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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTIONS 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NO. 0-25120
SECURITY DYNAMICS TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 04-2916506
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 CROSBY DRIVE
BEDFORD, MASSACHUSETTS 01730
(Address of principal (Zip Code)
executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 687-7000
------------------------------------------------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
COMMON STOCK, $.01 PAR VALUE
(Title of class)
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Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The approximate aggregate market value of the common stock held by
non-affiliates of the registrant was $1,640,944,886 based on the last reported
sale price of the registrant's Common Stock on the Nasdaq National Market as of
the close of business on March 26, 1998. There were 40,857,538 shares of Common
Stock outstanding as of March 26, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
PART OF FORM 10-K
DOCUMENT INTO WHICH INCORPORATED
-------- -----------------------
Portions of the Registrant's
1997 Annual Report to Stockholders Items 6, 7 & 8 of Part II
Portions of the Registrant's Proxy Items 10, 11 & 12
Statement for the 1998 Annual Meeting of Part III
of Stockholders
This Annual Report on Form 10-K contains forward-looking statements within
the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
For this purpose, any statements contained herein that are not statements of
historical fact may be deemed to be forward-looking statements. Without limiting
the foregoing, the words "believes," "anticipates," "plans," "expects" and
similar expressions are intended to identify forward-looking statements. The
important factors discussed under the caption "Certain Factors That May Affect
Further Operating Results" in the Company's 1997 Annual Report to Stockholders
and incorporated herein by reference, among others, could cause actual results
to differ materially from those indicated by forward-looking statements made
herein and presented elsewhere by management. Such forward-looking statements
represent management's current expectations and are inherently uncertain.
Investors are warned that actual results may differ from management's
expectations.
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PART I.
ITEM 1. BUSINESS
The Company is a 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 SecurSight family of enterprise security solutions
(formerly known as the 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. As used in this Annual Report on Form
10-K, 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.
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.
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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 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
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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.
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 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 in several categories, including secure remote access via
dial-up and virtual private networks; secure access to corporate networks and
resources; secure access to applications, intranets and extranets; email
security; and platform security for desktops and UNIX hosts. 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
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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.
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 SecurSight family of enterprise security solutions, the Company
intends to address these needs by moving beyond secure remote access to secure
information access, thereby providing security across an enterprise. SecurSight
solutions address a wide range of enterprise security requirements, including
secure remote access via dial-up lines and virtual private networks; secure
network access; secure access to applications, intranets and extranets; email
security; and platform security for desktops and UNIX host systems.
SecurSight is built on the framework formerly known as "ESS" and 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 SecurSight, 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
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Company intends to incorporate into the SecurSight solutions.
Through SecurSight, 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 through a set
of products that are the integration of the ACE/Server and BoKS product
families, and that are also branded with the SecurSight name. First releases of
the integrated SecurSight products - including the SecurSight Manager,
SecurSight Desktop and SecurSight Agents-are expected to be delivered in 1998.
The integrated SecurSight products are modular add-ons to its ACE/Server and
BoKS Manager software, thereby protecting customers' investments and ensuring
backwards compatibility. As part of SecurSight, 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.
SECURITY DYNAMICS STRATEGY
The Company's objective is to continue as a leading provider of enterprise
network and data security solutions. Key elements of the Company's strategy to
achieve this objective include the following:
o 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 SecurSight products, 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 are expected to 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.
o 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.
o 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 70 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 SecurSight solutions. The Company also seeks to
heighten awareness regarding enterprise network and
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data security issues through marketing programs such as the annual RSA
Data Security Conference.
o 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. In October 1997, the
Company announced the SecurWorld program designed to develop and expand its
indirect sales and support channel through the establishment of 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.
o 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 23.3% and 26.6% of the Company's total revenue
for 1996 and 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.
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:
PRODUCT DESCRIPTION
------- -----------
SecurID Tokens o Three form factors -- SecurID Card,
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SecurID PINPAD and SecurID Key Fob --
that can be programmed to function for
between one and four years
SoftID o Authentication software that can be
deployed on a PC
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. The SecurID tokens and SoftID software will also work in conjunction
with the integrated SecurSight Manager when it is released.
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.
The Company's access control and privilege management products include the
following:
PRODUCT DESCRIPTION
------- -----------
BoKS Desktop o Manages a user's security credentials,
providing security for PCs as well as SSO
functionality to host systems, database
applications and network domains
o Supports Windows 3.1, Windows for
Workgroups 3.11, Windows 95, Windows NT
3.51 and 4.0
BoKS Connect o Application access control solution that
operates with BoKS Desktop to secure
database sessions, Telnet sessions and
other TCP/IP-based client/server
connections
ToolBoKS o 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
Each of the foregoing products works in conjunction with the Company's BoKS
Manager software to provide access control and privilege management services.
These products will work in conjunction with the integrated SecurSight Manager
when it is released.
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
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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.
The Company currently offers the following data privacy, integrity and
authentication (encryption) products:
PRODUCT DESCRIPTION
------- -----------
BSAFE o 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 o RSA's newest encryption engine and
developer toolkit that allows Java
developers to integrate encryption and
data authentication features into
applications
TIPEM o 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 o 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 o Standards-based secure messaging engine
and toolkit for providing a secure
messaging infrastructure based on the
S/MIME protocol
S/PAY o 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 o Encryption software based on RSA public
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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
In addition, at the RSA Conference in January 1998, RSA announced its
Certificate Security Suite, set of high-level security components and tools
designed to reduce the cost and time-to-market for developing certificate-based
secure applications, and to help developers integrate applications and public
key management products in the enterprise. Products created with Certificate
Security Suite will integrate with the SecurSight solutions. RSA Certificate
Security Suite is expected to be available in 1998.
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, and will
include the integrated SecurSight Manager when it is released.
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 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 SecurSight 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 $3,950 to
$553,000; RSA encryption engine and toolkit licenses from $25,000 to $50,000;
and BoKS products from $52 to $275 per user for BoKS Desktop and from
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$1,250 to $3,100 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 70 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 Lanoptics ANS Apple Computer Ascend
ACT Networks Lantronix Check Point Cisco Aventail
ADTRAN Livingston CyberGuard CyberSAFE Bay Networks
Apple Computer Microcom IBM Gradient Check Point
Ascend Microsoft Milkyway IBM Digital Equipment
Attachmate MultiLink Raptor Systems Lucent Technologies Fortress Technologies
Bay Networks Network General Secure Computing nCipher IBM
Cisco NNTI SOS Netscape InfoExpress
DigitalEquipment Osicom Technologic Network Express New Oak
Emulex Shiva Trusted Information NIT Raptor Systems
Gandalf Telebit Systems Novell Timestep
Hewlett-Packard 3COM V-ONE Oracle Trusted Information Systems
IBM U.S. Robotics OTG V-ONE
Kasten Chase Xyplex PLATINUM technologies VPNet
Sun Microsystems
Utimaco
WorldTalk
</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. In October 1997, the Company announced the SecurWorld
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
December 31, 1997, the Company's direct sales organization consisted of 154
sales and technical support personnel located throughout the world. The
Company's revenue from direct sales efforts for the years ended December 31,
1995, 1996 and 1997 was approximately
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95%, 90% and 75% of total revenue, respectively.
The Company also markets, sells and licenses its products indirectly through
its SecurWorld network OEMs, VARs and distributors. As of December 31, 1997, the
Company (excluding RSA) had relationships with approximately 250 OEMs, VARs and
distributors, and RSA had relationships with more than 350 OEMs. DynaSoft has
traditionally complemented its direct sales force with VARs and distributors and
is currently a party to OEM agreements with Sun Microsystems, Inc. and
Hewlett-Packard Company.
International sales (excluding Canada) accounted for approximately 18.6%,
23.3% and 26.6% of the Company's total revenue in the years ended December 31,
1995, 1996 and 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 December 31, 1997, SDI had sold or licensed more than 4,600 ACE/Server
products and over 2.5 million SecurID tokens to more than 3,000 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 customers 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
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<PAGE> 14
information will grow.
As of December 31, 1997, RSA had licensed its encryption engine and patent
technology to more than 400 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 December 31, 1997, DynaSoft had sold or licensed its BoKS systems to
more than 130 customers worldwide, representing more than 110,000 users.
Historically, DynaSoft's principal customers have been government organizations
and businesses in the healthcare, telecommunications and financial services
industries.
In the years ended December 31, 1996 and 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 who work directly with the Company's direct
sales force, distributors and customers. As of December 31, 1997, the Company's
customer support organization consisted of an aggregate of 69 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 applicable, 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 SecurSight architecture, 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
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<PAGE> 15
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 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.
As of December 31, 1997, the Company's product development staff consisted of
184 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,
1995, 1996 and 1997 were approximately $6.9 million, $13.4 million and $26.3
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,
Inc., 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
15
<PAGE> 16
purchased only from Sanyo Electric Co., Ltd., a Japanese computer chip
manufacturer, and the lithium batteries contained in the Company's SecurID
tokens are purchased from Gould Electronics, 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.
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 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.
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
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<PAGE> 17
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. A patent developed at the Massachusetts
Institute of Technology 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
patents covering fundamental encryption technology developed by Stanford
University and licensed to RSA expired in 1997. As a result of the expiration of
these 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 licensers will not be invalidated,
circumvented, challenged or terminated; that any of the Company's pending or
future patent applications will be within the scope of claims sought by the
Company, if at all, or that the steps taken by the Company to protect its rights
will be adequate to prevent misappropriation of the Company's technology or to
preclude competitors from developing products with features similar to the
Company's products. Further, there can be no assurance that others will not
develop technologies that are similar or superior to the Company's technology or
duplicate the Company's technology. In addition, the laws of certain countries
in which the Company's products are or may be developed or sold may not protect
the Company's products and intellectual property rights to the same extent as
the laws of the United States. The inability of the Company to protect its
intellectual property adequately could have a material adverse effect on its
financial condition and results of operations.
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<PAGE> 18
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.
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.
EMPLOYEES
At December 31, 1997, the Company employed 610 employees. Of these employees,
187 were involved in research and development; 281 in sales, marketing and
customer support; 63 in production and information technology; and 79 in
administration and finance. No employees are covered by any collective
bargaining agreements. The Company believes that its relationships with its
employees are good.
RECENT EVENTS
On March 26, 1998 (the "Effective Date"), the Company completed the
acquisition (the "IDI Acquisition") of all of the outstanding capital stock of
Intrusion Detection Inc. ("IDI"), a New York corporation, pursuant to an
Agreement and Plan of Merger (the "Merger Agreement") by and among the Company,
IDI, Apple Acquisition Corp., a wholly owned subsidiary of the Company, and the
former stockholders of IDI (the "IDI Stockholders"). The purchase price for the
IDI Acquisition consisted of approximately 784,000 shares of common stock of the
Company. The Company used authorized but previously unissued shares of common
stock in connection with the acquisition. The IDI Acquisition will be accounted
for as a pooling-of-interests.
The Company and IDI also entered into an Escrow Agreement pursuant to which
approximately 78,400 shares of the common stock consideration will be held in
escrow to reimburse the Company in connection with any breaches of
representations, warranties or covenants by IDI and the IDI Stockholders in the
Merger Agreement. In addition, the Company and the IDI Stockholders entered into
a Registration Rights Agreement pursuant to which the Company has agreed to file
a Registration Statement on Form S-3, on or prior to the 15th business day
following the Effective Date, for the
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<PAGE> 19
purpose of registering under the Securities Act of 1933 the shares of Common
Stock of the Company issued to such stockholders pursuant to the Merger
Agreement.
IDI, based in New York, is a leading publisher of network security software
tools that help network officials manage enterprise-wide security more
effectively. The IDI products, Kane Security Analyst and Kane Security Monitor
are highly complementary to the Company's SecurSight family of plug-in
enterprise security solutions and address two critical solutions areas, network
security assessment and monitoring. The products are currently distributed both
directly and through distributors in the United States and through resellers in
20 countries and will also be available through the Company's direct sales
forces, as well as through SecurWorld channel partners.
ITEM 2. PROPERTIES
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 December 31, 1997, the annual
base rent for this facility was approximately $1,607,000. 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.
In November 1997, the Company entered into two noncancelable ten-year leases
expiring in 2008 for RSA offices in Redwood City, California. The Company plans
to occupy the first facility in March 1998. The first facility consists of
approximately 27,000 square feet of office space, and the annual base rent is
$1,010,000. The Company plans to occupy the second facility in June 1998. The
second facility consists of approximately 31,000 square feet of office space,
and the annual base rent is $912,000 with annual operating expenses of $245,000.
Both leases have rent escalation provisions covering years two through ten based
on the Consumer Price Index.
RSA also leases approximately 15,000 square feet of office space in Redwood
City, California under a lease expiring in October 1999. As of December 31,
1997, the annual base rent for this facility was approximately $418,000. 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 December 31, 1997,
the annual base rent for this facility was approximately $200,000. 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.
ITEM 3. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
None.
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EXECUTIVE OFFICERS OF THE COMPANY
The executive officers of the Company and their respective ages are as
follows:
NAME AGE POSITION
- ---- --- --------
Charles R. Stuckey, Jr. ... 55 Chairman of the Board, President and Chief
Executive Officer
D. James Bidzos ........... 43 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 ............ 43 Senior Vice President, World Wide Sales
and Field Operations
W. David Power ............ 44 Senior Vice President, Marketing and
Corporate Development
Marian G. O'Leary ......... 43 Senior Vice President, Finance, Chief
Financial Officer and Treasurer
Linda E. Saris ............ 45 Vice President, Customer Support and
Operations and Chief Information Officer
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 was 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.
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
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<PAGE> 21
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.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
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 reported on the Nasdaq
National Market and after giving effect to both of 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, respectively.
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<PAGE> 22
FISCAL 1996
-----------
HIGH LOW
---- ---
First Quarter $ 33.75 $ 21.25
Second Quarter 54.50 23.125
Third Quarter 48.375 25.625
Fourth Quarter 43.50 29.75
FISCAL 1997
-----------
HIGH LOW
---- ---
First Quarter $ 39.25 $ 21.00
Second Quarter 38.25 22.75
Third Quarter 44.375 32.625
Fourth Quarter 41.625 29.75
There were 290 stockholders of record of the Company's Common Stock as of
March 26, 1998.
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.
In October 1997, James K. Sims was elected to the Company's Board of
Directors as a Class III director, filling a vacancy created by the resignation
of Marino R. Polestra. In connection with his election, on November 6, 1997 Mr.
Sims purchased 25,000 shares of Common Stock from the Company at a purchase
price of $25.92 per share, representing 75% of the closing price of the Common
Stock on the Nasdaq National Market on the date of purchase, pursuant to a Stock
Purchase Agreement, dated November 6, 1997 (the "Sims Agreement"), by and
between the Company and Mr. Sims. The Sims Agreement provides that in the event
that Mr. Sims ceases to be a member of the Board of Directors of the Company,
for any reason or no reason, with or without cause, prior to November 6, 1998,
then Mr. Sims shall return to the Company a pro rata portion of the aggregate
discount on the shares purchased. The shares of Common Stock were issued and
sold to Mr. Sims in reliance on Section 4(2) of the Securities Act of 1933, as
amended, as a sale by the Company not involving a public offering. No
underwriters were involved with such issuance and sale of Common Stock.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this item is contained under the caption
"Selected Consolidated Financial Data" appearing in the Company's 1997 Annual
Report to Stockholders (the "1997 Annual Report") and is incorporated herein by
this reference.
