------------------
Of the 2,500,000 shares of Common Stock offered hereby, 676,000 shares are
being sold by Security Dynamics Technologies, Inc. (the "Company") and 1,824,000
shares are being sold by the Selling Stockholders. See "Selling Stockholders."
The Company will not receive any proceeds from the sale of shares by the Selling
Stockholders. The Common Stock is traded on the Nasdaq National Market under the
symbol "SDTI." On September 2, 1997, the last reported sale price of the Common
Stock on the Nasdaq National Market was $37.50 per share. See "Price Range of
Common Stock and Dividend Policy."
------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=====================================================================================================
PRICE UNDERWRITING PROCEEDS PROCEEDS TO
TO DISCOUNTS AND TO SELLING
PUBLIC COMMISSIONS COMPANY(1) STOCKHOLDERS
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Per Share.................... $ $ $ $
- -----------------------------------------------------------------------------------------------------
Total(2)..................... $ $ $ $
=====================================================================================================
</TABLE>
(1) Before deducting estimated expenses of $450,000, all of which will be
payable by the Company.
(2) The Company has granted to the Underwriters a 30-day option to purchase up
to 375,000 additional shares of Common Stock solely to cover
over-allotments, if any. If such option is exercised in full, the total
Price to Public, Underwriting Discounts and Commissions, Proceeds to Company
and Proceeds to Selling Stockholders will be $ , $ ,
$ and $ , respectively. See "Underwriting."
------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, when, as and if delivered to and accepted by them, and subject to
the right of the Underwriters to reject any order in whole or in part. It is
expected that delivery of the shares of Common Stock will be made at the offices
of BT Alex. Brown Incorporated, Baltimore, Maryland, on or about
, 1997.
BT ALEX. BROWN
INCORPORATED
ROBERTSON, STEPHENS & COMPANY
COWEN & COMPANY
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE> 3
Security Dynamics' products, including the Company's
SecurID Card shown below, are used to authenticate the identity of
users accessing enterprise networks.
LAPTOP
------------------------
Each of the Company's SecurID Cards automatically generates a unique
sequence of pseudo-random codes at set intervals, typically every 60 seconds. To
log-in, a user is prompted to enter both a personal identification number and
the code which appears on the user's SercurID Card at that time.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK IN
CONNECTION WITH THE OFFERING, INCLUDING OVER-ALLOTMENT, STABILIZING AND
SHORT-COVERING TRANSACTIONS IN SUCH SECURITIES, AND THE IMPOSITION OF PENALTY
BIDS. IN ADDITION, CERTAIN UNDERWRITERS (AND SELLING GROUP MEMBERS, IF ANY) MAY
ALSO ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE
NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE
SECURITIES EXCHANGE ACT OF 1934. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
------------------------
SecurityDynamics, SecurID and ACE/Server are registered trademarks, and
ACE/Agent, PASSCODE, Enterprise Security Services, RSA SecurPC, SoftID, WebID
and PINPAD are trademarks, of Security Dynamics Technologies, Inc. RC2 and RC4
are registered trademarks, and BSAFE, JSAFE, TIPEM, BCERT, S/PAY, SecureONE,
S/MAIL and RC5 are trademarks, of RSA Data Security, Inc. BoKS is a trademark of
DynaSoft AB. All other trademarks or trade names referred to in this Prospectus
are the property of their respective owners.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors" and the Company's Supplemental
Consolidated Financial Statements and the Notes thereto, appearing elsewhere in
this Prospectus. Unless otherwise indicated, all information contained in this
Prospectus (i) gives effect to the Company's two-for-one splits of its Common
Stock in the form of stock dividends, which became effective as of October 30,
1995 and November 15, 1996, and (ii) assumes no exercise of the Underwriters'
over-allotment option. This Prospectus contains forward-looking statements which
involve risks and uncertainties. The Company's actual results could differ
materially from those anticipated in these forward-looking statements as a
result of certain factors, including those set forth under "Risk Factors" and
elsewhere in this Prospectus. As used in this Prospectus, the term "the Company"
refers to Security Dynamics Technologies, Inc. ("SDI") and its subsidiaries,
including without limitation RSA Data Security, Inc. ("RSA") and DynaSoft AB
("DynaSoft"), unless the context otherwise requires.
THE COMPANY
The Company is the leading provider of enterprise network and data security
solutions. The Company's products help organizations conduct business securely,
protect corporate information assets and facilitate business-to-business and
business-to-consumer electronic commerce. Historically, the Company has
delivered security solutions that provide secure remote access to corporate
networks. Through its Enterprise Security Services ("ESS") framework,
partnerships and acquisitions, the Company intends to expand its addressable
market by delivering solutions that provide secure access to information
wherever it resides in an enterprise.
The Company has built its business through the development and delivery of
security solutions, partnerships with leading industry vendors and acquisitions
of companies delivering complementary technologies and products. In July 1996,
the Company acquired RSA, a leading provider of cryptographic technology, and in
July 1997, the Company acquired DynaSoft, a leading security company providing
solutions for secure access to information. Through the combination of SDI, RSA
and DynaSoft, the Company believes that it is well positioned to take advantage
of the range of opportunities in the market for enterprise network security
products.
The Company's products include: (i) its remote access security solution,
including SecurID "tokens" and ACE/Server software, which authenticates the
identity of users accessing networked or stand-alone computer resources, (ii)
RSA encryption products used to implement cryptographic data security
applications for assuring the confidentiality and integrity of users' data and
(iii) the BoKS product family, which provides a broad range of security
solutions for accessing applications and information.
SDI is a world leader in user identification and authentication, having
sold more than two million SecurID tokens to over 2,000 customers worldwide.
SDI's customers include Fortune 500 companies and financial institutions as well
as academic institutions, research laboratories, hospitals and federal, state
and foreign government organizations. SDI's products are sold or licensed
primarily through its direct sales force, which is supported by a number of
strategic marketing relationships, as well as through value added resellers
("VARs") and dealers. A significant portion of the Company's revenue has
historically been attributable to follow-on sales to existing customers, either
to support additional users or platforms or to replace SecurID tokens at the
expiration of their programmed lives.
Through its wholly owned subsidiary, RSA, the Company also develops,
markets and supports cryptographic data security products and related consulting
services. RSA is the leading brand name for cryptography, with more than 80
million copies of RSA encryption and data authentication technologies installed
and in use worldwide. RSA's encryption security software components
3
<PAGE> 5
("encryption engines") and other software products are used to implement
cryptographic data security applications targeted at secure electronic commerce,
secure electronic mail, communications privacy, client/server data security,
smart cards and other key information technologies. RSA licenses its encryption
engine products to original equipment manufacturers ("OEMs"), which incorporate
RSA encryption technology into their products, and also licenses its products
directly to certain customers that incorporate RSA products and technologies
into their business, financial and electronic commerce networks. RSA's
encryption technology is embedded in current versions of Microsoft Corporation
("Microsoft") Windows NT, Netscape Communications Corporation ("Netscape")
Navigator, Quicken by Intuit, Inc. ("Intuit"), Lotus Development Corporation
("Lotus") Notes and numerous other products. RSA technologies are part of
existing and proposed standards for the Internet and World Wide Web, CCITT, ISO,
ANSI and IEEE.
DynaSoft is a leading provider of security solutions for protecting access
to corporate information and applications. Based in Stockholm, Sweden, DynaSoft
offers a broad range of security solutions through its flagship product family,
BoKS, and sells through direct and indirect distribution channels, as well as
through its recent licensing agreements with Sun Microsystems, Inc. ("Sun
Microsystems") and Hewlett-Packard Company ("Hewlett-Packard"). The Company
plans to integrate the technologies, products and staff of SDI and DynaSoft,
rather than operate DynaSoft as a separate division.
ACQUISITION OF DYNASOFT
On July 15, 1997, the Company acquired DynaSoft by issuing or reserving for
issuance approximately 2.7 million shares of Common Stock in exchange for
approximately 95% of the outstanding shares and certain of the outstanding
options to acquire shares of DynaSoft. The Company also paid approximately $6.0
million in cash to certain stockholders of DynaSoft in exchange for the
remaining outstanding shares and options. After the release of financial
statements that include the date of consummation of the DynaSoft acquisition
(the "DynaSoft Acquisition"), the DynaSoft Acquisition will be accounted for as
a pooling of interests in the Company's historical consolidated financial
statements. All financial information in this Prospectus has been restated to
include the results of DynaSoft for all periods presented.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company............................. 676,000 shares
Common Stock offered by the Selling Stockholders................ 1,824,000 shares
Common Stock to be outstanding after the offering............... 38,512,455 shares(1)
Use of proceeds................................................. General corporate purposes
Nasdaq National Market symbol................................... SDTI
</TABLE>
- ---------------
(1) Based on the number of shares of Common Stock outstanding as of August 31,
1997. Excludes an aggregate of 5,573,846 shares of Common Stock issuable
upon the exercise of outstanding options as of August 31, 1997.
4
<PAGE> 6
SUMMARY SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA(1)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenue.................... $12,574 $16,590 $23,866 $49,412 $83,817 $36,111 $61,374
Income from operations..... 820 2,352 2,416 8,914 8,296 6,242 13,202
Income before extraordinary
item and cumulative
effect of change in
accounting(2)............ 753 1,607 1,228 7,450 13,175 5,454 10,076
Net income................. $ 1,160 $ 2,171 $ 1,228 $ 7,450 $13,175 $ 5,454 $10,076
Per share data(3):
Income before cumulative
effect of change in
accounting............ $ 0.06 $ 0.05 $ 0.22 $ 0.34 $ 0.14 $ 0.26
Net income............... $ 0.09 $ 0.05 $ 0.22 $ 0.34 $ 0.14 $ 0.26
Weighted average number of
common and common
equivalent shares
outstanding(3)........... 25,015 25,231 34,115 38,877 38,398 39,418
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------------
ACTUAL AS ADJUSTED(4)
-------- --------------
<S> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable securities................. $110,753 $134,449
Working capital.................................................. 119,658 143,354
Total assets..................................................... 157,068 180,764
Stockholders' equity............................................. 134,539 158,235
</TABLE>
- ---------------
(1) On July 15, 1997, the Company acquired DynaSoft in exchange for
approximately 2.7 million shares of Common Stock and approximately $6.0
million in cash. After the release of financial statements that include the
date of consummation of the DynaSoft Acquisition, the DynaSoft Acquisition
will be accounted for as a pooling of interests in the Company's historical
consolidated financial statements. All financial information in this
Prospectus has been restated to include the results of DynaSoft for all
periods presented. See Note 2 of Notes to the Company's Supplemental
Consolidated Financial Statements.
(2) Effective January 1, 1993, the Company adopted, prospectively, the
provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." See Note 6 of Notes to the Company's
Supplemental Consolidated Financial Statements.
(3) Per share and share data for periods prior to 1995 are presented on a pro
forma basis. See Note 1 of Notes to the Company's Supplemental Consolidated
Financial Statements.
(4) Adjusted to give effect to the sale by the Company of 676,000 shares of
Common Stock offered hereby at an assumed public offering price of $37.50
per share (the last sale price on September 2, 1997) and after deducting the
estimated underwriting discounts and commissions and offering expenses
payable by the Company. See "Use of Proceeds."
------------------------
The Company was organized as a Massachusetts corporation in 1984 and
reincorporated in Delaware in 1986. The Company's principal office is located at
20 Crosby Drive, Bedford, Massachusetts 01730 and its telephone number is (781)
687-7000.
5
<PAGE> 7
RISK FACTORS
This Prospectus contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934. For this purpose, any statements contained
herein that are not statements of historical fact may be deemed to be
forward-looking statements. Without limiting the foregoing, the words
"believes," "anticipates," "plans," "expects" and similar expressions are
intended to identify forward-looking statements. Actual results could differ
materially from those indicated by such forward-looking statements as a result
of certain of the risk factors set forth below and elsewhere in this Prospectus.
In addition to the other information contained in this Prospectus, the following
factors should be considered carefully in evaluating an investment in the Common
Stock offered by this Prospectus.
Dependence on Principal Products. The Company currently derives
substantially all of its revenue from sales of its enterprise network and data
security products, the licensing of encryption engines and the provision of
related services, and existing and new versions of such products are expected to
continue to represent a high percentage of the Company's revenue for the
foreseeable future. As a result, any factor adversely affecting sales of these
products and services, or any factor impeding or delaying the Company's ability
to diversify its product offerings to lessen its dependency on those products,
would have a material adverse effect on the Company's financial condition and
results of operations. See "Business -- Products."
Risks Associated with Enterprise Network and Data Security Market. The
rapid development of enterprise-wide and remote computing as well as increased
use of the Internet, intranets and extranets has enhanced the ability of users
to access proprietary information and resources and has in recent years
increased demand for enterprise network and data security products. Declines in
demand for the Company's products, whether as a result of competition,
technological change, the public's perception of the need for security products,
developments in the hardware and software environments in which these products
operate, general economic conditions or other factors, could have a material
adverse effect on the Company's financial condition or results of operations.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
A well-publicized actual or perceived breach of enterprise network or data
security could trigger a heightened awareness of computer abuse, resulting in an
increased demand for security products such as those offered by the Company.
Similarly, an actual or perceived breach of enterprise network or data security
at one of the Company's customers, regardless of whether such breach is
attributable to the Company's products, could adversely affect the market's
perception of the Company and the Company's financial condition or results of
operations. In addition, although the effectiveness of the Company's
identification and authentication products is not dependent upon the secrecy of
its proprietary algorithm, the public disclosure or "breaking" of this algorithm
could result in a perception of breached security which could have an adverse
effect on the Company's financial condition or results of operations.
In February 1997, the Company announced ESS, a framework designed to
deliver enterprise-wide security solutions to businesses. As part of the ESS
framework, the Company intends to introduce products and form partnerships that
will enable delivery of security services such as certificate management, key
management and privilege management. There can be no assurance, however, that
the certificate management, key management and privilege management technologies
under consideration by the Company will be adopted by the marketplace, that the
Company will find appropriate partners for developing and marketing its products
or that the Company will successfully market any products developed as part of
the ESS framework. See "Business -- Security Dynamics Solution."
Technological Change and New Products. The market for security products,
especially in the Internet, intranet and extranet markets, is characterized by
rapidly changing technology, emerging and evolving industry standards, new
product introductions, relatively short product life cycles and rapid and
constant changes in customer requirements and preferences. To the extent that
specific
6
<PAGE> 8
methods other than those employed by the Company are adopted as standards for
implementing enterprise network and data security, sales of the Company's
existing and planned products in those market segments may be adversely
impacted, which could have a material adverse effect on the Company's financial
condition or results of operations. The Company's future success will depend in
part upon its customers' and end users' demand for enterprise network and data
security products and upon the Company's ability, on a timely and cost-effective
basis, to enhance its existing products and to introduce new products with
features that meet changing customer requirements and with competitive prices.
There can be no assurance that the Company will be successful in doing so.
Delays in product enhancement and development or the failure of the Company's
new products or enhancements to gain market acceptance would have a material
adverse effect on the Company's financial condition and results of operations.
Despite testing, new products may be affected by quality, reliability or
security failure problems, which could result in returns, delays in collecting
accounts receivable, unexpected service or warranty expenses, reduced orders and
a decline in the Company's competitive position.
Software products may also contain undetected errors or bugs when first
introduced or as new versions are released, and software products or media may
contain undetected viruses. Errors or bugs may also be present in software
licensed by the Company from third parties and incorporated into the Company's
products. Errors, bugs or viruses may result in loss of or delay in market
acceptance, recalls of hardware products incorporating the software or loss of
data. Delays or difficulties associated with new product introductions or
product enhancements could have a material adverse effect on the Company's
financial condition or results of operations.
Potential Fluctuations in Quarterly Performance; Seasonality. The
Company's quarterly operating results may vary significantly depending on a
number of factors, including the timing of the introduction or enhancement of
products by the Company or its competitors, the sizes, timing and shipment of
individual orders, market acceptance of new products, seasonality of revenue,
customer order deferrals in anticipation of new products, changes in the
Company's operating expenses, personnel changes, foreign currency exchange
rates, mix of products sold, changes in product pricing, development of the
Company's direct and indirect distribution channels and general economic
conditions. There can be no assurance that the Company will be able to grow or
sustain its profitability on a quarterly basis. Because the Company's operating
expenses are based on anticipated revenue levels and a high percentage of the
Company's expenses are fixed, a small variation in the time of recognition of
revenue can cause significant variations in operating results from quarter to
quarter. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Supplemental Quarterly Operating Results."
The Company has experienced, and may experience in the future, significant
seasonality in its business, and the Company's financial condition or results of
operations may be affected by such trends in the future. Revenue has
historically increased at higher rates in the last quarter of the year and at
lower rates in the next succeeding quarter. The Company believes that revenue
tends to increase at higher rates in the last quarter due to the Company's
quota-based compensation plans, year-end budgetary pressures on the Company's
customers and the tendency of certain of the Company's customers to implement
changes in enterprise network or data security prior to the end of the calendar
year. In addition, revenue tends to increase at lower rates in the summer
months, particularly in Europe, when businesses defer purchase decisions.
Risks Relating to Cryptographic Technology. Any significant advance in
techniques for attacking cryptographic systems could render some or all of RSA's
existing products obsolete or unmarketable. RSA's cryptographic systems depend
in part on the application of certain mathematical principles. The security
afforded by RSA's encryption products is predicated on the assumption that the
"factoring" of the composite of large prime numbers is difficult. Should an
"easy factoring method" be developed, then the security afforded by RSA's
encryption products would be reduced or eliminated. There can be no assurance
that such a development will not occur. Moreover, even if no breakthroughs in
factoring are discovered, factoring problems can theoretically be solved by a
7
<PAGE> 9
computer system significantly faster and more powerful than those presently
available. If such improved techniques for attacking cryptographic systems are
ever developed, it could have a material adverse impact on the Company's
business or results of operations.
Management of Growth. The Company is currently experiencing a period of
rapid growth that could place a significant strain on its management and other
resources. A component of the Company's business strategy is to seek the
acquisition of businesses, products and technologies that complement or augment
the Company's existing businesses, products and technologies. Acquisitions are
difficult to identify and complete for a number of reasons, including
competition among prospective buyers and the need for regulatory approvals,
including antitrust approvals. There can be no assurance that the Company will
be able to complete future acquisitions or that the Company will be able to
successfully integrate any acquired business. In order to finance such
acquisitions, it may be necessary for the Company to raise additional funds
through public or private financings. Any equity or debt financings, if
available at all, may be on terms which are not favorable to the Company and, in
the case of equity financings, may result in dilution to the Company's
stockholders. There can be no assurance that the Company will be able to operate
acquired businesses profitably or otherwise implement its growth strategy
successfully. The successful combination of companies in a rapidly changing high
technology industry may be more difficult to accomplish than in other
industries. The Company's ability to manage its growth and integrate any newly
acquired entities will require it to continue to improve its operational,
financial and management information systems, and to motivate and effectively
manage its employees. If the Company's management is unable to manage growth
effectively, the quality of the Company's products, its ability to identify,
hire and retain key personnel and its results of operations could be materially
and adversely affected.
Challenges of DynaSoft Integration. On July 15, 1997, the Company acquired
DynaSoft, a leading provider of security solutions for protecting access to
corporate information and applications. Achieving the anticipated benefits of
the DynaSoft Acquisition will depend in part upon whether the integration of
DynaSoft's business is accomplished in an efficient and effective manner, and
there can be no assurance that this will occur. The combination of the two
companies will require, among other things, integration of the companies'
respective product offerings and coordination of their sales and marketing and
research and development efforts. There can be no assurance that such
integration will be accomplished smoothly or successfully. The difficulties of
such integration may be increased by the necessity of coordinating
geographically separated organizations. The integration of certain operations
will require the dedication of management resources which may temporarily
distract attention from the day-to-day business of the combined company. The
inability of management to successfully integrate the operations of the two
companies could have a material adverse effect on the business and results of
operations of the Company.
The Company currently expects to recognize approximately $8.5 million of
expenses during the third quarter of 1997, the quarter in which the DynaSoft
Acquisition was consummated, to reflect direct transaction costs, primarily for
investment banking, legal and accounting fees, and costs associated with
combining the operations of the two companies. This amount is a preliminary
estimate and is therefore subject to change. Additional unanticipated expenses
may be incurred relating to the integration of the businesses of the Company and
DynaSoft, including the integration of certain product lines and distribution
and administrative functions.
Dependence on Proprietary Technology. The Company's success and ability to
compete is dependent in part upon its proprietary technology. The Company relies
on a combination of patent, trade secret, copyright and trademark laws, software
licenses, nondisclosure agreements and technical measures to establish and
protect its proprietary technology. The Company generally enters into
confidentiality and/or license agreements with its employees, distributors and
strategic partners as well as with its customers and potential customers seeking
proprietary information, and limits access to and distribution of its software,
documentation and other proprietary information. There can be no assurance that
the steps taken by the Company in this regard will be adequate to deter
misappropriation or independent third-party development of its technology.
8
<PAGE> 10
The Company's 15 issued U.S. patents expire at various dates ranging from
2005 to 2016. Upon expiration of the Company's patents, competitors may develop
and sell products based on technologies similar or equivalent to those currently
covered by the Company's patents. In addition, a patent developed at the
Massachusetts Institute of Technology ("MIT") (U.S. Patent No. 4,405,829) and
licensed to RSA (the "RSA/MIT Patent"), the claims of which cover significant
elements of RSA's products, will expire on September 20, 2000, which may enable
competitors to thereafter market competing products which previously would have
infringed the RSA/MIT Patent. In addition, two U.S. Patents (Nos. 4,200,770 and
4,218,582) covering encryption technology developed by Stanford University (the
"Stanford Patents"), which have been licensed to RSA, expire in 1997. After
expiration of the Stanford Patents, competitors may develop and sell products
based on technologies covered by such patents, including products that may be
positioned as competitive with products covered by the RSA/MIT Patent, thereby
adversely impacting sales of RSA's products. There can be no assurance that any
patent owned or held by the Company or its licensors will not be invalidated,
circumvented, challenged or terminated, that any of the Company's pending or
future patent applications will be within the scope of claims sought by the
Company, if at all, or that the steps taken by the Company to protect its rights
will be adequate to prevent misappropriation of the Company's technology or to
preclude competitors from developing products with features similar to the
Company's products. Further, there can be no assurance that others will not
develop technologies that are similar or superior to the Company's technologies
or duplicate the Company's technologies. In addition, the laws of certain
countries in which the Company's products are or may be developed or sold may
not protect the Company's products and intellectual property rights to the same
extent as the laws of the United States. The inability of the Company to protect
its intellectual property adequately could have a material adverse effect on its
financial condition and results of operations.
The Company has from time to time received correspondence alleging that its
products may infringe patents held by third parties. The Company is not
presently aware of any claims that its products infringe third-party rights, and
the Company believes that its products and other proprietary rights do not
infringe the proprietary rights of third parties. There can be no assurance,
however, that third parties will not assert infringement claims against the
Company in the future. The encryption industry is highly litigious, and RSA is
and has been involved in litigation relating to its intellectual property rights
and those of its competitors. See "Business -- Proprietary Rights." Any
litigation, whether or not resolved in favor of the Company, could result in
significant expense to the Company and could divert management and other
resources. In the event of an adverse ruling in any litigation involving
intellectual property, the Company might be required to discontinue the use of
certain processes, cease the manufacture, use and sale of infringing products,
expend significant resources to develop non-infringing technology or obtain
licenses to the infringing technology and may suffer significant monetary
damages, which could include treble damages. There can be no assurance that
under such circumstances a license would be available to the Company on
reasonable terms or at all. In the event of a successful claim against the
Company and the Company's failure to develop or license a substitute technology
on commercially reasonable terms, the Company's financial condition and results
of operations would be materially adversely affected.
Dependence on Suppliers and Third-Party Manufacturers. Although the
Company generally uses standard parts and components for its products, certain
components are currently available only from a single source or from limited
sources. For example, the microprocessor chips contained in the Company's
SecurID tokens are currently purchased only from Sanyo Electric Co., Ltd.
("Sanyo"), a Japanese computer chip manufacturer, the lithium batteries
contained in the Company's SecurID tokens are purchased from one supplier
located in the United States, Gould Electronics ("Gould"), and the Company's
SecurID Key Fob is manufactured only by Pemstar, Inc. ("Pemstar"), an assembly
subcontractor located in the United States. The inability to obtain sufficient
manufactured goods or sole or limited source components as required, or to
obtain or develop alternative sources at competitive prices and quality if and
as required in the future, could result in delays in product shipments or
increase the Company's material costs, either of which
9
<PAGE> 11
would adversely affect the Company's financial condition or results of
operations. See "Business -- Manufacturing and Suppliers."
The relational database management software contained in the Company's
ACE/Server software is licensed by the Company from Progress Software
Corporation ("Progress Software"). The Company relies on Progress Software for
ongoing maintenance and support for such licensed software.
Need to Establish and Maintain Strategic Relationships. A significant
business strategy of the Company is to enter into strategic marketing alliances
or other similar collaborative relationships. There can be no assurance that the
Company's existing strategic relationships will be commercially successful, that
the Company will be able to negotiate additional strategic relationships, that
such additional relationships will be available to the Company on acceptable
terms or that any such relationships, if established, will be commercially
successful. In addition, there can be no assurance that parties with whom the
Company has established strategic relationships will not pursue alternative
technologies or develop alternative products in addition to or in lieu of the
Company's products either on their own or in collaboration with others,
including the Company's competitors. The Company's financial condition or
results of operations may also be affected by the success of its collaborators
in marketing any successfully developed products. See "Business -- Security
Dynamics Strategy," "-- Products" and "-- Sales and Marketing."
Competition. The market for enterprise network and data security products
is highly competitive and subject to rapid change. The Company believes that the
principal competitive factors affecting the market for enterprise network and
data security products include technical features, ease of use,
quality/reliability, level of security, customer service and support,
distribution channels and price. The Company's competitors and potential
competitors include organizations that provide or may seek to provide enterprise
network and data security products based upon approaches similar to and
different from those employed by the Company, and could in the future include
operating system or network suppliers not currently offering competitive
enterprise-wide security products. There can be no assurance that the market for
enterprise network and data security products will not ultimately be dominated
by approaches other than the approach marketed by the Company. See
"Business -- Industry Background" and "-- Competition."
Certain of the Company's potential competitors have significantly greater
financial, marketing, technical and other competitive resources than the
Company. As a result, they may be able to leverage an installed customer base
and/or other existing or future enterprise-wide products, adapt more quickly to
new or emerging technologies and changes in customer requirements, or devote
greater resources to the promotion and sale of their products than can the
Company. Competition could increase if new companies enter the market or if
existing competitors expand their product lines. Any reduction in gross margins
resulting from competitive factors could have a material adverse effect on the
Company's financial condition or results of operations. Although the Company
believes it has certain technological and other advantages over its competitors,
maintaining such advantages will require continued investment by the Company in
research and development and sales and marketing. There can be no assurance that
the Company will have sufficient resources to make such investments or that the
Company will be able to make the technological advances necessary to maintain
such competitive advantages. In addition, current and potential competitors have
established or may in the future establish collaborative relationships among
themselves or with third parties, including third parties with whom the Company
has strategic relationships, to increase the ability of their products to
address the security needs of the Company's prospective customers. Accordingly,
it is possible that new competitors or alliances may emerge and rapidly acquire
significant market share. If this were to occur, the financial condition and
results of operations of the Company would be materially adversely affected. See
"Business -- Competition."
10
<PAGE> 12
Dependence on Key Personnel. The Company's success depends to a
significant extent upon a number of key employees, including members of senior
management. The loss of the services of one or more of these key employees could
have a material adverse effect on the Company. The Company believes that its
future success will depend in part on its ability to attract, motivate and
retain highly skilled technical, managerial and marketing personnel. Competition
for such personnel is intense and there can be no assurance that the Company
will be successful in attracting, motivating and retaining key personnel. See
"Management."
Risks Associated with International Sales. Sales outside the United States
accounted for approximately 27.3%, 24.2%, 28.9% and 31.5% of the Company's
revenue in the years ended December 31, 1994, 1995 and 1996 and the six months
ended June 30, 1997, respectively. While the Company believes its current
products are designed to meet the regulatory standards of foreign markets, any
inability to obtain foreign regulatory approvals on a timely basis could have an
adverse effect on the Company's financial condition or results of operations. In
addition, the Company's international business may be subject to a variety of
risks, including delays in establishing international distribution channels,
difficulties in collecting international accounts receivable, and increased
costs associated with maintaining international marketing efforts. The Company's
direct sales in Canada, the United Kingdom, France, Germany, Norway, Sweden and
Japan are denominated in the local currency, and the Company is subject to the
risks associated with fluctuations in currency exchange rates. A decrease in the
value of any of these foreign currencies relative to the U.S. dollar could
affect the profitability in U.S. dollars of the Company's products sold in these
markets. In addition, the Company is subject to the usual risks of doing
business abroad, including increases in duty rates, the introduction of
non-tariff barriers and difficulties in enforcement of intellectual property
rights.
Export Controls. All of the Company's products are subject to export
controls under U.S. law and applicable foreign government restrictions. The
Company believes it has obtained necessary export approvals for the export of
the products it currently exports. There can be no assurance, however, that the
list of products and countries for which export approval is required, and the
regulatory policies with respect thereto, will not be revised from time to time,
or that the Company will be able to obtain necessary regulatory approvals for
the export of future products. The inability of the Company to obtain required
approvals under these regulations could adversely affect the ability of the
Company to make international sales.
Exports of RSA's encryption products, or third-party products bundled with
the encryption technology of RSA, are expected to continue to be restricted by
the U.S. and various foreign governments. All cryptographic products require
export licenses from either the U.S. State Department, acting under the
authority of the International Traffic in Arms Regulation, or the U.S. Commerce
Department, acting under the authority of the Export Administration Regulations.
Regulations issued by these departments define cryptographic devices, including
software, as both defense articles and dual-use commodities. The U.S. government
generally limits the export of software with encryption capabilities to mass
marketed software with limited key sizes, which significantly constrains the
security effectiveness of RSA products available for export. As a result, RSA
may be at a disadvantage in competing for international sales compared to
companies located outside the United States that are not subject to such
restrictions.
Third-Party Claims. Customers rely on the Company's information security
products for critical electronic security applications. Failure of the Company's
products to work as designed could result in tort or warranty claims. Although
the Company attempts to reduce the risk of losses resulting from such claims
through warranty disclaimers and liability limitation clauses in its sales
agreements, there can be no assurance that such measures will be effective in
limiting the Company's liability. Any liability for damages resulting from any
such failure could be substantial and could have a material adverse effect on
the Company's business and results of operations.
11
<PAGE> 13
Possible Volatility of Share Price. The market price of the Company's
Common Stock, which is traded on the Nasdaq National Market, may be subject to
significant fluctuations in response to operating results, announcements of
technological innovations or new products by the Company or its competitors,
patent or proprietary rights developments and market conditions for computer
industry stocks in general. In addition, the stock market in recent years has
experienced extreme price and volume fluctuations that often have been unrelated
or disproportionate to the operating performance of individual companies. These
market fluctuations, as well as general economic conditions, may adversely
affect the market price of the Common Stock. The trading prices of many high
technology companies' stocks are at or near their historical highs and reflect
price/earnings ratios substantially above historical norms. There can be no
assurance that the trading price of the Common Stock will remain at or near its
current level. See "Price Range of Common Stock and Dividend Policy."
Dividends. No cash dividends have been paid on the Common Stock to date
and the Company does not anticipate paying cash dividends in the foreseeable
future. See "Price Range of Common Stock and Dividend Policy."
Unallocated Net Proceeds. The Company has not as yet identified specific
uses for the net proceeds to be received by it from this offering, and, pending
such uses, the Company expects that it will invest such net proceeds in
short-term, investment grade, interest-bearing instruments. The Company will
have discretion over the use and investment of such proceeds. See "Use of
Proceeds."
Antitakeover Provisions. The Company's Third Restated Certificate of
Incorporation, as amended (the "Restated Certificate of Incorporation"),
requires that any action required or permitted to be taken by stockholders of
the Company must be effected at a duly called annual or special meeting of
stockholders and may not be effected by any consent in writing, and requires
reasonable advance notice by a stockholder of a proposal or director nomination
which such stockholder desires to present at any annual or special meeting of
stockholders. Special meetings of stockholders may be called only by the
Chairman of the Board, the Chief Executive Officer or, if none, the President of
the Company or by the Board of Directors. The Restated Certificate of
Incorporation provides for a classified Board of Directors, and members of the
Board of Directors may be removed only for cause upon the affirmative vote of
holders of at least two-thirds of the shares of capital stock of the Company
entitled to vote. These provisions, and other provisions of the Restated
Certificate of Incorporation, may have the effect of deterring hostile takeovers
or delaying or preventing changes in control or management of the Company,
including transactions in which stockholders might otherwise receive a premium
for their shares over then current market prices. In addition, these provisions
may limit the ability of stockholders to approve transactions that they may deem
to be in their best interests.
12
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of shares of Common Stock
offered by the Company hereby are estimated to be approximately $23,696,000
($37,090,000 if the Underwriters' over-allotment option is exercised in full)
after deducting the estimated underwriting discounts and commissions and
offering expenses payable by the Company and assuming a public offering price of
$37.50 per share (the last reported sale price on September 2, 1997). The
Company will not receive any of the net proceeds from the sale of shares by the
Selling Stockholders. See "Selling Stockholders."
The Company expects to use the net proceeds from this offering for general
corporate purposes. The Company has not as yet identified specific uses for such
proceeds and will have discretion over their use and investment. See "Risk
Factors -- Unallocated Net Proceeds."
The Company intends to seek acquisitions of businesses, products and
technologies that are complementary to those of the Company, and a portion of
the net proceeds may also be used for such acquisitions. The Company is
continuing to identify and prioritize additional security technologies which it
may wish to develop, either internally or through the licensing or acquisition
of products from third parties. While the Company engages from time to time in
discussions with respect to potential acquisitions, the Company has no plans,
commitments or agreements with respect to any such acquisitions as of the date
of this Prospectus, and there can be no assurances that any such acquisitions
will be made. Pending such uses, the Company intends to invest the net proceeds
from this offering in short-term, investment grade, interest-bearing
instruments.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Company's Common Stock has been trading on the Nasdaq National Market
under the symbol "SDTI" since the Company's initial public offering on December
14, 1994. The following table sets forth for the fiscal periods indicated the
high and low sales prices per share of Common Stock (as adjusted for stock
splits) as reported on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1995
First Quarter....................................... $ 9.44 $ 4.41
Second Quarter...................................... 11.56 7.75
Third Quarter....................................... 12.44 8.81
Fourth Quarter...................................... 29.13 11.44
1996
First Quarter....................................... $33.75 $21.25
Second Quarter...................................... 54.50 23.13
Third Quarter....................................... 48.38 25.63
Fourth Quarter...................................... 43.50 29.75
1997
First Quarter....................................... $39.25 $21.00
Second Quarter...................................... 38.25 22.75
Third Quarter (through September 2, 1997)........... 44.38 32.63
</TABLE>
On September 2, 1997, the last reported sale price of the Company's Common
Stock on the Nasdaq National Market was $37.50 per share. As of September 2,
1997, there were 345 stockholders of record of the Company's Common Stock.