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<PAGE> 23
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The information required by this item is contained under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing in the 1997 Annual Report and is incorporated herein by
this reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is contained in the Consolidated
Financial Statements appearing in the 1997 Annual Report and is incorporated
herein by this reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item is contained in part under the caption
"Executive Officers of the Company" in PART I hereof, and the remainder is
contained in the Company's Proxy Statement for the Company's Annual Meeting of
Stockholders to be held on April 30, 1998 (the "1998 Proxy Statement") under the
captions "Proposal 1 - Election of Directors" and "Section 16(a) Beneficial
Ownership Reporting Compliance" and is incorporated herein by this reference.
Officers are elected on an annual basis and serve at the discretion of the
Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is contained under the captions
"Director Compensation," "Compensation of Executive Officers" and "Compensation
Committee Interlocks and Insider Participation" in the 1998 Proxy Statement and
is incorporated herein by this reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT
The information required by this item is contained under the caption "Stock
Ownership of Certain Beneficial Owners and Management" in the 1998 Proxy
Statement and is incorporated herein by this reference.
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<PAGE> 24
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this Form 10-K:
1. Financial Statements. The Consolidated Financial Statements
are included in the 1997 Annual Report, portions of which are filed as an
exhibit to this Annual Report on Form 10-K. The Consolidated Financial
Statements include:
Independent Advisors' Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules. Financial Statement Schedule II,
"Valuation and Qualifying Accounts" and the Reports of Deloitte & Touche LLP
and Ernst & Young LLP, immediately following the "Exhibit Index" are filed as
part of this Annual Report on Form 10-K.
3. Exhibits. The Exhibits listed in the Exhibit Index immediately
preceding such Exhibits are filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K:
On December 17, 1997, the Company filed a Current Report on Form
8-K, dated December 16, 1997, for the purposes of filing under Item 5 (Other
Events) the Company's Selected Consolidated Financial Data, Management's
Discussion and Analysis of Financial Conditions and Results of Operations and
Consolidated Financial Statements of the Company as of December 31, 1995 and
1996 and June 30, 1996 (unaudited) and for the years ended December 31, 1994,
1995 and 1996 and the six months ended June 30, 1996 and 1997 (unaudited).
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<PAGE> 25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
SECURITY DYNAMICS TECHNOLOGIES, INC.
By:/s/ CHARLES R. STUCKEY, JR.
---------------------------------
Charles R. Stuckey, Jr.
Chairman, President and Chief Executive Officer
Date: March 31, 1998
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
Signature Title Date
/s/ CHARLES R. STUCKEY, JR. Chairman, President and March 31, 1998
- -------------------------- Chief Executive Officer
Charles R. Stuckey, Jr. (Principal Executive Officer)
/s/ MARIAN G. O'LEARY Senior Vice President, March 31, 1998
- --------------------- Finance, Chief Financial
Marian G. O'Leary Officer and Treasurer
(Principal Financial and
Accounting Officer)
Director March 31, 1998
- -------------------
D. James Bidzos
Director March 31, 1998
- ----------------------
Richard L. Earnest
/s/ JOSEPH B. LASSITER, III Director March 31, 1998
- ---------------------------
Joseph B. Lassiter, III
/s/ GEORGE M. MIDDLEMAS Director March 31, 1998
- -----------------------
George M. Middlemas
Director March 31, 1998
- -----------------------
Sanford M. Sherizen
Director March 31, 1998
- -----------------
James K. Sims
25
<PAGE> 26
EXHIBIT INDEX
-------------
EXHIBIT
NO. DESCRIPTION
--- -----------
*2.1 Stock Purchase Agreement by and among the Registrant, DynaSoft AB
and the stockholders of DynaSoft named on Schedule I thereto, dated
July 12, 1997, is incorporated herein by reference to Exhibit 2.1
to the Registrant's Current Report on Form 8-K, dated
July 15, 1997 (File No. 0-25120) (the "Form 8-K")
*2.2 Stock Purchase Agreement by and among the Registrant, DynaSoft AB
and the stockholders of DynaSoft named on Schedule I thereto, dated
July 15, 1997, is incorporated herein by reference to
Exhibit 2.2 to the Form 8-K
*2.3 Stock Purchase Agreement by and among the Registrant, DynaSoft AB
and the stockholders of DynaSoft named on Schedule I thereto, dated
July 15, 1997, is incorporated herein by reference to
Exhibit 2.3 to the Form 8-K
*2.4 Stock Purchase Agreement by and between the Registrant and Ian
Anderson, dated July 15, 1997, is incorporated herein by
reference to Exhibit 2.4 to the Form 8-K
*2.5 Stock Purchase Agreement by and between the Registrant and Joakim
Borell, dated July 15, 1997, is incorporated herein by reference to
Exhibit 2.5 to the Form 8-K
*2.6 Stock Purchase Agreement by and between the Registrant and Jean
Paul Link, dated July 15, 1997, is incorporated herein by
reference to Exhibit 2.6 to the Form 8-K
*2.7 Stock Purchase Agreement by and between the Registrant and Sten
Sorenson, dated July 15, 1997, is incorporated herein by reference
to Exhibit 2.7 to the Form 8-K
*3.1 Third Restated Certificate of Incorporation, as amended, of the
Registrant (filed as Exhibit 3 to the Registrant's Quarterly Report
on Form 10-Q for the Quarter Ended September 30, 1996 and
incorporated herein by reference)
*3.2 Amended and Restated By-Laws, as amended, of the Registrant (filed
as Exhibit 3.3 to the Registrant's Registration Statement on Form
S-1 (File No. 33-85606) (the "Form S-1") and incorporated
herein by reference)
*4 Specimen Certificate for shares of Common Stock, $.01 par value, of
the Registrant (filed as Exhibit 4.1 to the Form S-1 and
incorporated herein by reference)
*#10.1 1986 Stock Option Plan, as amended (filed as Exhibit 10.1 to the
Form S-1 and incorporated herein by reference)
*#10.2 1994 Stock Option Plan, as amended, is incorporated herein by
reference to Exhibit 10.2 to the Registrant's Annual Report on Form
10-K for the Year Ended December 31, 1996 (File No. 0-25120)
(the "Form 10-K")
26
<PAGE> 27
*#10.3 1994 Director Stock Option Plan, as amended, is incorporated *#10.3
herein by reference to Exhibit 10.3 to the Form 10-K
*#10.4 1994 Employee Stock Purchase Plan, as amended, is incorporated
herein by reference to Exhibit 10.4 to the Form 10-K
#10.5 Employment Agreement between the Registrant and Charles R.
Stuckey, Jr., dated as of November 1, 1997
*#10.6 Employment Agreement, dated as of April 14, 1996, as amended, among
the Registrant, RSA and D. James Bidzos (filed as Exhibit 10.18 to
the Registrant's Registration Statement on Form S-4 (File No.
333-7265) (the "Form S-4") and incorporated herein by reference)
*#10.7 Letter Agreement between the Registrant and Arthur W. Coviello,
Jr., dated as of August 21, 1995 (filed as Exhibit 10 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter Ended
September 30, 1995 and incorporated herein by reference
*#10.8 Letter Agreement between the Registrant and Linda E. Saris,
dated as of May 1, 1989 (filed as Exhibit 10.7 to the Form S-1
and incorporated herein by reference)
*10.9 Amended and Restated Registration Rights Agreement, dated as of
September 7, 1988, as amended, among the Registrant and certain
stockholders of the Registrant (filed as Exhibit 10.11 to the
Form S-1 and incorporated herein by reference)
*10.10 Amendment to Amended and Restated Registration Rights Agreement,
dated as of October 31, 1995, among the Registrant and certain
stockholders of the Registrant (filed as Exhibit 10.19 to the
Registrant's Registration Statement on Form S-1 (File No.
33-98818) and incorporated herein by reference)
*#10.11 Stock Restriction Agreement between the Registrant and Richard L.
Earnest, dated October 25, 1994 (filed as Exhibit 10.13 to the
Form S-1 and incorporated herein by reference)
*+10.12 Terms and Conditions of Purchase, dated January 1, 1994, between
the Registrant and Gould Electronics (filed as Exhibit 10.15 to
the Form S-1 and incorporated herein by reference)
*+10.13 Letter, dated October 12, 1994, from Sanyo Electric Co., LTD. to
the Registrant (filed as Exhibit 10.16 to the Form S-1 and
incorporated herein by reference)
*+10.14 Agreement between the Registrant and Progress Software
Corporation, dated December 1994 (filed as Exhibit 10.17 to the
Form S-1 and incorporated herein by reference)
27
<PAGE> 28
*10.15 Indenture of Lease, dated as of March 11, 1996, between the
Registrant and Beacon Properties, L.P. (filed as Exhibit 10.17 to
the Form S-4 and incorporated herein by reference)
*10.16 Stockholder Agreement, dated as of April 14, 1996, among the
Registrant, RSA and Addison Fischer (filed as Exhibit 10.19 to
the Form S-4 and incorporated herein by reference)
*10.17 Stockholder Agreement, dated as of April 14, 1996, among the
Registrant, RSA and D. James Bidzos (filed as Exhibit 10.20 to
the Form S-4 and incorporated herein by reference)
*10.18 Stockholder Agreement, dated as of April 14, 1996, among the
Registrant, RSA and Ronald Rivest (filed as Exhibit 10.21 to the
Form S-4 and incorporated herein by reference)
*#10.19 Amendment No. 3 to 1994 Stock Option Plan, as amended, is
incorporated herein by reference to Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the Quarter Ended
June 30, 1997 (File No. 0-25120) (the "Form 10-Q")
*10.20 First Amendment to Lease, dated as of May 10, 1997, between the
Registrant and Beacon Properties, L.P. is incorporated herein by
reference to Exhibit 10.2 to the Form 10-Q
*+10.21 Second Amendment to Progress Software Application Partner
Agreement, dated as of November 29, 1995, between the Registrant
and Progress Software Corporation is incorporated herein by
reference to Exhibit 10.3 to the Form 10-Q
*+10.22 Third Amendment to Progress Software Application Partner Agreement,
dated as of November 15, 1996, between the Registrant and Progress
Software Corporation is incorporated herein by reference to Exhibit
10.4 to the Form 10-Q
*10.23 Registration Rights Agreement by and among the Registrant and the
parties named on Schedule I thereto, dated July 15, 1997, is
incorporated herein by reference to Exhibit 10.1 to the Form 8-K
10.24 Stock Purchase Agreement, dated as of November 6, 1997, between
the Registrant and James K. Sims
11 Computation of Income per Common Share
13 Portions of the Registrant's 1997 Annual Report to Stockholders
(which is not deemed to be "filed" except to the extent that
portions thereof are expressly incorporated by reference in this
Annual Report on Form 10-K)
21 Subsidiaries of the Registrant
28
<PAGE> 29
23.1 Consent of Deloitte & Touche LLP, Independent Auditors
23.2 Consent of Ernst & Young LLP, Independent Auditors
27.1 Restated Financial Data Schedule for the year ended December 31,
1995
27.2 Restated Financial Data Schedule for the three months ended March
31, 1996
27.3 Restated Financial Data Schedule for the six months ended June
30, 1996
27.4 Restated Financial Data Schedule for the nine months ended
September 30, 1996
27.5 Restated Financial Data Schedule for the year ended December 31,
1996
27.6 Restated Financial Data Schedule for the three months ended March
31, 1997
27.7 Restated Financial Data Schedule for the six months ended June
30, 1997
27.8 Restated Financial Data Schedule for the nine months ended
September 30, 1997
27.9 Financial Data Schedule for the year ended December 31, 1997
- -------------------
* Incorporated herein by reference.
+ Confidential treatment previously granted by the Securities and Exchange
Commission as to certain portions.
# Management contract or compensatory plan or arrangement filed in response to
Item 14(a)(3) of the instructions to Form 10-K.
29
<PAGE> 30
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Security Dynamics Technologies, Inc. and Subsidiaries:
We have audited the consolidated financial statements of Security Dynamics
Technologies, Inc. (the "Company") as of December 31, 1997 and 1996, and for
each of the three years in the period ended December 31, 1997, and have issued
our report thereon dated March 20, 1998 (which report expresses an unqualified
opinion and includes explanatory paragraphs referring to the restatement of the
consolidated financial statements for a pooling of interests in 1997 and a
change in the Company's method of accounting for option grants requiring
stockholder approval in 1996). Such financial statements and report are included
in your 1997 Annual Report to Stockholders and are incorporated herein by
reference.
Our audits also included the consolidated financial statement schedule of the
Company, listed in Item 14. (a) 2. This consolidated financial statement
schedule is the responsibility of the Company's management. Our responsibility
is to express an opinion based on our audits. The consolidated financial
statement schedule gives retroactive effect to the acquisition of DynaSoft AB,
which has been accounted for as a pooling of interests as described in Note 2 of
notes to the consolidated financial statements. We did not audit the
consolidated financial statement schedule of RSA Data Security, Inc. for 1995.
That financial statement schedule was 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 1995, is based solely on the report of
such other auditors.
In our opinion, based on our audits and the report of the other auditors, such
consolidated financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
Deloitte & Touche LLP
Boston, Massachusetts
March 20, 1998
<PAGE> 31
Report of Ernst & Young LLP, Independent Auditors
To the Board of Directors
RSA Data Security, Inc.
We have audited the consolidated statements of operations, shareholders' equity
and cash flows of RSA Data Security, Inc. for the year ended December 31, 1995
(none of which are presented separately herein). Our audits also included the
financial statement schedule of RSA Data Security, Inc. (not presented
separately herein) listed in the Index at Item 14(a). These financial statements
and schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedule based on our audits.
We conducted our audit 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 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated results of operations and cash flows of
RSA Data Security, Inc. for the year ended December 31, 1995 in conformity with
generally accepted accounting principles. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly, in all material respects, the
information set forth therein.
Ernst & Young LLP
Palo Alto, California
April 8, 1996
<PAGE> 32
SCHEDULE II
SECURITY DYNAMICS TECHNOLOGIES, INC.
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
- --------------------------------------------------------------------------------
(IN THOUSANDS)
BALANCE
AT CHARGED
BEGINNING TO COSTS BALANCE
OF AND AT END
PERIOD EXPENSES DEDUCTIONS OF PERIOD
ALLOWANCE FOR
DOUBTFUL
ACCOUNTS (1):
For the year ended $ 527 $ 249 $ 34 $ 742
December 31, 1997
For the year ended 724 223 420 527
December 31, 1996
For the year ended 416 541 233 724
December 31, 1995
ACCRUED WARRANTY
COSTS (1):
For the year ended $ 105 $ - $ - $ 105
December 31, 1997
For the year ended 105 128 128 105
December 31, 1996
For the year ended 105 64 64 105
December 31, 1995
(1) Results for all periods prior to July 15, 1997 and July 26, 1996 have been
restated for the acquisitions of DynaSoft AB and RSA Data Security, Inc.,
respectively, each of which have been accounted for as poolings of
interests.
<PAGE> 1
EXHIBIT 10.5
AMENDED AND RESTATED
EMPLOYMENT AGREEMENT
THIS AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") is made as
of the 1st day of November, 1997 (the "Agreement Date"), by and between Security
Dynamics Technologies, Inc., a Delaware corporation ("Employer"), and Charles R.
Stuckey, Jr. ("Employee").
WHEREAS, Employer and Employee are parties to an Employment Agreement,
dated as of July 9, 1993 (the "1993 Agreement"); and
WHEREAS, Employer and Employee are desirous of continuing Employee's
employment with Employer for the period, and on the terms and conditions, set
forth herein;
NOW, THEREFORE, in consideration of the foregoing and of the mutual
covenants and conditions herein contained, the parties hereby agree that the
1993 Agreement is amended and restated in its entirety to read as follows:
Section 1. EMPLOYMENT.