The Company has never declared or paid any cash dividends on its capital
stock. The Company currently intends to retain earnings, if any, to support its
growth strategy and does not anticipate paying cash dividends in the foreseeable
future. Payment of future dividends, if any, will be at the discretion of the
Company's Board of Directors after taking into account various factors,
including the Company's financial condition, operating results, current and
anticipated cash needs and plans for expansion.
13
<PAGE> 15
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1997 (i) on an actual basis (after giving effect to the DynaSoft
Acquisition) and (ii) as adjusted to reflect the issuance and sale by the
Company of 676,000 shares of Common Stock offered hereby at an assumed public
offering price of $37.50 per share (the last reported sale price on September 2,
1997), after deducting the estimated underwriting discounts and commissions and
offering expenses payable by the Company. See "Use of Proceeds." This table
should be read in conjunction with the Company's Supplemental Consolidated
Financial Statements and the Notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
---------------------
AS
ACTUAL ADJUSTED
-------- --------
(IN THOUSANDS,
EXCEPT SHARE DATA)
<S> <C> <C>
Stockholders' equity(1):
Common stock, $.01 par value; 80,000,000 shares authorized;
37,903,380 shares issued and outstanding (actual); 38,579,380
shares issued and outstanding (as adjusted)(2)..................... $ 379 $ 386
Additional paid-in capital........................................... 104,607 128,296
Retained earnings.................................................... 27,761 27,761
Deferred stock compensation.......................................... (141) (141)
Treasury stock, at cost, 509 shares.................................. -- --
Cumulative translation adjustment.................................... (194) (194)
Unrealized gain on marketable securities, net........................ 2,127 2,127
-------- --------
Total stockholders' equity................................. 134,539 158,235
-------- --------
Total capitalization....................................... $134,539 $158,235
======== ========
</TABLE>
- ---------------
(1) Excludes DynaSoft Acquisition expenses and cash payments to certain
stockholders of DynaSoft which will be recognized during the quarter ending
September 30, 1997. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and Note 2 of Notes to the Company's
Supplemental Consolidated Financial Statements.
(2) Excludes an aggregate of 4,855,852 shares of Common Stock reserved for
issuance upon the exercise of options outstanding as of June 30, 1997 and an
aggregate of 51,530 shares of Common Stock reserved for issuance upon the
exercise of options granted to DynaSoft optionholders in connection with the
DynaSoft Acquisition. See Note 1 of Notes to the Company's Supplemental
Consolidated Financial Statements.
14
<PAGE> 16
SELECTED SUPPLEMENTAL CONSOLIDATED FINANCIAL DATA
The following selected supplemental consolidated financial data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Supplemental Consolidated
Financial Statements included elsewhere in this Prospectus, and with the
consolidated financial statements and related notes included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1996 and the
Company's Quarterly Reports on Form 10-Q for the quarters ended March 31, 1997
and June 30, 1997, which reports are incorporated by reference in this
Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenue.............................. $12,574 $16,590 $23,866 $49,412 $83,817 $36,111 $61,374
Cost of revenue...................... 2,987 3,707 4,837 8,920 18,207 7,451 13,147
------- ------- ------- ------- ------- ------- -------
Gross profit....................... 9,587 12,883 19,029 40,492 65,610 28,660 48,227
Costs and expenses:
Research and development........... 2,658 2,817 4,314 6,292 12,382 5,533 8,646
Purchased research and
development...................... -- -- -- 648 1,000 -- --
Marketing and selling.............. 4,437 5,506 8,931 14,263 24,429 10,824 18,770
General and administrative......... 1,672 2,208 3,368 10,375 13,403 6,061 7,609
Merger expenses.................... -- -- -- -- 6,100 -- --
------- ------- ------- ------- ------- ------- -------
Total....................... 8,767 10,531 16,613 31,578 57,314 22,418 35,025
------- ------- ------- ------- ------- ------- -------
Income from operations............... 820 2,352 2,416 8,914 8,296 6,242 13,202
Interest income and other............ 185 90 166 1,843 5,004 2,500 2,717
Gain on sale of marketable securities
and other income (expense)......... 253 73 99 62 10,872 (141) 197
------- ------- ------- ------- ------- ------- -------
Income before provision for income
taxes, extraordinary item and
cumulative effect of change in
accounting......................... 1,258 2,515 2,681 10,819 24,172 8,601 16,116
Provision for income taxes(1)........ 505 908 1,453 3,369 10,997 3,147 6,040
------- ------- ------- ------- ------- ------- -------
Income before extraordinary item and
cumulative effect of change in
accounting(1)...................... 753 1,607 1,228 7,450 13,175 5,454 10,076
Extraordinary item................... 407 -- -- -- -- -- --
Cumulative effect of change in
accounting(1)...................... -- 564 -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net income........................... $ 1,160 $ 2,171 $ 1,228 $ 7,450 $13,175 $ 5,454 $10,076
======= ======= ======= ======= ======= ======= =======
Per share data(2):
Income before cumulative effect of
change in accounting............. $ 0.06 $ 0.05 $ 0.22 $ 0.34 $ 0.14 $ 0.26
Cumulative effect of change in
accounting....................... 0.03 -- -- -- -- --
------- ------- ------- ------- ------- -------
Net income......................... $ 0.09 $ 0.05 $ 0.22 $ 0.34 $ 0.14 $ 0.26
======= ======= ======= ======= ======= =======
Weighted average number of common and
common equivalent shares
outstanding(2)..................... 25,015 25,231 34,115 38,877 38,398 39,418
======= ======= ======= ======= ======= =======
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------------------------------------------- --------
1992 1993 1994 1995 1996 1997
------- ------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and marketable
securities............................... $ 3,894 $ 3,860 $27,828 $112,367 $106,495 $110,753
Working capital............................ 4,791 6,070 29,007 104,349 109,202 119,658
Total assets............................... 9,109 11,511 37,691 128,659 145,975 157,068
Redeemable convertible preferred stock..... 9,016 8,527 -- -- -- --
Stockholders' equity (deficiency).......... (2,796) (2,001) 29,660 109,026 124,178 134,539
</TABLE>
- ---------------
(1) Effective January 1, 1993, the Company adopted, prospectively, the
provisions of Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes." See Note 6 of Notes to the Company's
Supplemental Consolidated Financial Statements.
(2) Per share and share data for years prior to 1995 are presented on a pro
forma basis. See Note 1 of Notes to the Company's Supplemental Consolidated
Financial Statements.
16
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is the leading provider of enterprise network and data security
solutions. The Company was founded in 1984, began shipping its SecurID tokens
and Access Control Module ("ACM") hardware products in 1986, and introduced its
first ACM software products for minicomputers and mainframe computers in 1988.
Prior to 1986, the Company was primarily engaged in research and development
activities. In December 1991, the Company introduced its ACE/Server software
products for enterprise information protection using client/server architecture.
The Company believes that its growth has historically been driven by the
emergence of local and wide area networks and a corresponding increase in users
with direct access to core enterprise systems and confidential data. The Company
also believes that the number of users with such direct access is increasing
because of the growth of the Internet and corporate intranets and extranets.
On July 26, 1996, the Company completed a merger with RSA (the "RSA
Merger") and on July 15, 1997, the Company completed the DynaSoft Acquisition.
The RSA Merger has been accounted for as a pooling of interests and, after the
release of financial statements that include the date of consummation of the
DynaSoft Acquisition, the DynaSoft Acquisition will be accounted for as a
pooling of interests in the Company's historical consolidated financial
statements. All financial information included in the discussion which follows
has been restated to include the results of RSA and DynaSoft for all periods
presented. See the Company's Supplemental Consolidated Financial Statements and
the Notes thereto included elsewhere in this Prospectus.
RSA, located in Redwood City, California, is a recognized leader in
cryptography and develops, markets and supports cryptographic data security
products and provides cryptographic consulting services. Products are licensed
to OEMs that incorporate the technology into their products. Developer toolkits
and other products are used to implement cryptographic data security
applications such as electronic mail, communications privacy, client/server data
security, smart cards and other key information technologies.
DynaSoft is based in Stockholm, Sweden and offers a range of software
security solutions, including secure single sign-on solutions, through its BoKS
product family. DynaSoft markets its products worldwide through subsidiaries and
also through OEM licensing agreements with Sun Microsystems, Hewlett-Packard and
other companies.
The Company's revenue is derived primarily from sales of SecurID tokens;
licensing of ACE/Server, BoKS and SecurPC software; licensing of BSAFE, TIPEM,
BCERT, S/PAY and S/MAIL encryption engines; licensing of patents; and revenues
from maintenance and professional services. Historically, the Company's growth
has been attributable to sales to new customers as well as to existing
customers. Sales to existing customers include sales of SecurID tokens and
ACE/Server software for use by different branches or divisions, sales of
replacement tokens (which are programmed at the request of the customer to
operate for a fixed period of up to four years) and sales of additional tokens
for use by vendors, suppliers, customers and clients of the Company's customers.
Sales to existing ACE/Server and BoKS customers are typically associated with an
increase in the number of users authorized under a license, and the sales of
additional functionality that can be added to the customer installation.
ACE/Server and BoKS software license fee prices are typically based on the
number of users authorized under a license. Sales to existing customers also
include revenue associated with amendments to encryption engine and patent
licensing agreements, usually in order to accommodate licensing of new software
or technology to the customer, to increase the field of use rights of the
customer, or both. Encryption engine software licensing terms vary by product,
and are typically composed of both initial fees plus ongoing royalties paid as a
percentage of the OEM's product or service revenues. Sales of ACM hardware and
software products have been decreasing relative to sales of ACE/Server software
for several years due to increased
17
<PAGE> 19
emphasis by the Company on sales to customers with larger security needs better
met by client/server software solutions such as ACE/Server software. The Company
believes that this trend will continue.
The Company's direct sales to customers in countries outside of the United
States are denominated in the local currency. As a result, fluctuations in
currency exchange rates could affect the profitability in U.S. dollars of the
Company's products sold in these markets. See Note 9 of Notes to the Company's
Supplemental Consolidated Financial Statements.
The Company's cost of revenue consists primarily of costs associated with
the manufacture and delivery of SecurID tokens and hardware products. The
Company utilizes assembly contractors for most manufacturing. Cost of revenue
also includes royalty fees incurred on the sale of ACE/Server software, royalty
fees payable on the licensing of patent technology and royalties payable under
certain OEM agreements. Cost of revenue includes customer support costs and
production costs, which include labor costs associated with the programming of
SecurID tokens, inspection and quality control functions and shipping costs. In
the future, gross profit may be affected by several factors, including changes
in product mix and distribution channels, price reductions (resulting from
volume discounts or otherwise), competition, increases in the cost of revenue
(including any software license fees or royalties payable by the Company) and
other factors.
Operating expenses are incurred for research and development, marketing and
selling and general and administrative activities. Research and development
expenses consist primarily of personnel costs as well as fees for development
services provided by consultants. From time to time the Company has also
purchased, and expensed, research and development technology. Marketing and
selling expenses consist primarily of salaries, commissions and travel expenses
of direct sales and marketing personnel and marketing program expenses. General
and administrative expenses consist primarily of personnel costs for
administration, finance, human resources, general management and legal and
accounting fees.
Interest and other income consists primarily of interest earned on the
Company's cash balances and marketable securities.
The Company has been profitable for each of the years in the seven-year
period ended December 31, 1996 and for the six months ended June 30, 1997.
18
<PAGE> 20
RESULTS OF OPERATIONS
The following table sets forth certain supplemental consolidated financial
data as a percentage of revenue for the years ended December 31, 1994, 1995 and
1996 and the six months ended June 30, 1996 and 1997:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Revenue......................................... 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue................................. 20.3 18.1 21.7 20.6 21.4
----- ----- ----- ----- -----
Gross profit.................................. 79.7 81.9 78.3 79.4 78.6
Costs and expenses:
Research and development...................... 18.1 12.7 14.8 15.3 14.1
Purchased research and development............ -- 1.3 1.2 -- --
Marketing and selling......................... 37.4 28.9 29.1 30.0 30.6
General and administrative.................... 14.1 21.0 16.0 16.8 12.4
Merger expenses............................... -- -- 7.3 -- --
----- ----- ----- ----- -----
Total...................................... 69.6 63.9 68.4 62.1 57.1
----- ----- ----- ----- -----
Income from operations.......................... 10.1 18.0 9.9 17.3 21.5
Interest income and other....................... 0.7 3.7 5.9 6.9 4.4
Gain on sale of marketable securities and other
income (expense).............................. 0.4 0.2 13.0 (0.4) 0.3
----- ----- ----- ----- -----
Income before provision for income taxes........ 11.2 21.9 28.8 23.8 26.2
Provision for income taxes...................... 6.1 6.8 13.1 8.7 9.8
----- ----- ----- ----- -----
Net income...................................... 5.1% 15.1% 15.7% 15.1% 16.4%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended June 30, 1997 Compared With Six Months Ended June 30, 1996
Revenue. Total revenue increased 70.0% in the first six months of 1997 to
$61.4 million from $36.1 million in the first six months of 1996. This increase
in revenue reflected increases in unit sales of all of the Company's products,
except ACM/400 and ACM/1600 hardware products. During the first six months of
1997, approximately 42% of the increase in revenue was attributable to increased
sales of SecurID tokens, approximately 26% of the increase was attributable to
increased sales of encryption engine licenses and approximately 17% of the
increase was attributable to increased sales of ACE/Server software licenses.
The balance of the increase in revenue primarily resulted from sales of BoKS
software licenses, patent licenses and maintenance revenue, offset by decreased
hardware revenue. The Company believes that the overall increase in sales was
attributable in part to growth of the information security market, with
increased use of the Internet and corporate intranets and extranets continuing
to play significant roles in developing new opportunities for the Company.
International revenue (excluding Canada) increased 83.0% in the first six
months of 1997 to $15.7 million from $8.6 million in the first six months of
1996. International revenue accounted for 25.6% and 23.7% of total revenue in
the first six months of 1997 and 1996, respectively. The increase in
international revenue was primarily attributable to the continuing expansion of
the Company's international direct sales force and increased market penetration
of the Company's products in foreign markets.
Cost of Revenue and Gross Profit. The Company's gross profit increased
68.3% in the first six months of 1997 to $48.2 million, from $28.7 million in
the first six months of 1996, and remained relatively constant as a percentage
of revenue at 78.6% in 1997 compared to 79.4% in 1996.
19
<PAGE> 21
Approximately 40% of the increase in gross profit during the first six months of
1997 was attributable to increased unit sales of SecurID tokens, approximately
30% to increased licensing sales of encryption engine technology, approximately
19% to increased licensing sales of ACE/Server software and approximately 4% to
sales of BoKS software products. In addition, gross profit increased due to
increased patent licensing sales, royalties and maintenance revenue, offset by
reduced sales of ACM/400 and ACM/1600 hardware products.
Research and Development. Research and development expenses increased
56.3% in the first six months of 1997 to $8.6 million from $5.5 million in the
first six months of 1996. Research and development expenses decreased as a
percentage of revenue in the first six months of 1997 to 14.1% from 15.3% in the
first six months of 1996. During the first six months of 1997, approximately 82%
of the increase in research and development expenses resulted from employment of
additional staff. The remainder of the increase in research and development was
attributable to purchases of computer equipment, resulting in higher
depreciation charges, occupancy expenses and consulting expenses.
Marketing and Selling. Marketing and selling expenses increased 73.4% in
the first six months of 1997 to $18.8 million from $10.8 million in the first
six months of 1996. Marketing and selling expenses increased as a percentage of
revenue in the first six months of 1997 to 30.6% from 30.0% in the first six
months of 1996. During the first six months of 1997, approximately 42% of the
increase in marketing and selling expenses resulted from employment of
additional staff, approximately 11% of the increase was attributable to sales
commissions on increased revenues, and approximately 16% of the increase
resulted from increased travel expenses and marketing program expenses.
General and Administrative. General and administrative expenses increased
25.5% in the first six months of 1997 to $7.6 million, from $6.1 million in the
first six months of 1996, but decreased as a percentage of revenue to 12.4% in
1997 compared to 16.8% in 1996. The increase in general and administrative
expenses was due to the employment of additional staff offset by reduced legal
expenses. Legal expenses decreased approximately $1.3 million from the first six
months of 1996 compared to the first six months of 1997 due to the settlement of
certain of the Company's legal proceedings in 1996.
Interest Income and Other. Interest income increased 8.7% in the first six
months of 1997 to $2.7 million from $2.5 million in the first six months of 1996
due to interest earned on higher cash and marketable securities balances.
Provision for Income Taxes. The provision for income taxes increased to
$6.0 million during the first six months of 1997 from $3.1 million in the first
six months of 1996 due to higher pre-tax income and a higher effective tax rate
during the first six months of 1997. The Company's estimated effective tax rate
increased to 37.5% in the first half of 1997 from 36.6% in the first half of
1996 due to higher tax rates associated with certain foreign income, which
increased relative to domestic income.
Net Income. As a result of the above factors, net income in the first six
months of 1997 increased to $10.1 million, or 16.4% of revenue, from $5.5
million, or 15.1% of revenue, in the first six months of 1996.
1996 Compared With 1995
Revenue. Total revenue increased 69.6% in 1996 to $83.8 million from $49.4
million in 1995. This increase in revenue reflected increases in unit sales and
licensed use of substantially all of the Company's products. Approximately 42%,
22% and 11% of the increase in revenue was attributable to the increases in unit
sales of SecurID tokens, the increase in unit sales of ACE/Server software
licenses and the issuance of additional encryption engine and patent licenses,
respectively.
International revenue (excluding Canada) increased 114.0% in 1996 to $19.7
million from $9.2 million in 1995 and accounted for 23.4% and 18.6% of total
revenue in 1996 and 1995, respectively.
20
<PAGE> 22
This increase in international revenue was primarily attributable to the
continuing expansion of the Company's international direct sales force and
increased market penetration of the Company's products in foreign markets.
Cost of Revenue and Gross Profit. The Company's gross profit increased
62.0% in 1996 to $65.6 million, or 78.3% of revenue, from $40.5 million, or
81.9% of revenue, in 1995. Approximately 46% of the increase in gross profit was
attributable to an increase in the unit sales and gross margin from the sale of
SecurID tokens. Approximately 26% of the increase in gross profit was
attributable to increased sales of ACE/Server software licenses. Approximately
9% of the increase in gross profit was attributable to increased sales of patent
and encryption engine licenses. Overall, gross margins were lower due primarily
to the higher royalty costs associated with the ACE/Server software and patent
license products and additional investment in the Company's customer support
infrastructure.
In December 1994, the Company entered into an agreement with Progress
Software, a vendor of commercial database software, for the right to use certain
of Progress Software's software to enhance the functionality of the Company's
ACE/Server software. The Company began incurring royalties, which are charged to
cost of revenue, under the Progress Software agreement upon the commercial
introduction of ACE/Server software version 2.0 in October 1995. These royalties
have decreased gross margins.
Research and Development. Research and development expenses increased
96.8% in 1996 to $12.4 million from $6.3 million in 1995, and increased as a
percentage of revenue to 14.8% in 1996 from 12.7% in 1995. Approximately 54% of
the increase in research and development expenses resulted from an increase in
compensation costs associated primarily with the employment of additional staff.
Approximately 15% of the increase in research and development expenses in 1996
was related to general overhead costs. Approximately 9% of the increase was
attributable to increases in consulting services contracted to develop
enhancements to the Company's ACE/Server software line.
Purchased Research and Development. During the fourth quarter of 1996, the
Company purchased, and recorded as purchased research and development expense,
technology from Worldtalk Corporation for $1.0 million. The technology was
incorporated into the Company's S/MAIL developer kit, a standards-based secure
messaging solution for third-party software developers designed to provide a
secure messaging infrastructure based on the S/MIME protocol.
During 1995, the Company purchased, and recorded as purchased research and
development expense, SecurADM technology for $0.6 million. The technology was
incorporated into products designed to provide secure single sign-on capability
in heterogeneous networked data processing environments.
Marketing and Selling. Marketing and selling expenses increased 71.3% in
1996 to $24.4 million from $14.3 million in 1995, and increased as a percentage
of revenue to 29.1% in 1996 from 28.9% in 1995. Approximately 36% of the
increase in marketing and selling expenses was due to an increase in payroll
costs associated primarily with the employment of additional direct sales and
marketing personnel. Approximately 16% of the increase in marketing and selling
expenses was attributable to the increase in commissions on products sold by the
Company's direct sales force. Approximately 15% of the increase in marketing and
selling expenses was due to an increase in travel-related costs and marketing
programs, such as direct mail and seminar activities, trade shows and public
relations campaigns. Approximately 12% of the increase in marketing and selling
expenses in 1996 was related to general overhead costs.
During 1996, international sales expenses increased due to the continued
development of the Company's sales offices in Europe and Asia.
General and Administrative. General and administrative expenses increased
29.2% in 1996 to $13.4 million, or 16.0% of revenue, from $10.4 million, or
21.0% of revenue, in 1995. Approximately
21
<PAGE> 23
29% of the increase was due to an increase in payroll and recruitment costs
associated primarily with the growth in the Company's staff needed to support
the continuing expansion of operations. Approximately 17% of the increase in
general and administrative expense was from an increase in consulting and
temporary administrative services. In addition, approximately 10% of the
increase in general and administrative expenses consisted of moving costs
incurred in relocating to the Company's new corporate offices.
Merger Expenses. Merger expenses incurred in connection with the RSA
Merger were $6.1 million in the third quarter of 1996. See Note 2 of Notes to
the Company's Supplemental Consolidated Financial Statements.
Interest Income and Other. Interest income increased to $5.0 million in
1996 from $1.8 million in 1995. This increase was due primarily to higher
average daily balances in invested cash resulting from the Company's follow-on
public offering in November 1995.
Gain on Sale of Marketable Securities. The Company realized a gain of
approximately $11.0 million in 1996 on the sale of marketable securities.
Provision for Income Taxes. The provision for income taxes increased to
$11.0 million in 1996 from $3.4 million in 1995. This increase was primarily the
result of higher pre-tax income during 1996. The Company's effective tax rate
increased to 45.5% in 1996 from 31.1% in 1995. The increase in the effective tax
rate was caused principally by the non-deductibility of certain RSA Merger
expenses in the third quarter of 1996. For the year ended December 31, 1995, the
valuation allowance was reduced by approximately $0.9 million, which resulted in
a decrease in the provision for income taxes for 1995. See Notes 1 and 6 of
Notes to the Company's Supplemental Consolidated Financial Statements.
Net Income. As a result of the above factors, net income in 1996 increased
to $13.2 million, or 15.7% of revenue, from $7.5 million, or 15.1% of revenue,
in 1995.
1995 Compared With 1994
Revenue. Total revenue increased 107.0% in 1995 to $49.4 million from
$23.9 million in 1994. This increase in revenue reflected increases in unit
sales of all of the Company's products except the ACM/1600 hardware product.
Approximately 39%, 32% and 22% of the increase in revenue was attributable to
the increases in unit sales of SecurID tokens, encryption engine and patent
licenses and sales of ACE/Server software licenses, respectively, offset by a
decrease in unit sales of ACM/1600 hardware products.
International revenue (excluding Canada) increased 74.0% in 1995 to $9.2
million from $5.3 million in 1994 and accounted for 18.6% and 22.2% of total
revenue in 1995 and 1994, respectively. This increase in international revenue
was primarily attributable to expansion of the Company's direct sales force and
increased market acceptance of the Company's products.
Cost of Revenue and Gross Profit. The Company's gross profit increased
112.8% in 1995 to $40.5 million, or 81.9% of revenue, from $19.0 million, or
79.7% of revenue, in 1994. Approximately 36% of the increase in gross profit was
attributable to an increase in the unit sales of SecurID tokens. Approximately
36% of the increase in gross profit was attributable to an increase in the
number of patent and encryption engine licenses sold. Approximately 25% of the
increase in gross profit was attributable to an increase in the number of
ACE/Server software licenses sold. These factors, which contributed to an
improvement in the gross margin in 1995, were partially offset by ongoing
increases in production costs associated with quality management programs and
continued increases in customer support costs in Europe.
Research and Development. Research and development expenses increased
45.9% in 1995 to $6.3 million from $4.3 million in 1994, but decreased as a
percentage of revenue to 12.7% in 1995 from 18.1% in 1994. Approximately 69% of
the increase in research and development expenses
22
<PAGE> 24
resulted from an increase in payroll costs associated primarily with the
employment of additional staff. Approximately 20% of the increase was
attributable to increases in consulting expenses to develop enhancements to the
Company's product lines, primarily the Company's ACE/Server software and
encryption engine product lines.
Purchased Research and Development. During 1995, the Company purchased,
and recorded as purchased research and development expense, SecurADM technology
for $0.6 million. The technology was incorporated into products designed to
provide secure single sign-on capability in heterogeneous networked data
processing environments.
Marketing and Selling. Marketing and selling expenses increased 59.7% in
1995 to $14.3 million from $8.9 million in 1994, but decreased as a percentage
of revenue to 28.9% in 1995 from 37.4% in 1994. Approximately 36% of the
increase in marketing and selling expenses was due to an increase in payroll
costs associated primarily with the employment of additional direct sales and
marketing personnel. Approximately 27% of the increase in marketing and selling
expenses was attributable to the increase in commissions on products sold by the
Company's direct sales force. Approximately 14% of the increase in marketing and
selling expenses was due to an increase in marketing programs, such as direct
mail and seminar activities, trade shows and public relations campaigns.
During 1995, international sales expenses increased due to the continued
development of the Company's United Kingdom, German, French and Swedish sales
offices and the opening of the Company's office in Singapore.
General and Administrative. General and administrative expenses increased
208.0% in 1995 to $10.4 million, or 21.0% of revenue, from $3.4 million, or
14.1% of revenue, in 1994. Approximately 52% of the increase in general and
administrative expenses was attributable to increases in legal costs and also
accounting and investor relations expenses resulting from the additional costs
incurred in connection with being a public company. Approximately 29% of the
increase was due to increases in executive compensation and to increased payroll
expenses associated with the growth in the Company's staff to support increased
operations.
Interest Income and Other. Interest income increased to $1.8 million in
1995 from $0.2 million in 1994. This increase was due primarily to higher
average daily balances in invested cash resulting from the Company's initial
public offering in December 1994 and its follow-on public offering in November
1995.
Provision for Income Taxes. The provision for income taxes increased to
$3.4 million in 1995 from $1.5 million in 1994. This increase was primarily the
result of higher pre-tax income during 1995. The Company's effective tax rate
decreased to 31.1% in 1995 from 54.2% in 1994. The decrease in the effective tax
rate resulted primarily from the change in the recorded valuation allowance and
a decrease in state taxes. For 1995, the valuation allowance was reduced by
approximately $0.9 million and for 1994 the valuation allowance was increased by
approximately $0.3 million. See Notes 1 and 6 of Notes to the Company's
Supplemental Consolidated Financial Statements.
Net Income. As a result of the above factors, net income in 1995 increased
to $7.5 million, or 15.1% of revenue, from $1.2 million, or 5.1% of revenue, in
1994.
23
<PAGE> 25
SUPPLEMENTAL QUARTERLY OPERATING RESULTS
The following table sets forth unaudited supplemental quarterly results of
operations of the Company for each of the quarters in the years ended December
31, 1995 and 1996 and the six months ended June 30, 1997. The Company believes
that this information has been prepared on the same basis as the Company's
audited Supplemental Consolidated Financial Statements and that all necessary
adjustments, consisting only of normal recurring adjustments, have been included
in the amounts stated below to present fairly, in accordance with generally
accepted accounting principles, the quarterly information when read in
conjunction with the Company's audited Supplemental Consolidated Financial
Statements and the Notes thereto included elsewhere in this Prospectus. The
quarterly operating results are not necessarily indicative of future results of
operations.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............ $7,387 $11,698 $14,849 $15,478 $16,290 $19,821 $21,143 $26,563 $28,419 $32,955
Cost of revenue.... 1,373 2,111 2,357 3,079 3,671 3,780 5,283 5,473 6,417 6,730
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross
profit..... 6,014 9,587 12,492 12,399 12,619 16,041 15,860 21,090 22,002 26,225
Costs and expenses:
Research and
development..... 1,348 1,595 1,509 1,840 2,342 3,191 3,134 3,715 3,848 4,798
Purchased research
and
development..... -- -- 648 -- -- -- -- 1,000 -- --
Marketing and
selling......... 3,084 3,445 3,495 4,239 5,004 5,820 5,988 7,617 8,669 10,101
General and
administrative... 1,629 2,650 2,307 3,789 2,901 3,160 3,208 4,134 3,389 4,220
Merger expenses... -- -- -- -- -- -- 6,100 -- -- --
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Total....... 6,061 7,690 7,959 9,868 10,247 12,171 18,430 16,466 15,906 19,119
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations........ (47) 1,897 4,533 2,531 2,372 3,870 (2,570) 4,624 6,096 7,106
Interest income and
other............. 396 447 379 621 1,274 1,226 1,119 1,385 1,271 1,446
Gain on sale of
marketable
securities and
other income
(expense)......... 86 (157) 46 87 1 (142) 4,553 6,460 (25) 222
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Income before
provision for
income taxes...... 435 2,187 4,958 3,239 3,647 4,954 3,102 12,469 7,342 8,774
Provision for
income taxes...... 667 1,134 338 1,230 1,304 1,843 3,284 4,566 2,781 3,259
------ ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income
(loss)............ $ (232) $ 1,053 $ 4,620 $ 2,009 $ 2,343 $ 3,111 $ (182) $ 7,903 $ 4,561 $ 5,515
====== ======= ======= ======= ======= ======= ======= ======= ======= =======
Net income (loss)
per equivalent
share............. $ (0.01) $ 0.03 $ 0.14 $ 0.06 $ 0.06 $ 0.08 $ (0.00) $ 0.20 $ 0.12 $ 0.14
====== ======= ======= ======= ======= ======= ======= ======= ======= =======
Weighted average
number of common
and common
equivalent shares
outstanding....... 32,411 33,699 33,951 35,445 37,777 39,039 39,168 39,563 39,299 39,527
====== ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
24
<PAGE> 26
The following table sets forth supplemental consolidated financial data as
a percentage of revenue for each of the quarters in the years ended December 31,
1995 and 1996 and the six months ended June 30, 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------------------------------------------------------------------------
MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30,
1995 1995 1995 1995 1996 1996 1996 1996 1997 1997
-------- -------- --------- -------- -------- -------- --------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue............ 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of revenue.... 18.6 18.0 15.9 19.9 22.5 19.1 25.0 20.6 22.6 20.4
--- --- --- --- --- --- --- --- --- ---
Gross
profit..... 81.4 82.0 84.1 80.1 77.5 80.9 75.0 79.4 77.4 79.6
Costs and expenses:
Research and
development..... 18.2 13.6 10.2 11.9 14.4 16.1 14.8 14.0 13.5 14.6
Purchased research
and
development..... -- -- 4.4 -- -- -- -- 3.8 -- --
Marketing and
selling......... 41.7 29.4 23.5 27.4 30.7 29.4 28.3 28.6 30.5 30.6
General and
administrative... 22.1 22.7 15.5 24.5 17.8 15.9 15.2 15.6 12.0 12.8
Merger expenses... -- -- -- -- -- -- 28.9 -- -- --
--- --- --- --- --- --- --- --- --- ---
Total....... 82.0 65.7 53.6 63.8 62.9 61.4 87.2 62.0 56.0 58.0
--- --- --- --- --- --- --- --- --- ---
Income (loss) from
operations........ (0.6) 16.3 30.5 16.3 14.6 19.5 (12.2) 17.4 21.4 21.6
Interest income and
other............. 5.4 3.8 2.6 4.0 7.8 6.2 5.3 5.2 4.5 4.4
Gain on sale of
marketable
securities and
other income
(expense)......... 1.1 (1.3) 0.3 0.6 -- (0.7) 21.5 24.3 (0.1) 0.6
--- --- --- --- --- --- --- --- --- ---
Income before
provision for
income taxes...... 5.9 18.8 33.4 20.9 22.4 25.0 14.6 46.9 25.8 26.6
Provision for
income taxes...... 9.0 9.7 2.3 7.9 8.0 9.3 15.5 17.2 9.8 9.9
--- --- --- --- --- --- --- --- --- ---
Net income
(loss)............ (3.1)% 9.1% 31.1% 13.0% 14.4% 15.7% (0.9)% 29.7% 16.0% 16.7%
=== === === === === === === === === ===
</TABLE>
The Company's total revenue and operating results have varied substantially
from quarter to quarter and should not be relied upon as an indication of future
results. Quarterly revenue and operating results can be difficult to forecast
because the Company's sales cycle can be relatively long and depends on factors
such as the size and timing of individual transactions, changes in customer
budget authorizations, the level of research and development expenditures and
general economic conditions. The Company has historically allowed customers to
place large order commitments to secure volume price discounts with deliveries
specified at a later time, typically within a 12-month period. As a result, it
is difficult to forecast when the customer will request delivery of these
orders. Gross profit levels are affected by sales volume and mix, and gross
margins are different for SecurID tokens, software licenses, patent licenses and
maintenance and professional services.
The Company's revenue has increased in each of the quarters in the period
January 1, 1995 to June 30, 1997. Future revenue, however, may not increase on a
quarterly basis or may not increase at the same rate in comparison to prior
quarters. The Company has experienced, and expects to continue to experience,
significant seasonality in its business, and the Company's financial condition
or results of operations may be affected by such trends in the future. Revenue
has historically increased at higher rates in the last quarter of the year and
at lower rates in the next succeeding quarter. The Company believes that revenue
tends to increase at higher rates in the last quarter due to the Company's
quota-based compensation policies, year-end budgetary pressures on the Company's
customers and the tendency of certain of the Company's customers to implement
changes in enterprise network or data security prior to the end of the calendar
year. In addition, revenue tends to increase at lower rates in the summer
months, particularly in Europe, when businesses defer purchase decisions.
Because the Company's operating expenses are based on anticipated revenue levels
and a high percentage of the Company's expenses are fixed, a small variation in
the time of recognition of revenue can cause significant variations in operating
results from quarter to quarter.
25
<PAGE> 27
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had cash and marketable securities of $110.8
million and working capital of $119.7 million. The Company has historically
funded its operations primarily from cash generated from its operating
activities. During 1996 and 1997, the Company used the cash provided by
operations principally for working capital needs and to finance certain costs in
connection with the RSA Merger. The Company believes that working capital will
be sufficient to meet its anticipated cash requirements through at least 1998.
On July 15, 1997, the Company acquired approximately 95% of the outstanding
shares and certain of the outstanding options to acquire shares of DynaSoft in
exchange for approximately 2.7 million shares of the Company's Common Stock. The
Company also paid approximately $6.0 million in cash to certain stockholders of
DynaSoft in exchange for the remaining outstanding shares and options. The
DynaSoft Acquisition costs, which will be recognized during the quarter ending
September 30, 1997, are estimated to be approximately $8.5 million. On July 26,
1996, a wholly owned subsidiary of the Company acquired RSA. The RSA Merger
costs were approximately $6.1 million. The RSA Merger has been accounted for as
a pooling of interests and, after the release of financial statements that
include the date of consummation of the DynaSoft Acquisition, the DynaSoft
Acquisition will be accounted for as a pooling of interests in the Company's
historical consolidated financial statements. See Note 2 of Notes to the
Company's Supplemental Consolidated Financial Statements.