Employer hereby agrees to continue to employ Employee, and Employee accepts
such continued employment, according to the terms and conditions set forth in
this Agreement.
Section 2. TERM.
The initial term of this Agreement (the "Initial Term") shall be for a
period commencing on November 1, 1997 and continuing through November 1, 1999.
Thereafter, this Agreement shall be automatically renewed for additional
one-year periods (the "Renewal Term") on the same terms and conditions (except
as may be otherwise mutually agreed to in writing by the parties) unless either
party gives the other written notice of non-renewal at least ninety (90) days
prior to the expiration of the then-current term. Notwithstanding the foregoing,
the Employment Period (as defined below) may be terminated at any time upon the
occurrence of any one of the following events: (i) Employee's decision to resign
pursuant to Section 9 of this Agreement, (ii) Employer's decision to terminate
Employee, either "for cause" or other than "for cause" pursuant to Section 9, or
(iii) the parties' agreement in writing to terminate the Agreement. The period
of time between the commencement and termination of Employee's employment shall
be referred to herein as the "Employment Period."
-1-
<PAGE> 2
Section 3. POSITION AND SERVICES.
(a) Employee will occupy the position of President and Chief Executive
Officer of Employer. Employee will also be a member of the Employer's
Board of Directors (the "Board of Directors"), subject to the terms of
the Employer's Third Restated Certificate of Incorporation as amended
from time to time. Any subsequent substantial diminution in the
position, office or duties of Employee (other than any such diminution
resulting from a Change in Control (as such term is defined in Section
12 hereof)) or material breach by the Employer of its obligations
under this Agreement shall be deemed a termination of this Agreement
other than "for cause" as defined in Section 9 hereof. Employee will
report directly to the Board of Directors and shall have such duties
and responsibilities as are set forth in the Employer's Amended and
Restated By-Laws, as amended from time to time, which duties and
responsibilities shall include, but not be limited to, overall
management responsibility for the operations and administration of
Employer as well as such other duties and responsibilities, consistent
with Employee's position as President and Chief Executive Officer, as
shall be defined by the Board of Directors.
(b) Employee will be expected to be in the full-time employment of
Employer, to devote substantially all of his business time and
attention, and exert his best efforts, to the performance of his
duties hereunder, and to serve Employer diligently and to the best of
his ability. During the Employment Period, the Employee shall devote
his full business time to the business and interests of the Employer;
provided, that, except to the extent set forth in the Prior Agreements
(as such term is defined in Section 8 hereof), nothing set forth
herein shall prohibit the Employee from engaging in other activities
to the extent that such activities do not impair the ability of the
Employee to perform his duties and obligations under this Agreement.
Section 4. COMPENSATION.
The Employer shall pay to the Employee an initial base salary (the "Base
Salary") at an annual rate of not less than $231,000, subject to deductions for
social security, state payroll and unemployment and all other legally required
or authorized deductions and withholding. Employee's salary shall be payable at
the same time and basis as Employer pays its payroll in general. The Board of
Directors shall review Employee's Base Salary during the Employment Period at
least on an annual basis. The Employee shall have the right, by written notice
to the Employer within thirty (30) days following any decrease in Employee's
Base Salary at any time during the Employment Period, to treat such reduction as
a termination of this Agreement other than "for cause" as defined in Section 9
hereof.
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<PAGE> 3
Section 5. INCENTIVE PAYMENTS.
In addition to the Base Salary payable pursuant to Section 4 hereof,
Employee shall be entitled to annual bonuses if Employee satisfies agreed-upon
discrete goals/objectives to be contained in an annual incentive plan for the
Employee to be established by the Board of Directors at its sole and absolute
discretion in consultation with Employee on an annual basis. The incentive plan
for 1997 is attached as EXHIBIT A hereto.
Section 6. DEATH OR DISABILITY DURING EMPLOYMENT.
If Employee is prevented from performing his duties hereunder by reason of
illness or injury for a period of (i) four or more consecutive months or (ii)
six months during any 12-month period as determined by a recognized physician
chosen by Employer and acceptable to Employee (the applicable date when either
of such disabling events shall occur being hereinafter referred to as the
"Effective Date of Disability"), or if Employee dies during the Employment
Period, Employer shall pay to the Employee, if the Employee is disabled, or to
Employee's spouse, the Executors under Employee's Last Will and Testament duly
admitted to probate within one year of his death or the Employee's heir at law,
if the Employee dies, in addition to such amounts (if any) as may be payable
pursuant to any short- or long-term disability or life insurance policies then
in effect and maintained by the Company with respect to the Employee
("Disability Policies"), the compensation which would otherwise be payable to
the Employee under this Agreement through the end of the month in which the
Employee's Effective Date of Disability or death occurs, or, in the case of
disability (and assuming any Disability Policies are currently in effect) such
later date as the Employee would, if eligible, be entitled to receive benefits
under such Disability Policies. In addition, the Employer shall pay, at the time
when such bonus would normally be paid, all bonus payments under Section 5
hereof which the Board of Directors, in good faith, believed that the Employee
was entitled to in respect of the year in which the Effective Date of Disability
or death occurred.
Section 7. BENEFITS; EXPENSES.
(a) The Employee shall be entitled to receive the same standard employment
benefits as other executives of the Employer receive. The Employee
shall be entitled to fully participate in all of the Employer's future
employee benefit programs in accordance with their then-existing
terms. The Employee shall be entitled to reimbursement for all
approved reasonable travel and other business expenses incurred by the
Employee in connection with his services to the Employer pursuant to
the terms of this Agreement. All business expenses for which the
Employee seeks reimbursement from the Employer shall be adequately
documented by the Employee in accordance with the Employer's
procedures covering expense
-3-
<PAGE> 4
reimbursement and in compliance with the regulations of the U.S.
Internal Revenue Service.
(b) The Employee shall be entitled to five weeks of vacation during each
year of the Employment Period. The Employee may accrue and carry
forward vacation time to future years; provided, however, that in no
event may the Employee carry forward into any year in excess of five
weeks of accrued paid vacation time.
Section 8. CONFIDENTIALITY; NON-COMPETITION.
The parties acknowledge that the Employee has previously entered into a
Non-Competition Agreement and a Nondisclosure and Developments Agreement, each
initially dated as of February 13, 1987 and amended and restated as of the
Agreement Date (together, as amended and restated, the "Prior Agreements"), in
connection with the Employee's employment by the Employer. The Prior Agreements
are each incorporated herein by this reference and made a part hereof as if set
forth herein in their entirety. The parties hereby agree that the Non-Disclosure
and Non-Competition Covenant, dated as of February 13, 1987, by and between the
Employer and the Employee be and hereby is terminated and shall be of no further
force and effect as of the Agreement Date.
Section 9. TERMINATION.
This Agreement does not grant the Employee any right or entitlement to be
retained by the Employer, and shall not affect or prejudice the Employer's right
to discharge the Employee in accordance herewith. The Employee may terminate
this Agreement at any time during the Initial Term upon sixty (60) days' prior
written notice to the Employer. The Employer may terminate this Agreement "for
cause" (as defined below) at any time upon thirty (30) days' prior written
notice to the Employee. Employee shall, during such 30-day period, be given an
opportunity to defend the basis or facts giving rise to the notice. The Employer
may terminate this Agreement other than "for cause" at any time during the
Initial Term upon sixty (60) days' prior written notice to the Employee. Either
party may terminate this Agreement at any time during the Renewal Term upon
ninety (90) days' prior written notice to the other party. If Employee is
terminated either "for cause" or for reasons other than "for cause," Employee
shall be entitled to the following severance payments:
(i) If termination occurs by the Employer other than "for cause," then the
following severance payments (less applicable deductions for social
security, payroll and other applicable taxes) and related arrangements
will be made:
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<PAGE> 5
(a) cash payments at the Employee's current monthly Base Salary at
the time of termination (less applicable deductions) for a period
of 24 months commencing with the month immediately succeeding the
month during which the 30-day period after the giving of notice
shall have ended (the "Effective Date of Termination");
(b) in addition to (a) above, normal employee medical and insurance
benefits will be continued on an insured basis for the Employee
and for the Employee's spouse at the Effective Date of
Termination ("Spouse") until the latter to occur of (i)
Employee's death or (ii) the Spouse's death, provided that
medical benefits provided to the Employee and the Spouse pursuant
to this subparagraph (b) may be reduced from time to time to the
extent that medical benefits are provided through Medicare or
through any other employer following the Effective Date of
Termination;
(c) to the extent that all or any stock options granted to Employee
shall not have vested as of the Effective Date of Termination,
then all such stock options shall automatically vest;
(d) the Employer shall pay to the Employee, in a single lump sum
payment within 30 days following the Effective Date of
Termination, an amount equal to a pro rata portion of the
Employee's current monthly Base Salary at the time of termination
(less applicable deductions) with respect to the month in which
the Effective Date of Termination occurs based upon the number of
days elapsed in such month prior to the Effective Date of
Termination;
(e) the Employer shall pay to the Employee, in a single lump sum
payment within 30 days following the Effective Date of
Termination, an amount equal to the greater of (i) a pro rata
portion of the bonus payable to the Employee pursuant to Section
5 of this Agreement with respect to the year in which such
termination shall have occurred, calculated at 100% of the
Employee's target bonus amount, and (ii) a pro rata portion of
the actual bonus payable to the Employee pursuant to Section 5 of
this Agreement with respect to the year in which such termination
shall have occurred (assuming the Employee had been employed by
the Employer the entire year);
(f) the Employer shall reimburse the Employee for any reasonable
legal expenses incurred by the Employee in connection with the
termination of the Agreement (excluding any expenses incurred in
contesting any such termination, but including without limitation
any reasonable legal expenses incurred by the Employee in
-5-
<PAGE> 6
connection with the negotiation, execution and delivery of the
Consulting Agreement referred to in (g) below); and
(g) the Employer shall negotiate in good faith with the Employee
regarding the retention of the Employee by the Employer as a
consultant for the two-year period following the Effective Date
of Termination pursuant to a Consulting Agreement to be entered
into by the Employer and the Employee.
(ii) If Employee is terminated by the Employer "for cause," the Employer
shall (a) provide the Employee with normal employee medical and
insurance benefits for a period of six months following the Effective
Date of Termination, and (b) pay to the Employee an amount equal to a
pro rata portion of any bonus payable to the Employee pursuant to
Section 5 of this Agreement with respect to the year in which such
termination shall have occurred based on the number of days elapsed in
such year prior to the Effective Date of Termination. Except as set
forth in the prior sentence, in the event of a termination for cause,
the Employee shall not be entitled to any salary, severance or other
payments or any benefits of any kind beyond the Effective Date of
Termination. Termination "for cause" as used herein, and as determined
by the Board of Directors, shall include only the following Employee
behavior: (1) any act committed by Employee which shall represent (x)
a breach in any material respect of any of the terms hereof or (y) a
material breach of fiduciary duty to the Employer and/or all of its
stockholders under the laws of the State of Delaware; (2) willful
failure to carry out reasonable assigned duties; (3) gross negligence,
consisting of wanton and reckless acts or omissions in the performance
of Employee's duties to the material detriment of Employer; (4)
addiction to drugs or chronic alcoholism which impairs the Employee's
ability to carry out his obligations under this Agreement; or (5) any
conviction of the Employee of a felony which is subject to a jail
sentence of at least three months; provided, that in the case of a
termination for cause pursuant to clause (1), (2) or (3) of this
paragraph (ii), the Employee shall be provided with not less than 30
days' written notice thereof from the Board of Directors or the
Compensation Committee of the Board of Directors and an opportunity to
cure such event to the reasonable satisfaction of the Board of
Directors.
(iii) If Employee voluntarily resigns then the following severance payments
(less applicable deductions for social security, payroll and other
applicable taxes) and related arrangements will be made:
-6-
<PAGE> 7
(a) normal employee medical and insurance benefits will be continued
on an insured basis for the Employee and for the Spouse until the
latter to occur of (i) Employee's death or (ii) the Spouse's
death, provided that medical benefits provided to the Employee
and the Spouse pursuant to this subparagraph (a) may be reduced
from time to time to the extent that medical benefits are
provided through Medicare or through any other employer following
the Effective Date of Termination;
(b) the Employer shall pay to the Employee, in a single lump sum
payment within 30 days following the Effective Date of
Termination, an amount equal to a pro rata portion of the
Employee's current monthly Base Salary at the time of
termination (less applicable deductions) with respect to the
month in which the Effective Date of Termination occurs
based upon the number of days elapsed in such month prior to
the Effective Date of Termination; and
(c) the Employer shall pay to the Employee, in a single lump sum
payment within 30 days following the Effective Date of
Termination, an amount equal to a pro rata portion of the
actual bonus payable to the Employee pursuant to Section 5
of this Agreement with respect to the year in which such
termination shall have occurred (assuming the Employee had
been employed by the Employer the entire year).
Section 10. BREACH OR VIOLATION OF AGREEMENT.
Any controversy or claim arising out of, or relating to, this Agreement, or
the breach thereof, shall be settled by arbitration in accordance with the
Commercial Arbitration Rules of the American Arbitration Association, and
judgment upon the award rendered may be entered in any court having jurisdiction
thereof. Notwithstanding the foregoing, the parties agree that a breach or
violation of this Agreement will result in immediate and irreparable injury and
harm to the other party, who shall have the right of an injunction, specific
performance or other equitable relief to prevent the violation of the
obligations hereunder. In addition, the prevailing party in any arbitration or
litigation relating to the interpretation or enforcement of this Agreement shall
be entitled to reimbursement of all reasonable costs and expenses (including
without limitation fees and expenses of counsel) incurred in connection
therewith.
-7-
<PAGE> 8
Section 11. NOTICES.
Any notice required to be given pursuant to the provisions of this
Agreement shall be in writing and, if mailed, sent by registered or certified
mail, postage prepaid, with a copy delivered by an overnight courier service of
recognized standing, to the party named at the address set forth below, or at
such other address as each party may hereafter designate in writing to the other
party:
Employer: Security Dynamics Technologies, Inc.
20 Crosby Drive
Bedford, MA 01730
Attn: Secretary
cc: Hale and Dorr LLP
60 State Street
Boston, MA 02109
Attn: Hal J. Leibowitz, Esq.
Employee: Charles R. Stuckey, Jr.
121 Woodbine Road
Carlisle, MA 01741
Any such notices shall be deemed to have been delivered when served
personally, or 28 hours after being mailed in the manner specified above.
Section 12. CHANGE IN CONTROL EVENT.
If a Change in Control (as such term is defined below) shall have occurred,
Employee shall be entitled, at his election, to receive, if he chooses to leave
Employer's management at any time during the first 18 months after the effective
date of the Change in Control, (a) a lump sum payment in an amount equal to two
times his then-current monthly Base Salary (less applicable deductions) provided
for in Section 4 hereof for a 12-month period, and (b) a pro rata portion of any
bonus otherwise payable to the Employee pursuant to Section 5 of this Agreement
with respect to the year in which such Change in Control shall have occurred,
calculated at 100% of the Employee's target bonus amount, based on the number of
days elapsed in such year prior to the Employee's last day of full time
employment with the Employer. In addition, all of the stock options granted to
Employee which shall not have vested or which shall still remain exercisable as
of the effective date of the Change in Control shall thereupon automatically
vest and be free from repurchase if Employee is terminated other than "for
cause" within one year after the effective date of the Change in Control.