In December 1994, the Company sold 6,000,000 shares of Common Stock in its
initial public offering, which generated $21.6 million of net cash proceeds to
the Company. In January 1995, the Company sold 1,020,000 shares of Common Stock
under the terms of an over-allotment option granted to the underwriters as part
of the initial public offering, generating an additional $3.8 million in net
cash proceeds. In November 1995, the Company sold an additional 3,120,000 shares
of Common Stock in a follow-on offering, which generated $55.9 million of net
cash proceeds to the Company.
In August 1997, the Company purchased 877,193 Series C Preferred Shares of
Finjan Software Ltd. ("Finjan") for an aggregate purchase price of $1.0 million.
Finjan is an Israeli software company organized to develop and market products
for the Java Internet security market. The Company's investment in Finjan
represents a minority interest of less than 5% of Finjan's capitalization.
In December 1996, the Company purchased 250,000 shares of Series B
Preferred Stock of VPNet Technologies, Inc. ("VPNet") of San Jose, California,
for an aggregate purchase price of $1.5 million. VPNet was organized to develop
and market products and technologies for implementing high-performance virtual
private networks. The Company's investment in VPNet represents a minority
interest of less than 10% of VPNet's capitalization.
On April 17, 1995 and February 20, 1996, the Company purchased 425,000
shares of Series A and 72,091 shares of Series B Convertible Preferred Stock,
respectively, of VeriSign, Inc. ("VeriSign") of Redwood City, California for an
aggregate purchase price of $687,000. VeriSign was organized to provide digital
certificates and related services that use public-key cryptography to ensure
essential privacy and authentication features. During 1995, RSA granted certain
rights and privileges in certain technology to VeriSign in connection with
VeriSign's incorporation and received 4,000,000 shares of VeriSign common stock.
The Company's voting interest in VeriSign was approximately 44%, 24% and 24% at
December 31, 1995 and 1996 and June 30, 1997, respectively.
Two of the companies in which the Company has equity positions had initial
public offerings in 1996. The Company now considers these investments to be
available for sale marketable securities and the investment cost of $737,000 is
classified with marketable securities at June 30, 1997. See Note 1 of Notes to
the Company's Supplemental Consolidated Financial Statements.
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<PAGE> 28
The Company's capital expenditures for the first six months of 1997 were
$4.6 million and were for additional leasehold improvements, office furniture
and equipment, as well as computer equipment for product development, testing
and support to accommodate the Company's continued growth. The Company generated
$1.7 million of cash from the exercise of stock options and generated $1.4
million of cash from the sale of minority interests in RSA's Japan subsidiary in
the first six months of 1997. The Company currently anticipates that it will
expend approximately $3.1 million for purchased research and development during
the quarter ending September 30, 1997.
In March 1996, the Company entered into a noncancelable operating lease
expiring in 2006 for corporate executive offices in Bedford, Massachusetts. The
Company commenced its tenancy in August 1996. The facility consists of
approximately 75,000 square feet of office space, and the annual base rent for
the first year is $956,000 increasing annually up to $1.2 million for years five
through ten. In June 1997, the Company entered into a noncancelable operating
lease expiring in 2006 for additional facilities in Bedford, Massachusetts. The
Company commenced its tenancy in August 1997. The new facility consists of
approximately 32,000 square feet of office space, and the annual base rent for
the first four years is $599,000, increasing up to $662,000 for years five
through ten.
In November 1996, the Company amended its agreement with Progress Software
for the right to use certain of its software to enhance the functionality of the
Company's ACE/Server software. In order to obtain favorable pricing the Company
pre-paid $1.5 million and $1.25 million during the first and fourth quarters of
1996, respectively, and pre-paid $2.5 million during the first quarter of 1997.
The Company intends to seek acquisitions of businesses, products and
technologies that are complementary to those of the Company. The Company is
continuing to identify and prioritize additional security technologies which it
may wish to develop, either internally or through the licensing or acquisition
of products from third parties. While the Company engages from time to time in
discussions with respect to potential acquisitions, there can be no assurances
that any such acquisitions will be made or that the Company will be able to
successfully integrate any acquired business. In order to finance such
acquisitions, it may be necessary for the Company to raise additional funds
through public or private financings. Any equity or debt financings, if
available at all, may be on terms which are not favorable to the Company and, in
the case of equity financings, may result in dilution to the Company's
stockholders.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings per Share,"
which is required to be adopted in the fourth quarter of 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. SFAS 128 supersedes Accounting
Principles Board Opinion No. 15 and is intended to simplify the computation of
earnings per share and to make the U.S. computations more comparable with
international computations. See Note 1 of Notes to the Company's Supplemental
Consolidated Financial Statements.
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" and "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 130" and "SFAS 131," respectively). The Company will be
required to adopt the provisions of these statements in fiscal 1998. SFAS 130
provides standards for reporting items considered to be "comprehensive income"
and uses the term "other comprehensive income" to refer to revenues, expenses,
gains and losses that are included in comprehensive income under generally
accepted accounting principles but excluded from net income. Currently the only
items presented in the Company's consolidated financial statements that would be
considered other comprehensive income as defined in SFAS 130 are the unrealized
gains and losses on marketable securities and cumulative translation
adjustments,
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<PAGE> 29
which are recorded as components of stockholders' equity. SFAS 131 establishes
new standards for reporting information about operating segments. The Company
believes the segment information required to be disclosed under SFAS 131 will be
more comprehensive than previously provided, including expanded disclosure of
income statement and balance sheet items for each reportable operating segment.
The Company has not yet completed its analysis of which operating segments it
will report on. The Company believes that the provisions of SFAS 130 will not,
when adopted, have a material impact on the Company's financial statements.
ACCOUNTING FOR CERTAIN STOCK OPTIONS
On October 18, 1995, January 24, 1996, April 1, 1996 and April 24, 1996,
the Company's Board of Directors or the Compensation Committee of the Company's
Board of Directors granted stock options to employees to purchase 32,000,
605,600, 200,000 and 38,900 shares of the Company's Common Stock at exercise
prices of $14.25, $24.76, $24.30 and $38.20, respectively, subject to
stockholder approval (obtained on May 22, 1996) of an increase in the number of
shares available for grant. The exercise prices represented the fair market
value on the dates of grant. As permitted by Statement of Financial Accounting
Standard No. 123, which became effective on January 1, 1996, the Company has
elected to continue to apply the intrinsic value method of Accounting Principles
Board Opinion No. 25 for stock-based compensation to employees.
For options granted prior to April 1, 1996, because approval of the
stockholders was required and considered perfunctory, the Company measured
compensation expense on the date of grant by the Board of Directors or the
Compensation Committee of the Board of Directors. As a result of discussions
with the staff of the Securities and Exchange Commission, the Company changed
its accounting policy on options requiring stockholder approval to measure
compensation expense on the approval date. This change is effective for options
granted on or after April 1, 1996. This change resulted in an aggregate
compensation expense of approximately $4.5 million relating to the April 1, 1996
and April 24, 1996 option grants, which the Company will recognize over the
remainder of the four-year vesting period of the options from May 22, 1996. The
effect of this change was to reduce income from operations by approximately $0.7
million in 1996.
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<PAGE> 30
BUSINESS
The Company is the leading provider of enterprise network and data security
solutions. The Company's products help organizations conduct business securely,
protect corporate information assets and facilitate business-to-business and
business-to-consumer electronic commerce. Historically, the Company has
delivered security solutions that provide secure remote access to corporate
networks. Through its ESS framework, partnerships and acquisitions, the Company
intends to expand its addressable market by delivering solutions that provide
secure access to information wherever it resides in an enterprise.
INDUSTRY BACKGROUND
Historically, computer and enterprise network security has been the focus
of businesses engaged in security-conscious industries such as banking,
telecommunications, aerospace and defense. However, a number of factors have
contributed to an increased awareness of, and need for, enterprise security
solutions for companies that use and rely on network-based information
resources. These factors include the growing complexity of enterprise networks
and a shift in network security requirements driven by increased use of the
Internet and corporate intranets and extranets.
Enterprise computing has evolved over the past three decades from
host-based systems to a distributed model where individuals are accessing
corporate resources from virtually anywhere inside or outside of an
organization. Enterprise computing environments today consist of heterogeneous
computer resources coupled with converging public and private networks. As such,
they require comprehensive, flexible products and solutions that can be deployed
to a large number of users in a consistent, manageable and secure fashion.
In addition, the traditional security model of network perimeter defense is
being expanded in light of increased use of the Internet. The growth of the
Internet as a business tool has led to a rapid increase in corporate intranets,
where employees share information, and extranets, where companies share
information with their suppliers, partners and customers. Companies that have
traditionally relied solely on static password protection or on corporate
firewalls are now seeking to adopt more sophisticated, comprehensive security
strategies to protect corporate information assets and to conduct business
securely. Companies today require scaleable enterprise security solutions that
can be easily integrated, deployed and managed across complex, heterogeneous
enterprise environments.
Classes of Enterprise Network and Data Security
The Company believes that enterprise network and data security requirements
can be grouped into the following four classes: (i) user identification and
authentication, (ii) access control and privilege management, (iii) data
privacy, integrity and authentication (encryption) and (iv) security
administration and audit.
User Identification and Authentication. Reliable authentication of the
identity of users is necessary to prevent unauthorized access to computer and
network resources. There are three generally accepted methods of user
identification: (i) something secret the user knows, such as a word, phrase,
PIN, code or fact; (ii) something physical the user possesses, such as a key,
smart card, badge or other form of discrete "token," which is resistant to
counterfeiting and (iii) something unique to the user, such as a fingerprint,
signature, retinal pattern, voice print or other measurable personal
characteristic or "biometric." The Company believes that the use of a two-factor
authentication system, combining two of the three generally accepted methods of
user identification, is required for reliable enterprise network and data
security.
Access Control and Privilege Management. One of the key challenges facing
organizations is the proliferation of passwords required for users to access
disparate operating systems, applications and databases. Products addressing
access control and privilege management must protect and
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<PAGE> 31
manage access to corporate information and applications and control user
privileges at multiple levels within the enterprise, including the network,
application and data levels. Single sign-on ("SSO") represents the ability to
provide authenticated users with transparent access to a variety of services,
thereby improving user productivity and reducing the frustration caused by users
having to enter multiple passwords. Early SSO solutions did not require
authentication from a security server; data centers could establish trust
between two devices through a direct connection in a static environment. With
the growth in distributed networks and the variety of operating systems and
client/server applications, reliable SSO now requires authentication, encryption
and key exchange to ensure secure communication between the desktop and the
application. Together with traditional SSO solutions, user authentication and
application session encryption capabilities make up a more complete solution
called secure single sign-on ("SSSO").
Data Privacy, Integrity and Authentication (Encryption). In addition to
authenticating the identity of users and ensuring that only authorized users can
access, view or modify certain data, a comprehensive security solution must
ensure that the data transmitted over a network are not disclosed to
unauthorized persons (data privacy), have not been altered or compromised by
unauthorized manipulation (data integrity) and were actually transmitted by the
purported sender (data authentication). Such data privacy, integrity and
authentication are provided by encryption and data authentication technologies.
Encryption. In traditional cryptography, known as secret key or
symmetric cryptography, the sender and receiver of a message know and use
the same secret keys. The sender uses the secret key to encrypt a message
by transforming data into a form unreadable by anyone without a secret
decryption key. The receiver uses the same secret key to decrypt the
message by transforming the encrypted data into the original readable
message. A key is a value or series of bits used by the cryptographic
system to convert the original text into an encrypted text or to decrypt
the encrypted text back into the original text.
The principal problem with secret key cryptography is communicating
the secret key between the sender and receiver without anyone else
discovering it. If the sender and receiver are in separate physical
locations, they must trust a courier, a phone system or some other
transmission medium to prevent the disclosure of the secret key being
communicated. Anyone who overhears or intercepts the key in transit can
later read, modify and forge messages encrypted or authenticated using that
key. Because all keys in a secret key cryptosystem must remain secret,
secret key cryptography often has difficulty providing secure key
management, especially in open systems like the Internet with a large
number of users.
The concept of public key cryptography attempts to solve the key
management problem by giving each person a pair of keys, one called the
public key and the other called the private key. Each person's public key
is published while the private key is kept secret. The sender encrypts a
message using the public key of the intended recipient and communicates it
via a public mode of communication. If implemented properly, the message
can only be decrypted with the recipient's private key, which is in the
sole possession of the intended recipient. All communications involve only
public keys, and no private key is ever transmitted or shared. With public
key cryptography, it is not necessary to trust a communications channel to
be secure against eavesdropping or betrayal. In general, public key
cryptography requires only that public keys be associated with their users
in a trusted manner, for instance, by maintaining the key in a trusted
directory, and that the private key not be disclosed.
Data Authentication. Data authentication is a process whereby the
receiver of a digital message can be confident of the identity of the
sender and/or the integrity of the message. In public key cryptosystems,
authentication is enabled by the use of digital signatures. Digital
signatures play in the digital world a function similar to that played by
handwritten signatures for printed documents. The signature is an authentic
piece of data asserting that a named person wrote or otherwise agreed to
the document to which the signature is attached. The recipient, as
30
<PAGE> 32
well as a third party, can verify both that the document originated from
the person whose signature is attached and that the document has not been
altered since it was signed. Secure digital signatures may be used to
refute a claim by the signer of a document that it was forged.
Security Administration and Audit. With the growth of distributed
computing environments, including those utilizing the Internet, organizations
are increasingly concerned about various administrative issues relating to
network security, including the scaleability of their security solutions and the
ability of the solutions to cover multiple geographic regions. Security
administration and audit solutions must also monitor user activity for purposes
of detection and deterrence and in order to ensure that the network or data have
not been compromised.
Enterprise Security
The Company believes that there is an emerging market for enterprise-wide
security solutions and, increasingly, for extranet security solutions, where
companies exchange information with their suppliers, partners and customers.
These enterprise security solutions must incorporate elements of all four
classes of security and address the need for: (i) ease of use; (ii)
interoperability within heterogeneous enterprise environments; (iii)
scaleability; (iv) integrated network security administration; (v) integration
with existing customer applications; (vi) secure access to information,
including secure remote access; (vii) information privacy, integrity and
authentication; and (viii) system reliability and availability.
To date, most approaches to network security have been limited in scope and
have failed to address one or more of these requirements. The Company believes
that, in order to compete effectively in this market, network security vendors
must develop comprehensive network security services that can accommodate a
large number of local and remote users and integrate security management across
heterogeneous computing resources.
SECURITY DYNAMICS SOLUTION
Security Dynamics is the leading provider of enterprise network and data
security solutions. The Company's products help companies conduct business
securely, protect information assets and facilitate business-to-business and
business-to-consumer electronic commerce. The Company's solutions employ a
patent-protected combination of super smart card technology, access control and
privilege management products, public key encryption technology and security
administration software to protect information wherever it resides in an
enterprise.
A key element of the Company's strategy has been and continues to be the
expansion of its product offerings to address each of the four classes of
enterprise network and data security and deliver integrated solutions for
protecting information resources. Since its inception, the Company has focused
on the fundamental need for user identification and authentication, with an
emphasis on solutions for secure remote access to enterprise networks. In
furtherance of its strategy to expand product offerings within the security
classes, in July 1996 the Company acquired RSA, a leader in cryptography, to
address the need for data privacy, integrity and authentication.
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<PAGE> 33
Narritive description of graphic material omitted in electronically
filed document.
Under the heading "Secure Information Access," a schematic diagram
of the Company's products is presented. On the left side, above the
caption "Secure Remote Access," is a picture of a laptop computer
next to a SecurID Card and the words "BoKS Desktop" and "RSA
SecurPC." The laptop computer is connected to a labelled picture
of a remote access server by telephone lines and to a labelled
picture of a firewall by a cloud labelled "Internet" and two
lightning bolts. On the right side, below the caption "Enterprise
Network," lines exiting the remote access server and the firewall
join and enter, in succession, labelled pictures of BoKS Manager
and ACE/Server software. Lines exiting a picture of a computer
terminal next to a SecurID Card and the words "BoKS Desktop" and
"RSA SecurPC" and a labelled picture of an application server and
database next to the words "BoKS Connect" join the line exiting
the labelled picture of ACE/Server software.
The Company's solutions have historically focused on addressing secure
remote access through: (i) SecurID tokens for user identification and
authentication, (ii) ACE/Server administration software and (iii) ACE/Agent code
embedded in remote access devices such as remote access servers and firewalls.
The RSA SecurPC product and RSA encryption engines have contributed to secure
remote access by allowing customers to control access to the network and by
providing data privacy, integrity and authentication.
As businesses expand their networks to make use of the Internet, intranets
and extranets, companies have begun to realize that the internal network is
becoming more vulnerable and that there is a critical need for products and
services that allow system administrators to control user privileges at multiple
levels within an enterprise and encrypt information within an internal network.
Through its ESS framework, the Company intends to address these needs by moving
beyond secure remote access to secure information access, thereby providing
security across an enterprise. The ESS framework is intended to combine products
and technologies developed or acquired by the Company with solutions gained
through partnerships with leading vendors and is designed to assist in the
development of systems and applications that facilitate and control secure
access to information.
In support of its ESS framework, in July 1997 the Company acquired
DynaSoft, a leading vendor of platform-independent security solutions for
distributed client/server networks. The DynaSoft BoKS product family includes
technologies for access control and privilege management which the Company
intends to incorporate into the ESS framework.
Through the ESS framework, the Company intends to provide additional
security applications, including certificate management (certificates which
attest to the authenticity of the owners of public keys) and key management
(services such as generation, distribution, validation, replacement, termination
and recovery of keys). The Company intends to provide these and other
applications as modular add-ons to its ACE/Server and BoKS Manager software,
thereby protecting customers' investments and ensuring backwards compatibility.
As part of the ESS framework, the Company also plans to provide a broader
administrative framework to manage security services and to add access control
agents to support application access control and smart cards as an additional
form factor for user authentication.
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SECURITY DYNAMICS STRATEGY
The Company's objective is to continue as the leading provider of
enterprise network and data security solutions. Key elements of the Company's
strategy to achieve this objective include the following:
- Deliver Enterprise Security Services. The Company's strategy has been
and continues to be to expand the depth and breadth of its product
offerings across the classes of enterprise network and data security to
meet the evolving requirements for the protection of its customers'
information assets. Through its ESS framework, the Company plans to
develop and deliver scaleable, reliable enterprise security solutions
that enable companies to conduct business securely, protect corporate
information assets and facilitate electronic commerce. For instance, the
Company intends to introduce or acquire products and technologies and
form partnerships that will enable delivery of security services such as
certificate management and key management. In addition, through
partnerships the Company plans to expand its agent roster to include
application-specific agents and add additional authentication form
factors, including smart cards.
- Maintain Technological Leadership. The Company plans to continue to add
new capabilities and features to its enterprise network and data security
products to meet its customers' identification and authentication needs
within the context of evolving enterprise environments. The Company also
plans to continue to establish RSA's proprietary technology as a de facto
encryption standard. Through its RSA Laboratories division, RSA maintains
a leading role in basic cryptographic research, develops new encryption
technologies and maintains close working relationships with leading
academic centers and custom development teams.
- Expand Market Opportunities. The Company intends to expand its market
opportunities through strategic partnerships, industry initiatives and
marketing designed to heighten awareness of security issues. The Company
has strategic partnerships with approximately 50 industry-leading vendors
and plans to continue to foster and leverage these partnerships and enter
into additional relationships with companies that can provide
complementary technologies for its ESS framework. In July 1997, SDI, RSA,
McAfee Associates, Inc. and VeriSign announced the formation of the
SecureONE framework, a network security environment designed to link the
authentication, encryption, anti- virus and digital certificate products
and technologies of the four firms. The Company also seeks to heighten
awareness regarding enterprise network and data security issues through
marketing programs such as the annual RSA Data Security Conference.
- Expand Indirect Sales and Support Channel. The Company currently sells
its products through a direct sales force and through relationships with
a significant number of OEMs, VARs and distributors. The Company intends
to develop and expand its indirect sales and support channel by
developing a model for two-tier distribution of the Company's solutions.
The Company believes that an expanded indirect sales and support channel
will enable it to enter new markets and gain access to a larger installed
base of potential customers in a cost-effective manner.
- Expand International Presence. The Company believes that international
markets present a large, relatively new market for enterprise network and
data security products. Sales outside the United States and Canada
represented approximately 23.4% and 25.6% of the Company's total revenue
for 1996 and the six months ended June 30, 1997, respectively. The
Company plans to continue to expand its business outside North America
through the hiring of sales personnel, the establishment of additional
distribution arrangements, primarily in Europe and the Far East, and the
development of local presence in key markets.
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PRODUCTS
The Company offers products designed to address all classes of enterprise
network and data security. The Company's products interoperate with a wide
variety of operating systems, network environments and third-party hardware and
software products, thus enabling customers to select optimal configurations for
the installation of the Company's computer and enterprise network security
products.
User Identification and Authentication
The Company's user identification and authentication products combine two
methods of user identification -- something secret the user knows (a PIN) and
something the user possesses (the SecurID token). To gain access to a protected
resource, a user enters his or her PIN and the token code automatically computed
and displayed on the liquid crystal display ("LCD") of the user's SecurID token.
The PIN and the token code together form the user's "PASSCODE." With a valid
PASSCODE, the authorized user is identified, authenticated and granted access to
appropriate information resources.
Each SecurID token contains the Company's proprietary algorithm and is
programmed with a secret, randomly generated seed number which is unique to the
token. The algorithm uses the seed number and Greenwich Mean Time to produce a
sequence of token codes at set intervals (typically every 60 seconds). The
Company's ACE/Server software uses the same algorithm, seed number and Greenwich
Mean Time to generate a token code corresponding to the token code generated by
the user's SecurID token.
The Company currently offers the following user identification and
authentication products:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ------------------------------ ------------------------------------------
<S> <C> <C>
SecurID Tokens - Three form factors -- SecurID Card, PINPAD
and Key Fob -- that can be programmed to
function for between one and four years
SoftID - Authentication software that can be
deployed on a PC
</TABLE>
The Company's SecurID tokens and SoftID software work in conjunction with
the Company's ACE/Server software to provide user identification and
authentication services.
Access Control and Privilege Management
The Company's access control and privilege management products provide a
modular set of security services for protecting and managing access to corporate
information and applications. These services are delivered through a flexible
framework designed to control user privileges at multiple levels within the
enterprise, including at the network, application and data levels. The Company's
BoKS products can be used together to form a comprehensive security solution or
independently for use with other system components. BoKS software also employs
encryption to protect application data transiting the network, as well as for
the protection of local files and data used within the security management
system.
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<PAGE> 36
The Company's access control and privilege management products include the
following:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ------------------------------ ------------------------------------------
<S> <C> <C>
BoKS Desktop - Manages a user's security credentials,
providing security for PCs as well as SSO
functionality to host systems, database
applications and network domains
- Supports Windows 3.1, Windows for
Workgroups 3.11, Windows 95, Windows NT
3.51 and 4.0
BoKS Connect - Application access control solution that
operates with BoKS Desktop to secure
database sessions, Telnet sessions and
other TCP/IP-based client/server
connections
ToolBoKS - Toolkit that allows developers to
implement SSSO functionality and create
secure applications, including secure
mail, secure remote access, secure
Internet services and secure electronic
commerce
</TABLE>
Each of the foregoing products works in conjunction with the Company's BoKS
Manager software to provide access control and privilege management services.
Data Privacy, Integrity and Authentication (Encryption)
RSA's toolkit products, built around the RSA public key cryptographic
technology (or "cryptosystem"), enable the Company's customers to develop
applications that are designed to provide secure data communication. The RSA
public key cryptosystem uses a pair of large prime numbers to generate private
keys and public keys. The size of the keys determines the degree of security
provided. The Company believes that RSA's public key cryptosystem is one of the
most secure cryptographic techniques commercially available to encrypt, and to
verify the authenticity and integrity of, electronic data.
The Company believes that the RSA cryptosystem is a de facto standard for a
number of data security applications. RSA's encryption technology is embedded in
current versions of Microsoft Windows NT, Netscape Navigator, Quicken by Intuit,
Lotus Notes and numerous other products. RSA technology is also used in secure
telephones, on Ethernet network cards and on smart cards, and is incorporated
into major protocols for secure Internet communications, including SSL, S-HTTP,
S/MIME, PCT, PKCS, SET and PEM. It is also used internally in many institutions,
including financial institutions, major corporations, U.S. governmental
agencies, national laboratories and universities. RSA's technology has also
become widely selected as a standard for various electronic banking
applications.
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<PAGE> 37
The Company currently offers the following data privacy, integrity and
authentication (encryption) products:
<TABLE>
<CAPTION>
PRODUCT DESCRIPTION
- ------------------------------ ------------------------------------------
<S> <C> <C>
BSAFE - RSA's flagship encryption engine and
developer toolkit that allows programmers
to integrate encryption and data
authentication features into a wide range
of applications, including digitally
signed electronic forms and virtual
private networks
JSAFE - RSA's newest encryption engine and
developer toolkit that allows Java
developers to integrate encryption and
data authentication features into
applications
TIPEM - Developer toolkit providing flexible,
secure electronic messaging foundation for
a variety of messaging protocols,
including PEM, MOSS and S/MIME; used in
products or services offered by Lotus,
Netscape and America Online Inc.
BCERT - Developer toolkit designed to allow
developers to incorporate public key
certificates into their applications and
containing all cryptographic support
necessary to generate certificate
requests, sign certificates and create and
distribute certificate revocation lists
(CRLs)
S/MAIL - Standards-based secure messaging engine
and toolkit for providing a secure
messaging infrastructure based on the
S/MIME protocol
S/PAY - Standards-based secure transaction engine
and developer toolkit suite for providing
a secure payment card (including credit
cards) transaction infrastructure based on
the SET standard
RSA SecurPC - Encryption software based on RSA public
key and RC4 symmetric key cryptosystem
that protects and encrypts data in transit
via email and protects data on local hard
drives, network drives and laptop PCs
</TABLE>
The Company also believes that RSA's RC series of symmetric, or secret key,
encryption technologies are among the highest performance and most secure
techniques of their class available to encrypt electronic data. RC2 and RC4 are
designed to handle block and streaming data types, respectively, and are
designed to provide for easy adjustment of key size for exportability, as well
as high performance without specialized hardware.
Security Administration and Audit
The Company offers highly scaleable network security solutions that are
easy to deploy and provide system administrators with the ability to administer
the entire global authentication network from any location, delegate
administrative roles and privileges, write customized reports on security-
related activities on the network, and perform other administrative functions
with a high degree of granularity and flexibility. The Company's security
administration and audit products include its ACE/Server and BoKS Manager
software products.
The Company's ACE/Server software manages access to network resources via
the Internet, public gateways, remote dial-up modems, leased lines,
workstations, terminals, personal computers
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<PAGE> 38
or direct connection. It permits centralized user authentication and security
administration for all customer resources protected on a TCP/IP network.
ACE/Server software is currently available for most popular UNIX-based operating
systems and Windows NT.
BoKS Manager is the administration framework for the BoKS product family.
BoKS Manager provides customers with centralized user, security and public key
administration through Web-based graphical interfaces. Its primary functions are
to provide UNIX platform security and to create and administer security domains,
including UNIX systems, with BoKS Desktop.
As part of its ESS framework, the Company intends to integrate the
functionality of its ACE/Server and BoKS Manager software into a unified server
platform.
Pricing
Subject to volume discounts and other licensing terms and conditions, the
suggested U.S. list prices for the Company's products range as follows: SecurID
tokens from $34 to $86 per token; ACE/Server software products from $2,850 to
$172,500; RSA encryption engine and toolkit licenses from $25,000 to $50,000;
and BoKS products from $50 to $200 per user for BoKS Desktop and from $1,000 to
$2,000 per server for BoKS Manager. The Company continually reviews and adjusts
its product pricing policies in light of factors such as relative value,
industry standards and demand.
STRATEGIC PARTNERS
To enhance its enterprise network and data security solutions, the Company
has established relationships with approximately 50 vendors of remote access
products, Internet firewalls, network and applications software and virtual
private network ("VPN") products. Most of these vendors integrate the Company's
client software into one or more of their products to provide compatibility
between their product offerings and the Company's ACE/Server software. Other
vendors build call routines, software hooks or APIs into their products to
provide compatibility with the Company's ACE/Server software. The Company has
also entered into strategic relationships with vendors that share technical
information with the Company to enable it to develop products which will be
interoperable with the vendors' products. The Company's strategic partners
include the following:
<TABLE>
<CAPTION>
REMOTE ACCESS INTERNET FIREWALLS NETWORK AND APPLICATIONS VPN
- ------------------------------------------ ------------------- ------------------------ ------------
<S> <C> <C> <C> <C>
Access Beyond IBM ANS Apple Computer Ascend
ACT Networks Kasten Chase Check Point Cisco Aventail
ADTRAN Lantronix CyberGuard Citrix Check Point
Apple Computer Livingston IBM CyberSAFE VPNet
Ascend Microcom Milkyway Gradient
Attachmate Microsoft NEC IBM
Bay Networks NNTI Raptor Systems McAfee
Cabletron Systems Osicom Secure Computing Netscape
Cisco Shiva SOS Network Express
Citrix Telebit Technologic NIT
Digital Equipment 3COM Trusted Information Novell
Emulex U.S. Robotics Systems Oracle
Gandalf Xyplex V-ONE OTG
Hewlett-Packard PLATINUM technologies
Utimaco
</TABLE>
SALES AND MARKETING
The Company has established a multi-channel distribution and sales network
to serve the enterprise network and data security market. The Company sells and
licenses its products directly to end users through its direct sales force and
indirectly through a network of OEMs, VARs and distributors. In addition, the
Company supports its direct and indirect sales efforts through strategic
marketing relationships and public relations programs, trade shows and other
marketing activities.
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<PAGE> 39
During the fourth quarter of 1997, the Company intends to implement a program
designed to enhance its indirect channel through the establishment of two-tier
distribution.
Sales
The Company's direct sales staff focuses on major accounts, provides
technical advice and support with respect to the Company's products and works
closely with the Company's customers, OEMs, VARs and distributors. As of August
31, 1997, the Company's direct sales organization consisted of 159 sales and
technical support personnel located throughout the world. The Company's revenue
from direct sales efforts for the years ended December 31, 1994, 1995 and 1996
and the six months ended June 30, 1997 was approximately 88%, 95%, 90% and 84%
of total revenue, respectively.
The Company also markets, sells and licenses its products indirectly
through OEMs, VARs and distributors. As of August 31, 1997, the Company
(excluding RSA) had relationships with approximately 250 OEMs, VARs and
distributors, and RSA had relationships with more than 300 OEMs. DynaSoft has
traditionally complemented its direct sales force with VARs and distributors and
recently entered into OEM agreements with Sun Microsystems and Hewlett-Packard.
International sales (excluding Canada) accounted for approximately 22.2%,
18.6%, 23.4% and 25.6% of the Company's total revenue in the years ended
December 31, 1994, 1995 and 1996 and the six months ended June 30, 1997,
respectively.
Marketing
In support of its sales efforts, the Company conducts sales training
courses, comprehensive targeted marketing programs, including direct mail,
public relations, advertising, seminars, trade shows and telemarketing, and
ongoing customer and third-party communications programs. The Company also seeks
to stimulate interest in enterprise network and data security through its public
relations program, speaking engagements, white papers, technical notes and other
publications.
The Company has entered into strategic marketing relationships with various
vendors of operating systems and network operating systems, remote access
products, Internet-related products and application software. The Company has
also entered into strategic relationships with vendors that share technical
information with the Company to enable it to develop products which will be
interoperable with the vendors' products. The Company has developed a separate
program, the SecurID Ready strategic partner program, to market the
compatibility between the vendors' products and the Company's ACE/Server
software. The end-user customers of all of these vendors must purchase tokens
and license ACE/Server software directly from the Company. The Company believes
that these relationships help the Company and its customers to expand their
enterprise network coverage and assist the Company in increasing its installed
customer base and SecurID token usage.
To enhance demand for its products, RSA has participated in the development
of various industry-specific protocols that rely on RSA's cryptographic data
security technologies. RSA also hosts its own annual industry conference and
participates in others to increase demand for its products. Through its RSA
Laboratories division, RSA maintains a leading role in basic cryptographic
research, develops new encryption technologies and maintains close working
relations with leading academic centers and customer development teams.
CUSTOMERS
As of August 31, 1997, SDI had sold or licensed more than 4,600 ACE/Server
products and over two million SecurID tokens to more than 2,000 customers
worldwide. Historically, SDI's principal customers have been in the
telecommunications, pharmaceutical, financial and healthcare industries as well
as academic institutions, research laboratories and government organizations.
These custom-
38
<PAGE> 40
ers are generally sophisticated and knowledgeable purchasers of security systems
and work with highly confidential information. The Company believes that as
corporate networks proliferate and become more complex, the number of industries
concerned with system security and access to information will grow.
As of August 31, 1997, RSA had licensed its encryption engine and patent
technology to more than 300 OEMs that typically incorporate RSA's encryption
technology into their products. RSA's encryption technology is embedded in
current versions of Microsoft Windows NT, Netscape Navigator, Quicken by Intuit,
Lotus Notes and numerous other products. RSA also licenses its encryption
technology directly to customers for incorporation into customers' business,
financial and electronic commerce networks. RSA technologies are part of
existing and proposed standards for the Internet and World Wide Web, ITU, ISO,
ANSI and IEEE.
As of August 31, 1997, DynaSoft had sold or licensed its BoKS systems to
more than 130 customers worldwide, representing more than 80,000 users.
Historically, DynaSoft's principal customers have been government organizations
and businesses in the healthcare, telecommunications and financial services
industries.
In the year ended December 31, 1996 and in the six months ended June 30,
1997, no customer accounted for more than 5% of the Company's total revenue.
CUSTOMER SERVICE AND SUPPORT
The Company maintains a customer support help desk and technical support
organization at its headquarters in Bedford, Massachusetts and at other
locations throughout the world and offers telephone support for certain of its
products 24 hours a day, seven days a week. The Company continues to add
advanced technical support personnel to its support staff to address anticipated
additional demands arising from the deployment of the Company's security
solutions into larger and more complex user environments. The Company also has
field technical support personnel that work directly with the Company's direct
sales force, distributors and customers. As of August 31, 1997, the Company's
customer support organization consisted of an aggregate of 51 full-time
employees located in Massachusetts, California, New Jersey, the United Kingdom,
Germany, France and Sweden.
The Company's standard practice is to provide a warranty on all SecurID
tokens for the customer-selected programmed life of the token and to replace any
damaged tokens (other than tokens damaged by a user's negligence or alteration)
free of charge. The Company generally sells each of its other products to
customers with a warranty for specified periods. After the expiration of the
applicable warranty period, customers may elect to purchase a maintenance
contract for 12-month renewable periods. Under these contracts, the Company
agrees to provide (i) corrections for documented program errors, (ii) version
upgrades for both software and, if appliable, firmware and (iii) telephone
consultation.
PRODUCT DEVELOPMENT
The Company's product development efforts are focused on enhancing the
functionality, reliability, performance and flexibility of its existing
products, and in integrating the BoKS product family with SDI's core products.
As part of its ESS framework, the Company is developing technology to enhance
the administrative capabilities and scaleability of its ACE/Server products and
to increase interoperability with additional network operating systems and
directory services. The Company also is developing tools to assist customers,
strategic marketing partners and other third-party integrators in integrating
the Company's products with custom and other third-party network or system
applications.
RSA plans to increase its competitive position by strengthening its core
cryptography toolkit and developing standards, protocols and applications that
address the needs of specific market segments
39
<PAGE> 41
and build on RSA's proprietary technology. In the latter case, RSA may choose to
partner with other parties to develop and/or market the products. RSA is
currently developing enhanced toolkits to enable emerging new applications. Each
of these value-added toolkits is being designed to address the needs of a
specific market segment.
In addition to enhancing its existing products, the Company continues to
identify and prioritize various technologies for potential future product
offerings. The Company may develop these products internally or enter into
arrangements to license or acquire products or technologies from third parties.
There can be no assurance, however, that the Company will be successful in
enhancing or developing existing products or identifying and successfully
acquiring new technologies. See "Risk Factors -- Technological Change and New
Products."
As of August 31, 1997, the Company's product development staff consisted of
157 full-time employees engaged in engineering and development, including
software and hardware engineering, testing and quality assurance and technical
documentation. The Company also engages outside contractors where appropriate to
supplement the Company's in-house expertise or expedite projects based on
customer or market demand. The Company's total research and development expenses
(including purchased research and development) for the years ended December 31,
1994, 1995 and 1996 and the six months ended June 30, 1997 were approximately
$4.3 million, $6.9 million, $13.4 million and $8.6 million, respectively.
MANUFACTURING AND SUPPLIERS
Manufacturing
SecurID Tokens. The Company contracts for the manufacture of its SecurID
tokens with two suppliers in the United States, only one of which, Pemstar, has
been qualified to manufacture the Company's SecurID Key Fob. The Company has
generally been able to obtain adequate supplies of SecurID tokens in a timely
manner and believes that alternate vendors can be identified if current vendors
are unable to fulfill its needs. However, delays or failure to identify
alternate vendors, if required, or a reduction or interruption in supply or a
significant increase in the manufacturing costs could adversely affect the
Company's financial condition or results of operations and could impact customer
relations.
SecurPC and ACE/Server Software Products. The Company's SecurPC and
ACE/Server software products are distributed on standard magnetic diskettes,
compact disks and tapes, together with printed documentation. The Company
contracts with media duplication subcontractors for the majority of its media
duplication. The Company has the capability to do all media duplication in-house
but limits its use to small production runs such as beta programs.
Suppliers
Although the Company generally uses standard parts and components for its
products, certain components are currently available only from a single source
or from limited sources. For example, the microprocessor chips contained in the
Company's SecurID tokens are currently purchased only from Sanyo, a Japanese
computer chip manufacturer, and the lithium batteries contained in the Company's
SecurID tokens are purchased from Gould, a supplier located in the United
States. The inability to obtain sufficient sole or limited source components as
required, or to obtain or develop alternative sources at competitive prices and
quality if and as required in the future, could result in delays in product
shipments or increase the Company's material costs, either of which would
adversely affect the Company's financial condition or results of operations. See
"Risk Factors -- Dependence on Suppliers and Third-Party Manufacturers."
The Company believes that it would take approximately six months to
identify and commence production of suitable replacements for the microprocessor
chip or lithium battery used in the
40
<PAGE> 42
Company's SecurID tokens. The Company attempts to maintain a three-month supply
of SecurID tokens in inventory.
COMPETITION
The market for enterprise network and data security products is highly
competitive and subject to rapid technological change. The Company believes that
competition in this market is likely to intensify as a result of increasing
demand for security products. The Company currently experiences competition from
a number of sources, including (i) software operating systems suppliers and
application software vendors that incorporate a single-factor static password
security system into their products; (ii) token-based password generator vendors
promoting challenge/response technology; (iii) smart card security device
vendors; (iv) biometric security device vendors; (v) public key infrastructure
and cryptographic software firms and (vi) SSO providers. In some cases, these
vendors also support the Company's products and those of its competitors. The
Company may also face competition from these and other parties in the future
that develop enterprise network and data security products based upon approaches
similar to or different from those employed by the Company, including operating
system or network suppliers not currently offering competitive enterprise-wide
security products. There can be no assurance that the market for enterprise
network and data security products will not ultimately be dominated by
approaches other than the approaches marketed by the Company. RSA has agreed, in
connection with the April 1995 formation of VeriSign, not to engage, directly or
indirectly, in the business of issuing public key certificates acting
in the capacity of a certificate authority for a period of five years from the
date of such formation.
The Company believes that the principal competitive factors affecting the
market for enterprise network and data security products include technical
features, ease of use, quality/reliability, level of security, customer service
and support, distribution channels and price. Although the Company believes that
its products currently compete favorably with respect to such factors, there can
be no assurance that the Company can maintain its competitive position against
current and potential competitors, especially those with significantly greater
financial, marketing, service, support, technical and other competitive
resources. See "Risk Factors -- Competition."
PROPRIETARY RIGHTS
The Company relies on a combination of patent, trade secret, copyright and
trademark laws, software licenses, nondisclosure agreements and technical
measures to establish and protect its proprietary technology. The Company
generally enters into confidentiality and/or license agreements with its
employees and distributors, as well as with its customers and potential
customers seeking proprietary information, and limits access to and distribution
of its software, documentation and other proprietary information. Despite these
precautions, it may be possible for unauthorized third parties to copy aspects
of the Company's products or to obtain and use information that the Company
regards as proprietary.
The Company's 15 issued U. S. patents expire at various dates ranging from
2005 to 2016. Upon expiration of the Company's patents, competitors may develop
and sell products based on technologies similar or equivalent to those currently
covered by the Company's patents. The RSA/MIT Patent, which is licensed to RSA
by MIT and the claims of which cover significant elements of RSA's products,
will expire on September 20, 2000, which may enable competitors to thereafter
market competing products which previously would have infringed the RSA/MIT
Patent. In addition, the two Stanford Patents covering fundamental encryption
technology developed by Stanford University and licensed to RSA will expire in
1997. After expiration of the Stanford Patents, competitors may develop and sell
products based on technologies covered by such patents, including products that
may be positioned as competitive with products covered by the RSA/MIT Patent,
thereby adversely impacting sales of RSA's products. There can be no assurance
that any patent owned or held by the Company or its licensors will not be
invalidated, circumvented, challenged or terminated, that any of the Company's
pending or future patent applications will be within the scope of claims sought
by
41
<PAGE> 43
the Company, if at all, or that the steps taken by the Company to protect its
rights will be adequate to prevent misappropriation of the Company's technology
or to preclude competitors from developing products with features similar to the
Company's products. Further, there can be no assurance that others will not
develop technologies that are similar or superior to the Company's technology or
duplicate the Company's technology. In addition, the laws of certain countries
in which the Company's products are or may be developed or sold may not protect
the Company's products and intellectual property rights to the same extent as
the laws of the United States. The inability of the Company to protect its
intellectual property adequately could have a material adverse effect on its
financial condition and results of operations. See "Risk Factors -- Dependence
on Proprietary Technology."
GOVERNMENT REGULATION AND EXPORT CONTROLS
All of the Company's products are subject to export controls under U.S. law
and applicable foreign government restrictions. The Company believes it has
obtained necessary approvals for the export of the products it currently
exports. There can be no assurance, however, that the list of products and
countries for which export approval is required, and the regulatory policies
with respect thereto, will not be revised from time to time or that the Company
will be able to obtain necessary regulatory approvals for the export of future
products. The inability of the Company to obtain required approvals under these
regulations could adversely affect the ability of the Company to make
international sales.
Exports of RSA's encryption products, or third-party products bundled with
the encryption technology of RSA, are expected to continue to be restricted by
the United States and various foreign governments. All cryptographic products
need export licenses from either the U.S. State Department, acting under the
authority of the International Traffic in Arms Regulation, or the U.S. Commerce
Department, acting under the authority of the Export Administration Regulations.
Regulations issued by these departments define cryptographic devices, including
software, as both defense articles and dual-use commodities. The U.S. government
generally limits the export of software with encryption capabilities to mass
marketed software with limited key sizes, which significantly constrains the
security effectiveness of RSA products available for export. There can be no
assurance that the U.S. government will ease its export restrictions on
encryption technology in any significant manner in the near future. As a result,
RSA may be at a disadvantage in competing for international sales compared to
companies located outside the United States that are not subject to such
restrictions. See "Risk Factors -- Export Controls."
EMPLOYEES
At August 31, 1997, the Company employed 553 employees. Of these employees,
157 were involved in research and development, 261 in sales, marketing and
customer support, 53 in production and information technology, and 82 in
administration and finance. No employees are covered by any collective
bargaining agreements. The Company believes that its relationships with its
employees are good.
FACILITIES
The Company's principal administrative, sales and marketing, research and
development and support facilities consist of approximately 107,000 square feet
of office space in Bedford, Massachusetts. The Company occupies these premises
under two leases expiring in August 2006. As of July 31, 1997, the annual base
rent for this facility was approximately $1,550,000. In support of its field
sales and support organization, the Company also leases facilities and offices
in 30 other locations in the United States, four locations in Canada and one
location in each of the United Kingdom, France, Germany, Norway, Singapore, Hong
Kong and Japan.
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RSA leases approximately 15,000 square feet of office space in Redwood
City, California under a lease expiring in October 1999. As of July 31, 1997,
the annual base rent for this facility was approximately $375,000. RSA also
leases office space in Virginia and Japan.
DynaSoft leases approximately 13,000 square feet of office space in
Stockholm, Sweden under a lease expiring in March 1999. As of July 31, 1997, the
annual base rent for this facility was approximately $204,000. In support of its
field sales and support organization, DynaSoft also leases facilities and
offices in four other locations in the United States, Sweden and the United
Kingdom.
LEGAL PROCEEDINGS
The Company is not a party to any litigation that it believes could have a
material adverse effect on the Company or its business.
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<PAGE> 45
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The executive officers and directors of the Company and their respective
ages as of August 31, 1997 are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---------------------------------- --- --------------------------------------------------
<S> <C> <C>
Charles R. Stuckey, Jr.(1)........ 55 Chairman of the Board, President and Chief
Executive Officer
D. James Bidzos................... 42 Executive Vice President and Director
Arthur W. Coviello, Jr............ 44 Executive Vice President, Chief Operating Officer
and Secretary
John Adams....................... 56 Senior Vice President, Engineering
Gary A. Rogers.................... 42 Senior Vice President, World Wide Sales and Field
Operations
W. David Power.................... 44 Senior Vice President, Marketing and Corporate
Development
Marian G. O'Leary................. 42 Senior Vice President, Finance, Chief Financial
Officer and Treasurer
Linda E. Saris.................... 45 Vice President, Customer Support and Operations
and Chief Information Officer
Richard L. Earnest(2)............. 55 Director
Joseph B. Lassiter, III(1)(3).... 49 Director
George M. Middlemas(3)............ 51 Director
Marino R. Polestra(1)(2).......... 40 Director
Sanford M. Sherizen(3)............ 57 Director
</TABLE>
- ---------------
(1) Member of the Nominating Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
Mr. Stuckey joined the Company as President in January 1987, was appointed
Chief Executive Officer and elected a director of the Company in March 1987 and
appointed Chairman of the Board in July 1996. From 1984 to January 1987, Mr.
Stuckey served as Vice President of Scientific Information Services, a systems
and commercial data service company and a division of Control Data Corporation.
Mr. Bidzos joined SDI as an Executive Vice President in July 1996. He
joined RSA in 1986 and has served as RSA's President and Chief Executive Officer
and as a director since 1988. Mr. Bidzos also is Chairman and a founder of
VeriSign, a company specializing in providing public-key certificates and
related products and services, and a founder of Terisa Systems, Inc., a company
specializing in security protocols for the World Wide Web that has been recently
acquired by SPYRUS Inc. He also is a director of the Electronic Privacy
Information Center. Mr. Bidzos became a director of SDI following the
acquisition of RSA by SDI in July 1996.
Mr. Coviello joined the Company as Executive Vice President in September
1995 and was appointed Treasurer in October 1995 and Chief Operating Officer in
January 1997. From October 1995 to August 1997, Mr. Coviello also served as the
Company's Chief Financial Officer. From January 1994 to August 1995, Mr.
Coviello served as Chief Operating Officer and from March 1992 to January 1994,
Mr. Coviello served as Vice President, Finance and Administration, Chief
Financial Officer and Treasurer of CrossComm Corporation, a developer of
inter-networking products.
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Dr. Adams joined the Company as Senior Vice President, Engineering, in
March 1996 after over twenty years of management, engineering and network
service for Digital Equipment Corporation ("Digital"). From 1976 to 1996, Dr.
Adams served in a number of positions with Digital, including Vice President and
Technical Director of Digital's Network Operating Systems Division from 1991 to
1996. Prior to joining Digital, Dr. Adams served as a structural engineer for
Mitchell Systems.
Mr. Rogers joined the Company as Senior Vice President, World Wide Sales
and Field Operations in February 1997. From 1994 to 1996, Mr. Rogers served as
Vice President, International Sales and Operations with Bay Networks, Inc. From
1992 to 1994, Mr. Rogers was Vice President, Sales and Operations -- Europe with
Wellfleet Communications, Inc., a predecessor to Bay Networks, Inc. Prior to
joining Wellfleet Communications, Inc., Mr. Rogers served in a number of
positions with several other organizations, including managerial-level sales and
marketing positions.
Mr. Power joined the Company as Vice President, Marketing in November 1996
and was appointed Senior Vice President, Marketing and Corporate Development in
April 1997. In 1995 and 1996, Mr. Power was Vice President and General Manager
of the AT&T New Media Services division, which was combined with Industry.Net to
form Nets, Inc. From 1992 to 1995, Mr. Power served as Vice President and
General Manager for two Sun Microsystems business units: SunSoft PC Desktop
Integration Products and SunSelect. Before joining Sun Microsystems, Mr. Power
was a Vice President at Mercer Management Consulting, a marketing and strategic
consulting firm, from 1980 to 1992.
Ms. O'Leary joined the Company as Senior Vice President, Finance, Chief
Financial Officer and Treasurer in August 1997. From 1987 to 1997, Ms. O'Leary
held a number of positions with Digital, including Vice President, Finance for
the Systems Business Unit from 1994 to 1997. Prior to joining Digital, Ms.
O'Leary held several positions with General Electric Company, including Senior
Vice President of Finance for GE Mortgage Insurance, a business unit of GE
Capital.
Ms. Saris joined the Company as Vice President, Finance and Operations,
Treasurer and Chief Financial Officer in June 1989, and has served as Vice
President, Customer Support and Operations since January 1997 and as Chief
Information Officer since August 1997. From October 1995 to January 1997, Ms.
Saris served as the Company's Vice President, Operations. From 1980 to 1989, Ms.
Saris served in a number of positions, including Senior Vice President and
General Manager and Vice President of Finance, with Clinical Data, Inc., a
medical technology and services company.
Mr. Earnest has served on the Board of Directors of the Company since
October 1993. Since April 1995, Mr. Earnest has served as the Chief Executive
Officer of Tudor Publishing Company in San Diego, California. From June 1994 to
March 1995, Mr. Earnest provided consulting services to several start-up
companies. From June 1993 to June 1994, Mr. Earnest served as Chief Executive
Officer of DEMAX Software, a provider of centralized security management
software. From April 1991 to June 1993, Mr. Earnest was the Chief Executive
Officer of Advant Edge Systems Group, a software company.
Dr. Lassiter has served on the Board of Directors of the Company since July
1996. Dr. Lassiter joined the Harvard University Graduate School of Business
Administration in September 1996, where he currently is Professor of Management.
From July 1994 to February 1996, Dr. Lassiter was President of Wildfire
Communications, Inc., a venture-backed telecommunications software company. From
January 1974 to February 1994, Dr. Lassiter was Vice President of Teradyne,
Inc., a manufacturer of automatic test equipment. Dr. Lassiter serves on the
Board of Directors of Advanced Magnetics, Inc., a developer of organ-specific
contrast agents.
Mr. Middlemas has served on the Board of Directors of the Company from May
1986 to June 1991 and since July 1992. Since January 1991, Mr. Middlemas has
been a General Partner of Apex Management Partnership, which is the General
Partner of Apex Investment Fund II, L.P. ("Apex"), a venture capital fund. Mr.
Middlemas serves on the Board of Directors of Pure Cycle Corporation, a
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<PAGE> 47
manufacturer and marketer of water recycling technologies, and American
Communications Services, Inc., a provider of integrated voice and data
communications services.
Mr. Polestra has served on the Board of Directors of the Company since July
1993. Since February 1996, Mr. Polestra has been a General Partner of Alta
Partners, a venture capital firm. From February 1989 to December 1996, Mr.
Polestra was a Vice President and Partner of Burr, Egan, Deleage & Co., a
venture capital firm. Mr. Polestra is a director of Premisys Communications
Holdings, Inc., a telecommunications equipment supplier, and of Individual Inc.,
a provider of customized information services.
Mr. Sherizen has served on the Board of Directors of the Company since
October 1989. Since 1983, Mr. Sherizen has served as President of Data Security
Systems, Inc., a computer security consulting firm.
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<PAGE> 48
SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of shares of Common Stock as of July 31, 1997, and as adjusted to
reflect the sale of the shares of Common Stock offered hereby, by each of the
Selling Stockholders.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED SHARES TO BE
SHARES BEING BENEFICIALLY OWNED
PRIOR TO OFFERING(1) OFFERED AFTER OFFERING(1)(2)
------------------------- ------------ ------------------------
NAME OF SELLING STOCKHOLDER NUMBER PERCENTAGE NUMBER NUMBER PERCENTAGE
- ---------------------------------- --------- ---------- ------------ ------- ----------
<S> <C> <C> <C> <C> <C>
D. James Bidzos(3)................ 1,145,936 3.0% 220,000 925,936 2.4%
Charles R. Stuckey, Jr.(4) ....... 868,272 2.3% 150,000 718,272 1.8%
Rolf Ljung(5)..................... 757,981 2.0% 350,000 407,981 1.1%
Hans Tholander(6)................. 317,201 * 190,000 127,201 *
Bjorn Oste(7)..................... 226,222 * 100,000 126,222 *
Arthur W. Coviello, Jr.(8) ....... 221,090 * 45,000 176,090 *
Khris Loux(9)..................... 198,194 * 109,006 89,188 *
Peter C. Loux(10)................. 198,193 * 109,200 88,993 *
Peter Rostin(11).................. 148,827 * 131,000 17,827 *
Kairdos L.L.C.(12)................ 147,752 * 30,000 117,752 *
Linda E. Saris(13)................ 131,606 * 5,794 125,812 *
Johan Borendal(14)................ 112,303 * 98,000 14,303 *
John Adams(15).................... 60,600 * 20,000 40,600 *
Thomas Brostrom(16)............... 55,903 * 47,000 8,903 *
George M. Middlemas(17)........... 52,482 * 5,000 47,482 *
Elin Kempegard(5)................. 31,056 * 27,500 3,556 *
Sara Kempegard(5)................. 31,056 * 27,500 3,556 *
Eva Ljung(5)...................... 31,056 * 27,500 3,556 *
Lotta Ljung(5).................... 31,056 * 27,500 3,556 *
Agnes Ljung-Lindberg(5)........... 31,056 * 27,500 3,556 *
Fanny Ljung-Lindberg(5)........... 31,056 * 27,500 3,556 *
Fredrick Tholander(6)............. 31,056 * 18,000 13,056 *
Jakob Tholander(6)................ 31,056 * 18,000 13,056 *
Mervi Brostrom(16)................ 15,528 * 13,000 2,528 *
</TABLE>
- ---------------
* Less than 1%
(1) The number of shares beneficially owned by each stockholder 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 ownership
includes any shares as to which the individual or entity has sole or shared
voting power or investment power and also any shares which the individual
or entity has the right to acquire within 60 days of July 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) Assumes no exercise of the Underwriters' over-allotment option.
(3) The number of shares beneficially owned by Mr. Bidzos prior to this
offering (i) includes 147,752 shares held by Kairdos L.L.C., a Delaware
limited liability company ("Kairdos") of which Mr. Bidzos is the General
Manager and a member, and 570,771 shares which may be acquired pursuant to
stock options exercisable within 60 days of July 31, 1997 and (ii) excludes
225,000 shares covered by stock options not exercisable within 60 days of
July 31, 1997. The number of shares beneficially owned by Mr. Bidzos after
this offering includes 117,752 shares held by Kairdos and 570,771 shares
which may be acquired pursuant to stock options exercisable within 60 days
of July 31, 1997 and excludes 225,000 shares covered by stock options not
exercisable within 60 days of July 31, 1997. Mr. Bidzos disclaims
beneficial ownership of the shares held by Kairdos except to the extent of
his proportionate pecuniary interest therein.
(4) The number of shares beneficially owned by Mr. Stuckey prior to and after
this offering includes 50,000 shares held by the Stuckey Family Charitable
Remainder Unitrust and 375,000 shares which may be acquired pursuant to
stock options exercisable within 60 days of July 31, 1997 and excludes
125,000 shares covered by stock options not exercisable within 60 days of
July 31, 1997.
(5) Mr. Ljung served as Chairman of the Board of DynaSoft until its acquisition
by the Company in July 1997, and currently serves as a consultant to the
Company. Eva Ljung and Lotta Ljung are daughters of Mr. Ljung, and Elin
Kempegard, Sara Kempegard, Agnes Ljung-Lindberg and Fanny Ljung-Lindberg
are granddaughters of Mr. Ljung. The number of shares beneficially owned by
Mr. Ljung includes shares owned by an entity controlled by and solely owned
by Mr. Ljung.
47
<PAGE> 49
(6) The number of shares beneficially owned by Mr. Tholander prior to and after
the offering excludes 25,000 shares covered by stock options not
exercisable within 60 days of July 31, 1997. Mr. Tholander is President and
a member of the Board of Directors of DynaSoft. He also served as a member
of the Board of Directors of Securix, Inc., a California corporation and a
wholly owned subsidiary of DynaSoft ("Securix"), until its acquisition by
the Company in July 1997. Mr. Tholander is Vice President, Product
Management of the Company. Frederick Tholander and Jakob Tholander are sons
of Mr. Tholander.
(7) The number of shares beneficially owned by Mr. Oste prior to and after the
offering excludes 100,000 shares covered by stock options not exercisable
within 60 days of July 31, 1997. Mr. Oste is Chief of Marketing and Sales
of DynaSoft. He also served as a member of the Board of Directors of
DynaSoft until its acquisition by the Company in July 1997.
(8) The number of shares beneficially owned by Mr. Coviello prior to and after
the offering includes 220,000 shares which may be acquired pursuant to
stock options exercisable within 60 days of July 31, 1997 and excludes
270,000 shares covered by stock options not exercisable within 60 days of
July 31, 1997.
(9) The number of shares beneficially owned by Khris Loux prior to and after
the offering excludes 100,000 shares covered by stock options not
exercisable within 60 days of July 31, 1997. Khris Loux has served as Vice
President of Sales and Marketing of Securix since July 1993. He served on
the Board of Directors of DynaSoft from July 1996 until its acquisition by
the Company in July 1997. He also served as a member of the Board of
Directors of Securix from July 1993 until its acquisition by the Company in
July 1997. Since July 1997, he has served as Vice President, Corporate
Development of the Company. Khris Loux is the nephew of Peter C. Loux.
(10) The number of shares beneficially owned by Peter C. Loux prior to the
offering includes 61,043 shares held by The Peter C. Loux Charitable
Remainder Unitrust (the "Loux Trust"), the sole trustee of which is Peter
C. Loux. The number of shares being offered hereby by Peter C. Loux
includes 7,200 shares held by the Loux Trust. The number of shares
beneficially owned by Peter C. Loux after the offering includes 53,843
shares held by the Loux Trust. Peter C. Loux served as the Chairman of the
Board and Chief Executive Officer of Securix from July 1993 until its
acquisition by the Company in July 1997. From July 1993 to August 1996, he
also served as President of Securix. He also served on the Board of
Directors of DynaSoft from July 1996 until its acquisition by the Company
in July 1997. He currently serves as a consultant to the Company. Peter C.
Loux is the uncle of Khris Loux.
(11) The number of shares beneficially owned by Mr. Rostin prior to and after
the offering excludes 70,000 shares covered by stock options not
exercisable within 60 days of July 31, 1997. He also served as a member of
the Board of Directors of DynaSoft until its acquisition by the Company in
July 1997. Mr. Rostin is Senior Officer of Research and Technology of
DynaSoft.
(12) Mr. Bidzos is the General Manager and a member of Kairdos. Mr. Bidzos
disclaims beneficial ownership of the shares held by Kairdos except to the
extent of his proportionate pecuniary interest therein.
(13) The number of shares beneficially owned by Ms. Saris prior to and after the
offering includes 12,917 shares held jointly by Ms. Saris and Brian T.
Watson and 11,248 shares which may be acquired pursuant to stock options
exercisable within 60 days of July 31, 1997 and excludes 18,750 shares
covered by stock options not exercisable within 60 days of July 31, 1997.
(14) The number of shares beneficially owned by Mr. Borendal prior to and after
the offering excludes 100,000 shares covered by stock options not
exercisable within 60 days of July 31, 1997. Mr. Borendal is Vice President
of Engineering of DynaSoft. He also served as a member of the Board of
Directors of DynaSoft until its acquisition by the Company in July 1997.
(15) The number of shares beneficially owned by Dr. Adams prior to and after the
offering includes 60,600 shares which may be acquired pursuant to stock
options exercisable within 60 days of July 31, 1997 and excludes 137,500
shares covered by stock options not exercisable within 60 days of July 31,
1997.
(16) Mr. Brostrom is Vice President of Finance of DynaSoft. Mervi Brostrom is
the wife of Mr. Brostrom.
(17) The number of shares beneficially owned by Mr. Middlemas prior to and after
the offering includes 24,500 shares which may be acquired pursuant to stock
options exercisable within 60 days of July 31, 1997 and excludes 12,000
shares covered by stock options not exercisable within 60 days of July 31,
1997.
48
<PAGE> 50
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters"), through their Representatives, BT
Alex. Brown Incorporated, Robertson, Stephens & Company LLC and Cowen & Company,
have severally agreed to purchase from the Company and the Selling Stockholders
the following respective numbers of shares of Common Stock at the public
offering price less the underwriting discounts and commissions set forth on the
cover page of this Prospectus:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
------------------------------------------------------------------------ ---------
<S> <C>
BT Alex. Brown Incorporated.............................................
Robertson, Stephens & Company LLC.......................................
Cowen & Company.........................................................
---------
Total......................................................... 2,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all shares of the Common Stock offered hereby if any
such shares are purchased.
The Company and the Selling Stockholders have been advised by the
Representatives of the Underwriters that the Underwriters propose to offer the
shares of Common Stock to the public at the public offering price set forth on
the cover page of this Prospectus, and to certain dealers at such price less a
concession not in excess of $ per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share
to certain other dealers. After the public offering, the public offering price
and other selling terms may be changed by the Representatives of the
Underwriters.
The Company has granted to the Underwriters an option, exercisable not
later than 30 days after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock at the public offering price less the
underwriting discounts and commissions set forth on the cover page of this
Prospectus. To the extent that the Underwriters exercise such option, each of
the Underwriters will have a firm commitment to purchase approximately the same
percentage thereof that the number of shares of Common Stock to be purchased by
it shown in the above table bears to 2,500,000, and the Company will be
obligated, pursuant to the option, to sell such shares to the Underwriters. The
Underwriters may exercise such option only to cover over-allotments made in
connection with the sale of the Common Stock offered hereby. If purchased, the
Underwriters will offer such additional shares on the same terms as those on
which the 2,500,000 shares are being offered.
The Underwriting Agreement contains covenants of indemnity among the
Underwriters, the Company and the Selling Stockholders against certain civil
liabilities, including liabilities under the Securities Act of 1933.
The Company has agreed, subject to certain exceptions, not to offer, sell
or otherwise dispose of any shares of Common Stock for a period of 90 days after
the date of this Prospectus, except that the Company may issue, and grant
options to purchase, shares of Common Stock under its current stock option and
purchase plans and other currently outstanding options. In addition, the Company
may issue shares of Common Stock in connection with any acquisition of another
company if the terms of such issuance provide that such Common Stock shall not
be resold prior to the expiration of the 90-day period referenced in the
preceding sentence. Each of the Company's directors and executive
49
<PAGE> 51
officers and certain of its securityholders have agreed, subject to certain
exceptions, not to offer, sell or otherwise dispose of (i) any shares of Common
Stock beneficially owned by them prior to the 50th day after the date of this
Prospectus, (ii) no more than an aggregate of approximately 666,433 shares on or
after such 50th day, but prior to the 90th day after the date of this Prospectus
and (iii) no more than an aggregate of approximately 666,433 additional shares
(for a total of approximately 1,332,866 additional shares) on or after the 70th
day but prior to the 90th day after the date of this Prospectus.
In connection with this offering, the Underwriters and other persons
participating in this offering may engage in transactions that stabilize,
maintain or otherwise affect the price of Common Stock. Specifically, the
Underwriters may over-allot in connection with this offering, creating a short
position in Common Stock for their own account. To cover over-allotments or to
stabilize the price of the Common Stock, the Underwriters may bid for, and
purchase, shares of Common Stock in the open market. The Underwriters may also
impose a penalty bid whereby they may reclaim selling concessions allowed to an
Underwriter or a dealer for distributing Common Stock in this offering, if the
Underwriters repurchase previously distributed Common Stock in transactions to
cover their short position, in stabilization transactions or otherwise. Finally,
the Underwriters may bid for, and purchase, shares of Common Stock in market
making transactions. These activities may stabilize or maintain the market price
of the Common Stock above market levels that may otherwise prevail. The
Underwriters are not required to engage in these activities and may end any of
these activities at any time.
As permitted by Rule 103 of Regulation M under the Securities Exchange Act
of 1934 (the "Exchange Act"), Underwriters or prospective Underwriters that are
market makers (passive market makers) in the Common Stock may make bids for or
purchases of shares of Common Stock in the Nasdaq National Market until such
time, if any, when a stabilizing bid for such securities has been made. Rule 103
generally provides that (i) a passive market maker's net daily purchases of the
Common Stock may not exceed 30% of its average daily trading volume in such
securities for the two full consecutive calendar months (or any 60 consecutive
days ending within the 10 days) immediately preceding the filing date of the
registration statement of which this Prospectus forms a part, (ii) a passive
market maker may not effect transactions or display bids for the Common Stock at
a price that exceeds the highest independent bid for shares of Common Stock by
persons who are not passive market makers and (iii) bids made by passive market
makers must be identified as such.
Robertson, Stephens & Company LLC and BT Alex. Brown Incorporated provided
financial advisory services to the Company in connection with the Company's
acquisition of RSA in July 1996, and Robertson, Stephens & Company LLC provided
financial advisory services to the Company in connection with the acquisition of
DynaSoft in July 1997. In each case, the Company paid customary financial
advisory fees to Robertson, Stephens & Company LLC and BT Alex. Brown
Incorporated for such services.
LEGAL MATTERS
The validity of the shares of Common Stock offered by the Company hereby
will be passed upon for the Company by Hale and Dorr LLP, Boston, Massachusetts,
and for the Underwriters by Ropes & Gray, Boston, Massachusetts.
50
<PAGE> 52
EXPERTS
The supplemental and historical consolidated financial statements of the
Company as of December 31, 1995 and 1996 and for each of the three years in the
period ended December 31, 1996, except as they relate to the consolidated
financial statements of RSA as of December 31, 1995 and for each of the two
years in the period ended December 31, 1995, included in, or incorporated by
reference in, this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports with respect to (i) the
Supplemental Consolidated Financial Statements dated July 15, 1997 (which
expresses an unqualified opinion and includes explanatory paragraphs relating to
the restatement of the historical consolidated financial statements for a
pooling of interests and a change in the Company's method of accounting for
option grants requiring stockholder approval in 1996) included herein and (ii)
the Company's historical consolidated financial statements and schedule dated
January 22, 1997 (the report on the historical consolidated financial statements
expresses an unqualified opinion and includes an explanatory paragraph referring
to a change in the Company's method of accounting for option grants requiring
stockholder approval in 1996) incorporated by reference herein. The consolidated
financial statements of RSA as of December 31, 1995 and for each of the two
years in the period ended December 31, 1995 (not presented separately herein)
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein and incorporated by reference
herein and are included and incorporated by reference in reliance upon such
report given upon the authority of such firm as experts in accounting and
auditing. The supplemental and historical financial statements of the Company
have been so included and incorporated by reference in reliance upon the reports
of Deloitte & Touche LLP given upon its authority as experts in accounting and
auditing.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance with the Exchange Act files reports, proxy statements and
other information with the SEC. The Company has filed a registration statement
on Form S-3 (the "Registration Statement") under the Securities Act of 1933, as
amended, with the SEC with respect to the Common Stock offered hereby. This
Prospectus, which constitutes part of the Registration Statement, does not
contain all the information set forth in the Registration Statement and
reference is made to the Registration Statement and the exhibits thereto for
further information with respect to the Company and the Common Stock. Such
reports, proxy statements, Registration Statement and exhibits and other
information omitted from this Prospectus can be inspected and copied at the
public reference facilities maintained by the SEC at 450 Fifth Street, N.W.,
Room 1024, Washington, D.C. 20549 and at the SEC's Regional Offices located at
Seven World Trade Center, Suite 1300, New York, N.Y. 10048 and Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, IL 60661-2511. Copies of such
material can be obtained at prescribed rates from the Public Reference Section
of the SEC, 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549. Such
reports, proxy statements and other information concerning the Company can be
inspected at the Nasdaq Stock Market at 1735 K Street, N.W., Washington, D.C.
20006. In addition, the Company is required to file electronic versions of these
documents with the SEC through the SEC's Electronic Data Gathering, Analysis,
and Retrieval (EDGAR) system. The SEC maintains a World Wide Web site at
http://www.sec.gov that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the SEC.
51
<PAGE> 53
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Company's Annual Report on Form 10-K for the fiscal year ended December
31, 1996, the Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997 and June 30, 1997, the Company's Current Report on Form 8-K dated
July 15, 1997, including the amendments thereto on Form 8-K/A filed with the SEC
on July 31, 1997 and August 4, 1997, and the description of the Common Stock
contained in the Company's Registration Statement on Form 8-A filed by the
Company with the SEC on November 15, 1994, are incorporated by reference in this
Prospectus. All documents filed by the Company pursuant to Section 13(a), 13(c),
14 or 15(d) of the Exchange Act subsequent to the date of this Prospectus and
prior to the termination of the offering made hereby shall be deemed to be
incorporated by reference into this Prospectus and to be made a part hereof from
the respective dates of filing of such documents. Any statement in any document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of the Registration Statement and this
Prospectus to the extent that a statement contained herein or in any
subsequently filed document which also is or is deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of the Registration Statement or this Prospectus.