-8-
<PAGE> 9
For purposes of this Agreement, a "Change in Control" shall be deemed to
have taken place if:
(i) there shall be consummated any consolidation or merger of Employer in
which Employer is not the continuing or surviving corporation or
pursuant to which shares of the Employer's capital stock are converted
into cash, securities or other property, other than a consolidation or
merger of Employer in which each holder of the Employer's capital
stock immediately prior to the consolidation or merger has upon
consummation of the consolidation or merger the same proportionate
ownership of each class or series of capital stock of the surviving
corporation as such holder had of each class or series of the
Employer's capital stock immediately prior to the consolidation or
merger, or any sale, lease, exchange or other transfer (in one
transaction or a series of transactions contemplated or arranged by
any party as a single plan) of all or substantially all of the assets
of Employer; or
(ii) any person (as such term is used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"),
shall after the Agreement Date become the beneficial owner (as defined
in Rules 13(d)(3) and 13(d)(5) under the Exchange Act), directly or
indirectly, of securities of Employer representing more than 50% of
the voting power of all then outstanding securities of Employer having
the right under ordinary circumstances to vote in an election of the
Board of Directors (for purposes of this clause (ii), any securities
of Employer that any such person has the right to acquire pursuant to
any agreement, or upon exercise of conversion rights, warrants or
options, or otherwise, shall be deemed beneficially owned by such
person).
Section 13. EXERCISE OF STOCK OPTIONS.
(a) Subject to the provisions of Section 12 hereof, upon the termination
of the Employment Period, Employee shall have the following periods
during which to exercise all then vested stock options having a grant
date on or before the Agreement Date:
(i) if Employee voluntarily resigns, Employee shall have 60 days from
the date of resignation during which to exercise such vested
options; and
(ii) if there is a termination other than "for cause" and other than
due to the occurrence of any of the events referred to in Section
6 hereof, then Employee shall have six months from such date
during which to exercise such vested options.
-9-
<PAGE> 10
(b) Subject to the provisions of Section 12 hereof, upon the termination
of the Employment Period, Employee shall have the following periods
during which to exercise all then vested stock options having a grant
date after the Agreement Date:
(i) if Employee voluntarily resigns, Employee shall have 12 months
from the date of resignation during which to exercise such vested
options; and
(ii) if there is a termination other than "for cause" and other than
due to the occurrence of any of the events referred to in Section
6 hereof, then Employee shall have twelve months from the date of
such termination during which to exercise such vested options.
(c) Upon a termination of the Employment Period "for cause," all stock
options held by the Employee shall terminate automatically upon the
Effective Date of Termination.
(d) Upon a termination of the Employment Period as a result of any of the
events referred to in Section 6 hereof, the period of exercise of all
or any portion of the Employee's then vested stock options shall be 12
months from the Effective Date of Disability or death.
Section 14. LIMITATIONS ON PARACHUTE PAYMENTS.
(a) In the event that the Company undergoes a "Change in Ownership or
Control" (as defined below), a portion of any "Contingent Compensation
Payments" (as defined below) that the Employee would otherwise be
entitled to receive shall be eliminated to the extent necessary to
eliminate any "excess parachute payments" (as defined in Section
280G(b)(1) of the Internal Revenue Code of 1986, as amended (the
"Code")) for the Employee. For purposes of this Section 14, the
Contingent Compensation Payments so eliminated shall be referred to as
the "Eliminated Payments" and the aggregate amount (determined in
accordance with Proposed Treasury Regulation Section 1.280G-1, Q/A-30
or successor provision) of the Contingent Compensation Payments so
eliminated shall be referred to as the "Eliminated Amount."
Notwithstanding the foregoing, no such reduction in payments shall
occur if the excess of (A) 110% of the Eliminated Amount (computed
without regard to this sentence) over (B) the aggregate present value
(determined in accordance with Proposed Treasury Regulation Section
1.280G-1, Q/A-31, and Q/A-32 or successor provisions) of the amount of
any additional taxes that would be incurred by the Employee if the
Eliminated Payments (determined without regard to this sentence) were
paid to him (including, state and federal income
-10-
<PAGE> 11
taxes on the Eliminated Payments, the excise tax imposed by Section
4999 of the Code payable with respect to all of the Contingent
Compensation Payments, and any withholding taxes) is greater than
zero. For purpose of the preceding sentence, any federal or state
income tax that would be attributable to the receipt of the Eliminated
Payments shall be computed by multiplying the amount of the Eliminated
Payment by the maximum combined federal and state income tax rate
provided by law; provided, however, that if the Employee so notifies
the Company within 90 days following the timely filing of all relevant
tax returns for the Employee for the year or other taxable period in
which the Eliminated Payments would have been made, the Eliminated
Payments shall be recomputed based upon all of the Employee's actual
tax circumstances. If, as a result of such recomputation, there are no
Eliminated Payments, the Employee shall become entitled to receive
Contingent Compensation Payments previously treated as Eliminated
Payments within 10 days of the delivery of the aforementioned notice
together with interest thereon computed at the prime rate announced
from time to time by the Wall Street Journal compounded monthly from
the date that such payments originally would have been made.
(b) For purposes of this Section 14, the following terms shall have the
meaning given them in this subsection (b):
(i) "Change in Ownership or Control" shall mean a change in the
ownership or effective control of the Company or in the ownership
of a substantial portion of the assets of the Company determined
in accordance with Section 280G(b)(2) of the Code.
(ii) "Contingent Compensation Payment" shall mean any payment (or
benefit) in the nature of compensation that is made or supplied
to a "disqualified individual" (as defined in Section 280G(c) of
the Code) and that is contingent (within the meaning of Section
280G(b)(2)(A)(i) of the Code) on a Change in Ownership or Control
of the Company.
(c) The amount of any payments or other benefits otherwise due to the
Employee following a Change in Ownership or Control that could
reasonably be characterized as Contingent Compensation Payments (as
determined by the Company) shall not be made until 30 days after the
date on which they would otherwise have been due (the "Extended Due
Date"). Within 15 days of the date on which such payments or benefits
would have originally been due, the Company shall determine and notify
the Employee (with reasonable detail regarding the basis for its
conclusions)
-11-
<PAGE> 12
(i) whether some or all of such payments and benefits constitute
Contingent Compensation Payments and (ii) the amount of any
Eliminated Amount. On or prior to the Extended Due Date, the
Employee shall notify the Company either (A) that he agrees with
the Company's determination pursuant to the preceding sentence,
in which case he shall indicate, if applicable, the Contingent
Compensation Payments that will be treated as Eliminated Payments
or (B) that he disagrees with such determination, in which case
he shall indicate those payments that should be characterized as
Contingent Compensation Payments, the amount of any Eliminated
Amount and, if applicable, the Contingent Compensation Payments
that will be treated as Eliminated Payments. The amount and
characterization of any item in the notice from the Employee
shall be final; provided, however, that in the event that the
Employee fails to notify the Company pursuant to the preceding
sentence on or before the Extended Due Date, the Company's
initial determination shall be final and the Contingent
Compensation Payments that will be treated as Eliminated Payments
shall be determined by the Company in its absolute discretion. In
no event shall the Company be liable to the Employee as a result
of any factual or legal determination made by it pursuant to this
subsection (c) or for any information supplied by it to the
Employee or his advisors.
(d) The provisions of this Section 14 are intended to apply to any and all
payments or benefits available to the Employee under this Agreement.
Section 15. LEGAL EXPENSES.
The Employer shall reimburse the Employee for any reasonable legal expenses
incurred by the Employee in connection with the preparation and negotiation of
this Agreement and any amendments hereto.
Section 16. ENTIRE AGREEMENT.
(a) CHANGE, MODIFICATION, WAIVER. No change or modification of this
Agreement shall be valid unless it is in writing and signed by each of
the parties hereto. No waiver of any provision of this Agreement shall
be valid unless it is in writing and signed by the party against whom
the waiver is sought to be enforced. The failure of a party to insist
upon strict performance of any provision of this Agreement in any one
or more instances shall not be construed as a waiver or relinquishment
of the right to insist upon strict compliance with such provision in
the future.
(b) INTEGRATION OF ALL AGREEMENTS. This Agreement, together with the Prior
Agreements, constitutes the entire Agreement between the parties and
is intended to be an integration of all agreements between the parties
with
-12-
<PAGE> 13
respect to Employee's service with Employer. Any and all prior
agreements between Employee and Employer with respect to the subject
matter hereof (other than the Prior Agreements) are hereby revoked.
(c) SEVERABILITY OF PROVISIONS. If for any reason any provision of this
Agreement should be declared void or invalid, such declaration shall
not affect the validity of the rest of this Agreement, which shall
remain in force as if executed with the void or invalid provision
eliminated. Each of the Prior Agreements shall survive any termination
of this Agreement in accordance with its terms.
Section 17. BINDING EFFECT.
This Agreement shall be binding upon all parties hereto and their heirs,
successors and assigns. This Agreement shall be binding upon any successor
entity to Employer, including without limitation any successor by merger,
consolidation or sale of assets, and shall be assignable by the Employer to any
entity controlled by or under common control with the Employer.
Section 18. GOVERNING LAW.
This Agreement shall be governed by and construed in accordance with the
internal laws of The Commonwealth of Massachusetts, without regard to conflicts
of laws principles.
Section 19. MISCELLANEOUS.
(a) FORM. As employed in this Agreement, the singular form shall include,
if appropriate, the plural.
(b) HEADINGS. The headings employed in this Agreement are solely for the
convenience and reference of the parties and are not intended to be
descriptive of the entire contents of any paragraph and shall not
limit or otherwise affect any of terms, provisions or construction
thereof.
(c) COUNTERPARTS. This Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall
constitute one and the same instrument.
-13-
<PAGE> 14
IN WITNESS WHEREOF, this Agreement is executed as of the date first above
written.
EMPLOYER:
SECURITY DYNAMICS
TECHNOLOGIES, INC.
/s/ Joseph B. Lassiter, III
------------------------------
Joseph B. Lassiter, III
Director and Chairman of the
Compensation Committee of the
Board of Directors
EMPLOYEE:
/s/ Charles R. Stuckey, Jr.
------------------------------
Charles R. Stuckey, Jr.
<PAGE> 1
EXHIBIT 10.24
STOCK PURCHASE AGREEMENT
AGREEMENT made as of this 6th day of November, 1997 (the "Effective Date")
between Security Dynamics Technologies, Inc., a Delaware corporation (the
"Company"), and James K. Sims (the "Purchaser").
For valuable consideration, receipt of which is acknowledged, the parties
hereto agree as follows:
1. PURCHASE OF SHARES. On the Effective Date, the Company shall issue and
sell to the Purchaser, and the Purchaser shall purchase from the Company,
subject to the terms and conditions set forth in this Agreement, 25,000 shares
(the "Shares") of common stock, $.01 par value per share, of the Company
("Common Stock"), at a per share purchase price equal to the product of the
Closing Price multiplied by 75%. The term "Closing Price" shall mean the closing
price of the Common Stock on the Nasdaq National Market on the Effective Date.
The aggregate purchase price for the Shares shall be paid by the Purchaser by
check payable to the order of the Company or such other method as may be
acceptable to the Company. Upon receipt of payment by the Company for the
Shares, the Company shall issue to the Purchaser one or more certificates in the
name of the Purchaser for that number of Shares purchased by the Purchaser.
2. AGGREGATE DISCOUNT REPAYMENT. In the event that the Purchaser ceases to
be a member of the Board of Directors of the Company for any reason or no
reason, with or without cause, prior to the first anniversary of the Effective
Date, the Purchaser shall, within five days after such termination, pay to the
Company a sum that is determined by multiplying the Aggregate Discount by a
fraction, the numerator of which shall be 12 minus the number of full 30-day
periods during which the Purchaser served as a member of the Board of Directors
of the Company from and after the Effective Date and the denominator of which is
12. The "Aggregate Discount" shall mean the number obtained by multiplying
25,000 by the product of the Closing Price multiplied by 25%.
3. INVESTMENT REPRESENTATIONS. The Purchaser represents, warrants and
covenants as follows:
(a) The Purchaser is purchasing the Shares for his own account for
investment only, and not with a view to, or for sale in connection with, any
distribution of the Shares in violation of the Securities Act of 1933 (the
"Securities Act"), or any rule or regulation under the Securities Act.
(b) The Purchaser has had such opportunity as he has deemed adequate
to obtain from representatives of the Company such information as is necessary
to permit him to evaluate the merits and risks of his investment in the Company.
The Purchaser has received and reviewed, without limitation, the Company's
Annual Report
<PAGE> 2
on Form 10-K for the year ended December 31, 1996, the Company's Definitive
Proxy Statement for the 1997 Annual Meeting of Stockholders, 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 Securities and
Exchange Commission on July 31, 1997 and August 4, 1997, and the Company's
Registration Statements on Form S-3, as amended (File Nos. 333-34241 and
333-35035).
(c) The Purchaser has sufficient experience in business, financial and
investment matters to be able to evaluate the risks involved in the purchase of
the Shares and to make an informed investment decision with respect to such
purchase.
(d) The Purchaser can afford a complete loss of the value of the
Shares and is able to bear the economic risk of holding such Shares for an
indefinite period.
(e) The Purchaser understands that (i) the Shares have not been
registered under the Securities Act and are "restricted securities" within the
meaning of Rule 144 under the Securities Act, (ii) the Shares cannot be sold,
transferred or otherwise disposed of unless they are subsequently registered
under the Securities Act or an exemption from registration is then available;
(iii) in any event, the exemption from registration under Rule 144 will not be
available for at least one year and even then will not be available unless a
public market then exists for the Common Stock, adequate information concerning
the Company is then available to the public, and other terms and conditions of
Rule 144 are complied with; and (iv) there is now no registration statement on
file with the Securities and Exchange Commission with respect to the Shares and
the Company has no obligation or current intention to register the Shares under
the Securities Act.
(f) A legend substantially in the following form will be placed on the
certificate representing the Shares:
"The shares represented by this certificate have not been registered
under the Securities Act of 1933, as amended, and may not be sold,
transferred or otherwise disposed of in the absence of an effective
registration statement under such Act or an opinion of counsel
satisfactory to the corporation to the effect that such registration
is not required."
4. WITHHOLDING TAXES. The Purchaser acknowledges and agrees that the
Company has the right to deduct from payments of any kind otherwise due to the
Purchaser any federal, state or local taxes of any kind required by law to be
withheld with respect to the purchase of the Shares by the Purchaser.
-2-
<PAGE> 3
5. SEVERABILITY. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, and each other provision of this Agreement shall be
severable and enforceable to the extent permitted by law.
6. WAIVER. Any provision contained in this Agreement may be waived, either
generally or in any particular instance, by the Board of Directors of the
Company.
7. BINDING EFFECT. This Agreement shall be binding upon and inure to the
benefit of the Company and the Purchaser and their respective heirs, executors,
administrators, legal representatives, successors and assigns.
8. NO RIGHTS TO BOARD MEMBERSHIP. Nothing contained in this Agreement shall
be construed as giving the Purchaser any right to be retained as a member of the
Board of Directors of the Company.
9. PRONOUNS. Whenever the context may require, any pronouns used in this
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular form of nouns and pronouns shall include the plural, and
vice-versa.
10. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties, and supersedes all prior agreements and understandings,
relating to the subject matter of this Agreement.
11. AMENDMENT. This Agreement may be amended or modified only by a written
instrument executed by both the Company and the Purchaser.
12. GOVERNING LAW. This Agreement shall be construed, interpreted and
enforced in accordance with the laws of The Commonwealth of Massachusetts.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the Effective Date.