Copies of the above documents (other than exhibits to such documents unless
such exhibits are specifically incorporated by reference in such documents) may
be obtained upon written or oral request without charge from the Company, 20
Crosby Drive, Bedford, Massachusetts 01730, Attention: Investor Relations,
telephone (781) 687-7000.
52
<PAGE> 54
SECURITY DYNAMICS TECHNOLOGIES, INC.
INDEX TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Deloitte & Touche LLP, independent auditors................................. F-2
Report of Ernst & Young LLP, independent auditors..................................... F-3
Supplemental Consolidated Balance Sheets as of December 31, 1995 and 1996 and
(Unaudited) June 30, 1997........................................................... F-4
Supplemental Consolidated Statements of Income for the Years Ended December 31, 1994,
1995 and 1996 and (Unaudited) the Six Months Ended June 30, 1996 and 1997........... F-5
Supplemental Consolidated Statements of Stockholders' Equity for the Years Ended
December 31, 1994, 1995 and 1996 and (Unaudited) the Six Months Ended June 30,
1997................................................................................ F-6
Supplemental Consolidated Statements of Cash Flows for the Years Ended December 31,
1994, 1995 and 1996 and (Unaudited) the Six Months Ended June 30, 1996 and 1997..... F-7
Notes to Supplemental Consolidated Financial Statements............................... F-8
</TABLE>
F-1
<PAGE> 55
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Security Dynamics Technologies, Inc. and Subsidiaries:
We have audited the accompanying supplemental consolidated balance sheets
of Security Dynamics Technologies, Inc. (the "Company") and subsidiaries as of
December 31, 1995 and 1996, and the related supplemental consolidated statements
of income, stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits. The supplemental
consolidated financial statements give retroactive effect to the merger of the
Company and RSA Data Security, Inc., which has been accounted for as a pooling
of interests as described in Note 2 of notes to the supplemental consolidated
financial statements. We did not audit the consolidated balance sheet of RSA
Data Security, Inc. as of December 31, 1995, or the related consolidated
statements of income, stockholders' equity, and cash flows of RSA Data Security,
Inc. for the years ended December 31, 1994 and 1995, which consolidated
statements reflect total assets of $24,793,000 as of December 31, 1995, and
total revenues of $3,077,000 and $11,600,000 for the years ended December 31,
1994 and 1995, respectively. Those consolidated statements were audited by other
auditors whose report has been furnished to us, and our opinion, insofar as it
relates to the amounts included for RSA Data Security, Inc. for 1994 and 1995,
is based solely on the report of such other auditors.
The supplemental consolidated financial statements also give retroactive
effect to the acquisition of DynaSoft AB as of July 15, 1997, which has been
accounted for as a pooling of interests as described in Note 2 of notes to the
supplemental consolidated financial statements. Generally accepted accounting
principles proscribe giving effect to a consummated business combination
accounted for by the pooling of interests method in financial statements that do
not cover the date of consummation. These supplemental consolidated financial
statements do not extend through the date of consummation; however, they will
become the historical consolidated financial statements of the Company after
financial statements covering the date of consummation of the business
combination are issued.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the supplemental consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Security Dynamics
Technologies, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 in conformity with generally accepted
accounting principles for financial statements that are issued for a period
which includes the date of consummation of the DynaSoft AB business combination.
As discussed in Note 5 of the notes to the supplemental consolidated
financial statements, in 1996 the Company changed its method of accounting for
option grants requiring stockholder approval in 1996.
DELOITTE & TOUCHE LLP
Boston, Massachusetts
July 15, 1997
F-2
<PAGE> 56
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
To the Board of Directors
RSA Data Security, Inc.
We have audited the consolidated balance sheet of RSA Data Security, Inc.
as of December 31, 1995, and the related statements of operations, shareholders'
equity and cash flows for the years ended December 31, 1995 and 1994 (none of
which are presented separately herein). These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of RSA Data
Security, Inc. as of December 31, 1995, and the consolidated results of its
operations and its cash flows for the years ended December 31, 1995 and 1994 in
conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Palo Alto, California
April 8, 1996
F-3
<PAGE> 57
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- JUNE 30,
1995 1996 1997
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and equivalents.......................................... $ 50,730 $ 11,175 $ 24,316
Marketable securities......................................... 61,637 95,320 86,437
Accounts receivable (less allowance for doubtful accounts of
$724 in 1995, $527 in 1996 and $802 in 1997)................ 8,633 16,500 19,519
Inventory..................................................... 1,445 2,606 3,189
Prepaid expenses and other.................................... 1,537 4,204 6,069
Deferred taxes................................................ -- -- 79
-------- -------- --------
TOTAL CURRENT ASSETS................................... 123,982 129,805 139,609
-------- -------- --------
PROPERTY AND EQUIPMENT
Customer support equipment.................................... 187 294 294
Office furniture and equipment................................ 4,147 11,007 14,562
Leasehold improvements........................................ 309 2,863 3,179
-------- -------- --------
TOTAL PROPERTY AND EQUIPMENT........................... 4,643 14,164 18,035
Less accumulated depreciation and amortization................ (1,998) (3,596) (5,151)
-------- -------- --------
PROPERTY AND EQUIPMENT -- NET.......................... 2,645 10,568 12,884
-------- -------- --------
OTHER ASSETS:
Investments................................................... 872 2,924 2,187
Purchased technology and capitalized software costs -- net.... 446 197 247
Deferred taxes................................................ 414 1,026 1,026
Other......................................................... 300 1,455 1,115
-------- -------- --------
TOTAL OTHER ASSETS..................................... 2,032 5,602 4,575
-------- -------- --------
TOTAL........................................................... $128,659 $145,975 $ 157,068
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable.............................................. $ 2,860 $ 5,119 $ 4,481
Accrued payroll and related benefits.......................... 3,187 4,829 5,520
Accrued expenses and other.................................... 2,618 4,269 5,098
Income taxes payable.......................................... 349 51 --
Deferred revenue.............................................. 4,520 5,503 4,852
Deferred taxes................................................ 6,099 832 --
-------- -------- --------
TOTAL CURRENT LIABILITIES.............................. 19,633 20,603 19,951
-------- -------- --------
MINORITY INTERESTS.............................................. -- 1,194 2,578
-------- -------- --------
COMMITMENTS AND CONTINGENCIES (NOTES 8 AND 10)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized, 80,000,000 shares;
issued, 35,137,771, 37,220,893 and 37,903,889 shares in
1995, 1996 and 1997; outstanding, 35,137,475, 37,220,597,
and 37,903,380 shares in 1995, 1996 and 1997................ 351 372 379
Additional paid-in capital.................................... 94,452 102,322 104,607
Retained earnings............................................. 4,510 17,685 27,761
Deferred stock compensation................................... (292) (174) (141)
Treasury stock, common, at cost, 296 shares in 1995 and 1996,
509 shares in 1997.......................................... -- -- --
Cumulative translation adjustment............................. 95 493 (194)
Unrealized gain on marketable securities -- net............... 9,910 3,480 2,127
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY............................. 109,026 124,178 134,539
-------- -------- --------
TOTAL........................................................... $128,659 $145,975 $ 157,068
======== ======== ========
</TABLE>
See notes to supplemental consolidated financial statements.
F-4
<PAGE> 58
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------- -------------------
1994 1995 1996 1996 1997
--------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUE............................ $ 23,866 $49,412 $83,817 $36,111 $61,374
COST OF REVENUE.................... 4,837 8,920 18,207 7,451 13,147
------- ------- ------- ------- -------
GROSS PROFIT....................... 19,029 40,492 65,610 28,660 48,227
COSTS AND EXPENSES:
Research and development......... 4,314 6,292 12,382 5,533 8,646
Purchased research and
development................... -- 648 1,000 -- --
Marketing and selling............ 8,931 14,263 24,429 10,824 18,770
General and administrative....... 3,368 10,375 13,403 6,061 7,609
Merger expenses.................. -- -- 6,100 -- --
------- ------- ------- ------- -------
Total.................... 16,613 31,578 57,314 22,418 35,025
------- ------- ------- ------- -------
INCOME FROM OPERATIONS............. 2,416 8,914 8,296 6,242 13,202
Interest income and other.......... 166 1,843 5,004 2,500 2,717
Gain on sale of marketable
securities and other income
(expense)........................ 99 62 10,872 (141) 197
------- ------- ------- ------- -------
Income before provision for income
taxes............................ 2,681 10,819 24,172 8,601 16,116
Provision for income taxes......... 1,453 3,369 10,997 3,147 6,040
------- ------- ------- ------- -------
NET INCOME......................... $ 1,228 $ 7,450 $13,175 $ 5,454 $10,076
======= ======= ======= ======= =======
Pro Forma
Net income per common and common
equivalent share................. $ 0.05 $ 0.22 $ 0.34 $ 0.14 $ 0.26
======= ======= ======= ======= =======
Weighted average number of common
and common equivalent shares
outstanding...................... 25,231 34,115 38,877 38,398 39,418
======= ======= ======= ======= =======
</TABLE>
See notes to supplemental consolidated financial statements.
F-5
<PAGE> 59
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED DEFERRED TREASURY STOCK CUMULATIVE
------------------- PAID-IN EARNINGS STOCK ---------------- TRANSLATION
SHARES AMOUNT CAPITAL (DEFICIT) COMPENSATION SHARES AMOUNT ADJUSTMENT
---------- ------ ---------- -------- ------------ ------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1994............. 11,831,489 $118 $ 1,778 $(3,750) $ -- 90,296 $ (1) $ (146)
Common and Treasury stock
issued for services............... 52,032 -- 21 -- -- (90,000) 1 --
Exercise of stock options........... 152,376 1 41 -- -- -- -- --
Deferred stock compensation......... -- -- 360 -- (360) -- -- --
Amortization of deferred stock
compensation...................... -- -- -- -- 85 -- -- --
Issuance of common stock............ 6,276,854 63 22,041 -- -- -- -- --
Translation adjustment.............. -- -- -- -- -- -- -- (347)
Dividends accrued on preferred
stock............................. -- -- -- (418) -- -- -- --
Conversion of preferred stock to
common stock...................... 11,288,756 113 8,832 -- -- -- -- --
Net income.......................... -- -- -- 1,228 -- -- -- --
---------- ---- -------- ------- ----- ------- --- -----
Balance, December 31, 1994.......... 29,601,507 295 33,073 (2,940) (275) 296 -- (493)
Exercise of stock options........... 957,434 10 632 -- -- -- -- --
Tax benefit arising from exercise
of stock options.................. -- -- 225 -- -- -- -- --
Deferred stock compensation......... -- -- 157 -- (157) -- -- --
Amortization of deferred stock
compensation...................... -- -- -- -- 140 -- -- --
Issuance of common stock............ 4,578,830 46 60,365 -- -- -- -- --
Translation adjustment.............. -- -- -- -- -- -- -- 588
Change in unrealized gain on
marketable securities............. -- -- -- -- -- -- -- --
Net income.......................... -- -- -- 7,450 -- -- -- --
---------- ---- -------- ------- ----- ------- --- -----
Balance, December 31, 1995........... 35,137,771 351 94,452 4,510 (292) 296 -- 95
Exercise of stock options........... 817,123 8 2,598 -- -- -- -- --
Tax benefit arising from exercise
of stock options.................. -- -- 3,702 -- -- -- -- --
Compensation expense................ -- -- 1,049 -- -- -- -- --
Amortization of deferred stock
compensation...................... -- -- -- -- 118 -- -- --
Issuance of common stock............ 1,265,999 13 521 -- -- -- -- --
Translation adjustment.............. -- -- -- -- -- -- -- 398
Change in unrealized gain on
marketable securities............. -- -- -- -- -- -- -- --
Net income.......................... -- -- -- 13,175 -- -- -- --
---------- ---- -------- ------- ----- ------- --- -----
Balance, December 31, 1996........... 37,220,893 372 102,322 17,685 (174) 296 -- 493
Unaudited:
Settlement of RSA escrow.......... (36,037) -- -- -- -- 213 -- --
Exercise of stock options......... 719,033 7 1,697 -- -- -- -- --
Compensation expense.............. -- -- 588 -- -- -- -- --
Amortization of deferred stock
compensation.................... -- -- -- -- 33 -- -- --
Translation adjustment............ -- -- -- -- -- -- -- (687)
Change in unrealized gain
on marketable securities........ -- -- -- -- -- -- -- --
Net income........................ -- -- -- 10,076 -- -- -- --
---------- ---- -------- ------- ----- ------- --- -----
Balance, June 30, 1997 (unaudited)... 37,903,889 $379 $104,607 $27,761 $ (141) 509 $ -- $ (194)
========== ==== ======== ======= ===== ======= === =====
<CAPTION>
UNREALIZED
GAIN ON STOCKHOLDERS'
MARKETABLE EQUITY
SECURITIES (DEFICIENCY)
---------- -------------
<S> <<C> <C>
Balance, January 1, 1994............. $ -- $ (2,001)
Common and Treasury stock
issued for services............... -- 22
Exercise of stock options........... -- 42
Deferred stock compensation......... -- --
Amortization of deferred stock
compensation...................... -- 85
Issuance of common stock............ -- 22,104
Translation adjustment.............. -- (347)
Dividends accrued on preferred
stock............................. -- (418)
Conversion of preferred stock to
common stock...................... -- 8,945
Net income.......................... -- 1,228
------- --------
Balance, December 31, 1994.......... -- 29,660
Exercise of stock options........... -- 642
Tax benefit arising from exercise
of stock options.................. -- 225
Deferred stock compensation......... -- --
Amortization of deferred stock
compensation...................... -- 140
Issuance of common stock............ -- 60,411
Translation adjustment.............. -- 588
Change in unrealized gain on
marketable securities............. 9,910 9,910
Net income.......................... -- 7,450
------- --------
Balance, December 31, 1995........... 9,910 109,026
Exercise of stock options........... -- 2,606
Tax benefit arising from exercise
of stock options.................. -- 3,702
Compensation expense................ -- 1,049
Amortization of deferred stock
compensation...................... -- 118
Issuance of common stock............ -- 534
Translation adjustment.............. -- 398
Change in unrealized gain on
marketable securities............. (6,430) (6,430)
Net income.......................... -- 13,175
------- --------
Balance, December 31, 1996........... 3,480 124,178
Unaudited:
Settlement of RSA escrow.......... -- --
Exercise of stock options......... -- 1,704
Compensation expense.............. -- 588
Amortization of deferred stock
compensation.................... -- 33
Translation adjustment............ -- (687)
Change in unrealized gain
on marketable securities........ (1,353) (1,353)
Net income........................ -- 10,076
------- --------
Balance, June 30, 1997 (unaudited)... $ 2,127 $ 134,539
======= ========
</TABLE>
See notes to supplemental consolidated financial statements.
F-6
<PAGE> 60
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
SUPPLEMENTAL CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
YEARS ENDED DECEMBER 31, 30,
--------------------------------- ---------------------
1994 1995 1996 1996 1997
------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.............................. $ 1,228 $ 7,450 $ 13,175 $ 5,454 $ 10,076
Adjustments to reconcile net income to
net cash provided by (used for)
operating activities:
Gain on sale of marketable
securities......................... -- -- (11,027) -- --
Deferred taxes........................ 57 (746) (1,548) (50) 224
Purchased research and development.... -- 648 1,000 -- --
Depreciation and amortization......... 633 1,085 1,815 845 1,465
Provision for notes receivable........ -- 200 -- -- --
Stock compensation.................... 48 181 1,167 166 621
Equity in (profits) losses of
investees and minority interest.... (97) 20 (19) -- --
Increase (decrease) in cash from
changes in:
Accounts receivable................ (182) (3,281) (7,950) (3,979) (3,563)
Inventory.......................... (629) (309) (1,161) (920) (583)
Prepaid expenses and other......... (539) (1,125) (2,666) (1,721) (777)
Accounts payable................... 1,021 1,553 2,260 2,392 (611)
Accrued payroll and related
benefits......................... 494 1,808 1,652 (805) 764
Accrued expenses and other......... 99 824 1,938 589 877
Income taxes payable............... 101 265 (298) (373) (946)
Deferred revenue................... 899 2,320 1,000 (764) (573)
------- -------- -------- -------- --------
NET CASH PROVIDED BY (USED FOR)
OPERATING ACTIVITIES........... 3,133 10,893 (662) 834 6,974
------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities....... (7,966) (64,730) (119,619) (75,052) (48,027)
Sales and maturities of marketable
securities............................ -- 27,842 85,975 36,382 55,628
Expenditures for property and
equipment............................. (981) (1,891) (9,418) (2,597) (4,018)
Notes receivable........................ (228) (274) -- -- --
Capitalized software costs and purchased
technology............................ (118) (924) (1,061) 20 (112)
Investments and other................... 9 (734) (3,224) (1,477) 323
------- -------- -------- -------- --------
NET CASH PROVIDED BY (USED FOR)
INVESTING ACTIVITIES........... (9,284) (40,711) (47,347) (42,724) 3,794
------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net
of issuance costs..................... 22,104 60,411 534 536 133
Proceeds from exercise of stock options
and from stock purchase plans......... 42 642 2,606 541 1,704
Tax benefit from exercise of stock
options............................... -- 225 3,702 -- --
Minority interests...................... -- -- 1,213 -- 1,384
Other................................... (81) (786) 537 (111) (502)
------- -------- -------- -------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES..................... 22,065 60,492 8,592 966 2,719
------- -------- -------- -------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND EQUIVALENTS......................... 88 195 (138) (35) (346)
------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND
EQUIVALENTS............................. 16,002 30,869 (39,555) (40,959) 13,141
CASH AND EQUIVALENTS, BEGINNING OF
PERIOD.................................. 3,859 19,861 50,730 50,730 11,175
------- -------- -------- -------- --------
CASH AND EQUIVALENTS, END OF PERIOD....... $19,861 $ 50,730 $ 11,175 $ 9,771 $ 24,316
======= ======== ======== ======== ========
</TABLE>
See notes to supplemental consolidated financial statements.
F-7
<PAGE> 61
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS -- Security Dynamics Technologies, Inc. ("SDI," which,
together with its subsidiaries, is referred to as the "Company") is a leading
provider of enterprise network and data security solutions. The Company's
products help companies conduct business securely, protect corporate information
assets and facilitate business-to-business electronic commerce. The Company's
products include its SecurID "tokens" and ACE/Server software, which
authenticate the identity of users accessing networked or stand-alone computer
resources, RSA developer toolkits and other products used to implement
cryptographic data security applications and the BoKS product family, which
provides a broad range of security solutions, including secure single sign-on
solutions.
The principal markets for the Company's products are the United States,
Canada, Latin America, Europe and the Far East, with the United States, Europe
and Canada currently being the largest.
BASIS OF PRESENTATION -- The supplemental consolidated financial statements
have been prepared to give retroactive effect to the acquisition of DynaSoft AB
("DynaSoft") on July 15, 1997 (see Note 2), which has been accounted for as a
pooling of interests ("pooling"). Generally accepted accounting principles
proscribe giving effect to a merger or business combination accounted for as a
pooling in financial statements that do not include the date of consummation.
Although these supplemental consolidated financial statements do not extend
through the date of consummation, they will become the Company's historical
consolidated financial statements after financial statements including the
consummation date are issued.
PRINCIPLES OF CONSOLIDATION -- The supplemental consolidated financial
statements include all accounts of SDI and its subsidiaries. Strategic equity
investments for which the Company does not have the ability to exercise
significant influence are carried at cost. Investments in partnerships are
accounted for in accordance with the allocation of profits and losses under the
partnership agreements.
In the fourth quarter of 1996 and the first half of 1997, RSA sold minority
interests, which aggregate 24% as of June 30, 1997, in its Japanese subsidiary
to third parties for $1,213 and $1,384, respectively. The minority interests in
the subsidiary's profits and losses since the purchase dates are not material
and are included in interest income and other income in the supplemental
consolidated statements of income.
INTERIM RESULTS (UNAUDITED) -- In the opinion of management, the
accompanying interim unaudited supplemental consolidated financial statements as
of June 30, 1997 and for the six-month periods ended June 30, 1996 and 1997 have
been prepared on the same basis as the audited supplemental consolidated
financial statements and include all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the financial
position and operating results of the Company for such periods.
STOCK SPLITS -- In October 1995 and October 1996, the Board of Directors
declared two-for-one splits of the Company's common stock effected in the form
of stock dividends. All share and per share data have been adjusted to reflect
the two-for-one stock splits of the Company's common stock.
REVENUE RECOGNITION -- Revenue from software license fees, developer
toolkits, patent license fees and the sale of hardware products is recognized
upon shipment of the product, provided that no significant obligations remain
and collection of the receivable is considered probable. Shipments to
distributors are based upon receipt of a purchase order from end users by the
F-8
<PAGE> 62
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
distributor. Revenue from charges for maintenance services is deferred and
recognized ratably over the maintenance period, generally twelve months. No
customer accounted for 10% or more of the Company's revenue in any period
reported.
WARRANTY POLICY -- The Company's standard practice is to provide a warranty
on all SecurID tokens for the customer-selected programmed life of the token and
to replace any damaged tokens (other than tokens damaged by a user's negligence
or alteration) free of charge. The Company generally sells each of its other
products to customers with a warranty for a specified period. The Company
provides a reserve for warranties based upon historical experience.
INVENTORY -- Inventory consists primarily of finished SecurID tokens and
ACM hardware products and is stated at the lower of cost (first-in, first-out
method) or market.
PROPERTY AND EQUIPMENT -- Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the related assets (two to five years).
RESEARCH AND DEVELOPMENT, CAPITALIZED SOFTWARE AND PURCHASED TECHNOLOGY
COSTS -- Research and development costs, including purchased research and
development, are expensed as incurred. The Company capitalizes certain software
costs after technological feasibility has been established. Capitalized amounts
are reported at the lower of unamortized cost or net realizable value and are
amortized to cost of revenue over the estimated useful lives (two to three
years) starting at the general release of the software product to customers.
Purchased technology consists of acquired software and is recorded at cost.
Amortization is provided over estimated lives of two years. Amortization expense
for capitalized software and purchased technology approximated $176, $298 and
$330 for 1994, 1995 and 1996, respectively, and $135 and $166 for the six months
ended June 30, 1996 and 1997, respectively.
CASH EQUIVALENTS -- The Company considers all highly liquid investments
purchased with a remaining maturity of three months or less to be cash
equivalents.
MARKETABLE SECURITIES -- The Company classifies its marketable securities
as "available for sale," and, accordingly, carries such securities at aggregate
fair value. Unrealized gains and losses are included as a component of
stockholders' equity, net of tax effect. The Company's marketable securities
consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1995 1996 JUNE 30, 1997
-------------------- -------------------- --------------------
AGGREGATE AGGREGATE AGGREGATE
FAIR VALUE COST FAIR VALUE COST FAIR VALUE COST
---------- ------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
U.S. Government
obligations.......... $ 43,796 $43,632 $ 88,171 $88,161 $ 69,710 $69,672
Corporate equity
securities........... 16,680 60 5,809 20 4,512 983
Tax-exempt
securities........... 1,013 1,013 -- -- -- --
Corporate debt
securities........... 148 145 1,340 1,340 12,215 12,227
------- ------- ------- ------- ------- -------
Total......... $ 61,637 $44,850 $ 95,320 $89,521 $ 86,437 $82,882
======= ======= ======= ======= ======= =======
</TABLE>
At December 31, 1996 and June 30, 1997, substantially all of the Company's
U.S. Government obligations and corporate debt securities had contractual
maturities of two years or less. There were no sales of marketable securities
for 1994, 1995 or the six months ended June 30, 1997. Proceeds from the sale of
marketable securities for 1996 amounted to $11,067. The specific identified cost
F-9
<PAGE> 63
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
basis of the securities was used to determine the gain. Unrealized gross gains
at December 31, 1995, 1996 and June 30, 1997 were $16,687, $5,799 and $3,555,
respectively.
ADVERTISING -- Advertising costs are expensed as incurred. Total
advertising expense was approximately $424, $501 and $561 for 1994, 1995 and
1996, respectively, and $218 and $145 for the six months ended June 30, 1996 and
1997, respectively.
INCOME TAXES -- The Company utilizes the liability method of accounting for
income taxes. Deferred taxes are determined based on the estimated future tax
effects of differences between the financial statement and tax bases of assets
and liabilities given the provisions of the enacted tax laws. The Company
provides for taxes on the undistributed earnings of foreign subsidiaries which
are ultimately expected to be remitted to the parent company. Unrecognized
provisions for taxes on undistributed earnings of foreign subsidiaries which are
considered permanently invested are not material to the Company's consolidated
financial position or results of operations.
FOREIGN CURRENCY -- The Company considers the local currencies of the
countries in which the Company's branches and subsidiaries are domiciled to be
the functional currencies. Translation adjustments are accumulated in a separate
component of equity.
NET INCOME PER SHARE -- Net income per share is based on the weighted
average number of common shares outstanding which assumes on a pro forma basis
for 1994 that all series of convertible preferred stock had been converted to
common stock as of the original issuance dates. All series of the Company's
preferred stock were converted into shares of common stock on December 21, 1994.
Common equivalent shares are not included in the per share calculations where
the effect of their inclusion would be antidilutive, except in accordance with
Securities and Exchange Commission Staff Accounting Bulletin No. 83 (the
"Bulletin"). The Bulletin requires all shares of common stock issued and options
to purchase shares of common stock granted by the Company during the
twelve-month period prior to the filing of an initial public offering be
included in the calculation as if they were outstanding for all periods. For
1994, historical income per share, which excludes the assumed conversions of the
convertible preferred, was $0.01.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share," which
is required to be adopted in the fourth quarter of 1997. At that time, the
Company will be required to change the method currently used to compute earnings
per share and to restate all prior periods. SFAS No. 128 supersedes Accounting
Principles Board Opinion No. 15 and is intended to simplify the computation of
earnings per share and to make the U.S. computations more comparable with
international computations. The pro forma basic and diluted earnings per share
(as defined by SFAS No. 128) would have been as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Basic................................... $0.05 $0.23 $0.36 $0.15 $0.27
Diluted................................. 0.05 0.22 0.34 0.14 0.26
</TABLE>
FINANCIAL INSTRUMENTS -- The carrying values of cash and equivalents,
accounts receivable and accounts payable approximate fair value due to the
short-term nature of these instruments. Marketable securities are carried at
aggregate fair value. The Company's 24% interest in VeriSign, Inc. ("VeriSign")
(Note 3) is accounted for under the equity method. Other investments represent
strategic equity positions in companies and are stated at cost. It is not
practicable to measure the estimated fair value of such investments.
F-10
<PAGE> 64
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Two of the companies in which the Company has equity positions had initial
public offerings in 1996. In April 1997, an amendment to Rule 144 under the
Securities Act of 1933, became effective, which, among other things, shortened
the holding periods for sales of restricted securities under Rule 144. As a
result of this amendment, the Rule 144 holding-period requirements for certain
restricted securities (including shares of common stock of the two companies
which completed initial public offerings in 1996) currently held by the Company
will be met in 1997. Accordingly, these restricted securities, which have a cost
of $737, have been reclassified in 1997 from investments to marketable
securities as of June 30, 1997.
USE OF ESTIMATES -- The preparation of the Company's supplemental
consolidated financial statements in conformity with generally accepted
accounting principles necessarily requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
periods. Actual results could differ from those estimates.
CONCENTRATION OF CREDIT RISK -- The Company licenses its ACE/Server and
BoKS software and token technology to various customers in a diverse industry
range. Toolkit and patent licenses are issued primarily to companies in the
computer and software industries. The Company performs ongoing credit
evaluations of its customers and maintains allowances for potential credit
losses. The Company generally requires no collateral from its customers.
STOCK-BASED COMPENSATION -- The Company applies Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for stock option grants
to employees (and non-employees prior to January 1, 1996). Since January 1,
1996, the Company applies SFAS No. 123, "Accounting for Stock-Based
Compensation" and related interpretations for accounting for stock option grants
to non-employees.
LONG-LIVED ASSETS -- Effective January 1, 1996, the Company adopted the
provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," for 1996. The adoption of SFAS No.
121 did not have an impact on the Company's supplemental consolidated financial
statements.
RECENT ACCOUNTING PRONOUNCEMENTS -- In June 1997, the Financial Accounting
Standards Board issued Statements of Financial Accounting Standards Nos. 130 and
131, "Reporting Comprehensive Income" and "Disclosures about Segments of an
Enterprise and Related Information" ("SFAS 130" and "SFAS 131", respectively).
The Company will be required to adopt the provisions of these statements in
fiscal 1998. SFAS 130 provides standards for reporting items considered to be
"comprehensive income" and uses the term "other comprehensive income" to refer
to revenue, expenses, gains and losses that are included in comprehensive income
under generally accepted accounting principles but excluded from net income.
Currently the only items considered other comprehensive income, as defined in
SFAS 130 are the unrealized gains and losses on marketable securities and
cumulative translation adjustments, which are recorded as components of
stockholders' equity. SFAS 131 establishes new standards for reporting
information about operating segments. The Company believes the segment
information required to be disclosed under SFAS 131 will be more comprehensive
than previously provided, including expanded disclosure of income statement and
balance sheet items for each reportable operating segment. The Company has not
yet completed its analysis of which operating segments it will report on. The
Company believes that the provisions of SFAS 130 will not, when adopted, have a
material impact on the Company's financial statements.
F-11
<PAGE> 65
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. MERGER AND ACQUISITION
On July 15, 1997, SDI acquired DynaSoft AB (the "Acquisition" and
"DynaSoft," respectively). On July 26, 1996, SDI completed a merger with RSA
Data Security, Inc. (the "Merger" and "RSA," respectively). The Acquisition and
the Merger have been accounted for as poolings of interests and therefore the
supplemental consolidated financial statements for all periods prior to the
Merger and the Acquisition have been restated to include the accounts and
operations of RSA and DynaSoft with those of SDI. Expenses related to these
transactions for investment banking, professional fees and other direct expenses
are recorded at the respective dates of the Acquisition and Merger.
RSA, located in Redwood City, California, is a leader in cryptography and
develops, markets and supports cryptographic data security products and provides
related consulting services. Products are licensed to original equipment
manufacturers ("OEMs"), which incorporate the technology into their products.
Developer toolkits and other products are used to implement cryptographic data
security applications such as electronic mail, communications privacy,
client/server data security, smart cards and other key information technologies.
DynaSoft is based in Stockholm, Sweden and offers a range of software
security solutions, including secure single sign-on ("SSSO") solutions, through
its BoKS product family. Products are sold worldwide through direct sales and
through OEM licensing agreements with Sun Microsystems, Hewlett-Packard, and
other companies.
Under the terms of the Merger, each share of RSA common stock was exchanged
for 1.66112 shares of the Company's common stock and the Company issued a total
of 6,683,078 shares of its common stock to RSA stockholders and options to
purchase a total of 1,316,922 shares of the Company's common stock to option
holders of RSA.
Under the terms of the Acquisition, the Company issued approximately 2.7
million shares of common stock in exchange for approximately 95% of the
outstanding shares and certain of the outstanding options to acquire shares of
DynaSoft. The Company paid $6,035 to certain stockholders of DynaSoft in
exchange for the remaining outstanding shares and options.
Investment banking, professional fees and other direct expenses incurred in
connection with the Merger were approximately $6,100 in 1996. The Company
anticipates expenses in connection with the Acquisition will approximate $8,500
and will be expensed in the third quarter of 1997.
No adjustments to conform accounting policies of the Company and RSA were
required. Adjustments to conform accounting policies of DynaSoft to those of the
Company were not material.
Revenue and net income (loss) for the previously separate companies were:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
REVENUE
SDI............................ $17,572 $33,804 $70,105 $26,240 $56,097
RSA............................ 3,077 11,600 6,043(a) 6,043(a) --
DynaSoft....................... 3,217 4,008 7,669 3,828 5,277
------- ------- ------- ------- -------
Total.................. $23,866 $49,412 $83,817 $36,111 $61,374
======= ======= ======= ======= =======
NET INCOME (LOSS)
SDI............................ $ 2,315 $ 5,812 $13,428 $ 5,435 $10,231
RSA............................ (1,727) 950 (383)(a) (383)(a) --
DynaSoft....................... 640 688 130 402 (155)
------- ------- ------- ------- -------
Total.................. $ 1,228 $ 7,450 $13,175 $ 5,454 $10,076
======= ======= ======= ======= =======
</TABLE>
- ---------------
(a) Revenue and net loss of RSA for 1996 include only the six month period prior
to the consummation of the Merger.
F-12
<PAGE> 66
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Pursuant to escrow agreements entered into with the Company by certain of
the stockholders of DynaSoft and by RSA in connection with the Acquisition and
the Merger, respectively, 10.0% of the shares of the Company's common stock
issued to holders of DynaSoft's stock and 12.5% of the shares of the Company's
common stock issued to holders of RSA stock and issuable to holders of RSA
options were placed in escrow, pending settlement of any breaches of
representations, warranties or covenants to the Acquisition and Merger
agreements. In June 1997, the Company and the holders of the RSA shares reached
settlement with respect to claims against the escrow shares and 36,250 shares
were distributed to the Company and 837,957 shares were distributed to the
holders of the RSA shares. Of the shares received by the Company, 213 shares
were accounted for as treasury stock and the remainder were canceled.
3. INVESTMENTS
Investments were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
------------- --------
1995 1996 1997
---- ------ --------
<S> <C> <C> <C>
VeriSign, Inc............................................... $510 $ 687 $ 687
VPNet Technologies, Inc..................................... -- 1,500 1,500
Other....................................................... 362 737 --
---- ------ ------
Total............................................. $872 $2,924 $2,187
==== ====== ======
</TABLE>
Prior to 1997, other investments were carried at the lower of cost or
estimated realizable value (See Note 1, "Financial Instruments".)
VeriSign, Inc. -- On April 17, 1995, and February 20, 1996, SDI purchased
425,000 shares of Series A and 72,091 shares of Series B Convertible Preferred
Stock, respectively, of VeriSign of Redwood City, California for an aggregate
purchase price of $687. VeriSign was organized to provide digital certificates
and related services that use public-key cryptography to ensure essential
privacy and authentication features. During 1995, RSA granted certain rights and
privileges in certain technology to VeriSign in connection with VeriSign's
incorporation and received 4,000,000 shares of VeriSign common stock. The
Company's voting interest was approximately 44% and 24%, at December 31, 1995
and 1996, respectively and 24% at June 30, 1997. VeriSign had revenues of $382
in 1995 and $1,351 in 1996, and a net loss of $1,994 in 1995 and $10,243 in 1996
and had total assets of $4,052 and $36,503 at December 31, 1995 and 1996,
respectively.