SECURITY DYNAMICS TECHNOLOGIES, INC.
By: /s/ Charles R. Stuckey, Jr.
------------------------------
Name: Charles R. Stuckey, Jr.
Title: President
PURCHASER
/s/ James K. Sims
------------------------------------
James K. Sims
-3-
<PAGE> 1
EXHIBIT 11
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
COMPUTATION OF INCOME PER COMMON SHARE
(SHARES DATA IN THOUSANDS)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Basic earnings (loss) per share (1):
Net income per common share $ 0.23 $ 0.36 $ 0.43
-------- -------- --------
Weighted average number of shares outstanding 31,793 36,381 38,172
-------- -------- --------
Diluted earning (loss) per share (1):
Net income (loss) per common share $ 0.22 $ 0.34 $ 0.41
-------- -------- --------
Shares:
Weighted average number of shares outstanding 31,793 36,381 38,172
Effect of dilutive options 2,209 2,583 1,692
-------- -------- --------
Adjusted weighted-average number of shares outstanding 34,002 38,914 39,864
-------- -------- --------
</TABLE>
(1) Results for all periods prior to July 15, 1997 and July 26, 1996 have
been restated for the acquisitions of DynaSoft AB and RSA Data Security,
Inc., respectively, which have been accounted for as poolings of interests.
<PAGE> 1
EXHIBIT 13
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Years ended December 31,
---------------------------------------------------------------------
1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data (1):
Revenue $ 16,590 $ 23,866 $ 49,412 $ 83,817 $ 135,930
Cost of revenue 3,707 4,837 8,920 18,207 28,502
---------------------------------------------------------------------
Gross profit 12,883 19,029 40,492 65,610 107,428
Costs and expenses:
Research and development 2,817 4,314 6,292 12,382 20,070
Purchased research and development -- -- 648 1,000 6,210
Marketing and selling 5,506 8,931 14,263 24,429 40,926
General and administrative 2,208 3,368 10,375 13,403 15,371
Merger and integration -- -- -- 6,100 5,700
---------------------------------------------------------------------
Total 10,531 16,613 31,578 57,314 88,277
---------------------------------------------------------------------
Income from operations 2,352 2,416 8,914 8,296 19,151
Interest income and other 163 265 1,905 4,849 6,209
Gain on sale of marketable securities -- -- -- 11,027 4,264
---------------------------------------------------------------------
Income before provision for income taxes
and cumulative effect of change in accounting 2,515 2,681 10,819 24,172 29,624
Provision for income taxes (2) 908 1,453 3,369 10,997 13,142
Minority interests -- -- -- -- (114)
---------------------------------------------------------------------
Income before cumulative effect
of change in accounting (2) 1,607 1,228 7,450 13,175 16,368
Cumulative effect of change in accounting 564 -- -- -- --
---------------------------------------------------------------------
Net income $ 2,171 $ 1,228 $ 7,450 $ 13,175 $ 16,368
---------------------------------------------------------------------
Basic earnings per share (3):
Income before cumulative effect
of change in accounting $ 0.06 $ 0.05 $ 0.23 $ 0.36 $ 0.43
Cumulative effect of change in accounting 0.03 -- -- -- --
---------------------------------------------------------------------
Net income $ 0.09 $ 0.05 $ 0.23 $ 0.36 $ 0.43
---------------------------------------------------------------------
Weighted average shares 23,815 23,598 31,793 36,381 38,172
---------------------------------------------------------------------
Diluted earnings per share (3):
Income before cumulative effect
of change in accounting $ 0.06 $ 0.05 $ 0.22 $ 0.34 $ 0.41
Cumulative effect of change in accounting 0.03 -- -- -- --
---------------------------------------------------------------------
Net income $ 0.09 $ 0.05 $ 0.22 $ 0.34 $ 0.41
---------------------------------------------------------------------
Shares:
Weighted average shares 23,815 23,598 31,793 36,381 38,172
Effect of dilutive options 1,201 1,633 2,209 2,533 1,692
---------------------------------------------------------------------
Adjusted weighted average shares 25,016 25,231 34,002 38,914 39,864
---------------------------------------------------------------------
<CAPTION>
December 31,
---------------------------------------------------------------------
1993 1994 1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data (1):
Cash, cash equivalents and
marketable securities $ 3,860 $ 27,828 $ 112,367 $ 106,495 $ 163,811
Working capital 6,070 29,007 104,349 109,202 177,011
Total assets 11,511 37,691 128,659 145,975 231,672
Redeemable convertible preferred stock 8,527 -- -- -- --
Stockholders' equity (deficiency) (2,001) 29,660 109,026 124,178 199,273
</TABLE>
(1) Results for all periods prior to July 15, 1997 and July 26, 1996 have been
restated for the acquisitions of DynaSoft AB and RSA Data Security, Inc.,
respectively, which have been accounted for as poolings of interests. See
Note 2 of Notes to the Company's 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 5 of Notes to the Company's
Consolidated Financial Statements.
(3) In the fourth quarter of 1997, the Company adopted the provisions of
Statement of Accounting Standards No. 128, "Earnings per share." As a
result, all periods presented have been restated. See Note 1 of Notes to
the Company's Consolidated Financial Statements.
17
<PAGE> 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Security Dynamics Technologies, Inc. and Subsidiaries
OVERVIEW
The Company is a 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 Data Security, Inc.
("RSA") (the "RSA Merger") and on July 15, 1997, the Company completed an
acquisition of DynaSoft AB, ("DynaSoft") (the "DynaSoft Acquisition"). The RSA
Merger and the DynaSoft Acquisition have been accounted for as poolings 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.
RSA, located in Redwood City, California, is a recognized leader in cryptography
and develops, markets and supports cryptographic data security products and
provides cryptographic consulting services. Products are licensed to Original
Equipment Manufacturers ("OEMs") that incorporate the technology into their
products. Developer toolkits and other products are used to implement
cryptographic data security applications such as electronic mail, communications
privacy, client/server data security, smart cards and other key information
technologies.
DynaSoft is based in Stockholm, Sweden and offers a range of software security
solutions, including secure single sign-on solutions, through its BoKS product
family. DynaSoft markets its products worldwide through subsidiaries and also
through OEM licensing agreements with Sun Microsystems, Inc., Hewlett-Packard
Company 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 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 8 of Notes to the Company's
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.
18
<PAGE> 3
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 eight-year period
ended December 31, 1997.
RESULTS OF OPERATIONS
The following table sets forth certain consolidated financial data as a
percentage of revenue for the years ended December 31, 1995, 1996 and 1997:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenue 100.0% 100.0% 100.0%
Cost of revenue 18.1 21.7 21.0
------------------------------------
Gross profit 81.9 78.3 79.0
Costs and expenses:
Research and development 12.7 14.8 14.8
Purchased research and development 1.3 1.2 4.6
Marketing and selling 28.9 29.1 30.1
General and administrative 21.0 16.0 11.3
Merger and integration -- 7.3 4.2
------------------------------------
Total 63.9 68.4 65.0
------------------------------------
Income from operations 18.0 9.9 14.0
Interest income and other 3.9 5.8 4.6
Gain on sale of marketable securities -- 13.2 3.1
------------------------------------
Income before provision for income taxes 21.9 28.9 21.7
Provision for income taxes 6.8 13.1 9.7
------------------------------------
Net income 15.1% 15.8% 12.0%
------------------------------------
</TABLE>
1997 COMPARED WITH 1996
REVENUE
Total revenue increased 62.2% in 1997 to $135.9 million from $83.8 million in
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. Approximately
43% of the increase in revenue in 1997 was attributable to increased sales of
SecurID tokens, approximately 23% of the increase was attributable to increased
sales of encryption engine licenses and approximately 24% 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 1997 to $36.0
million from $19.7 million in 1996. International revenue accounted for 26.6%
and 23.3% of total revenue in 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 63.7% in 1997 to $107.4 million, from $65.6
million in 1996, and remained relatively constant as a percentage of revenue at
79.0% in 1997 compared to 78.3% in 1996. Approximately 39% of the increase in
gross profit during 1997 was attributable to increased unit sales of SecurID
tokens, approximately 27% to
19
<PAGE> 4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
continued
increased licensing sales of encryption engine technology and approximately 29%
to increased licensing sales of ACE/Server software. 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 62.1% in 1997 to $20.1 million from
$12.4 million in 1996. In each of 1997 and 1996, research and development
expenses remained the same as a percentage of revenue at 14.8%. During 1997,
approximately 63% of the increase in research and development expenses resulted
from an increase in payroll costs associated with the employment of additional
staff. The remainder of the increase in research and development was
attributable to occupancy costs, consulting fees and purchases of computer
equipment, resulting in higher depreciation charges.
PURCHASED RESEARCH AND DEVELOPMENT
During 1997, the Company purchased and recorded as purchased research and
development expense technology from VeriSign, Inc. ("VeriSign") for $2.7
million, from Baltimore Technologies, Ltd. for $0.5 million and from Netscape
Communications Corporation ("Netscape") for $3.0 million. The Company plans to
incorporate the technologies, respectively, into products which are expected to
offer electronic signatures and a certificate authority, and a Java-based
developer encryption engine as part of its SecurSight family of enterprise
security solutions ("SecurSight").
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.
MARKETING AND SELLING
Marketing and selling expenses increased 67.6% in 1997 to $40.9 million from
$24.4 million in 1996. Marketing and selling expenses increased as a percentage
of revenue in 1997 to 30.1% from 29.1% in 1996. During 1997, approximately 36%
of the increase in marketing and selling expenses resulted from an increase in
payroll costs associated with the employment of additional staff and
approximately 34% of the increase was attributable to sales commissions on
increased revenues. The remainder of the increase in marketing and selling
expenses resulted from increased travel expenses, marketing program costs and
occupancy costs.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 14.9% in 1997 to $15.4 million,
from $13.4 million in 1996, but decreased as a percentage of revenue to 11.3% in
1997 compared to 16.0% 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 $2.3 million in 1997 compared
to 1996 due to the settlement of certain of the Company's legal proceedings in
1996.
MERGER AND INTEGRATION
In 1997, the Company incurred direct costs in connection with the DynaSoft
Acquisition and, subsequently incurred costs in connection with the integration
of DynaSoft, primarily for severance. Total merger and integration costs were
$5.7 million in 1997. Expenses incurred in connection with the RSA Merger were
$6.1 million in the third quarter of 1996. See Note 2 to the Company's Notes to
Consolidated Financial Statements.
INTEREST INCOME AND OTHER
Interest income increased 29.2% in 1997 to $6.2 million from $4.8 million in
1996 due to interest earned on higher cash and marketable securities balances.
GAIN ON SALE OF MARKETABLE SECURITIES
The gain on sale of marketable securities was $4.3 million in 1997, compared to
$11.0 million in 1996.
MINORITY INTERESTS
Minority interest in the consolidated net income was $114,000 in 1997. In 1997
and 1996, the Company sold an aggregate 26% interest to minority stockholders of
RSA's Japanese subsidiary.
20
<PAGE> 5
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $13.1 million during 1997 from $11.0
million in 1996, primarily due to higher pre-tax income. The Company's estimated
effective tax rate decreased to 44.4% in 1997 from 45.5% in 1996 due to
differences in amounts of nondeductible merger expenses in 1997 compared to
1996.
NET INCOME
As a result of the above factors, net income in 1997 increased to $16.4 million,
or 12.0% of revenue, from $13.2 million, or 15.8% of revenue, in 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 23.5% and 18.6% of total
revenue in 1996 and 1995, respectively. This increase in international revenue
was primarily attributable to the continuing expansion of the Company's
international direct sales force and increased market penetration of the
Company's products in foreign markets.
COST OF REVENUE AND GROSS PROFIT
The Company's gross profit increased 62.0% in 1996 to $65.6 million, or 78.3% of
revenue, from $40.5 million, or 81.9% of revenue, in 1995. Approximately 46% of
the increase in gross profit was attributable to an increase in the unit sales
and gross margin from the sale of SecurID tokens. Approximately 26% of the
increase in gross profit was attributable to increased sales of ACE/Server
software licenses. Approximately 9% of the increase in gross profit was
attributable to increased sales of patent and encryption engine licenses.
Overall, gross margins were lower due primarily to the higher royalty costs
associated with the ACE/Server software and patent license products and
additional investment in the Company's customer support infrastructure.
In December 1994, the Company entered into an agreement with Progress Software
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, 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
21
<PAGE> 6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
continued
to the increase in commissions on products sold by the Company's direct sales
force. Approximately 15% of the increase in marketing and selling expenses was
due to an increase in travel-related costs and marketing programs, such as
direct mail and seminar activities, trade shows and public relations campaigns.
Approximately 12% of the increase in marketing and selling expenses in 1996 was
related to general overhead costs.
During 1996, international sales expenses increased due to the continued
development of the Company's sales offices in Europe and Asia.
GENERAL AND ADMINISTRATIVE
General and administrative expenses increased 29.2% in 1996 to $13.4 million, or
16.0% of revenue, from $10.4 million, or 21.0% of revenue, in 1995.
Approximately 29% of the increase was due to an increase in payroll and
recruitment costs associated primarily with the growth in the Company's staff
needed to support the continuing expansion of operations. Approximately 17% of
the increase in general and administrative expenses 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 AND INTEGRATION
Merger and integration 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
Consolidated Financial Statements.
INTEREST INCOME AND OTHER
Interest income increased to $4.8 million in 1996 from $1.9 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 5 of Notes to the Company's Consolidated
Financial Statements.
NET INCOME
As a result of the above factors, net income in 1996 increased to $13.2 million,
or 15.8% of revenue, from $7.5 million, or 15.1% of revenue, in 1995.
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY
At December 31, 1997, the Company had cash, cash equivalents and marketable
securities of $163.8 million and working capital of $177.0 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 and the DynaSoft Acquisition. The Company
believes that working capital will be sufficient to meet its anticipated cash
requirements through at least 1999.
MERGERS AND ACQUISITIONS
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 were approximately $5.7 million, which included
integration costs, primarily severance, of $0.3 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 and the DynaSoft Acquisition were
accounted for as poolings of interests. See Note 2 of Notes to the Company's
Consolidated Financial Statements.
On March 26, 1998 the Company acquired Intrusion Detection, Inc., ("IDI") in a
pooling of interests merger. The
22
<PAGE> 7
Company issued approximately 784,000 shares of common stock in exchange for all
of IDI's outstanding common stock. IDI develops and markets intrusion detection
software.
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.
SALES OF COMMON STOCK
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
Company's initial public offering, generating $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 October 1997, the Company sold an additional
1,626,000 shares of Common Stock in a follow-on offering, which generated $61.1
million of net cash proceeds to the Company.
The Company generated $7.5 million of cash from the exercise of stock options
and related income tax benefits and generated $1.9 million of cash from the sale
of minority interests in RSA's Japanese subsidiary in 1997.
STRATEGIC INVESTMENTS
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. 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 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. The Company's voting interest in VeriSign was
approximately 27% and 26% at December 31, 1996 and 1997, respectively. The
Company uses the equity method to account for its investment in VeriSign. In
January 1998, VeriSign had an initial public offering which diluted the
Company's ownership to approximately 22% (unaudited) but increased the Company's
equity in VeriSign. VeriSign introduced its first products and services in June
1995; as such, it has a limited operating history and through December 31, 1997
has incurred significant net losses, in each year since its inception. There can
be no assurance that VeriSign will achieve profitability in the foreseeable
future.
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.