VPNet Technologies, Inc. -- On December 2, 1996, the Company purchased
250,000 shares of Series B Preferred Stock of VPNet Technologies, Inc. ("VPNet")
of San Jose, California, for an aggregate purchase price of $1,500. VPNet was
organized to develop and market products and technologies for implementing
high-performance virtual private networks. The Company's investment in VPNet
represents a minority interest of less than 10% of VPNet's voting stock and is
carried at cost.
4. PREFERRED STOCK
In accordance with the Company's Second Restated Certificate of
Incorporation, as in effect immediately prior to the Company's initial public
offering (the "IPO"), all shares of the Company's Series A, B and C preferred
stock were converted into 11,288,756 shares of common stock upon the closing of
the IPO on December 21, 1994. At December 31, 1994, all shares of preferred
stock had been canceled and retired.
F-13
<PAGE> 67
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCK OPTION AND PURCHASE PLANS
1986 STOCK OPTION PLAN ("1986 PLAN") -- The Company's 1986 Plan terminated
by its terms in 1996 although options remain outstanding at June 30, 1997. In
general, options granted under the 1986 Plan become exercisable in equal annual
installments over four years and expire ten years from the date of grant.
1994 STOCK OPTION PLAN ("1994 PLAN") -- In October 1994, the Board of
Directors adopted the Company's 1994 Plan. The 1994 Plan authorizes (i) the
grant of options to purchase common stock intended to qualify as incentive stock
options and (ii) the grant of options that do not so qualify (non-statutory
options) to employees, officers, directors and consultants of the Company.
Option exercise prices for incentive stock options granted under the 1994 Plan
may not be less than 100% of the fair market value of the shares. In general,
options granted under the 1994 Plan become exercisable in equal annual
installments over four years and expire ten years from the date of grant. On
April 24, 1997, at the Annual Meeting of Stockholders of the Company, the
stockholders adopted an amendment increasing the number of shares authorized for
issuance under the 1994 Plan from 4,820,000 to 6,570,000. Shares of common stock
available for option grants were 1,801,185 at June 30, 1997.
1994 DIRECTOR STOCK OPTION PLAN ("DIRECTOR PLAN") -- In October 1994, the
Board of Directors adopted the Company's Director Plan. The Director Plan
permits the granting of options to purchase up to a maximum of 300,000 shares of
common stock to non-employee members of the Board of Directors. The exercise
price of the options may not be less than 100% of the fair market value on the
date of the grant. Options granted under the Director Plan become exercisable at
the earlier of the date of the next Annual Meeting of Stockholders or one year
from the date of grant and expire ten years from the date of grant. Shares of
common stock available for option grant were 103,000 at June 30, 1997.
1994 EMPLOYEE STOCK PURCHASE PLAN ("PURCHASE PLAN") -- In October 1994, the
Board of Directors adopted the Company's Purchase Plan. The Purchase Plan
provides for sales to participating employees of up to 400,000 shares of common
stock, at prices of not less than 85% of the closing price on either the first
day or the last day of the offering period, whichever is lower. Shares purchased
under the Plan were 35,716, and 91,408 and 119,779 at December 31, 1995 and 1996
and at June 30, 1997, respectively.
RSA OPTIONS -- At the effective date of the Merger, the then-outstanding
options to purchase shares of RSA common stock, issued under RSA's 1987 Stock
Option Plan (the "RSA Option Plan"), were exchanged for options to purchase an
aggregate of 1,316,922 shares of the Company's common stock. All option activity
data has been retroactively adjusted to the earliest period presented to give
effect to the conversion of the RSA options. Incentive stock options and
non-statutory stock options were awarded to employees, officers, directors,
consultants and independent contractors and were generally immediately
exercisable for a term of five years. In the event of termination of employment
or consulting services, the Company has the option to repurchase at the original
exercise price any unvested shares. At June 30, 1997, options as to 955,108
shares were subject to repurchase rights, and a total of 69,844 shares were
subject to repurchase which were previously issued upon the exercise of stock
options.
DYNASOFT OPTIONS -- In connection with the Acquisition of DynaSoft, the
Company exchanged options to purchase 44,931 shares of the Company's common
stock for all of the then outstanding options to purchase shares of DynaSoft.
F-14
<PAGE> 68
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of stock option activity under all plans, including converted RSA
and DynaSoft options, is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE
SHARES PRICE PER SHARE
--------- ----------------
<S> <C> <C>
OUTSTANDING AT JANUARY 1, 1994.......................... 2,181,990 $ 0.29
Granted............................................... 666,082 1.11
Exercised............................................. (152,376) 0.06
---------
OUTSTANDING AT DECEMBER 31, 1994........................ 2,695,696 0.47
Granted............................................... 1,485,486 5.25
Exercised............................................. (921,718) 0.47
Canceled.............................................. (80,269) 0.95
---------
OUTSTANDING AT DECEMBER 31, 1995........................ 3,179,195 2.69
Granted............................................... 2,332,212 29.12
Exercised............................................. (761,633) 2.33
Canceled.............................................. (27,317) 21.57
---------
OUTSTANDING AT DECEMBER 31, 1996........................ 4,722,457 15.71
Granted............................................... 957,383 29.35
Exercised............................................. (690,662) 1.45
Canceled.............................................. (81,796) 26.10
---------
OUTSTANDING AT JUNE 30, 1997............................ 4,907,382 20.26
=========
Exercisable at December 31, 1994...................... 2,293,266 0.31
=========
Exercisable at December 31, 1995...................... 2,261,327 0.40
=========
Exercisable at December 31, 1996...................... 2,127,928 1.69
=========
Exercisable at June 30, 1997.......................... 1,851,971 6.16
=========
</TABLE>
The following table sets forth information regarding stock options
outstanding at December 31, 1996 under all plans:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE OF NUMBER WEIGHTED REMAINING EXERCISE PRICE
NUMBER OF EXERCISE CURRENTLY AVERAGE CONTRACTUAL LIFE FOR CURRENTLY
OPTIONS PRICES EXERCISABLE EXERCISE PRICE (YEARS) EXERCISABLE
- ---------- --------------- ---------- -------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
324,800... $0.05-0.06 324,800 $ 0.05 1.1 $ 0.05
384,000... 0.10 384,000 0.10 3.3 0.10
28,000.... 0.25-0.35 -- 0.29 5.8 --
76,800.... 0.45 15,200 0.45 7.0 0.45
59,656.... 0.76 27,718 0.76 9.9 0.76
985,414... 0.85-0.90 975,874 0.90 7.8 0.90
39,450.... 1.75-2.55 11,650 2.25 7.6 2.28
197,185... 2.95-4.22 187,185 3.32 8.9 3.34
23,252.... 6.62 23,252 6.62 9.2 6.62
546,000... 9.97-14.31 178,249 10.26 8.6 10.27
1,315,600.. 24.30-35.63 -- 27.91 9.3 --
742,300... 38.00-44.21 -- 40.34 9.7 --
--------- ---------
4,722,457.. 0.05-44.21 2,127,928 15.71 7.8 1.69
========= =========
</TABLE>
F-15
<PAGE> 69
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ACCOUNTING FOR STOCK OPTIONS
For certain options and stock awards granted in 1994, 1995, 1996 and 1997,
the Company is recognizing compensation expense based on the excess of fair
market value over the option exercise or award prices at dates of grant.
Compensation is being recognized ratably over the vesting periods.
On April 1, 1996 and April 24, 1996, options to purchase 200,000 shares and
38,900 shares of common stock were granted at exercise prices of $24.30 and
$38.20, respectively, subject to stockholder approval of an amendment to the
1994 Plan increasing the number of shares available for grant to 4,820,000
shares. On May 22, 1996, the stockholders approved the amendment to the 1994
Plan.
For options granted prior to April 1, 1996, because approval of the
stockholders was required and considered perfunctory, the Company measured
compensation expense on the date of grant by the Board of Directors or the
Compensation Committee of the Board of Directors. As a result of discussions
with the Staff of the Securities and Exchange Commission, the Company changed
its accounting policy on options requiring stockholder approval to measure
compensation expense on the approval date. This change resulted in an aggregate
compensation expense of approximately $4,500 relating to the April 1, 1996 and
April 24, 1996 option grants, which the Company is recognizing over the
remainder of the four-year vesting period of the options from May 22, 1996. The
effect of this change was to reduce income from operations by $667 in the year
ended December 31, 1996. Total compensation expense relating to certain options
and stock awards amounted to $48, $181 and $1,167 for the years ended December
31, 1994, 1995 and 1996, respectively, and $166 and $621 for the six months
ended June 30, 1996 and 1997, respectively.
PRO FORMA DISCLOSURE -- Had the Company recognized compensation costs for
the employee and director stock option and purchase plans based on the fair
value for awards under those plans after January 1, 1995, in accordance with
SFAS No. 123 "Accounting for Stock Based Compensation," net income and net
income per share would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------
1995 1996
------ -------
<S> <C> <C>
Net income
As reported........................................... $7,450 $13,175
Pro forma............................................. 7,026 10,745
Net income per share
As reported........................................... $0.22 $0.34
Pro forma............................................. 0.21 0.28
</TABLE>
F-16
<PAGE> 70
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair values used to compute pro forma net income and net income per
share were estimated fair value at grant date using the Black-Scholes
option-pricing model with the following weighted average assumptions:
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
---------------
1995 1996
---- ----
<S> <C> <C>
STOCK OPTION PLANS
Risk-free interest rate................................... 6.0% 6.0%
Expected life of option grants (years).................... 4.4 4.4
Expected volatility of underlying stock................... 57.5% 57.5%
Expected dividend payment rate............................ 0.0% 0.0%
Expected forfeiture rate.................................. 4.1% 4.1%
EMPLOYEE STOCK PURCHASE PLAN
Risk-free interest rate................................... 5.9% 5.2%
Expected life of option grants (years).................... 0.5 0.5
Expected volatility of underlying stock................... 57.5% 57.5%
Expected dividend payment rate............................ 0.0% 0.0%
</TABLE>
The weighted average fair value of stock options granted, calculated using the
Black-Scholes option-pricing model, was $2.74 and $15.67 during the years ended
December 31, 1995 and 1996, respectively. The weighted fair value of stock
options granted under the Purchase Plan, calculated using the Black-Scholes
option-pricing model was $6.72 and $25.26 during 1995 and 1996, respectively.
6. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Current:
Federal............................................. $ 882 $3,049 $ 7,359
State............................................... 281 781 930
Foreign............................................. 265 302 399
------- ------- --------
Total....................................... 1,428 4,132 8,688
Deferred:
Federal............................................. (256) (93) (1,219)
State............................................... (15) (26) (174)
Change in valuation allowance....................... 296 (869) --
------- ------- --------
Total....................................... 25 (988) (1,393)
Tax benefit from exercise of stock options:
Federal............................................. -- 179 3,452
State............................................... -- 46 250
------- ------- --------
Total....................................... -- 225 3,702
------- ------- --------
Total................................................. $1,453 $3,369 $10,997
======= ======= ========
</TABLE>
F-17
<PAGE> 71
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the Company's deferred tax assets and liabilities
were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
-----------------------
1995 1996
------- -------
<S> <C> <C>
Deferred tax assets (liabilities) -- current:
Marketable securities.................................... $(6,877) $(2,319)
Deferred revenue......................................... 98 854
Allowance for doubtful accounts.......................... 293 211
Compensation............................................. 146 205
Inventory reserves....................................... 66 66
Warranty obligation...................................... 42 42
Commissions.............................................. 80 42
Net operating loss carryforwards......................... 81 --
Other.................................................... (28) 67
------- -------
Net deferred tax liabilities -- current.................... $(6,099) $ (832)
======= =======
Deferred tax assets (liabilities) -- non current:
Acquisition of technology................................ 249 733
Compensation............................................. -- 326
Capitalized software development costs................... (89) (79)
Net operating loss carryforwards......................... -- 32
Other.................................................... 254 14
------- -------
Net deferred tax assets -- non current..................... $ 414 $ 1,026
======= =======
</TABLE>
A reconciliation between the statutory and effective income tax rates
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Statutory tax rate......................................... 34.0% 34.0% 35.0%
State income taxes net of federal benefit.................. 10.5 5.4 3.2
Merger expenses............................................ -- -- 8.3
Foreign income taxes....................................... (13.0) (0.3) 0.3
Change in valuation allowance.............................. 16.5 (8.8) --
Foreign expenses without tax benefit....................... 8.5 -- --
Other...................................................... (2.3) 0.8 (1.3)
----- ----- -----
Effective income tax rate.................................. 54.2% 31.1% 45.5%
===== ===== =====
</TABLE>
The income tax provision for the six months ended June 30, 1996 and 1997 is
based upon the estimated effective tax rates of 37.5% and 37.6%, respectively,
for the full years.
Cash payments for income taxes were approximately $1,323, $4,140 and $8,384
for 1994, 1995 and 1996, respectively, and $3,801 and $7,099 for the six months
ended June 30, 1996 and 1997, respectively.
7. RETIREMENT AND SAVINGS PLAN
The Company has a 401(k) retirement and savings plan (the "Plan")
established in 1986 covering substantially all domestic employees. The Plan
allows each participant to defer up to 15% of annual earnings up to an amount
not to exceed an annual statutory maximum. Subject to the
F-18
<PAGE> 72
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
approval of the Board of Directors on an annual basis, the Company may make, at
its discretion, profit-sharing contributions and/or match employee deferrals. At
December 31, 1995 and 1996, the Company had accrued, and the Board of Directors
had approved, profit-sharing contributions approximating $78 and $305,
respectively. The Board of Directors also approved for 1995 and 1996 matching
contributions in an amount equal to one-third of the employee deferrals up to 6%
of annual earnings (or a total of 2%), subject to certain eligibility
requirements. Matching contributions amounted to $88, $112 and $261 for 1994,
1995 and 1996, respectively.
8. COMMITMENTS
The Company leases office facilities and automobiles under non-cancelable
operating leases expiring through 2006. Future minimum rental payments are as
follows for years ending December 31:
<TABLE>
<S> <C>
1997........................................................ $2,306
1998........................................................ 2,126
1999........................................................ 2,025
2000........................................................ 1,256
2001........................................................ 1,300
Balance thereafter.......................................... 5,934
</TABLE>
Net rent expense for 1994, 1995 and 1996 was approximately $618, $1,026 and
$2,004, respectively, and for the six months ended June 30, 1996 and 1997 was
approximately $788 and $1,359, respectively. Rent collected from a sublease of
the Company's former headquarters was $0, $0 and $108 in 1994, 1995 and 1996,
respectively, and $0 and $216 for the six months ended June 30, 1996 and 1997,
respectively.
During 1996, the Company issued an unsecured irrevocable standby letter of
credit in the amount of $750 to the landlord of its corporate headquarters in
lieu of a security deposit.
As of June 30, 1997, DynaSoft had approximately $673 due to a bank. The
amount, payable upon demand, bears interest at 13% and is included in accrued
expenses and other.
In December 1994, the Company entered into an agreement with Progress
Software Corporation ("Progress Software"), a vendor of commercial database
software, for the right to use certain of Progress Software's software to
enhance the functionality of the Company's ACE/Server software. The Company
began incurring royalties under the Progress Software agreement in the fourth
quarter of 1995 as a result of the commercial introduction of ACE/Server v2.0 in
October 1995. The Company renewed this agreement in November 1996, and at
December 31, 1996, the Company had prepaid $1,040 under this agreement. In the
first quarter of 1997, in accordance with the terms of the agreement, and in
order to obtain favorable pricing, the Company prepaid a further $2,500.
RSA has a license for cryptographic communication technology and devices
from the Massachusetts Institute of Technology ("MIT") which granted to RSA,
through September 2000, an exclusive right to use, lease or sell technology,
subject to payment of royalties.
Royalty expense was $118, $706 and $2,009 for 1994, 1995 and 1996,
respectively, and $1,047 and $2,370 for the six months ended June 30, 1996 and
1997, respectively.
F-19
<PAGE> 73
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO SUPPLEMENTAL CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. SEGMENT INFORMATION
The Company operates in only one industry segment. Export sales are
summarized as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
----------------------------- ------------------
1994 1995 1996 1996 1997
------ ------ ------- ------ -------
<S> <C> <C> <C> <C> <C>
Europe..................................... $2,005 $5,116 $11,616 $4,963 $ 9,205
Canada..................................... 1,230 2,772 4,511 2,038 3,636
Asia/Pacific............................... 176 571 2,518 921 2,574
Latin America.............................. -- -- 198 -- 204
------ ------ ------- ------ -------
$3,411 $8,459 $18,843 $7,922 $15,619
====== ====== ======= ====== =======
</TABLE>
10. LITIGATION
THE CYLINK SETTLEMENT -- Since 1994, RSA had been involved in arbitration
and litigation proceedings (collectively, the "Litigation") relating, among
other things, to (i) the validity of a U.S. patent (the "RSA/MIT Patent")
developed at MIT and licensed to RSA; (ii) the rights of Cylink Corporation
("Cylink") and its subsidiary Caro Kann Corporation ("CKC"), competitors of RSA,
to use and sub-license the RSA/MIT Patent; (iii) the validity and scope of
certain U.S. patents (the "Stanford Patents") which cover Cylink's fundamental
encryption technology and have been licensed to Cylink by the Board of Trustees
of the Leland Stanford Junior University; and (iv) the liability, if any, of RSA
for infringing or contributing to the infringement of the Stanford Patents. On
December 31, 1996, RSA, Cylink and CKC entered into a comprehensive settlement
relating to the Litigation. As part of the settlement, (a) the parties agreed to
dismiss all claims relating to the Litigation, (b) Cylink granted to RSA all
necessary rights to the Stanford Patents and (c) RSA granted to Cylink a license
to RSA's cryptographic software toolkit.
THE ACTIVCARD SETTLEMENT -- In December 1995, the Company, together with
co-plaintiff Vasco Data Security, Inc. ("Vasco"), filed suit in the U.S.
District Court for the Northern District of California against ActivCard, Inc.
and ActivCard S.A. (together, "ActivCard") alleging infringement of certain
patents of the Company and Vasco that collectively cover a range of technology
used to secure data access. The suit sought monetary damages and an injunction
against further infringement. In February 1996, in response to the Company's
repeated infringement allegations and prior to the serving of the Company's
complaint on ActivCard, ActivCard filed a complaint against the Company in the
same court seeking a declaratory judgment of non-infringement, invalidity and
unenforceability of the Company's patents asserted in the suit brought with
Vasco. In October 1996, Vasco, the Company and ActivCard entered into a
settlement agreement with respect to this litigation. Pursuant to the terms of
the settlement agreement, the Company and Vasco agreed to dismiss with prejudice
their claims against ActivCard and ActivCard similarly agreed to dismiss with
prejudice its claims against the Company and Vasco. In connection with this
settlement, ActivCard agreed to license certain patents from the Company and
Vasco.
The Company has been named as a defendant in other legal actions arising
from its normal business activities. The Company carries insurance against
liability for certain types of risks. Although the amount of liability that
could result from any litigation cannot be predicted, in the opinion of
management, after consulting with legal counsel, the Company's potential
liability on all known claims would not have a material adverse effect on the
consolidated financial position or results of operations of the Company.
11. RELATED PARTY TRANSACTIONS
A stockholder provides consulting services to the Company and received $81,
$91 and $97 in 1994, 1995 and 1996, respectively, and $41 and $56 during the six
months ended June 30, 1996 and 1997, respectively. As of June 30, 1997, DynaSoft
had approximately $25 due to a stockholder payable upon demand.
F-20
<PAGE> 74
ENTERPRISE-WIDE SECURITY SOLUTIONS
SECURID
The Company's SecurID tokens include its SecurID Card, its SecurID Key Fob and
its SecurID
PINPAD Card. Used in conjunction with the Company's Ace/Server software, the
SecurID
tokens provide security solutions for a variety of enterprise computing
environments.
<PAGE> 75
======================================================
NO PERSON HAS BEEN AUTHORIZED IN CONNECTION WITH THE OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDER OR
ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH
OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 13
Price Range of Common Stock and
Dividend Policy..................... 13
Capitalization........................ 14
Selected Supplemental Consolidated
Financial Data...................... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 29
Management............................ 44
Selling Stockholders.................. 47
Underwriting.......................... 49
Legal Matters......................... 50
Experts............................... 51
Available Information................. 51
Incorporation of Certain Documents by
Reference........................... 52
Index to Supplemental Consolidated
Financial Statements................ F-1
</TABLE>
======================================================
======================================================
2,500,000 SHARES
[SECURITYDYNAMICS LOGO]
COMMON STOCK
-----------------
PROSPECTUS
-----------------
BT ALEX. BROWN
INCORPORATED
ROBERTSON, STEPHENS & COMPANY
COWEN & COMPANY
, 1997
======================================================
<PAGE> 76
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses, all of which will be
borne by the Registrant, in connection with the sale and distribution of the
securities being registered, other than the underwriting discounts and
commissions. All amounts shown are estimates except for the Securities and
Exchange Commission registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC Registration Fee..................................................... $ 32,889
NASD Filing Fee.......................................................... 11,354
Nasdaq Listing Fee....................................................... 17,500
Blue Sky Fees and Expenses............................................... 5,000
Transfer Agent and Registrar Fees........................................ 10,000
Accounting Fees and Expenses............................................. 100,000
Legal Fees and Expenses.................................................. 125,000
Printing and Mailing Expenses............................................ 100,000
Miscellaneous............................................................ 48,257
-----
Total.......................................................... $450,000
=====
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Article EIGHTH of the Registrant's Third Restated Certificate of
Incorporation, as amended (the "Restated Certificate of Incorporation"),
provides that no director of the Registrant shall be personally liable for any
monetary damages for any breach of fiduciary duty as a director, except to the
extent that the Delaware General Corporation Law prohibits the elimination or
limitation of liability of directors for breach of fiduciary duty.
Article NINTH of the Registrant's Restated Certificate of Incorporation
provides that a director or officer of the Registrant (a) shall be indemnified
by the Registrant against all expenses (including attorneys' fees), judgments,
fines and amounts paid in settlement incurred in connection with any litigation
or other legal proceeding (other than an action by or in the right of the
Registrant) brought against him by virtue of his position as a director or
officer of the Registrant if he acted in good faith and in a manner he
reasonably believed to be in, or not opposed to, the best interests of the
Registrant, and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful and (b) shall be
indemnified by the Registrant against all expenses (including attorneys' fees)
and amounts paid in settlement incurred in connection with any action by or in
the right of the Registrant brought against him by virtue of his position as a
director or officer of the Registrant if he acted in good faith and in a manner
he reasonably believed to be in, or not opposed to, the best interests of the
Registrant, except that no indemnification shall be made with respect to any
matter as to which such person shall have been adjudged to be liable to the
Registrant, unless a court determines that, despite such adjudication but in
view of all of the circumstances, he is entitled to indemnification of such
expenses. Notwithstanding the foregoing, to the extent that a director or
officer has been successful, on the merits or otherwise, including, without
limitation, the dismissal of an action without prejudice, he is required to be
indemnified by the Registrant against all expenses (including attorneys' fees)
incurred in connection therewith. Expenses shall be advanced to a director or
officer at his request, provided that he undertakes to repay the amount advanced
if it is ultimately determined that he is not entitled to indemnification for
such expenses.
Indemnification is required to be made unless the Registrant determines
that the applicable standard of conduct required for indemnification has not
been met. In the event of a determination
II-1
<PAGE> 77
by the Registrant that the director or officer did not meet the applicable
standard of conduct required for indemnification, or if the Registrant fails to
make an indemnification payment within 60 days after such payment is claimed by
such person, such person is permitted to petition the court to make an
independent determination as to whether such person is entitled to
indemnification. As a condition precedent to the right of indemnification, the
director or officer must give the Registrant notice of the action for which
indemnity is sought and the Registrant has the right to participate in such
action or assume the defense thereof.
Article NINTH of the Registrant's Restated Certificate of Incorporation
further provides that the indemnification provided therein is not exclusive, and
provides that in the event that the Delaware General Corporation Law is amended
to expand the indemnification permitted to directors or officers the Registrant
must indemnify those persons to the fullest extent permitted by such law as so
amended.
Section 145 of the Delaware General Corporation Law provides that a
corporation has the power to indemnify a director, officer, employee or agent of
the corporation and certain other persons serving at the request of the
corporation in related capacities against amounts paid and expenses incurred in
connection with an action or proceeding to which he is or is threatened to be
made a party by reason of such position, if such person shall have acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, in any criminal proceeding, if such person
had no reasonable cause to believe his conduct was unlawful; provided that, in
the case of actions brought by or in the right of the corporation, no
indemnification shall be made with respect to any matter as to which such person
shall have been adjudged to be liable to the corporation unless and only to the
extent that the adjudicating court determines that such indemnification is
proper under the circumstances.
Under Section 8 of the Underwriting Agreement, the Underwriters are
obligated, under certain circumstances, to indemnify directors and officers of
the Registrant against certain liabilities, including liabilities under the
Securities Act of 1933. Reference is made to the form of Underwriting Agreement
filed as Exhibit 1 hereto.
ITEM 16. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- --------------------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement.
*4.1 Specimen Certificate for shares of Common Stock, $.01 par value, of the
Registrant.
5 Opinion of Hale and Dorr LLP with respect to the validity of the securities
being offered.
23.1 Consent of Hale and Dorr LLP (included in Exhibit 5).
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Ernst & Young LLP, independent auditors.
24 Powers of Attorney (included on page II-4).
</TABLE>
- ---------------
* Incorporated herein by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-85606).
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in this
Registration Statement shall be
II-2
<PAGE> 78
deemed to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
of 1993 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions contained in the Restated Certificate of
Incorporation and Amended and Restated By-Laws of the Registrant and the laws of
the State of Delaware, or otherwise, the Registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the Registrant of expenses incurred or
paid by a director, officer or controlling person of the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1993, the information omitted from the form of prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act of 1993, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE> 79
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Bedford, Commonwealth of Massachusetts, on this 5th
day of September, 1997.
SECURITY DYNAMICS TECHNOLOGIES, INC.
By: /s/ CHARLES R. STUCKEY, JR.
------------------------------------
Charles R. Stuckey, Jr.
Chairman of the Board, President
and Chief Executive Officer
POWER OF ATTORNEY AND SIGNATURES
We, the undersigned officers and directors of Security Dynamics
Technologies, Inc., hereby severally constitute and appoint Charles R. Stuckey,
Jr., Arthur W. Coviello, Jr. and Hal J. Leibowitz, and each of them singly, our
true and lawful attorneys with full power to them, and each of them singly, to
sign for us and in our names in the capacities indicated below, the Registration
Statement on Form S-3 filed herewith and any and all pre-effective and
post-effective amendments to said Registration Statement, and any subsequent
Registration Statement for the same offering which may be filed under Rule
462(b), and generally to do all such things in our names and on our behalf in
our capacities as officers and directors to enable Security Dynamics
Technologies, Inc. to comply with the provisions of the Securities Act of 1933,
as amended, and all requirements of the Securities and Exchange Commission,
hereby ratifying and confirming our signatures as they may be signed by our said
attorneys, or any of them, to said Registration Statement and any and all
amendments thereto or to any subsequent Registration Statement for the same
offering which may be filed under Rule 462(b).
II-4
<PAGE> 80
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ---------------------------- -------------------
<C> <S> <C>
/s/ CHARLES R. STUCKEY, JR. Chairman of the Board, September 5, 1997
- ------------------------------------------ President and Chief
Charles R. Stuckey, Jr. Executive Officer
/s/ MARIAN G. O'LEARY Senior Vice President, September 5, 1997
- ------------------------------------------ Finance, Chief Financial
Marian G. O'Leary Officer and Treasurer
(Principal Financial and
Accounting Officer)
/s/ D. JAMES BIDZOS Director September 5, 1997
- ------------------------------------------
D. James Bidzos
Director
- ------------------------------------------
Richard L. Earnest
/s/ JOSEPH B. LASSITER, III Director September 5, 1997
- ------------------------------------------
Joseph B. Lassiter, III
/s/ GEORGE M. MIDDLEMAS Director September 5, 1997
- ------------------------------------------
George M. Middlemas
/s/ MARINO R. POLESTRA Director September 5, 1997
- ------------------------------------------
Marino R. Polestra
/s/ SANFORD M. SHERIZEN Director September 5, 1997
- ------------------------------------------
Sanford M. Sherizen
</TABLE>
II-5
<PAGE> 81
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
------- --------------------------------------------------------------------------------
<C> <S>
1 Form of Underwriting Agreement.
*4.1 Specimen Certificate for shares of Common Stock, $.01 par value, of the
Registrant.
5 Opinion of Hale and Dorr LLP with respect to the validity of the securities
being offered.
23.1 Consent of Hale and Dorr LLP (included in Exhibit 5).
23.2 Consent of Deloitte & Touche LLP.
23.3 Consent of Ernst & Young LLP, independent auditors.
24 Powers of Attorney (included on page II-4).
</TABLE>
- ---------------
* Incorporated herein by reference to the Registrant's Registration Statement on
Form S-1 (File No. 33-85606).
<PAGE> 1
Exhibit 1
2,875,000 Shares
SECURITY DYNAMICS TECHNOLOGIES, INC.
Common Stock
($.01 Par Value)
UNDERWRITING AGREEMENT
________ __, 1997
BT Alex. Brown Incorporated
Robertson, Stephens & Company LLC
Cowen & Company
As Representatives of the
Several Underwriters
c/o BT Alex. Brown Incorporated
135 East Baltimore Street
Baltimore, Maryland 21202
Gentlemen:
Security Dynamics Technologies, Inc., a Delaware corporation (the
"Company"), and certain shareholders of the Company (the "Selling Stockholders")
propose to sell to the several underwriters (the "Underwriters") named in
Schedule I hereto for whom you are acting as representatives (the
"Representatives") an aggregate of 2,500,000 shares of the Company's Common
Stock, $.01 par value (the "Firm Shares"), of which 676,000 shares will be sold
by the Company and 1,824,000 shares will be sold by the Selling Stockholders.
The respective amounts of the Firm Shares to be so purchased by the several
Underwriters are set forth opposite their names in Schedule I hereto, and the
respective amounts to be sold by the Selling Stockholders are set forth opposite
their names in Schedule II hereto. The Company and the Selling Stockholders are
sometimes referred to herein collectively as the "Sellers." The Company also
propose to sell at the Underwriters' option an aggregate of up to 375,000
additional shares of the Company's Common Stock (the "Option Shares") as set
forth below.
As the Representatives, you have advised the Company and the Selling
Stockholders (a) that you are authorized to enter into this Agreement on behalf
of the several Underwriters, and (b) that the several Underwriters are willing,
acting severally and not jointly, to purchase the numbers of Firm Shares set
forth opposite their respective names in Schedule I, plus their pro rata portion
of the Option Shares if you elect to exercise the over-allotment option in whole
or in part for the accounts of the several Underwriters. The
<PAGE> 2
Firm Shares and the Option Shares (to the extent the aforementioned option is
exercised) are herein collectively called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SELLING
STOCKHOLDERS.
(a) The Company represents and warrants to each of the Underwriters as
follows:
(i) A registration statement on Form S-3 (File No.
333-_______) with respect to the Shares has been carefully prepared by
the Company in conformity with the requirements of the Securities Act
of 1933, as amended (the "Act"), and the Rules and Regulations (the
"Rules and Regulations") of the Securities and Exchange Commission (the
"Commission") thereunder and has been filed with the Commission under
the Act. The Company has complied with the conditions for the use of
Form S-3 in connection with the offering contemplated thereby. Copies
of such registration statement, including any amendments thereto, the
preliminary prospectuses (including the prospectus included in the
registration statement at the time it is declared effective under the
Act which meets the requirements of Rule 430A of the Rules and
Regulations) contained therein and the exhibits, financial statements
and schedules, as finally amended and revised, have heretofore been
delivered by the Company to you and, to the extent applicable, were
identical to the electronically transmitted copies thereof filed with
the Commission on the Commission's Electronic Data Gathering, Analysis
and Retrieval System ("EDGAR"), except to the extent permitted by
Regulation S-T. Such registration statement, together with any
registration statement filed by the Company pursuant to Rule 462(b)
under the Act, herein referred to as the "Registration Statement,"
which shall be deemed to include all information omitted therefrom in
reliance upon Rule 430A and contained in the Prospectus referred to
below, has become effective under the Act and no post-effective
amendment to the Registration Statement has been filed as of the date
of this Agreement. The form of prospectus first filed by the Company
with the Commission pursuant to its Rule 424(b) and Rule 430A is herein
referred to as the "Prospectus." Each preliminary prospectus included
in the Registration Statement prior to the time it becomes effective is
herein referred to as a "Preliminary Prospectus."
Any reference herein to the Registration Statement, any Preliminary
Prospectus or the Prospectus shall be deemed to include the documents
incorporated therein by reference, and any supplements or amendments
thereto filed with the Commission after the date of filing of the
Prospectus under Rules 424(b) or 430A and prior to the termination of
the offering of the Shares by the Underwriters. Any reference herein to
the Registration Statement, any Preliminary Prospectus, the Prospectus
or any amendment or supplement to any of the foregoing, shall be deemed
to include the respective copies thereof filed with the Commission on
EDGAR.
(ii) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement; each of the
-2-
<PAGE> 3
subsidiaries of the Company as listed on Schedule III hereto
(collectively, the "Subsidiaries") has been duly organized and is
validly existing as a corporation in good standing (to the extent such
concepts are applicable) under the laws of the jurisdiction of its
incorporation, with corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement; the Company and each of the Subsidiaries are duly qualified
to transact business in all jurisdictions in which the conduct of their
business requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the business,
financial condition, liquidity, or results of operation of the Company
and the Subsidiaries taken as a whole (a "Material Adverse Effect");
the outstanding shares of capital stock of each of the Subsidiaries
have been duly authorized and validly issued, are fully paid and
non-assessable and are owned directly or indirectly by the Company free
and clear of all liens, encumbrances, equities, and claims; and no
options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into
shares of capital stock or ownership interests in the Subsidiaries are
outstanding. The Subsidiaries are the only subsidiaries, direct or
indirect, of the Company.
(iii) The outstanding shares of Common Stock of the Company,
including all Shares to be sold by the Selling Stockholders, have been
duly authorized and validly issued and are fully paid and
non-assessable; the Shares to be issued and sold by the Company have
been duly authorized and when issued and paid for as contemplated
herein will be validly issued, fully paid and non-assessable; and no
preemptive rights of stockholders exist pursuant to the Company's Third
Restated Certificate of Incorporation, as amended (the "Charter"), its
by-laws, as amended (the "By-Laws"), or any other agreement or
instrument to which the Company is a party with respect to any of the
Shares to be issued and sold by the Company. Neither the filing of the
Registration Statement nor the offering or sale of the Shares as
contemplated by this Agreement gives rise to any rights, other than
those which have been waived or satisfied, for the registration of any
shares of Common Stock.
(iv) The information set forth under the caption
"Capitalization" in the Prospectus is true and correct in all material
respects. The Shares conform or when issued, delivered and paid for in
the manner set forth in this Agreement will conform to the description
thereof contained in the Registration Statement. The certificates
evidencing the Shares to be sold and delivered by the Company hereunder
are in due and proper form under the corporate law of the jurisdiction
of the Company's incorporation.
(v) The Commission has not issued an order preventing or
suspending the use of any Prospectus relating to the proposed offering
of the Shares nor, to the knowledge of the Company, instituted
proceedings for that purpose. The Registration Statement contains, and
the Prospectus and any amendments or supplements thereto will contain,
all statements which are required to be stated therein by, and in all
respects conform or will conform, as the case may be, to the
requirements of, the Act and the Rules and Regulations. The documents
incorporated by reference in the Prospectus, at the time filed with the
Commission, conformed in all material respects to the requirements of
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
or the Act, as applicable, and the rules and regulations of the
Commission thereunder. Neither the Registration Statement nor any
amendment thereto, and neither the Prospectus nor any supplement
thereto, contains or will contain, as the case may be, any untrue
statement of a material fact or
-3-
<PAGE> 4
omits or will omit to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided,
however, that the Company makes no representations or warranties as to
information contained in or omitted from the Registration Statement or
the Prospectus, or any such amendment or supplement, in reliance upon,
and in conformity with, written information furnished to the Company by
or on behalf of any Underwriter through the Representatives
specifically for use in the preparation thereof.
(vi) The consolidated financial statements of the Company and
the Subsidiaries, together with related notes and schedules as set
forth in the Registration Statement, present fairly, in all material
respects, the consolidated financial position and results of operations
and cash flows of the Company and the Subsidiaries, at the indicated
dates and for the indicated periods. Such financial statements have
been prepared in accordance with generally accepted accounting
principles, consistently applied throughout the periods involved, and
all adjustments necessary for a fair presentation of results for such
periods have been made, in each case except as otherwise disclosed in
the notes to such financial statements. The summary financial and
statistical data included in the Registration Statement present fairly
the information shown therein and such data have been compiled on a
basis consistent with the financial statements presented therein and
the books and records of the Company.
(vii) There is no action, suit, claim or proceeding pending
or, to the knowledge of the Company, threatened against the Company or
any of the Subsidiaries before any court or administrative agency which
if determined adversely to the Company or any of its Subsidiaries might
result in a Material Adverse Effect, except as set forth in the
Registration Statement.
(viii) The Company and the Subsidiaries own, or have valid
rights to use, all of the properties and assets reflected in the
financial statements (or as described in the Registration Statement)
hereinabove described, subject to no lien, mortgage, pledge, charge or
encumbrance of any kind except those reflected in such financial
statements (or as described in the Registration Statement) or which
secure obligations not material in amount. The Company and the
Subsidiaries occupy their leased properties under valid and binding
leases conforming to the description thereof set forth in the
Registration Statement (it being understood that certain of such leases
by their terms are on a "month-to-month" basis), with such exceptions
as are not significant in light of the intended use of the property by
the Company or a Subsidiary.
(ix) The Company and the Subsidiaries have filed all Federal
income tax returns which have been required to be filed and have paid
all taxes indicated by said returns and all assessments received by any
of them to the extent that such taxes have become due, except for
assessments contested in good faith for which adequate reserves have
been provided to the extent required by generally accepted accounting
principles. The Company and the Subsidiaries have filed all State,
local and foreign income tax returns which have been required to be
filed and have paid all taxes indicated by said returns and all
assessments received by any of them to the extent that such taxes have
become due, except for such failures to file as would not have a
Material Adverse Effect and except for the failure to pay assessments
contested in good faith.
-4-
<PAGE> 5
(x) Since the respective dates as of which information is
given in the Registration Statement, as it may be amended or
supplemented, and except as specifically disclosed in or contemplated
by the Prospectus, there has not been any material adverse change or
any development involving a prospective material adverse change in or
affecting the earnings, business, management, condition (financial or
otherwise), or business prospects of the Company and its Subsidiaries
taken as a whole, whether or not occurring in the ordinary course of
business, and there has not been any material transaction entered into
by the Company or the Subsidiaries, other than transactions in the
ordinary course of business and changes and transactions contemplated
by the Registration Statement, as it may be amended or supplemented.
The Company and the Subsidiaries have no material contingent
obligations which are not disclosed in the Registration Statement.
(xi) Neither the Company nor any of the Subsidiaries is or, as
a result of the giving of notice or lapse of time or both will be, in
violation of or in default under its Charter or By-Laws, or under any
agreement, lease, contract, indenture or other instrument or obligation
to which it is a party or by which it or any of its properties is bound
and which default is of material significance in respect of the
business, management, condition (financial or otherwise) or business
prospects of the Company and the Subsidiaries taken as a whole. The
execution and delivery of this Agreement and the consummation of the
transactions herein contemplated and the fulfillment of the terms
hereof will not conflict with or result in a breach of any of the terms
or provisions of, or constitute a default under, any indenture,
mortgage, deed of trust or other agreement or instrument to which the
Company or any Subsidiary is a party, or of the Charter or By-laws of
the Company or any order, rule or regulation applicable to the Company
or any Subsidiary of any court or of any regulatory body or
administrative agency or other governmental body having jurisdiction.
(xii) Each approval, consent, order, authorization,
designation, declaration or filing by or with any regulatory,
administrative or other governmental body necessary in connection with
the execution and delivery by the Company of this Agreement and the
consummation by the Company of the transactions herein contemplated
(except such additional steps as may be required by the Commission, the
National Association of Securities Dealers, Inc. (the "NASD"), the
Nasdaq National Market, or such additional steps as may be necessary to
qualify the Shares for public offering by the Underwriters under state
securities or Blue Sky laws) has been obtained or made and is in full
force and effect.
(xiii) The Company and each of the Subsidiaries holds all
licenses, certificates and permits from governmental authorities which
are material to the conduct of the business of the Company and the
Subsidiaries taken as a whole.
(xiv) The Company or a Subsidiary owns or possesses adequate
licenses or other rights to use all service marks, service mark
applications, trade names, copyrights, manufacturing processes,
formulae, trade secrets and know-how or other information (together
with patents, patent applications, trademarks and trademark
applications, collectively "Intellectual Property") described in the
Prospectus as owned by or used by them or which are necessary to the
conduct of their business as described in the Prospectus, except where
the failure to own or possess any such licenses or rights would not
have a Material Adverse Effect. To the knowledge of the
-5-
<PAGE> 6
Company after reasonable inquiry (it being understood that reasonable
inquiry does not mean an inquiry that would be adequate to conclusively
establish that no failure to own or possess could exist anywhere in the
world), the Company or a Subsidiary owns or possesses adequate licenses
or other rights to use all patents, patent applications, trademarks and
trademark applications described in the Prospectus as owned by or used
by them or which are necessary to the conduct of their business as
described in the Prospectus, except where the failure to own or possess
any such licenses or rights would not have a Material Adverse Effect.
To the knowledge of the Company, none of the patent rights owned or
licensed by the Company are unenforceable or invalid. The Company is
not aware of any infringement of or conflict with the rights or claims
of others with respect to any of the Company's products or Intellectual
Property which could have a Material Adverse Effect. Except as a result
of the license of its software in the ordinary course of business, the
Company is not aware of the granting of any patent rights to third
parties or the filing of patent application by third parties or any
other rights of third parties to any of the Company's Intellectual
Property. The Company is not aware of any ongoing infringement of any
of the Company's Intellectual Property rights by any third party which
could have a Material Adverse Effect. The Company has duly and properly
filed or caused to be filed with the United States Patent and Trademark
Office all United States patents described or referred to in the
Prospectus. The Company has clear title to its patents referenced in
the Prospectus.
(xv) Except as otherwise set forth in the Prospectus, there
are no material legal, governmental, regulatory or administrative
proceedings pending to which the Company or any of the Subsidiaries is
a party or to which any of their respective property is subject, and,
to the Company's knowledge, no such proceedings are threatened or
contemplated. No contract or document of a character required to be
described in the Registration Statement or the Prospectus or to be
filed as an exhibit to the Registration Statement is not so described
or filed as required.
(xvi) Neither the Company nor the any of the Subsidiaries is,
and after giving effect to the issuance of the Shares hereunder will
be, an "investment company" within the meaning of the Investment
Company Act of 1940, as amended (the "1940 Act").
(xvii) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances, in all material
respects, that (i) transactions are executed in accordance with
management's general or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of financial statements in
conformity with generally accepted accounting principles and to
maintain accountability for assets; (iii) access to assets is permitted
only in accordance with management's general or specific authorization;
and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.
(xviii) The Company and each of its Subsidiaries carry, or are
covered by, insurance in such amounts and covering such risks as is
customary for companies engaged in similar industries.
(xix) The Company, the U.S. Subsidiaries (as defined below)
and DynaSoft AB collectively hold ___% of the assets of the Company and
its Subsidiaries (as defined below) taken as a whole (in each case
calculated based on the book value thereof).
-6-
<PAGE> 7
(xx) Deloitte & Touche LLP, who have certified certain of the
financial statements filed with the Commission as part of the
Registration Statement, are independent public accountants as required
by the Act and the Rules and Regulations.
(xxi) Neither the Company, nor to the Company's best
knowledge, any of its affiliates, has taken, directly or indirectly,
any action designed to cause or result in, or which has constituted,
the stabilization or manipulation of the price of the shares of Common
Stock to facilitate the sale or resale of the Shares.
(b) Each of the Selling Stockholders severally represents and warrants
to each of the Underwriters and the Company as follows:
(i) Such Selling Stockholder has and at the Closing Date and
the Option Closing Date, as the case may be (as such dates are
hereinafter defined) will have good and marketable title to the Shares
to be sold by such Selling Stockholder, free and clear of any liens,
encumbrances, equities and claims, and full right, power and authority
to effect the sale and delivery of such Shares; and upon the delivery
of and against payment for such Shares pursuant to this Agreement, the
Underwriters will acquire good and marketable title thereto, free and
clear of any liens, encumbrances, equities and claims, assuming that
they are bona fide purchasers within the meaning of the Uniform
Commercial Code as in effect in The Commonwealth of Massachusetts.
(ii) Such Selling Stockholder has full right, power and
authority to execute and deliver this Agreement, the Custody Agreement
(as such term is defined in Section 2 below) and the Power of Attorney
executed by such Selling Stockholder (together with the Custody
Agreement, the "Shareholders' Agreements") and to perform such Selling
Stockholder's obligations under such documents; the execution and
delivery of this Agreement and the consummation by or on behalf of such
Selling Stockholder of the transactions herein and therein contemplated
and the fulfillment by such Selling Stockholder of the terms hereof
will not require any consent, approval, authorization, or other order
of any court, regulatory body, administrative agency or other
governmental body (except as may be required under the Act, state
securities laws or Blue Sky laws) and thereof will not result in a
breach of any of the terms and provisions of, or constitute a default
under organizational documents of such Selling Stockholder, if not an
individual, or any indenture, mortgage, deed of trust or other
agreement or instrument to which such Selling Stockholder is a party,
or of any order, rule or regulation applicable to such Selling
Stockholder of any court or of any regulatory body or administrative
agency or other governmental body having jurisdiction; and no consent,
approval, authorization or order of or declaration or filing with any
government, governmental instrumentality or court is required for the
execution, delivery or performance of this Agreement or the
Shareholders' Agreements by such Selling Stockholder, except as may be
required under the Act or any state securities laws or Blue Sky laws in
connection with the purchase and distribution by the Underwriters of
the Shares.
(iii) Such Selling Stockholder has not taken and will not
take, directly or indirectly, any action designed to, or which has
constituted, or which might reasonably be expected to cause or result
in the stabilization or manipulation of the price of the Common Stock
of the Company and, other than as permitted by the Act, the Selling
Shareholder will not distribute any prospectus or other offering
material in connection with the offering of the Shares.
-7-
<PAGE> 8
(iv) Without having undertaken to determine independently the
accuracy or completeness of either the representations and warranties
of the Company contained herein or the information contained in the
Registration Statement, such Selling Stockholder has no actual
knowledge of any material fact, condition or information not disclosed
in the Registration Statement which has adversely affected in any
material respect or may adversely affect in any material respect the
business of the Company and the Subsidiaries taken as a whole.
(v) The information pertaining to such Selling Stockholder
under the caption "Principal and Selling Stockholders" in the
Prospectus is complete and accurate in all material respects.
2. PURCHASE, SALE AND DELIVERY OF THE SHARES.
(a) On the basis of the representations, warranties and covenants
herein contained, and subject to the conditions herein set forth, the Sellers
agree to sell to the Underwriters and each Underwriter agrees, severally and not
jointly, to purchase, at a price of $________ per share, the number of Firm
Shares set forth opposite the name of each Underwriter in Schedule I hereof,
subject to adjustments in accordance with Section 9 hereof. The number of Firm
Shares to be purchased by each Underwriter from each Seller shall be as nearly
as practicable in the same proportion to the total number of Firm Shares being
sold by each Seller as the number of Firm Shares being purchased by each
Underwriter bears to the total number of Firm Shares to be sold hereunder. The
obligations of the Company and of each of the Selling Stockholders shall be
several and not joint.
(b) Certificates in negotiable form for the total number of the Shares
to be sold hereunder by the Selling Stockholders have been placed in custody
with the Company as custodian (the "Custodian") pursuant to a Custody Agreement
(the "Custody Agreement") executed by each Selling Stockholder for delivery of
all Shares to be sold hereunder by the Selling Stockholders. Each of the Selling
Stockholders specifically agrees that the Shares represented by the certificates
held in custody for such Selling Stockholder under the Custody Agreement are
subject to the interests of the Underwriters hereunder, that the arrangements
made by such Selling Stockholder for such custody are to that extent
irrevocable, and that the obligations of such Selling Stockholder hereunder
shall not be terminable by any act or deed of such Selling Stockholder (or by
any other person, firm or corporation including the Custodian or the
Underwriters) or by operation of law (including the death of an individual
Selling Stockholder or the dissolution of a corporate Selling Stockholder) or by
the occurrence of any other event or events, except as set forth in the Custody
Agreement. If any such event should occur prior to the delivery to the
Underwriters of the Shares hereunder, certificates for the Shares shall be
delivered by the Custodian in accordance with the terms and conditions of this
Agreement as if such event has not occurred. The Custodian is authorized to
receive and acknowledge receipt of the proceeds of sale of the Shares held by it
against delivery of such Shares.
(c) Payment for the Firm Shares to be sold hereunder is to be made by
wire transfer of same-day funds to an account of the Company for the Shares to
be sold by it and to an account of the Company "as Custodian" for the Shares to
be sold by the Selling Stockholders, in each case against delivery of
certificates therefor to the Representatives for the several accounts of the
Underwriters. Such payment and delivery are to be made at the offices of BT
Alex. Brown Incorporated, 135 East Baltimore Street, Baltimore, Maryland, at
10:00 a.m., Baltimore time, on the third business day after the date of this
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<PAGE> 9
Agreement or at such other time and date not later than five business days
thereafter as you and the Company shall agree upon, such time and date being
herein referred to as the "Closing Date." (As used herein, "business day" means
a day on which the New York Stock Exchange is open for trading and on which
banks in New York are open for business and not permitted by law or executive
order to be closed.) The certificates for the Firm Shares will be delivered in
such denominations and in such registrations as the Representatives request in
writing not later than the second full business day prior to the Closing Date,
and will be made available for inspection by the Representatives at least one
business day prior to the Closing Date.
(d) In addition, on the basis of the representations and warranties
herein contained and subject to the terms and conditions herein set forth, the
Company and the Selling Stockholders listed on Schedule III hereto hereby grant
an option to the several Underwriters to purchase the Option Shares at the price
per share as set forth in paragraph (a) of this Section 2. The maximum number of
Option Shares to be sold by the Company and such Selling Stockholders is set
forth opposite their respective names on Schedule III hereto. The option granted
hereby may be exercised in whole or in part by giving written notice (i) at any
time before the Closing Date and (ii) only once thereafter given within 30 days
after the date of this Agreement, by you, as Representatives of the several
Underwriters, to the Company and the Custodian setting forth the number of
Option Shares as to which the several Underwriters are exercising the option,
the names and denominations in which the Option Shares are to be registered and
the time and date at which such certificates are to be delivered. If the option
granted hereby is exercised in part, the respective number of Option Shares to
be sold by the Company and each of the Selling Stockholders listed in Schedule
III hereto shall be determined on a pro rata basis in accordance with the
percentages set forth opposite their names on Schedule III hereto, adjusted by
you in such manner as is necessary to avoid fractional shares. The time and date
at which certificates for Option Shares are to be delivered shall be determined
by the Representatives but shall not be earlier than three nor later than 10
full business days after the exercise of such option, nor in any event prior to
the Closing Date (such time and date being herein referred to as the "Option
Closing Date"). If the date of exercise of the option is three or more days
before the Closing Date, the notice of exercise shall set the Closing Date as
the Option Closing Date. The number of Option Shares to be purchased by each
Underwriter shall be in the same proportion to the total number of Option Shares
being purchased as the number of Firm Shares being purchased by such Underwriter
bears to the total number of Firm Shares being purchased, adjusted by you in
such manner as is necessary to avoid fractional shares. The option with respect
to the Option Shares granted hereunder may be exercised only to cover
over-allotments in the sale of the Firm Shares by the Underwriters. You, as
Representatives of the several Underwriters, may cancel such option at any time
prior to its expiration by giving written notice of such cancellation to the
Company. To the extent, if any, that the option is exercised, payment for the
Option Shares shall be made on the Option Closing Date by wire transfer of
same-day funds to the account of the Company for the Option Shares to be sold by
it against delivery of certificates thereof to the Representatives for the
several accounts of the Underwriters.
3. OFFERING BY THE UNDERWRITERS.
It is understood that the several Underwriters are to make a public
offering of the Firm Shares as soon as the Representatives deem it advisable to
do so. The Firm Shares are to be initially offered to the public at the initial
public offering price set forth in the Prospectus. The Representatives may from
time to time thereafter change the public offering price and other selling
terms. To the extent, if at all, that any
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Option Shares are purchased pursuant to Section 2 hereof, the Underwriters will
offer them to the public on the foregoing terms.
It is further understood that you will act as the Representatives for
the Underwriters in the offering and sale of the Shares in accordance with a
Master Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. COVENANTS OF THE COMPANY AND THE SELLING STOCKHOLDERS.
(a) The Company covenants and agrees with the several Underwriters and
the Selling Stockholders that:
(i) The Company will (A) prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus
containing information previously omitted at the time of effectiveness
of the Registration Statement in reliance on Rule 430A of the Rules and
Regulations, and (B) not file any amendment to the Registration
Statement or supplement to the Prospectus of which the Representatives
shall not previously have been advised and furnished with a copy or to
which the Representatives shall have reasonably objected in writing or
which is not in compliance with the Rules and Regulations. To the
extent applicable, the copies of the Registration Statement (including
all exhibits filed therewith), any Preliminary Prospectus or Prospectus
furnished to the Underwriters shall be identical to the copies thereof
electronically filed with the Commission on EDGAR, except to the extent
permitted by Regulation S-T.
(ii) The Company will advise the Representatives promptly (A)
when any post-effective amendment to the Registration Statement shall
have become effective, (B) of receipt subsequent to the execution
hereof of any comments from the Commission, (C) of any request of the
Commission for amendment of the Registration Statement or for
supplement to the Prospectus or for any additional information, and (D)
of the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or the use of the
Prospectus or of the institution of any proceedings for that purpose,
and the Company will use its best efforts to prevent the issuance of
any such stop order preventing or suspending the use of the Prospectus
and to obtain as soon as possible the lifting thereof, if issued.
(iii) The Company will cooperate with the Representatives in
endeavoring to qualify the Shares for sale under the securities laws of
such jurisdictions as the Representatives may reasonably have
designated in writing and will make such applications, file such
documents, and furnish such information as may be reasonably required
for that purpose, provided the Company shall not be required to qualify
as a foreign corporation or to file a general consent to service of
process in any jurisdiction where it is not now so qualified or
required to file such a consent. The Company will, from time to time,
prepare and file such statements, reports, and other documents, as are
or may be required to continue such qualifications in effect for so
long a period as the Representatives may reasonably request for
distribution of the Shares.
(iv) The Company will deliver to, or upon the order of, the
Representatives from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company
will deliver to, or upon the order of, the Representatives during the
period when
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delivery of a Prospectus is required under the Act, as many copies of
the Prospectus in final form, or as thereafter amended or supplemented,
as the Representatives may reasonably request. The Company will deliver
to the Representatives at or before the Closing Date, four signed
copies of the Registration Statement and all amendments thereto,
including all exhibits filed therewith, and will deliver to the
Representatives such number of copies of the Registration Statement
(including such number of copies of the exhibits filed therewith that
may reasonably be requested) and of all amendments thereto, as the
Representatives may reasonably request.
(v) The Company will comply with the Act and the Rules and
Regulations, and the Exchange Act, and the rules and regulations of the
Commission thereunder, so as to permit the completion of the
distribution of the Shares as contemplated in this Agreement and the
Prospectus. If during the period in which a prospectus is required by
law to be delivered by an Underwriter or dealer any event shall occur
as a result of which, in the judgment of the Company or in the opinion
of counsel for the Underwriters, it becomes necessary to amend or
supplement the Prospectus in order to make the statements therein, in
the light of the circumstances existing at the time the Prospectus is
delivered to a purchaser, not misleading, or, if it is necessary at any
time to amend or supplement the Prospectus to comply with any law, the
Company promptly will either (A) prepare and file with the Commission
an appropriate amendment to the Registration Statement or supplement to
the Prospectus or (B) prepare and file with the Commission an
appropriate filing under the Exchange Act which shall be incorporated
by reference in the Prospectus so that the Prospectus as so amended or
supplemented will not, in the light of the circumstances when it is so
delivered, be misleading, or so that the Prospectus will comply with
the law.
(vi) The Company will make generally available to its security
holders, as soon as it is practicable to do so, but in any event not
later than 15 months after the effective date of the Registration
Statement, an earning statement (which need not be audited) in
reasonable detail, covering a period of at least 12 consecutive months
beginning after the effective date of the Registration Statement, which
earning statement shall satisfy the requirements of Section 11(a) of
the Act and Rule 158 of the Rules and Regulations and will advise you
in writing when such statement has been so made available.
(vii) The Company will, for a period of five years from the
Closing Date, deliver to the Representatives copies of annual reports
and copies of all other documents, reports and information furnished by
the Company to its stockholders or filed with any securities exchange
pursuant to the requirements of such exchange or with the Commission
pursuant to the Act or the Exchange Act. The Company will deliver to
the Representatives similar reports with respect to significant
subsidiaries, as that term is defined in the Rules and Regulations,
which are not consolidated in the Company's financial statements. To
the extent applicable, such reports and documents shall be identical to
any copies thereof electronically filed with the Commission on EDGAR,
except to the extent permitted by Regulation S-T.
(viii) The Company will not offer, sell or otherwise dispose
of any shares of Common Stock of the Company or other securities
convertible into or exchangeable or exercisable for shares of Common
Stock or derivative of Common Stock of the Company (or any agreement
for such) for a period of 90 days after the date of this Agreement,
directly or indirectly, otherwise than hereunder or with the prior
written consent of the Representatives, except that the Company may,
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without such consent, (A) issue shares upon the exercise of options
outstanding on the date of this Agreement issued pursuant to its 1986
Stock Option Plan, as amended, 1994 Stock Option Plan, 1994 Director
Stock Option Plan, as amended, and 1994 Employee Stock Purchase Plan,
as amended, (B) issue shares in respect of the acquisition by the
Company of the assets or capital stock of another person or entity,
provided, however, that any such shares so issued shall be subject to
the restrictions on offers, sales and dispositions of shares set forth
in this Section 4(a)(viii) for the remainder of the 90-day period
referenced above in this Section, and (C) grant options, offer to sell
and sell shares of Common Stock to its employees and directors pursuant
to the plans listed in clause (A).
(ix) The Company will use its best efforts to have the Shares
authorized for inclusion on the Nasdaq National Market.
(x) The Company has caused each officer and director and
certain stockholders of the Company to furnish to you, on or prior to
the date of this agreement, a letter or letters (each, a "Lock-Up
Agreement"), in form and substance satisfactory to the Underwriters,
pursuant to which each such person shall agree to not, otherwise than
hereunder or with the prior written consent of BT Alex. Brown
Incorporated or in accordance with a transfer permitted by such Lock-Up
Agreement, directly or indirectly, offer, sell, pledge, contract to
sell, grant any option to purchase or otherwise dispose of (i) any of
such person's Locked-Up Shares (as defined below) during the period
commencing on the date specified in such agreements and ending on the
49th day after the Effective Date (as defined below), (ii) no more than
20% of such person's Locked-Up Shares during the period commencing on
the 50th day after the Effective Date and ending on the 89th day after
the Effective Date, and (iii) no more than an additional 20% of such
person's Locked-Up Shares (for a total of 40%) during the period
commencing on the 70th day after the Effective Date and ending on the
89th day after the Effective Date, provided, however, that each former
stockholder of DynaSoft AB who is a party to a Lock-Up Agreement (each
a "DynaSoft Seller" and collectively, the "DynaSoft Sellers") shall be
relieved from such DynaSoft Seller's obligations under his, her or its
Lock-Up Agreement if the Closing Date hereunder and payment to the
DynaSoft Sellers for such DynaSoft Sellers' Shares has not occurred or,
in the case of a payment, been received by the DynaSoft Sellers by
November 7, 1997. For purposes of this Section 4(a)(x), "Locked-Up
Shares" shall mean any shares of Common Stock (including, without
limitation, shares of Common Stock that may be deemed to be
beneficially owned by such officer, director or stockholder on the date
of such letter in accordance with the rules and regulations of the
Commission and shares of Common Stock that may be issued upon exercise
of a stock option or warrant) or any securities convertible into,
derivative of or exercisable or exchangeable for such Common Stock, and
"Effective Date" shall mean the date on which the Registration
Statement becomes effective under the Act.
(xi) The Company shall apply the net proceeds of its sale of
the Shares as set forth in the Prospectus.
(xii) The Company shall not invest, or otherwise use the
proceeds received by the Company from its sale of the Shares in such a
manner as would require the Company or any of the Subsidiaries to
register as an investment company under the 1940 Act.
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<PAGE> 13
(xiii) The Company will not take, directly or indirectly, any
action designed to cause or result in, or that might reasonably be
expected to constitute, the stabilization or manipulation of the price
of any securities of the Company.
(b) Each of the Selling Stockholders covenants and agrees with the
several Underwriters and the Company that:
(i) In order to document the Underwriters' compliance with the
reporting and withholding provisions of the Tax Equity and Fiscal
Responsibility Act of 1982 and the Interest and Dividend Tax Compliance
Act of 1983 with respect to the transactions herein contemplated, each
of the Selling Stockholders agrees to deliver to you prior to or at the
Closing Date a properly completed and executed United States Treasury
Department Form W-9 (or other applicable form or statement specified by
Treasury Department regulations in lieu thereof).
(ii) Such Selling Shareholder will not take, directly or
indirectly, any action designed to cause or result in, or that might
reasonably be expected to constitute, the stabilization or manipulation
of the price of any securities of the Company.
5. COSTS AND EXPENSES.
The Company will pay all costs, expenses and fees incident to the
performance of the obligations of the Sellers under this Agreement, including,
without limiting the generality of the foregoing, the following: accounting fees
of the Company; the fees and disbursements of counsel for the Company and the
Selling Stockholders; the cost of printing and delivering to, or as requested
by, the Underwriters copies of the Registration Statement, Preliminary
Prospectuses, the Prospectus, this Agreement, the Agreement Among Underwriters,
the Underwriters' Selling Memorandum, the Underwriters' Questionnaire, the
Invitation Letter, the Power of Attorney, the Blue Sky Survey and any
supplements or amendments thereto; the filing fees of the Commission; the filing
fees and expenses (including reasonable legal fees and expenses) incident to
securing any required review by the National Association of Securities Dealers,
Inc. (the "NASD") of the terms of the sale of the Shares; and the expenses,
including the fees and disbursements of counsel for the Underwriters, incurred
in connection with the qualification of the Shares under state securities or
Blue Sky laws. To the extent, if at all, that any of the Selling Stockholders
engage special legal counsel to represent them in connection with this offering,
the fees and expenses of such counsel shall be borne by such Selling
Stockholders. Any transfer taxes imposed on the sale of the Shares to the
several Underwriters will be paid by the Sellers pro rata. The Sellers shall
not, however, be required to pay for any of the Underwriters' expenses (other
than those related to qualification under NASD regulation, state securities laws
or Blue Sky laws) except that, if this Agreement shall not be consummated
because the conditions in Section 7 hereof are not satisfied, or because this
Agreement is terminated by the Representatives pursuant to Section 6 hereof, or
by reason of any failure, refusal or inability on the part of the Company or the
Selling Stockholders to perform any undertaking or satisfy any condition of this
Agreement or to comply with any of the terms hereof on their part to be
performed, unless such failure to satisfy said condition or to comply with said
terms shall be due to the default or omission of any Underwriter, then the
Company shall reimburse the several Underwriters for reasonable out-of-pocket
expenses, including fees and disbursements of counsel, reasonably incurred in
connection with investigating, marketing and proposing to market the Shares or
in contemplation of performing their obligations hereunder; but the Company and
the Selling Stockholders shall not in any event be liable to any
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<PAGE> 14
of the several Underwriters for damages on account of loss of anticipated
profits from the sale by them of the Shares.
6. CONDITIONS OF OBLIGATIONS OF THE UNDERWRITERS.
The several obligations of the Underwriters to purchase the Firm Shares
on the Closing Date and the Option Shares, if any, on the Option Closing Date
are subject to the accuracy, as of the Closing Date or the Option Closing Date,
as the case may be, of the representations and warranties of the Company and the
Selling Stockholders contained herein, and to the performance by the Company and
the Selling Stockholders of their covenants and obligations hereunder and to the
following additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by Rule 424
and Rule 430A of the Rules and Regulations shall have been made, and any request
of the Commission for additional information (to be included in the Registration
Statement or otherwise) shall have been disclosed to the Representatives and
complied with to their reasonable satisfaction. No stop order suspending the
effectiveness of the Registration Statement, as amended from time to time, shall
have been issued and no proceedings for that purpose shall have been taken or,
to the knowledge of the Company or the Selling Stockholders, shall be
contemplated by the Commission and no injunction, restraining order, or order of
any nature by a Federal or state court of competent jurisdiction shall have been
issued as of the Closing Date that would prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Hale and Dorr LLP,
counsel for the Company and special counsel for the Selling Stockholders, dated
the Closing Date or the Option Closing Date, as the case may be, addressed to
the Underwriters to the effect that:
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware, with corporate power and authority to own or lease its
properties and conduct its business as described in the Prospectus; SD
Securities Corp., RSA Data Security, Inc. and SD Investment Corp. (the
"U.S. Subsidiaries") have been duly incorporated and are validly
existing as corporations in good standing under the laws of the
jurisdictions of their respective incorporations, with corporate power
and authority to own or lease their respective properties and conduct
their businesses as, to the knowledge of such counsel, currently
conducted by them; the Company is duly qualified to transact business
in each of the jurisdictions listed on Schedule IV attached hereto; the
outstanding shares of capital stock of each of the U.S. Subsidiaries
have been duly authorized and validly issued, are fully paid and
non-assessable and are owned of record by the Company or a subsidiary
of the Company; and, to such counsel's knowledge, (A) the outstanding
shares of capital stock of each of the U.S. Subsidiaries are owned free
and clear of all liens, encumbrances, equities and claims, and (B) no
options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into
any shares of capital stock or of ownership interests in the U.S.
Subsidiary are outstanding.
(ii) The Company has authorized and outstanding capital stock
as set forth under the caption "Capitalization" in the Prospectus
(except for subsequent issuances, if any, pursuant to
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<PAGE> 15
stock plans described in the Prospectus); the outstanding shares of its
Common Stock, including the Shares to be sold by the Selling
Stockholders, have been duly authorized and validly issued and are
fully paid and non-assessable; all of the Shares conform, or when
issued, delivered and paid for in accordance with the terms of this
Agreement will conform, in all material respects, to the description
thereof contained in the Prospectus; the certificates evidencing the
Shares delivered to the Representatives for the several accounts of the
Underwriters are in due and proper form under Delaware law, and when
duly countersigned by the Company's transfer agent and registrar and
delivered to you or upon your order against payment of the agreed
consideration therefor in accordance with the provisions of this
Agreement, the Shares represented thereby will be duly authorized and
validly issued, fully paid and nonassessable; there are no statutory
preemptive rights or, to such counsel's knowledge, contractual
preemptive rights to subscribe for or purchase the Shares to be sold by
the Company hereunder.
(iii) The Registration Statement has become effective under
the Act and, to the knowledge of such counsel, no stop order
proceedings with respect thereto have been instituted or are pending or
threatened by the Commission.
(iv) The Registration Statement, all Preliminary Prospectuses,
the Prospectus and each amendment or supplement thereto, when filed and
when declared effective, complied as to form in all material respects
with the requirements of the Act and the applicable Rules and
Regulations thereunder (except that such counsel need express no
opinion as to the financial statements, including the notes and
schedules thereto, or any other financial or accounting information
included therein). In passing upon the form of such documents, such
counsel is not passing upon the statements made therein and takes no
responsibility therefor.
(v) The statements under the caption "Risk Factors -
Antitakeover Provisions" in the Prospectus, insofar as such statements
constitute matters of law or legal conclusions, have been reviewed by
us and are correct in all material respects.
(vi) Such counsel does not know of any contracts or documents
required by the Act or by the Rules and Regulations thereunder to be
filed as exhibits to the Registration Statement or described in the
Registration Statement or the Prospectus which are not so filed,
incorporated by reference or described as required.
(vii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company or any of the
Subsidiaries required to be described in the Prospectus which are not
described as required.
(viii) The execution and delivery of this Agreement by the
Company and the consummation by the Company of the transactions herein
contemplated do not conflict with or result in a breach of any of the
terms or provisions of, or constitute a default under, the Charter or
By-laws of the Company, or any agreement or instrument listed as an
Exhibit to the Registration Statement.
(ix) This Agreement has been duly authorized, executed and
delivered by the Company.
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<PAGE> 16
(x) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or
other governmental body is necessary in connection with the execution
and delivery by the Company of this Agreement and the consummation by
the Company of the transactions herein contemplated, except such as
have been obtained or made and are in full force and effect and such as
may be required by the NASD, or by state securities and Blue Sky laws,
as to which such counsel need express no opinion.
(xi) Each of this Agreement and the Shareholders' Agreements
has been duly authorized, executed and delivered by or on behalf of
each of the Selling Stockholders.
(xii) To the knowledge of such counsel, each Selling
Stockholder has the legal right, power and authority, and any approval
required by law (other than as required by state securities and Blue
Sky laws, as to which such counsel need express no opinion), to sell,
transfer and deliver the portion of the Shares to be sold by such
Selling Stockholder under this Agreement.
(xiii) To the knowledge of such counsel, the Shareholders'
Agreements executed and delivered by each Selling Stockholder are
valid, irrevocable instruments legally sufficient for the purposes
intended.
(xiv) Upon the Underwriters obtaining control of the Shares to
be sold by the Selling Stockholders and assuming the Underwriters
purchased such Shares for value and without notice of any adverse claim
to such Shares within the meaning of Section 8-102 of the Uniform
Commercial Code as in effect in The Commonwealth of Massachusetts, the
Underwriters will have acquired all rights of the Selling Stockholders
in such Shares free of any adverse claim, any lien in favor of the
Company and any restrictions on transfer imposed by the Company.