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 October 1997, the Company purchased 175,285 Ordinary Shares of nCipher
Corporation Limited ("nCipher") for an aggregate purchase price of $512,000.
nCipher is located in the United Kingdom and develops products designed to
accelerate cryptographic processes in Internet security, electronic commerce and
other applications. The Company's investment in nCipher represents a minority
interest of less than 5% of nCipher's capitalization.
CAPITAL EXPENDITURES
The Company's capital expenditures during 1997 were $10.9 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. During the fourth quarter of 1997, the Company
commenced implementation of a system which is designed to better meet the
Company's growing world-wide information and business process needs. The Company
expects the system, which is represented by the manufacturer to be year 2000
compliant, to be operational in 1998 and estimates the cost at approximately
$5.0 million, of which approximately $3.5 million will be spent in 1998.
23
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
continued
LEASING EXPENDITURES
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 1997, the Company entered into two noncancelable ten year leases
expiring in 2008 for RSA offices in Redwood City, CA. The Company plans to
occupy the first facility in March 1998. The first facility consists of
approximately 27,000 square feet of office space, and the annual base rent is
$1,010,000. The Company plans to occupy the second facility in June 1998. The
second facility consists of approximately 31,000 square feet of office space,
and the annual base rent is $912,000 and annual operating expenses of $245,000.
Both leases have rent escalation provisions covering years two through ten based
on the Consumer Price Index.
ROYALTY ARRANGEMENTS AND PURCHASED RESEARCH AND DEVELOPMENT
In September 1997, the Company announced its SecurMessage email security
solution, now known as SecurSight for Email, which incorporates technology from
Worldtalk Corporation ("Worldtalk") and VeriSign for securing already-deployed
enterprise email and groupware applications. In October 1997 the Company paid
Worldtalk a one-time prepaid, nonrefundable license fee of $3.0 million in order
to obtain favorable pricing. The prepaid asset will be recorded as cost of sales
as Worldtalk products are sold.
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 prepaid asset is recorded as cost of sales as products incorporating
Progress Software products are sold.
In December 1997, the Company acquired and recorded as purchased technology
certain rights to Netscape technology for approximately $3.0 million, which
amount is included in accounts payable as of December 31, 1997. The Company
plans to incorporate the technology in its SecurSight products.
The Company expended approximately $6.2 million for purchased research and
development technology during 1997.
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded to
accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, software and computer systems may need to be
upgraded or replaced in order to comply with such "Year 2000" requirements.
Although the Company believes that its products and systems are Year 2000
compliant, the Company utilizes third-party equipment and software that may not
be Year 2000 compliant. Failure of such third-party equipment or software to
operate properly with regard to the year 2000 and thereafter could require the
Company to incur unanticipated expenses to remedy any problems, which could have
a material adverse effect on the Company's business, operating results and
financial condition.
Furthermore, the purchasing patterns of customers or potential customers may be
affected by Year 2000 issues as companies expend significant resources to
correct their current systems for Year 2000 compliance. These expenditures may
result in reduced funds available to implement the infrastructure needed to
conduct trusted and secure communications and commerce over information networks
or to purchase products and services such as those offered by the Company, which
could have a material adverse effect on the Company's business, operating
results and financial condition.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 97-2, "Software Revenue
Recognition", which supersedes SOP No. 91-1. The Company adopted SOP No. 97-2
prospectively on January 1, 1998. SOP No. 97-2 generally requires revenue earned
on software arrangements involving multiple elements to be allocated to each
element based on the relative fair values of the elements. In March 1998, the
AICPA postponed the adoption date of certain provisions of SOP No. 97-2. The
Company's management believes that the adoption of SOP No. 97-2 will not have a
material effect on the Company's revenues and operating results.
24
<PAGE> 9
In June 1997, the Financial Accounting Standards Board issued Statements of
Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" and "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 130" and "SFAS 131," respectively). The Company will be
required to adopt the provisions of these statements in fiscal 1998. SFAS 130
provides standards for reporting items considered to be "comprehensive income"
and uses the term "other comprehensive income" to refer to revenues, expenses,
gains and losses that are included in comprehensive income under generally
accepted accounting principles but excluded from net income. Currently the only
items presented in the Company's consolidated financial statements that would be
considered other comprehensive income as defined in SFAS 130 are the unrealized
gains and losses on marketable securities and cumulative translation
adjustments, which are recorded as components of stockholders' equity. SFAS 131
establishes new standards for reporting information about operating segments.
The Company believes 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 the
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 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 approximately $0.7 million in
1996.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
This Annual Report to Stockholders 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. The following important
factors, among others, could cause actual results to differ materially from
those indicated by forward-looking statements made in this Annual Report to
Stockholders and presented elsewhere by management from time to time. Such
forward-looking statements represent management's current expectations and are
inherently uncertain. Investors are warned that actual results may differ from
management's expectations
A number of uncertainties exist that could affect the Company's future operating
results, including, without limitation, general economic conditions, the
Company's continued ability to develop and introduce products, the introduction
of new products by competitors, pricing practices of competitors, expansion of
the Company's sales distribution capability, the cost and availability of
components and the Company's ability to control costs.
The Company's success is dependent in part on its ability to complete its
integration of the operations of DynaSoft and RSA in an efficient and effective
manner. The successful combination of the Company, DynaSoft and RSAin a rapidly
changing high technology industry may be more difficult to accomplish than in
other industries. The combination of the three companies will require, among
other things, integration of the companies' respective product offerings and
coordination of their sales and marketing and research and development efforts.
There can be no assurance that such integration will be accomplished smoothly or
successfully. The difficulties of such integration may be increased by the
25
<PAGE> 10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
continued
necessity of coordinating geographically separated organizations. The
integration of certain operations will require the dedication of management
resources which may temporarily distract attention from the day-to-day business
of the combined company. The inability of management to successfully integrate
the operations of the three companies could have a material adverse effect on
the business and results of operations of the Company.
The Company's success is also dependent on the success of its SecurSight
strategy, which is a security solution being developed by the Company that would
enable organizations to support and manage the growing use of public and private
keys, digital signatures and digital certificates for assuring confidentiality
and privacy on an enterprise-wide scale. The success of SecurSight is dependent
on a number of factors, including without limitation delays in product
development, undetected software errors or bugs, competitive pressures,
technical difficulties, market acceptance of new technologies, including without
limitation the use and implementation of various certificate management and key
management technologies, changes in customer requirements and government
regulations, delays in developing strategic partnerships and general economic
conditions.
The Company's success is highly dependent on its ability to enhance its existing
products and to develop and introduce new products in a timely manner. If the
Company were to fail to introduce new products on a timely basis, the Company's
operating results could be adversely affected. To date, substantially all of the
Company's revenues have been attributable to sales of its enterprise network and
data security products, the licensing of encryption engines and the provision of
related services, and existing and new versions of such products are expected to
continue to represent a high percentage of the Company's revenue for the
foreseeable future. As a result, any factor adversely affecting sales of these
products and services could have a material adverse effect on the Company's
financial condition and results of operations.
Certain components of the Company's products are currently purchased from a
single or limited sources and any interruption in the supply of such components
could adversely affect the Company's operating results.
The Company's quarterly operating results may vary significantly depending on a
number of factors, including the timing of the introduction or enhancement of
products by the Company or its competitors, the sizes, timing and shipment of
individual orders, market acceptance of new products, changes in the Company's
operating expenses, personnel changes, mix of products sold, changes in product
pricing, development of the Company's direct and indirect distribution channels
and general economic conditions.
International sales have represented a significant portion of the Company's
sales. The international business and financial performance of the Company may
be affected by fluctuations in foreign exchange rates, difficulties in managing
accounts receivable, tariff regulations and difficulties in obtaining export
licenses.
All of the Company's products are subject to export controls under U.S. law and
applicable foreign government restrictions, including without limitation
restrictions on the export of encryption technology. 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. In addition the Company 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.
26
<PAGE> 11
INDEPENDENT AUDITORS' REPORT
[DELOITTE & TOUCHE LLP LOGO]
To the Board of Directors and Stockholders of
Security Dynamics Technologies, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Security
Dynamics Technologies, Inc. (the "Company") and subsidiaries as of December 31,
1996 and 1997, and the related consolidated statements of income, stockholders'
equity, and cash flows for each of the three years in the period ended December
31, 1997. 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 consolidated financial statements give
retroactive effect to the acquisition of DynaSoft AB, which has been accounted
for as a pooling of interests as described in Note 2 of notes to the
consolidated financial statements. We did not audit the consolidated statements
of income, stockholders' equity, and cash flows of RSA Data Security, Inc. for
the year ended December 31, 1995, which consolidated statements reflect, total
revenues of $11,600,000 for the year ended December 31, 1995. 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 1995, is based solely on the report of such other auditors.
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
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, 1996 and 1997, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
As discussed in Note 4 of the notes to the consolidated financial statements, in
1996 the Company changed its method of accounting for option grants requiring
stockholder approval in 1996.
/s/ Deloitte & Touche LLP
March 20, 1998
Boston, Massachusetts
27
<PAGE> 12
CONSOLIDATED BALANCE SHEETS
Security Dynamics Technologies, Inc. and Subsidiaries
(In thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
ASSETS 1996 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT ASSETS:
Cash and equivalents $ 11,175 $ 95,747
Marketable securities 95,320 68,064
Accounts receivable (less allowance for doubtful accounts of $527
in 1996 and $742 in 1997) 16,500 26,193
Inventory 2,606 3,035
Prepaid expenses and other 4,204 9,284
Prepaid income taxes -- 2,562
Deferred taxes -- 1,426
------------------------------
TOTAL CURRENT ASSETS 129,805 206,311
------------------------------
PROPERTY AND EQUIPMENT
Furniture and equipment 11,301 20,842
Leasehold improvements 2,863 4,528
------------------------------
TOTAL PROPERTY AND EQUIPMENT 14,164 25,370
Less accumulated depreciation and amortization (3,596) (7,878)
------------------------------
PROPERTY AND EQUIPMENT -- NET 10,568 17,492
------------------------------
OTHER ASSETS:
Investments 2,924 3,699
Purchased technology and capitalized software costs -- net 197 86
Deferred taxes 1,026 3,371
Other 1,455 713
------------------------------
TOTAL OTHER ASSETS 5,602 7,869
------------------------------
TOTAL $145,975 $231,672
------------------------------
</TABLE>
See notes to consolidated financial statements
28
<PAGE> 13
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY 1996 1997
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable $ 5,119 $ 10,966
Accrued payroll and related benefits 4,829 5,254
Accrued expenses and other 4,269 4,041
Income taxes payable 51 --
Deferred revenue 5,503 9,039
Deferred taxes 832 --
----------------------------------
TOTAL CURRENT LIABILITIES 20,603 29,300
----------------------------------
Minority Interests 1,194 3,099
----------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 7 and 9)
STOCKHOLDERS' EQUITY
Common stock, $.01 par value; authorized, 80,000,000 shares; issued,
37,220,893 and 39,682,776 shares in 1996 and 1997;
outstanding, 37,220,597 and 39,682,267 shares in 1996 and 1997 372 397
Additional paid-in capital 102,322 165,610
Retained earnings 17,685 34,053
Deferred stock compensation (174) (116)
Treasury stock, common, at cost, 296 shares in 1996, 509 in 1997 -- --
Cumulative translation adjustment 493 (750)
Unrealized gain on marketable securities -- net 3,480 79
----------------------------------
TOTAL STOCKHOLDERS' EQUITY 124,178 199,273
----------------------------------
TOTAL $ 145,975 $ 231,672
----------------------------------
</TABLE>
29
<PAGE> 14
CONSOLIDATED STATEMENTS OF INCOME
Security Dynamics Technologies, Inc. and Subsidiaries
(In thousands, except per share data)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1995 1996 1997
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE $ 49,412 $ 83,817 $ 135,930
COST OF REVENUE 8,920 18,207 28,502
----------------------------------------------
GROSS PROFIT 40,492 65,610 107,428
COSTS AND EXPENSES:
Research and development 6,292 12,382 20,070
Purchased research and development 648 1,000 6,210
Marketing and selling 14,263 24,429 40,926
General and administrative 10,375 13,403 15,371
Merger and integration -- 6,100 5,700
----------------------------------------------
Total 31,578 57,314 88,277
----------------------------------------------
INCOME FROM OPERATIONS 8,914 8,296 19,151
Interest income and other 1,905 4,849 6,209
Gain on sale of marketable securities -- 11,027 4,264
----------------------------------------------
Income before provision for income taxes 10,819 24,172 29,624
Provision for income taxes 3,369 10,997 13,142
Minority interests -- -- (114)
----------------------------------------------
NET INCOME $ 7,450 $ 13,175 $ 16,368
----------------------------------------------
BASIC EARNINGS PER SHARE
Per share amount $ 0.23 $ 0.36 $ 0.43
----------------------------------------------
Weighted average shares 31,793 36,381 38,172
----------------------------------------------
DILUTED EARNINGS PER SHARE
Per share amount $ 0.22 $ 0.34 $ 0.41
----------------------------------------------
Weighted average shares 31,793 36,381 38,172
Effect of dilutive options 2,209 2,533 1,692
----------------------------------------------
Adjusted weighted average shares 34,002 38,914 39,864
----------------------------------------------
</TABLE>
See notes to consolidated financial statements
30
<PAGE> 15
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Security Dynamics Technologies, Inc. and Subsidiaries
(In thousands, except share data)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL RETAINED DEFERRED TREASURY STOCK
----------------------- PAID-IN EARNINGS STOCK -----------------------
SHARES AMOUNTS CAPITAL (DEFICIT) COMPENSATION SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, JANUARY 1, 1995 29,601,507 $295 $ 33,073 $ (2,940) $ (275) 296 $ --
Exercise of stock options 957,434 10 632 -- -- -- --
Tax benefit arising from
exercise of stock options -- -- 225 -- -- -- --
Deferred stock compensation -- -- 157 -- (157) -- --
Amortization of deferred stock
compensation -- -- -- -- 140 -- --
Issuance of common stock 4,578,830 46 60,365 -- -- -- --
Translation adjustment -- -- -- -- -- -- --
Change in unrealized gain
on marketable securities -- -- -- -- -- -- --
Net income -- -- -- 7,450 -- -- --
----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1995 35,137,771 351 94,452 4,510 (292) 296 --
Exercise of stock options 817,123 8 2,598 -- -- -- --
Tax benefit arising from
exercise of stock options -- -- 3,702 -- -- -- --
Compensation expense -- -- 1,049 -- -- -- --
Amortization of deferred stock
compensation -- -- -- -- 118 -- --
Issuance of common stock 1,265,999 13 521 -- -- -- --
Translation adjustment -- -- -- -- -- -- --
Change in unrealized gain on
marketable securities -- -- -- -- -- -- --
Net income -- -- -- 13,175 -- -- --
----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1996 37,220,893 372 102,322 17,685 (174) 296 --
Settlement of RSA escrow (36,037) -- -- -- -- 213 --
Exercise of stock options 1,031,322 10 5,485 -- -- -- --
Tax benefit arising from
exercise of stock options -- -- 2,012 -- -- -- --
Payments to Acquisition shareholders (159,402) (1) (6,037) -- -- -- --
Issuance of common stock 1,626,000 16 61,092 -- -- -- --
Compensation expense -- -- 736 -- -- -- --
Amortization of deferred stock
compensation -- -- -- -- 58 -- --
Translation adjustment -- -- -- -- -- -- --
Change in unrealized gain on
marketable securities -- -- -- -- -- -- --
Net income -- -- -- 16,368 -- -- --
----------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 39,682,776 $397 $165,610 $ 34,053 $ (116) 509 $ --
----------------------------------------------------------------------------------------------
<CAPTION>
UNREALIZED
CUMULATIVE GAIN ON
TRANSLATION MARKETABLE STOCKHOLDERS'
ADJUSTMENT SECURITIES EQUITY
- -----------------------------------------------------------------------------------
<S> <C> <C> <C>
BALANCE, JANUARY 1, 1995 $ (493) $ -- $ 29,660
Exercise of stock options -- -- 642
Tax benefit arising from
exercise of stock options -- -- 225
Deferred stock compensation -- -- --
Amortization of deferred stock
compensation -- -- 140
Issuance of common stock -- -- 60,411
Translation adjustment 588 -- 588
Change in unrealized gain
on marketable securities -- 9,910 9,910
Net income -- -- 7,450
----------------------------------------------
BALANCE, DECEMBER 31, 1995 95 9,910 109,026
Exercise of stock options -- -- 2,606
Tax benefit arising from
exercise of stock options -- -- 3,702
Compensation expense -- -- 1,049
Amortization of deferred stock
compensation -- -- 118
Issuance of common stock -- -- 534
Translation adjustment 398 -- 398
Change in unrealized gain on
marketable securities -- (6,430) (6,430)
Net income -- -- 13,175
----------------------------------------------
BALANCE, DECEMBER 31, 1996 493 3,480 124,178
Settlement of RSAescrow -- -- --
Exercise of stock options -- -- 5,495
Tax benefit arising from
exercise of stock options -- -- 2,012
Payments to Acquisition shareholders -- -- (6,038)
Issuance of common stock -- -- 61,108
Compensation expense -- -- 736
Amortization of deferred stock
compensation -- -- 58
Translation adjustment (1,243) -- (1,243)
Change in unrealized gain on
marketable securities -- (3,401) (3,401)
Net income -- -- 16,368
----------------------------------------------
BALANCE, DECEMBER 31, 1997 $ (750) $ 79 $199,273
----------------------------------------------
</TABLE>
See notes to consolidated financial statements
31
<PAGE> 16
CONSOLIDATED STATEMENTS OF CASH FLOWS
Security Dynamics Technologies, Inc. and Subsidiaries
(In thousands)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1995 1996 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 7,450 $ 13,175 $ 16,368
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Gain on sale of marketable securities -- (11,027) (4,264)
Deferred taxes (988) (1,393) (2,337)
Purchased research and development 648 1,000 6,210
Depreciation and amortization 1,085 1,815 4,352
Provision for notes receivable 200 -- --
Stock compensation 181 1,167 794
Minority interests -- -- (114)
Increase (decrease) in cash from changes in:
Accounts receivable (3,281) (7,950) (10,428)
Inventory (309) (1,161) (429)
Prepaid expenses and other (1,125) (2,666) (5,099)
Accounts payable 1,573 2,241 1,594
Accrued payroll and related benefits 1,808 1,652 510
Accrued expenses and other 824 1,938 33
Prepaid and income taxes payable 507 (453) (4,850)
Deferred revenue 2,320 1,000 3,653
-------------------------------------------------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 10,893 (662) 5,993
-------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of marketable securities (64,730) (119,619) (104,172)
Sales and maturities of marketable securities 27,842 85,975 133,804
Purchases of property and equipment (1,891) (9,418) (10,891)
Notes receivable (274) -- --
Capitalized software costs and purchased technology (924) (1,061) (1,410)
Investments and other (734) (3,224) (1,616)
-------------------------------------------------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES (40,711) (47,347) 15,715
-------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock, net of issuance costs 60,411 534 61,108
Payments to Acquisition shareholders -- -- (6,038)
Proceeds from exercise of stock options and purchase plans 642 2,606 5,495
Tax benefit from exercise of stock options 225 3,702 2,012
Minority interests -- 1,213 1,905
Other (786) 537 --
-------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 60,492 8,592 64,482
-------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS 195 (138) (1,618)
-------------------------------------------------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS 30,869 (39,555) 84,572
CASH AND EQUIVALENTS, BEGINNING OF PERIOD 19,861 50,730 11,175
-------------------------------------------------
CASH AND EQUIVALENTS, END OF PERIOD $ 50,730 $ 11,175 $ 95,747
-------------------------------------------------
</TABLE>
See notes to consolidated financial statements
32
<PAGE> 17
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Security Dynamics Technologies, Inc. and Subsidiaries
(In thousands, except 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 Asia/Pacific, with the United States, Europe and
Asia/Pacific currently being the largest.
PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements include all
accounts of SDI and its subsidiaries including RSA Data Security, Inc. ("RSA").
Strategic equity investments are either accounted for under the equity method
or, for where the Company does not have the ability to exercise significant
influence are carried at cost.
In 1996 and 1997, RSA sold minority interests, aggregating 26% in its Japanese
subsidiary to third parties for $1,213 and $1,905, respectively. The minority
interest in the subsidiaries' profits and losses is separately presented in the
accompanying consolidated income statement.
REVENUE RECOGNITION -- Revenue from software license fees, developer toolkits,
patent license fees and the sale of hardware products is recognized upon
shipment of the product, provided that no significant obligations remain and
collection of the receivable is considered probable. Shipments to distributors
are based upon receipt of a purchase order from end users by the distributor.
Revenue from charges for maintenance services is deferred and recognized ratably
over the maintenance period, generally twelve months. No customer accounted for
10% or more of the Company's revenue in any period reported.
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 SecurID tokens 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 ten 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 $298, $330 and $111 for 1995, 1996 and
1997, respectively.
In December 1997, the Company acquired and recorded as purchased technology
certain rights to Netscape technology for approximately $3.0 million, which
amount is included in accounts payable as of December 31, 1997. The Company
plans to incorporate the technology in its SecurSight products. The Company
expended approximately $6.2 million for purchased research and development
technology during 1997.
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:
33
<PAGE> 18
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
continued
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------
1996 1997
- ------------------------------------------------------------------------------------------------
AGGREGATE AGGREGATE
FAIR VALUE COST FAIR VALUE COST
-------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government obligations $88,171 $88,161 $67,582 $67,510
Corporate equity securities 5,809 20 482 422
Corporate debt securities 1,340 1,340 -- --
-------------------------------------------------------------
Total $95,320 $89,521 $68,064 $67,932
-------------------------------------------------------------
</TABLE>
At December 31, 1996 and 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 in 1995.
Proceeds from the sale of marketable securities were $11,027 and $4,264 in 1996
and 1997, respectively. The specific identified cost basis of the securities was
used to determine the gain. Unrealized gross gains at December 31, 1996 and 1997
were $5,799 and $132, respectively.
ADVERTISING -- Advertising costs are expensed as incurred. Total advertising
expense was approximately $501, $561 and $638 for 1995, 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.
EARNINGS PER SHARE -- In the fourth quarter of 1997, the Company adopted the
provisions of Statement of Financial Accounting Standards ("SFAS") No. 128
"Earnings per Share." The Company changed the method used to compute earnings
per share and restated all prior periods in accordance with SFAS No. 128. 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 by requiring the presentation of
basic and fully diluted earnings per share. The Company's only dilutive stock
equivalents are stock options.
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 interest in 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.
Two 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 have
been met in 1997. Accordingly, these restricted securities, which had a cost of
$737, have been reclassified in 1997 from investments to marketable securities.
USE OF ESTIMATES -- The preparation of the Company's 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.
34
<PAGE> 19
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 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 the 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 consolidated financial statements.
In October 1997, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") No. 97-2, "Software Revenue
Recognition", which supersedes SOP No. 91-1. The Company adopted SOP No. 97-2
prospectively for software transactions entered into after January 1, 1998. SOP
No. 97-2 generally requires revenue earned on software arrangements involving
multiple elements to be allocated to each element based on the relative fair
values of the elements. In March 1998, the AICPA postponed the adoption date of
certain provisions of SOP No. 97-2. The Company's management believes that the
adoption of SOP No. 97-2 will not have a material effect on the Company's
consolidated revenues and operating results.
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 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 $6,038 to certain stockholders of DynaSoft in exchange for the
remaining outstanding shares and options.
35
<PAGE> 20
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
continued
Investment banking, professional fees and other direct expenses incurred in
connection with the Merger were approximately $6,100 in 1996. In the third
quarter of 1997, the Company accrued a charge of $7,000 representing the
estimated direct costs of the DynaSoft Acquisition. In the fourth quarter, the
Company's actual direct costs were determined to be approximately $5,400, a
difference of $1,600. The difference came from lower than expected legal and
other professional fees and from a change in the planned use of the DynaSoft
facilities. As a result, the Company reversed $1,600 of the original accrual in
the fourth quarter of 1997. As of December 31, 1997, approximately $325,
representing unbilled professional fees and unsettled lease obligations, remains
unpaid.
In December 1997, the Company committed to a plan to integrate the DynaSoft
operations into its worldwide structure. The plan of integration encompasses the
severing of 9 DynaSoft employees and consultants, all of whom have been notified
of their pending termination from the Company prior to December 31, 1997. In
connection with this plan, the Company accrued severance and other related costs
of $300 in the fourth quarter of 1997. As of December 31, 1997, four of the
employees have been terminated, whereby the Company paid severance of $49. The
remaining 5 employees/consultants were terminated in early 1998, at which time
the Company paid the remaining amounts contemplated under the plan.
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>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUE
SDI $ 33,804 $ 70,105 $ 130,653
RSA 11,600 6,043(a) --
DynaSoft 4,008 7,669 5,277(b)
-----------------------------------------------
Total $ 49,412 $ 83,817 $ 135,930
-----------------------------------------------
NET INCOME (LOSS)
SDI $ 5,812 $ 13,428 $ 16,523
RSA 950 (383)(a) --
DynaSoft 688 130 (155)(b)
-----------------------------------------------
Total $ 7,450 $ 13,175 $ 16,368
-----------------------------------------------
</TABLE>
(a) Revenue and net loss of RSA for 1996 include only the six month period prior
to the consummation of the Merger.
(b) Revenue and net loss of DynaSoft for 1997 include only the six month period
prior to the consummation of the Acquisition.
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 a 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 stock. Of
the shares received by the Company, 213 shares were accounted for as treasury
stock and the remainder were canceled.
36
<PAGE> 21
3. INVESTMENTS
Investments were as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
VeriSign, Inc. $ 687 $ 687
VPNet Technologies, Inc. 1,500 1,500
nCipher Corporation Ltd. -- 512
Finjan Software Ltd. -- 1,000
Other 737 --
----------------------------
Total $2,924 $3,699
----------------------------
</TABLE>
Prior to 1997, other investments were carried at the lower of cost or estimated
realizable value (See Note 1, "Financial Instruments").
VERISIGN, INC. ("VERISIGN") -- During 1995, RSA granted certain rights and
priveleges in certain technology to Verisign in connection with VerSign's
incorporation and received 4,000,000 shares of VeriSign common stock. 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, 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. The Company's voting interest in
VeriSign was approximately 27% and 26% at December 31, 1996 and 1997,
respectively. The Company uses the equity method to account for its investment
in VeriSign. The Company's equity interest in VeriSign was zero in 1996 and 1997
and the Company recognized no equity interest in VeriSign's net losses. In
January 1998 VeriSign had an initial public offering of 3 million shares of its
common stock. The Company's series A and B convertible preferred stock converted
to common stock in connection with the offering. The offering diluted the
Company's ownership to approximately 22% but increased the Company's equity in
VeriSign. As of December 31, 1997, VeriSign had total assets and liabilities of
$24,406 (unaudited) and $11,937 (unaudited), respectively. For the year ended
December 31, 1997 VeriSign had a net loss of $19,195 (unaudited).
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 capitalization and is
carried at cost.
nCIPHER CORPORATION LTD. -- In October 1997, the Company purchased 175,285
Ordinary Shares of nCipher Corporation Limited ("nCipher") for an aggregate
purchase price of $512. nCipher is located in the United Kingdom and develops
products designed to accelerate cryptographic processes in Internet security,
electronic commerce and other applications. The Company's investment in nCipher
represents a minority interest of less than 5% of nCipher's capitalization and
is carried at cost.
FINJAN SOFTWARE LTD. -- 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 and is carried at cost.
4. STOCK OPTION AND PURCHASE PLANS
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 356,917 at December 31, 1997. On January 22, 1998, the Board of
Directors adopted, subject to stockholder approval, an amendment to the 1994
Plan increasing the number of shares of common stock
37
<PAGE> 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
continued
authorized for issuance from 6,570,000 to 9,570,000 shares in the aggregate.
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 115,000 at December 31, 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 145,203 in 1995, 1996 and 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 December 31, 1997, options as to 871,208
shares were subject to repurchase rights, and a total of 40,843 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
then outstanding options to purchase shares of DynaSoft.
A summary of stock option activity under all plans, including converted RSA and
DynaSoft options, is as follows:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
EXERCISE
SHARES PRICE PER SHARE
- --------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at January 1, 1995 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 2,437,383 34.29
Exercised (959,143) 3.58
Canceled (147,056) 26.43
---------------------------------------
Outstanding at December 31, 1997 6,053,641 24.87
---------------------------------------
Exercisable at December 31, 1995 2,261,327 0.40
---------------------------------------
Exercisable at December 31, 1996 2,127,928 1.69
---------------------------------------
Exercisable at December 31, 1997 2,120,841 11.45
---------------------------------------
</TABLE>
38
<PAGE> 23
The following table sets forth information regarding stock options outstanding
at December 31, 1997 under all plans:
<TABLE>
<CAPTION>
WEIGHTED AVERAGE WEIGHTED AVERAGE
RANGE WEIGHTED REMAINING NUMBER EXERCISE PRICE
EXERCISE NUMBER OF AVERAGE CONTRACTUAL LIFE CURRENTLY FOR CURRENTLY
PRICES OPTIONS EXERCISE PRICE (YEARS) EXERCISABLE EXERCISABLE
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 0.10 302,000 $ 0.10 2.3 302,000 $ 0.10
0.35-0.45 54,247 0.43 6.0 47,084 0.42
0.76-0.90 742,270 0.90 2.3 733,754 0.90
1.75-2.55 27,651 2.31 6.6 18,350 2.33
2.95-4.22 148,235 3.30 3.8 139,294 3.31
6.62 17,557 6.62 3.3 17,557 6.62
9.97-14.31 482,200 10.30 7.7 225,910 10.36
24.30-36.25 2,586,414 29.84 8.9 407,203 27.70
37.59-44.21 1,693,067 39.60 9.2 229,689 40.60
- --------------------------------------------------------------------------------------------------------------
0.10-44.21 6,053,641 24.87 7.6 2,120,841 11.45
- --------------------------------------------------------------------------------------------------------------
</TABLE>
ACCOUNTING FOR STOCK OPTIONS
For certain options and stock awards granted in 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 subsequent to April 1, 1996, 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 1996.
Total compensation expense relating to certain options and stock awards amounted
to $181, $1,167 and $1,205 for the years ended December 31, 1995, 1996, and
1997, respectively.