(xv) The Company did not, immediately prior to the issuance of
the Shares, constitute an "investment company" as such term is defined
in the 1940 Act.
(xvi) The Company will not, upon the issuance of the Shares,
receipt of the proceeds thereof as contemplated by this Agreement and
the investment of such proceeds in accordance with a certificate of the
Company, constitute an "investment company" as such term is defined in
the 1940 Act.
In rendering such opinion, Hale and Dorr LLP may rely as to
all matters governed other than by the laws of The Commonwealth of
Massachusetts, the Delaware General Corporation Law or Federal laws on
local counsel in such jurisdictions, and in rendering the opinions set
forth in subparagraphs (xi), (xii), (xiii) and (xiv) on opinions of
other counsel, reasonably satisfactory to the Underwriters,
representing each Selling Stockholder or, in the case of a natural
person, on representations made by the Selling Stockholder. In addition
to the matters set forth above, such opinion shall also include a
statement to the effect that no facts have come to the attention of
such counsel which have caused such counsel to believe that the
Registration Statement, at the time it became effective under the Act
(but after giving effect to changes incorporated therein pursuant to
Rule 430A under the Act), the Prospectus or any amendment or supplement
thereto, on the date it was filed pursuant to Rule 424(b) and the
Registration Statement and the Prospectus, or any amendment or
supplement thereto, as of the Closing Date or the Option Closing Date,
as the case
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<PAGE> 17
may be, contain an untrue statement of a material fact or omit to state
a material fact required to be stated therein or necessary to make the
statements therein not misleading (except that such counsel need
express no view as to financial statements, including the notes and
schedules thereto, or any financial or accounting information, or
information relating to the Underwriters or the method of distribution
of the Shares by the Underwriters included therein). With respect to
such statement, Hale and Dorr LLP may state that their belief is based
upon the procedures set forth therein, but is without independent check
and verification.
(c) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Wolf, Greenfield &
Sacks, P.C., intellectual property counsel for the Company, dated the Closing
Date or the Option Closing Date, as the case may be, addressed to the
Underwriters to the effect that such counsel are familiar with the technology
used by the Company in its business and the manner of its use thereof and have
read the Registration Statement and the Prospectus, including particularly the
portions of the Registration Statement and the Prospectus referring to
trademarks, trade names, patents, mask works, copyrights, licenses, trade
secrets or other intellectual property rights and:
(i) To the best of such counsel's knowledge, neither the
Registration Statement nor the Prospectus (A) contains any untrue
statement of a material fact with respect to trademarks, trade names,
patents, mask works, copyrights, license, trade secrets or other
intellectual property rights owned or used by the Company, or the
manner of its use thereof, or any allegation on the part of any person
or entity that the Company is infringing any trademarks, trade names,
patent rights, mask works, copyrights, licenses, trade secrets or other
intellectual property rights of any such person or entity or (B) omits
to state any material fact relating to trademarks, trade names,
patents, mask works, copyrights, licenses, trade secrets or other
intellectual property rights owned or used by the Company, or the
manner of its use thereof, or any allegation of which such counsel have
knowledge, that is required to be stated in the Registration Statement
or the Prospectus or is necessary to make the statements therein not
misleading;
(ii) To the best of such counsel's knowledge, and except as
set forth in the Prospectus under the captions "Risk
Factors--Dependence on Proprietary Technology" and "Business--
Proprietary Rights," there are no legal or governmental proceedings
pending relating to trademarks, trade names, patent rights, mask works,
copyrights, licenses, trade secrets or other intellectual property
rights of the Company other than prosecution by the Company of its
patent and trademark/service mark applications before the United States
Patent Office and appropriate foreign government agencies, and to the
best of such counsel's knowledge no such proceedings are threatened or
contemplated by governmental authorities or others;
(iii) The Company duly and properly holds the patents and
trademark/service marks, and has duly and properly filed patent and/or
trademark/service mark applications and patent cooperation treaty
applications, listed or otherwise referred to in the Prospectus under
the caption "Business--Proprietary Rights";
(iv) Such counsel do not know of any contracts or other
documents relating to the Company's trademarks, trade names, patents,
mask works, copyrights, licenses, trade secrets or other intellectual
property rights of a character required to be filed as an exhibit to
the Registration
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<PAGE> 18
Statement or required to be described in the Registration Statement or
the Prospectus that are not filed, incorporated by reference or
described as required;
(v) To the best of such counsel's knowledge, the Company is
not infringing or otherwise violating any trademarks, trade names,
patents, mask works, copyrights, licenses, trade secrets or other
intellectual property rights of others, and to the best of such
counsel's knowledge, except as described in the Prospectus under the
captions "Risk Factors--Dependence on Proprietary Technology" and
"Business--Proprietary Rights," there are no infringements by others of
any of the Company's trademarks, trade names, patents, mask works,
copyrights, licenses, trade secrets or other intellectual property
rights which in the judgment of such counsel could affect materially
the use thereof by the Company or the ability of the Company to
transfer any or all of such property or rights to a third party; and
(vi) To the best of such counsel's knowledge, the Company owns
or possesses sufficient licenses or other rights to use all trademarks,
trade names, patents, mask works, copyrights, licenses, trade secrets
or other intellectual property rights necessary to conduct the business
now being or proposed to be conducted by the Company as described in
the Prospectus.
In rendering such opinion, such counsel may, to the extent stated
therein, rely as to matters of fact on certificates of officers of the Company,
copies of which shall be attached to the opinion. In rendering such opinion,
such counsel need not have conducted any independent investigation or conducted
searches to locate any third party patents, mask works, copyrights or other
intellectual property rights that might impact the Company's activities.
(d) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Mannheimer Swartling,
special Swedish counsel for the Company, dated the Closing Date or the Option
Closing Date, as the case may be, addressed to the Underwriters to the effect
that DynaSoft AB ("DynaSoft"), has been duly incorporated and is validly
existing as a corporation under the laws of Sweden with corporate power and
authority to own or lease its properties and conduct its business as, to the
knowledge of such counsel, currently conducted by it; the outstanding shares of
capital stock of DynaSoft have been duly authorized and validly issued are fully
paid and non-assessable and are owned of record by the Company; and, to such
counsel's knowledge, (A) the outstanding shares of capital stock of DynaSoft are
owned free and clear of all liens, encumbrances, equities and claims, and (B) no
options, warrants or other rights to purchase, agreements or other obligations
to issue or other rights to convert any obligations into any shares of capital
stock or of ownership interests in DynaSoft are outstanding.
(e) The Representatives shall have received from Ropes & Gray, counsel
for the Underwriters, an opinion dated the Closing Date or the Option Closing
Date, as the case may be, substantially to the effect specified in subparagraphs
(ii), (iii), (iv), (ix) and (xi) of Paragraph (b) of this Section 6, and that
the Company is a duly organized and validly existing corporation under the laws
of the State of Delaware. In rendering such opinion, Ropes & Gray may rely as to
all matters governed other than by the laws of The Commonwealth of
Massachusetts, the Delaware General Corporation Law or Federal laws, and as to
matters relating to the Selling Stockholders, on the opinions of counsel
referred to in Paragraph (b) of this Section 6. In addition to the matters set
forth above, such opinion shall also include a statement to the effect that
nothing has come to the attention of such counsel which leads them to believe
that (i) the
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<PAGE> 19
Registration Statement, or any amendment thereto, as of the time it became
effective under the Act (but after giving effect to changes incorporated therein
pursuant to Rule 430A under the Act), as of the Closing Date or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (ii) that the
Prospectus or any amendment or supplement thereto, on the date it was filed
pursuant to the Rules and Regulations and as of the Closing Date, or the Option
Closing Date, as the case may be, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein, in light of the circumstances under
which they were made, not misleading (except that such counsel need express no
view as to financial statements, schedules and other financial information
included therein). With respect to such statement, Ropes & Gray may state that
their belief is based upon the procedures set forth therein, but is without
independent check and verification.
(f) The Representatives shall have received at or prior to the Closing
Date from Ropes & Gray, a memorandum or summary, in form and substance
satisfactory to the Representatives, with respect to the qualification for
offering and sale by the Underwriters of the Shares under the State securities
or Blue Sky laws of such jurisdictions as the Representatives may reasonably
have designated to the Company.
(g) The Representatives shall have received on each of the date hereof,
the Closing Date and the Option Closing Date, as the case may be, a signed
letter from Deloitte & Touche LLP, dated the date hereof, the Closing Date or
the Option Closing Date, as the case may be, confirming that they are
independent public accountants within the meaning of the Act and the applicable
published Rules and Regulations thereunder and stating that in their opinion the
financial statements and schedules examined by them and included in the
Registration Statement comply in form in all material respects with the
applicable accounting requirements of the Act and the related published Rules
and Regulations; and containing such other statements and information as is
ordinarily included in accountants' "comfort letters" to Underwriters with
respect to the financial statements and certain financial and statistical
information contained in the Registration Statement and Prospectus. All such
letters shall be in form and substance satisfactory to the Representatives.
(h) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of (i)
the Chief Executive Officer or Chief Operating Officer of the Company and (ii)
the Chief Financial Officer of the Company, in each case to the effect that, as
of the Closing Date or the Option Closing Date, as the case may be, each of them
severally represents as follows:
(i) The Registration Statement has become effective under the
Act and no stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for such purpose have
been taken or are, to his or her knowledge, contemplated by the
Commission.
(ii) He or she does not know of any litigation instituted or
threatened against the Company of a character required to be disclosed
in the Registration Statement which is not so disclosed; he or she does
not know of any material contract required to be filed as an exhibit to
the Registration Statement which is not so filed; and to his or her
knowledge the representations and warranties of the Company contained
in Section 1(a) hereof are true and correct as of the Closing Date or
the Option Closing Date, as the case may be.
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<PAGE> 20
(iii) He or she has carefully examined the Registration
Statement and the Prospectus and, in his or her opinion, as of the
effective date of the Registration Statement, the statements contained
in the Registration Statement were true and correct, and such
Registration Statement and Prospectus did not omit to state a material
fact required to be stated therein or necessary in order to make the
statements therein not misleading and, in his or her opinion, since the
effective date of the Registration Statement, no event has occurred
which should have been set forth in a supplement to or an amendment of
the Prospectus which has not been so set forth in such supplement or
amendment.
(iv) All filings required to have been made pursuant to Rule
424 or Rule 430A under the Act have been made.
(i) The Company and the Selling Stockholders through the
attorney-in-fact designated in the Shareholders' Agreement shall have furnished
to the Representatives such further certificates and documents confirming the
representations and warranties, covenants and conditions contained herein and
related matters as the Representatives may reasonably have requested.
(j) The Company shall have taken all steps required to have the Firm
Shares and Option Shares, if any, authorized for inclusion on the Nasdaq
National Stock Market.
(k) The Lock-Up Agreements shall be in full force and effect.
The opinions and certificates mentioned in this Agreement shall be
deemed to be in compliance with the provisions hereof only if they are in all
material respects satisfactory to the Representatives and to Ropes & Gray,
counsel for the Underwriters.
If any of the conditions hereinabove provided for in this Section 6
shall not have been fulfilled when and as required by this Agreement to be
fulfilled, the obligations of the Underwriters hereunder may be terminated by
the Representatives by notifying the Company and the Selling Stockholders of
such termination in writing or by telegram at or prior to the Closing Date or
the Option Closing Date, as the case may be. In such event, the Selling
Stockholders, the Company and the Underwriters shall not be under any obligation
to each other (except to the extent provided in Sections 5 and 8 hereof).
7. CONDITIONS OF THE OBLIGATIONS OF THE SELLERS.
The obligations of the Sellers to sell and deliver the portion of the
Shares required to be delivered as and when specified in this Agreement are
subject to the conditions that at the Closing Date or the Option Closing Date,
as the case may be, no stop order suspending the effectiveness of the
Registration Statement shall have been issued and in effect or proceedings
therefor initiated or threatened.
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8. INDEMNIFICATION.
(a) The Company and, subject to Section 8(g), the Selling Stockholders,
jointly and severally, agree to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of the Act
against any losses, claims, damages or liabilities to which such Underwriter or
any such controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto, or (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, and will reimburse upon demand each
Underwriter and each such controlling person for any legal or other expenses
reasonably incurred by such Underwriter or such controlling person in connection
with investigating or defending any such loss, claim, damage, liability, action
or proceeding or in responding to a subpoena or governmental inquiry related to
the offering of the Shares (other than with respect to a governmental inquiry
targeted at or relating to any Underwriter or any person who controls any
Underwriter), whether or not such Underwriter or controlling person is a party
to any action or proceeding; provided, however, that the Company and the Selling
Stockholders will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement, or omission or alleged omission, made in
the Registration Statement, any Preliminary Prospectus, the Prospectus, or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof; and provided further, that the
Company and the Selling Stockholders shall not be liable to any Underwriter
under this Section 8(a) with respect to any untrue statement of a material fact
contained in, or the omission of a material fact from, any Preliminary
Prospectus which untrue statement or omission was corrected in the Prospectus,
if such Underwriter sold Shares to a person to whom there was not sent or given,
at or prior to the written confirmation of such sale, a copy of the Prospectus.
This indemnity agreement will be in addition to any liability which the Company
or the Selling Stockholders may otherwise have.
(b) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who have
signed the Registration Statement, the Selling Stockholders, and each person, if
any, who controls the Company or the Selling Stockholders within the meaning of
the Act, against any losses, claims, damages or liabilities to which the Company
or any such director, officer, Selling Stockholder or controlling person may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto, or arise out
of or are based upon the omission or the alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading in the light of the circumstances under which they were
made; and will reimburse any legal or other expenses reasonably incurred by the
Company or any such director, officer, Selling Stockholder or controlling person
in connection with investigating or defending any such loss, claim, damage,
liability, action or proceeding; provided, however, that each Underwriter will
be liable in each case to the extent, but only to the extent, that such untrue
statement or alleged untrue statement or omission or alleged omission has been
made in the Registration Statement, any Preliminary Prospectus, the Prospectus
or such amendment or supplement,
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in reliance upon and in conformity with written information furnished to the
Company by or through the Representatives specifically for use in the
preparation thereof. This indemnity agreement will be in addition to any
liability which such Underwriter may otherwise have.
(c) In case any proceeding (including any governmental investigation)
shall be instituted involving any person in respect of which indemnity may be
sought pursuant to this Section 8, such person (the "indemnified party") shall
promptly notify the person against whom such indemnity may be sought (the
"indemnifying party") in writing. No indemnification provided for in Section
8(a) or (b) shall be available to any party who shall fail to give notice as
provided in this Section 8(c) if the party to whom notice was not given was
unaware of the proceeding to which such notice would have related and was
prejudiced by the failure to give such notice, but the failure to give such
notice shall not relieve the indemnifying party or parties from any liability
which it or they may have to the indemnified party for contribution or otherwise
than on account of the provisions of Section 8(a) or (b). In case any such
proceeding shall be brought against any indemnified party and it shall notify
the indemnifying party of the commencement thereof, the indemnifying party shall
be entitled to participate therein and, to the extent that it shall wish,
jointly with any other indemnifying party similarly notified, to assume the
defense thereof, with counsel selected by such indemnifying party and reasonably
satisfactory to such indemnified party. After notice from the indemnifying party
to the indemnified party of its election to assume the defense of such claim or
action, the indemnifying party shall not be liable to the indemnified party for
any legal or other expenses subsequently incurred by the indemnified party in
connection with the defense thereof other than reasonable costs of
investigations; except that if the indemnifying party or parties reasonably
determine that there is or may be a conflict between the positions of the
indemnifying party or parties and of the indemnified party or parties in
conducting the defense of such action, suit, investigation, inquiry or
proceeding or that there is or may be legal defenses available to such
indemnified party or parties different from or in addition to those available to
the indemnifying party or parties, then counsel for the indemnified party or
parties shall be entitled to conduct the defense to the extent reasonably
determined by such counsel or by such indemnified party or parties to be
necessary to protect the interests of the indemnified party or parties, and in
that event the fees and expenses of such counsel for the indemnified party or
parties shall be paid by the indemnifying parties. It is understood that the
indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm for all such indemnified parties. Such
firm shall be designated in writing by you in the case of parties indemnified
pursuant to Section 8(a) and by the Company and the Selling Stockholders in the
case of parties indemnified pursuant to Section 8(b). The indemnifying party
shall not be liable for any settlement of any proceeding effected without its
written consent but if settled with such consent or if there be a final judgment
for the plaintiff, the indemnifying party agrees to indemnify the indemnified
party from and against any loss or liability by reason of such settlement or
judgment. In addition, the indemnifying party will not, without the prior
written consent of the indemnified party, settle or compromise or consent to the
entry of any judgment in any pending or threatened claim, action or proceeding
for which indemnification has been sought hereunder unless such settlement,
compromise or consent includes an unconditional release of each indemnified
party from all liability arising out of such claim, action or proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable to or insufficient to hold harmless an indemnified party under
Section 8(a) or (b) above in respect of any losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to therein,
then, subject to Section 8(g), each indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a
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<PAGE> 23
result of such losses, claims, damages or liabilities (or actions or proceedings
in respect thereof) in such proportion as is appropriate to reflect the relative
benefits received by the Company and the Selling Stockholders on the one hand
and the Underwriters on the other from the offering of the Shares. If, however,
the allocation provided by the immediately preceding sentence is not permitted
by applicable law or if indemnification is not available to the indemnified
party as a result of a failure by the indemnified party to give the notice
required under Section 8(c) above, then, subject to Section 8(g), each
indemnifying party shall contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the Company and the Selling
Stockholders on the one hand and the Underwriters on the other in connection
with the statements or omissions which resulted in such losses, claims, damages
or liabilities (or actions or proceedings in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Selling Stockholders on the one hand and the Underwriters on the
other shall be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the Company and the
Selling Stockholders bear to the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Selling Stockholders on
the one hand or the Underwriters on the other and the parties' relative intent,
knowledge, access to information and opportunity to correct or prevent such
statement or omission.
The Company, the Selling Stockholders and the Underwriters agree that
it would not be just and equitable if contributions pursuant to this Section
8(d) were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
which does not take account of the equitable considerations referred to above in
this Section 8(d). The amount paid or payable by an indemnified party as a
result of the losses, claims, damages or liabilities (or actions or proceedings
in respect thereof) referred to above in this Section 8(d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this subsection (d), (i) no Underwriter shall
be required to contribute any amount in excess of the underwriting discounts and
commissions applicable to the Shares purchased by such Underwriter and (ii) no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations in
this Section 8(d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any
Preliminary Prospectus, the Prospectus or any supplement or amendment thereto,
each party against whom contribution may be sought under this Section 8 hereby
consents to the jurisdiction of any court having jurisdiction over any other
contributing party, agrees that process issuing from such court may be served
upon him or it by any other contributing party and consents to the service of
such process and agrees that any other contributing party may join him or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
(f) Except as otherwise expressly provided herein, any losses, claims,
damages, liabilities or expenses for which an indemnified party is entitled to
indemnification or contribution under this Section
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<PAGE> 24
8 shall be paid by the indemnifying party to the indemnified party as such
losses, claims, damages, liabilities or expenses are incurred. Except as
otherwise expressly provided herein, the indemnity and contribution agreements
contained in this Section 8 and the representations and warranties of the
Company set forth in this Agreement shall remain operative and in full force and
effect, regardless of (i) any investigation made by or on behalf of any
Underwriter or any person controlling any Underwriter, the Company, its
directors or officers or any person controlling the Company, (ii) acceptance of
any Shares and payment therefor hereunder, and (iii) any termination of this
Agreement. A successor to any Underwriter, or to the Company, its directors or
officers, or any person controlling the Company, shall be entitled to the
benefits of the indemnity, contribution and reimbursement agreements contained
in this Section 8.
(g) In no event shall the liability for indemnification and/or
contribution under this Section 8 of (i) any Selling Stockholder identified in
the Prospectus under the caption "Principal and Selling Stockholders" as
beneficially owning more than five percent of the Company's Common Stock
outstanding prior to the sale of the Shares hereunder, including as a result of
Common Stock held by affiliates, exceed in the aggregate the proceeds received
by such Selling Stockholder from the Underwriters hereunder, and (ii) any other
Selling Stockholder exceed in the aggregate the lesser of (A) the proceeds
received by such Selling Stockholder from the Underwriters hereunder and (B) the
product of the total amount of losses, claims, damages and liabilities subject
to indemnification and/or contribution under this Section 8 multiplied by a
fraction the numerator of which is the number of Shares sold by such Selling
Stockholder hereunder and the denominator of which is the total number of Shares
sold hereunder.
9. DEFAULT BY UNDERWRITERS.
If on the Closing Date or the Option Closing Date, as the case may be,
any Underwriter shall fail to purchase and pay for the portion of the Shares
which such Underwriter has agreed to purchase and pay for on such date
(otherwise than by reason of any default on the part of the Company or a Selling
Stockholder), you, as Representatives of the Underwriters, shall use your best
efforts to procure within 36 hours thereafter one or more of the other
Underwriters, or any others, to purchase from the Company and the Selling
Stockholders such amounts as may be agreed upon and upon the terms set forth
herein, the Firm Shares or Option Shares, as the case may be, which the
defaulting Underwriter or Underwriters failed to purchase. If during such 36
hours you, as such Representatives, shall not have procured such other
Underwriters, or any others, to purchase the Firm Shares or Option Shares, as
the case may be, agreed to be purchased by the defaulting Underwriter or
Underwriters, then (a) if the aggregate number of shares with respect to which
such default shall occur does not exceed 10% of the Firm Shares or Option
Shares, as the case may be, covered hereby, the other Underwriters shall be
obligated, severally, in proportion to the respective numbers of Firm Shares or
Option Shares, as the case may be, which they are obligated to purchase
hereunder, to purchase the Firm Shares or Option Shares, as the case may be,
which such defaulting Underwriter or Underwriters failed to purchase, or (b) if
the aggregate number of shares of Firm Shares or Option Shares, as the case may
be, with respect to which such default shall occur exceeds 10% of the Firm
Shares or Option Shares, as the case may be, covered hereby, the Company and the
Selling Stockholders or you as the Representatives of the Underwriters will have
the right, by written notice given within the next 36-hour period to the parties
to this Agreement, to terminate this Agreement without liability on the part of
the non-defaulting Underwriters or of the Company or of the Selling Stockholders
except to the extent provided in Section 8 hereof. In the event of a default by
any Underwriter or Underwriters, as set forth in this Section 9, the Closing
Date or Option Closing Date, as the case may be,
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<PAGE> 25
may be postponed for such period, not exceeding seven days, as you, as
Representatives, may determine in order that the required changes in the
Registration Statement or in the Prospectus or in any other documents or
arrangements may be effected. The term "Underwriter" includes any person
substituted for a defaulting Underwriter. Any action taken under this Section 9
shall not relieve any defaulting Underwriter from liability in respect of any
default of such Underwriter under this Agreement.
10. NOTICES.
All communications hereunder shall be in writing and, except as
otherwise provided herein, will be mailed, delivered, telecopied or telegraphed
and confirmed as follows: if to the Underwriters, to BT Alex. Brown
Incorporated, 135 East Baltimore Street, Baltimore, Maryland 21202, Attention:
Legal Department (telecopier (410) 783-3028), with a copy to Daniel S. Evans,
Esq., Ropes & Gray, One International Place, Boston, Massachusetts 02110
(telecopier (617) 951-7050); and if to the Company or the Selling Stockholders,
to Security Dynamics Technologies, Inc., 20 Crosby Drive, Bedford, Massachusetts
01730, Attention: Chief Executive Officer, (telecopier (781) 687-7010) with a
copy to Hal J. Leibowitz, Esq., Hale and Dorr LLP, 60 State Street, Boston,
Massachusetts 02109 (telecopier (617) 526-5000).
11. TERMINATION.
This Agreement may be terminated by you by notice to the Sellers as
follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters, or (ii) 11:30 a.m. on
the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given in the
Registration Statement and the Prospectus, any material adverse change or any
development involving a prospective material adverse change in or affecting the
condition, financial or otherwise, of the Company and its Subsidiaries taken as
a whole or the earnings, business, management, condition (financial or
otherwise) or business prospects of the Company and its Subsidiaries taken as a
whole, whether or not arising in the ordinary course of business, (ii) any
outbreak or escalation of hostilities or declaration of war or national
emergency after the date hereof or other national or international calamity or
crisis or change in economic or political conditions if the effect of such
outbreak, escalation, declaration, emergency, calamity, crisis or change on the
financial markets of the United States would, in your reasonable judgment, make
it impracticable to market the Shares or to enforce contracts for the sale of
the Shares, (iii) suspension of trading in securities generally on the New York
Stock Exchange or the American Stock Exchange or limitation on prices (other
than limitations on hours or numbers of days of trading) for securities on
either exchange, (iv) the enactment, publication, decree or other promulgation
of any federal or state statute, regulation, rule or order of any court or other
governmental authority which in your reasonable opinion materially and adversely
affects or may materially and adversely affect the business or operations of the
Company and the Subsidiaries taken as a whole, (v) declaration of a banking
moratorium by either federal or New York State authorities, (vi) the suspension
of trading of the Company's Common Stock by the Commission or the Nasdaq
National Market, or (vii) the taking of any action by any federal, state or
local governmental body or agency in respect of its monetary or fiscal affairs
which in your reasonable opinion has a material adverse effect on the securities
markets in the United States; or
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<PAGE> 26
(c) as provided in Sections 6 and 9 of this Agreement.
This Agreement also may be terminated by you, by notice to the Sellers,
as to any obligation of the Underwriters to purchase the Option Shares, upon the
occurrence at any time prior to the Option Closing Date of any of the events
described in subparagraph (b) above or as provided in Sections 6 and 9 of this
Agreement.
12. SUCCESSORS.
This Agreement has been and is made solely for the benefit of the
Underwriters, the Company and the Selling Stockholders and their respective
successors, executors, administrators, heirs and assigns, and the officers,
directors and controlling persons referred to herein, and no other person will
have any right or obligation hereunder. The term "successors" shall not include
any purchaser of the Shares merely because of such purchase.
13. INFORMATION PROVIDED BY UNDERWRITERS
The Company, the Selling Stockholders and the Underwriters acknowledge
and agree that the only information furnished or to be furnished by any
Underwriter to the Company for inclusion in any Prospectus or the Registration
Statement consists of the information set forth in the last paragraph on the
front cover page (insofar as such information relates to the Underwriters),
legends required by Item 502(d) of Regulation S-K under the Act and the
information under the caption "Underwriting" in the Prospectus.
14. MISCELLANEOUS.
This Agreement may be executed in two or more counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument.
This Agreement shall be governed by, and construed in accordance with,
the laws of The Commonwealth of Massachusetts.
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<PAGE> 27
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Selling Stockholders, the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
SECURITY DYNAMICS TECHNOLOGIES, INC.
By:_________________________________
President
Selling Stockholders listed on Schedule II
By__________________________________
Attorney-in-Fact
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
BT ALEX. BROWN INCORPORATED
ROBERTSON, STEPHENS & COMPANY LLC
COWEN & COMPANY
As Representatives of the several
Underwriters listed on Schedule I
By: BT Alex. Brown Incorporated
By:______________________________
Authorized Officer
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<PAGE> 28
SCHEDULE I
SCHEDULE OF UNDERWRITERS
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriter to be Purchased
----------- ---------------
<S> <C>
BT Alex. Brown Incorporated
Robertson, Stephens & Company LLC
Cowen & Company
---------
Total Underwriters 2,500,000
=========
</TABLE>
-28-
<PAGE> 29
SCHEDULE II
SCHEDULE OF SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
Number of Firm Shares
Selling Stockholder to be Sold
------------------- ---------------------
<S> <C>
D. James Bidzos 220,000
Charles R. Stuckey, Jr. 150,000
Rolf Ljung 350,000
Hans Tholander 190,000
Bjorn Oste 100,000
Arthur W. Coviello, Jr. 45,000
Khris Loux 109,006
Peter C. Loux 109,200
Peter Rostin 131,000
Kairdos L.L.C. 30,000
Linda E. Saris 5,794
John Adams 20,000
George M. Middlemas 5,000
Johan Borendal 98,000
Thomas Brostrom 47,000
Mervi Brostrom 13,000
Elin Kempegard 27,500
Sara Kempegard 27,500
Eva Ljung 27,500
Lotta Ljung 27,500
Agnes Ljung-Lindberg 27,500
Fanny Ljung-Lindberg 27,500
Fredrick Tholander 18,000
Jakob Tholander 18,000
Total 1,824,000
=========
</TABLE>
-29-
<PAGE> 30
SCHEDULE III
SUBSIDIARIES
<TABLE>
<CAPTION>
Subsidiary Name Jurisdiction of Organization
--------------- ----------------------------
<S> <C>
SD Securities Corp. Massachusetts
SD Investments Corp. Massachusetts
Security Dynamics (France) S.A.R.L. France
Security Dynamics Technologies GmbH Germany
Security Dynamics International Pte. Ltd. Singapore
Security Dynamics Nordic A.S. Norway
RSA Data Security, Inc. Delaware
Nihon RSA Company, Ltd. Japan
RSA Technology Holdings, Inc. Delaware
DynaSoft AB Sweden
Securix, Inc. California
DynaSoft Ltd. U.K.
Dynamic Software AB Sweden
</TABLE>
-30-
<PAGE> 31
SCHEDULE IV
FOREIGN QUALIFICATIONS
California
Colorado
Connecticut
Florida
Georgia
Massachusetts
Minnesota
Missouri
New York
North Carolina
Ohio
Pennsylvania
Texas
Virginia
-31-
<PAGE> 1
EXHIBIT 5
HALE AND DORR LLP
Counsellors at Law
60 State Street
Boston, MA 02109
617-526-6000* FAX 617-526-5000
September 5, 1997
Security Dynamics Technologies, Inc.
20 Crosby Drive
Bedford, MA 01730
Ladies and Gentlemen:
This opinion is furnished to you in connection with a Registration
Statement on Form S-3 (the "Registration Statement") filed with the Securities
and Exchange Commission (the "Commission") under the Securities Act of 1933, as
amended (the "Securities Act"), relating to the public offering of an aggregate
of 2,875,000 shares of Common Stock, $.01 par value per share (the "Common
Stock"), of Security Dynamics Technologies, Inc., a Delaware corporation (the
"Company"), of which (i) 1,051,000 shares of Common Stock (including 375,000
shares of Common Stock subject to an over-allotment option granted by the
Company to the Underwriters (as defined below) will be issued and sold by the
Company to the Underwriters, and (ii) 1,824,000 shares of Common Stock will be
sold by certain stockholders of the Company (the "Selling Stockholders") to the
Underwriters (such shares being hereinafter referred to as the "Shares").
The Shares are to be sold by the Company and the Selling Stockholders
pursuant to an underwriting agreement (the "Underwriting Agreement") to be
entered into among the Company, the Selling Stockholders, and BT Alex. Brown
Incorporated, Robertson, Stephens & Company LLC and Cowen & Company (the
"Underwriters"), the form of which has been filed as Exhibit 1 to the
Registration Statement.
We have acted as counsel for the Company in connection with the sale by the
Company and the Selling Stockholders of the Shares. We have examined signed
copies of the Registration Statement and all exhibits thereto, all as filed with
the Commission. We have also examined and relied upon the Third Restated
Certificate of Incorporation, as amended, and the Amended and Restated By-Laws
of the Company and all amendments thereto and have examined and relied on the
originals, or copies certified to our satisfaction, of such records of meetings,
written actions in lieu of meetings, or resolutions adopted at meetings, of the
directors and stockholders of the Company, all as provided to us by the Company,
and such other
<PAGE> 2
documents and instruments as in our judgment are necessary or appropriate to
enable us to render the opinions expressed below.
In our examination of the foregoing documents, we have assumed (i) the
genuineness of all signatures and the authenticity of all documents submitted to
us as originals, (ii) the conformity to the originals of all documents submitted
to us as certified, facsimile or photostatic copies, (iii) the authenticity of
the originals of such latter documents, and (iv) the legal competence of all
signatures to such documents.
We assume that the appropriate action will be taken, prior to the offer and
sale of the Shares in accordance with the Underwriting Agreement, to register
and qualify the Shares for sale under all applicable state securities or "Blue
Sky" laws.
We express no opinion herein as to the laws of any state or jurisdiction
other than the state laws of the Commonwealth of Massachusetts, the Delaware
General Corporation Law statute and the federal laws of the United States of
America.
Based upon the foregoing, we are of the opinion that (i) the Shares to be
issued and sold by the Company have been duly authorized for issuance and, when
issued and paid for in accordance with the terms of the Underwriting Agreement,
will be validly issued, fully paid and nonassessable, and (ii) the Shares to be
sold by the Selling Stockholders have been duly authorized and are validly
issued, fully paid and nonassessable.
It is our understanding that this opinion is to be used only in connection
with the offer and sale of the Shares while the Registration Statement is in
effect.
Please note that we are opining only as to the matters set forth herein,
and no opinion should be inferred as to any other matters.
We hereby consent to the filing of this opinion with the Commission as an
exhibit to the Registration Statement in accordance with the requirements of
Item 601(b)(5) of Regulation S-K under the Securities Act and to the use of our
name therein and in the related Prospectus under the caption "Legal Matters." In
giving such consent, we do not hereby admit that we are in the category of
persons whose consent is required under Section 7 of the Securities Act or the
rules and regulations of the Commission.
Very truly yours,
/s/ HALE AND DORR LLP
HALE AND DORR LLP
<PAGE> 1
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Security Dynamics
Technologies, Inc. (the "Company") on Form S-3 of our report dated July 15, 1997
on the Company's supplemental consolidated financial statements as of December
31, 1995 and 1996 and for each of the three years in the period ended December
31, 1996 (which expresses an unqualified opinion and includes explanatory
paragraphs relating to the restatement of the historical consolidated financial
statements for a pooling-of-interests and a change in accounting for option
grants requiring stockholder approval in 1996) appearing in the Prospectus,
which is part of this Registration Statement.
We also consent to the incorporation by reference in this Registration
Statement of our reports dated January 22, 1997 (the report on the historical
consolidated financial statements expresses an unqualified opinion and includes
an explanatory paragraph relating to a change in accounting for option grants
requiring stockholder approval in 1996) appearing in and incorporated by
reference in the Annual Report on Form 10-K of the Company for the year ended
December 31, 1996.
We also consent to the references to our firm under the heading "Experts"
in the Prospectus, which is part of this Registration Statement.
/s/ DELOITTE & TOUCHE LLP
Boston, Massachusetts
September 4, 1997
<PAGE> 1
Exhibit 23.3
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and the
use of our report dated April 8, 1996 with respect to the consolidated
financial statements of RSA Data Security, Inc. (not presented separately
herein) in the Registration Statement (Form S-3) of Security Dynamics
Technologies, Inc. for the registration of 2,875,000 shares of its common stock.
/s/ Ernst & Young LLP
Palo Alto, California
September 5, 1997