PRO FORMA DISCLOSURE -- Had the Company recognized compensation costs for its
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," pro forma net income and pro forma net income per
share would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1995 1996 1997
- ----------------------------------------------------------------------------
<S> <C> <C> <C>
Pro forma net income $ 7,026 $ 10,745 $ 5,017
Pro forma net income
per share
-- basic $ 0.22 $ 0.30 $ 0.13
-- diluted $ 0.20 $ 0.28 $ 0.13
</TABLE>
39
<PAGE> 24
NOTES TO 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 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
STOCK OPTION PLANS
Risk-free interest rate 6.0% 6.0% 6.1%
Expected life of option grants (years) 4.4 4.4 4.3
Expected volatility of underlying stock 57.5% 57.5% 57.5%
Expected dividend payment rate 0.0% 0.0% 0.0%
Expected forfeiture rate 4.1% 4.1% 4.1%
EMPLOYEE STOCK PURCHASE PLAN
Risk-free interest rate 5.9% 5.2% 5.2%
Expected life of option grants (years) 0.5 0.5 0.5
Expected volatility of underlying stock 57.5% 57.5% 57.5%
Expected dividend payment rate 0.0% 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, $17.36 and $19.64 during the
years ended December 31, 1995, 1996 and 1997, respectively. The weighted fair
value of stock options granted under the Purchase Plan, calculated using the
Black-Scholes option-pricing model was $2.30, $8.81 and $10.82 during 1995, 1996
and 1997, respectively.
5. INCOME TAXES
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------
1995 1996 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current:
-----------------------------------
Federal $ 3,049 $ 7,359 $ 11,459
State 781 930 1,577
Foreign 302 399 431
-----------------------------------
Total 4,132 8,688 13,467
Deferred:
Federal (93) (1,219) (2,179)
State (26) (174) (158)
Change in valuation allowance (869) -- --
-----------------------------------
Total (988) (1,393) (2,337)
Tax benefit from exercise of stock options:
Federal 179 3,452 1,878
State 46 250 134
-----------------------------------
Total 225 3,702 2,012
-----------------------------------
Total $ 3,369 $ 10,997 $ 13,142
-----------------------------------
</TABLE>
40
<PAGE> 25
Significant components of the Company's deferred tax assets and liabilities at
December 31 were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1996 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets (liabilities) -- current
Marketable securities $(2,319) $ (846)
Deferred revenue 854 942
Merger and integration -- 196
Sales returns 271 524
Allowance for doubtful accounts 211 267
Compensation 205 185
Inventory reserves 66 67
Warranty obligation 42 42
Commissions 42 22
Other (204) 27
------------------------------
Net deferred tax asset (liability) -- current $ (832) $ 1,426
------------------------------
Deferred tax assets (liabilities) -- non current:
Purchased research and development $ 733 $ 2,907
Compensation 326 575
Capitalized software development costs (79) (34)
Net operating loss carryforwards 32 --
Other 14 (77)
------------------------------
Net deferred tax assets -- non current $ 1,026 $ 3,371
------------------------------
</TABLE>
A reconciliation between the statutory and effective income tax rates follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1995 1996 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory tax rate 34.0% 35.0% 35.0%
State income taxes net of federal benefit 5.4 3.2 4.4
Merger expenses -- 8.3 6.7
Change in valuation allowance (8.8) -- --
Other 0.5 (1.0) (1.7)
---------------------------------
Effective income tax rate 31.1% 45.5% 44.4%
---------------------------------
</TABLE>
Through the first three quarters of 1997, the Company provided income taxes
based upon an estimated effective income tax rate of 37.5%. In December 1997,
the Company changed its international income tax strategy and, as a result,
recorded an additional income tax provision of $1,900.
Cash payments for income taxes were approximately $4,140, $8,384 and $15,361 for
1995, 1996 and 1997, respectively.
6. RETIREMENT AND SAVINGS PLAN
The Company has a 401(k) retirement and savings plan (the "Plan") established in
1986 covering substantially all domestic employees. The Plan allows each
participant to defer up to 15% of annual earnings up to an amount not to exceed
an annual statutory maximum. Subject to the approval of the Board of Directors
on an annual basis, the Company may make, at its discretion, profit-sharing
contributions and/or match employee deferrals. At December 31, 1996 and 1997,
the Company had accrued, and the Board of Directors had approved, profit-sharing
contributions approximating $305 and $400, respectively. The Board of Directors
also approved for 1996 and 1997 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 $112, $261 and $367 for 1995, 1996 and 1997, respectively.
41
<PAGE> 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
continued
7. COMMITMENTS
The Company leases office facilities and automobiles under non-cancelable
operating leases expiring through 2008. Future minimum rental payments are as
follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------
- --------------------------------------------------------------------------------
<S> <C>
1998 $ 5,349
1999 4,821
2000 4,173
2001 4,162
2002 4,210
Balance thereafter $18,561
</TABLE>
Net rent expense for 1995, 1996 and 1997 was approximately $1,026, $2,004 and
$3,459, respectively. Rent collected from a sublease of the Company's former
headquarters was $108 and $527 in 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 December 31, 1996 and 1997, the Company 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.
In September 1997, the Company entered into an agreement with Worldtalk
Communications Corporation ("Worldtalk"), a vendor of directory-based messaging
and security solutions that support organizations in transforming Intranets into
secure platforms, for the right to distribute certain of Worldtalk's software
products to help complement the Company's future product lines. The Company had
prepaid $3,000 under this agreement as of December 31, 1997 and has not yet
incurred any royalty expense under the agreement.
Royalty expense was $706, $2,009 and $6,061 for 1995, 1996 and 1997,
respectively.
As of April 14, 1996 and November 1,1997, the Company entered into employment
agreements with two of its executive officers, which require total annual
minimum salaries of $500 and expire in July 1998 and November 1999,
respectively. One of the agreements includes a post retirement benefit, to be
paid by the Company for the executive. The Company is recognizing the present
value of the benefit over the applicable service period.
42
<PAGE> 27
8. SEGMENT INFORMATION
The Company operates in only one industry segment. Export sales are summarized
as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Europe $ 5,116 $11,616 $28,290
Canada 2,772 4,511 6,606
Asia/Pacific 571 2,518 7,059
Latin America -- 198 630
-------------------------------------------
Total $ 8,459 $18,843 $42,585
-------------------------------------------
</TABLE>
9. LITIGATION
The Company has been named as a defendant in legal actions arising from its
normal business activities. The Company is not a party to any litigation that it
believes could have a material adverse effect on the Company or its business.
10. RELATED PARTY TRANSACTION
A Company officer and director serves as VeriSign's (Note 3) Chairman of the
Board of Directors.
In September 1997, the Company and VeriSign (Note 3) entered into a Master
Development and License Agreement (the "Development Agreement"), pursuant to
which VeriSign will develop certain technology for the Company. The Development
Agreement provides that the Company will pay VeriSign an aggregate of $2.7
million as an initial license fee, $900 of which was paid in October 1997 and
the remainder of which will be payable upon the achievement of certain
milestones of which $1.8 million was recorded as accounts payable at December
31, 1997. Commencing in March 1998, the Company will also be required to pay
VeriSign a monthly product support fee for a three-year period, and thereafter
for successive annual terms, unless either of the parties elects to terminate
such product support within 60 days prior to the end of the term or the Company
terminates support services at any time on 60 days prior written notice to
VeriSign. For a yearly fee, the Company can purchase product maintenance
services. For so long as the Company is paying such maintenance fees, VeriSign
will be obligated, at no additional cost, to provide the Company with
non-exclusive first-to-market access to new technologies developed by VeriSign
that are relevant to the business of providing enterprise security solutions or
solutions for secure business communications. VeriSign is also obligated, upon
the request of the Company, to make its other technology available to the
Company on certain "most favored pricing" terms.
Since September 1996, the Company subleases its former headquarters in
Cambridge, Massachusetts, to VeriSign pursuant to a sublease that expires in
March 1998. The Company has received lease payments from VeriSign of $18 and
$105 in 1996 and 1997, respectively.
A stockholder, who owns less than 5% of the Company's common stock, provides
consulting services to the Company and received $91, $97 and $104 in 1995, 1996
and 1997 respectively. As of December 31, 1997, the Company has approximately
$25 due to a less than 5% stockholder payable upon demand.
11. SUBSEQUENT EVENT-MERGER (UNAUDITED)
On March 26, 1998 the Company acquired Intrusion Detection, Inc., ("IDI") in a
pooling of interests merger. The Company issued approximately 784,000 shares of
common stock in exchange for all of IDI's outstanding common stock. IDI develops
and markets intrusion detection software.
43
<PAGE> 1
EXHIBIT 21
Subsidiaries of the Registrant
Subsidiary Name Jurisdiction of Organization
- --------------- ----------------------------
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
Dynamic Software AB Sweden
DynaSoft Limited United Kingdom
Securix, Inc. California
Intrusion Detection Inc. New York
_______________
* Doing business as "Security Dynamics"
** Doing business as "RSA"
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders of
Security Dynamics Technologies, Inc. and Subsidiaries:
We consent to the incorporation by reference in Registration Statements Nos.
33-87916, 33-88506, 33-88508, 33-88510, 333-08939, 333-31793 of Security
Dynamics Technologies, Inc. (the "Company") on Forms S-8 and Registration
Statement No. 333-34241 of the Company on Form S-3 of our reports dated March
20, 1998 (which report on consolidated financial statements expresses an
unqualified opinion and includes explanatory paragraphs referring to the
restatement of the consolidated financial statements for a pooling of interests
in 1997 and a change in the Company's method of accounting for option grants
requiring stockholder approval in 1996), appearing in and incorporated by
reference in this Annual Report on Form 10-K of Security Dynamics Technologies,
Inc. for the year ended December 31, 1997.
Deloitte & Touche LLP
Boston, Massachusetts
March 27, 1998
<PAGE> 1
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the use of our report dated April 8, 1996, with respect to the
consolidated financial statements of RSA Data Security, Inc. (not presented
separately herein) in the Annual Report (Form 10-K) of Security Dynamics
Technologies, Inc.
We also consent to the incorporation by reference in the Registration Statements
on Form S-8 (Nos. 33-87916, 33-88506, 33-88508, 33-88510, 333-08939 and
333-31793) pertaining to the 1986 Stock Option Plan, the 1994 Stock Option Plan,
the 1994 Employee Stock Purchase Plan, the 1994 Director Stock Incentive Plan,
the Amended 1994 Stock Option Plan and the Amended 1994 Stock Option Plan and
the Securix, Inc. 1996 Stock Option Plan and the Registration Statement on Form
S-3 (No. 333-34241) for the registration of 396,387 shares of the common stock
of Security Dynamics Technologies, Inc. of our report dated April 8, 1996,
referred to in the preceding paragraph.
ERNST & YOUNG LLP
Palo Alto, California
March 27, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 50,730
<SECURITIES> 61,637
<RECEIVABLES> 9,357
<ALLOWANCES> 724
<INVENTORY> 1,445
<CURRENT-ASSETS> 123,982
<PP&E> 4,643
<DEPRECIATION> 1,998
<TOTAL-ASSETS> 128,659
<CURRENT-LIABILITIES> 19,633
<BONDS> 0
0
0
<COMMON> 351
<OTHER-SE> 108,675
<TOTAL-LIABILITY-AND-EQUITY> 128,659
<SALES> 49,412
<TOTAL-REVENUES> 49,412
<CGS> 8,920
<TOTAL-COSTS> 40,498
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 541
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 10,819
<INCOME-TAX> 3,369
<INCOME-CONTINUING> 7,450
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,450
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.22
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<EXCHANGE-RATE> 1
<CASH> 22,858
<SECURITIES> 88,592
<RECEIVABLES> 10,286
<ALLOWANCES> 507
<INVENTORY> 1,322
<CURRENT-ASSETS> 125,179
<PP&E> 5,746
<DEPRECIATION> 2,340
<TOTAL-ASSETS> 130,951
<CURRENT-LIABILITIES> 19,896
<BONDS> 0
0
0
<COMMON> 356
<OTHER-SE> 110,638
<TOTAL-LIABILITY-AND-EQUITY> 130,951
<SALES> 16,290
<TOTAL-REVENUES> 16,290
<CGS> 3,671
<TOTAL-COSTS> 13,918
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 56
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 3,647
<INCOME-TAX> 1,304
<INCOME-CONTINUING> 2,343
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,343
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.06
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<EXCHANGE-RATE> 1
<CASH> 9,569
<SECURITIES> 107,244
<RECEIVABLES> 12,792
<ALLOWANCES> 626
<INVENTORY> 2,365
<CURRENT-ASSETS> 135,012
<PP&E> 7,442
<DEPRECIATION> 2,692
<TOTAL-ASSETS> 143,572
<CURRENT-LIABILITIES> 14,898
<BONDS> 0
0
0
<COMMON> 362
<OTHER-SE> 118,910
<TOTAL-LIABILITY-AND-EQUITY> 143,572
<SALES> 36,111
<TOTAL-REVENUES> 36,111
<CGS> 7,451
<TOTAL-COSTS> 29,869
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 111
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,601
<INCOME-TAX> 3,147
<INCOME-CONTINUING> 5,454
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,454
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.14
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<CASH> 8,942
<SECURITIES> 96,043
<RECEIVABLES> 15,556
<ALLOWANCES> 577
<INVENTORY> 2,717
<CURRENT-ASSETS> 124,883
<PP&E> 12,079
<DEPRECIATION> 3,229
<TOTAL-ASSETS> 137,285
<CURRENT-LIABILITIES> 18,798
<BONDS> 0
0
0
<COMMON> 367
<OTHER-SE> 113,990
<TOTAL-LIABILITY-AND-EQUITY> 137,285
<SALES> 57,254
<TOTAL-REVENUES> 57,254
<CGS> 12,734
<TOTAL-COSTS> 47,482
<OTHER-EXPENSES> 6,100
<LOSS-PROVISION> 167
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,703
<INCOME-TAX> 6,431
<INCOME-CONTINUING> 5,272
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,272
<EPS-PRIMARY> 0.15
<EPS-DILUTED> 0.14
<FN>
OTHER COSTS REFER TO MERGER EXPENSE INCURRED DURING MERGER WITH RSA DATA
SECURITY, INC.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<EXCHANGE-RATE> 1
<CASH> 11,175
<SECURITIES> 95,320
<RECEIVABLES> 17,027
<ALLOWANCES> 527
<INVENTORY> 2,606
<CURRENT-ASSETS> 129,805
<PP&E> 14,164
<DEPRECIATION> 3,596
<TOTAL-ASSETS> 145,975
<CURRENT-LIABILITIES> 20,603
<BONDS> 0
0
0
<COMMON> 372
<OTHER-SE> 123,806
<TOTAL-LIABILITY-AND-EQUITY> 145,975
<SALES> 83,817
<TOTAL-REVENUES> 83,817
<CGS> 18,207
<TOTAL-COSTS> 69,421
<OTHER-EXPENSES> 6,100
<LOSS-PROVISION> 223
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 24,172
<INCOME-TAX> 10,997
<INCOME-CONTINUING> 13,175
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 13,175
<EPS-PRIMARY> 0.36
<EPS-DILUTED> 0.34
<FN>
OTHER EXPENSES REFERS TO MERGER EXPENSES INCURRED IN CONJUNCTION WITH THE MERGER
WITH RSA DATA SECURITY, INC. IN JULY 1996.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<EXCHANGE-RATE> 1
<CASH> 15,973
<SECURITIES> 89,208
<RECEIVABLES> 17,307
<ALLOWANCES> 507
<INVENTORY> 2,798
<CURRENT-ASSETS> 130,214
<PP&E> 15,325
<DEPRECIATION> 4,331
<TOTAL-ASSETS> 146,382
<CURRENT-LIABILITIES> 15,817
<BONDS> 0
0
0
<COMMON> 378
<OTHER-SE> 128,501
<TOTAL-LIABILITY-AND-EQUITY> 146,382
<SALES> 28,419
<TOTAL-REVENUES> 28,419
<CGS> 6,417
<TOTAL-COSTS> 22,323
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 62
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,342
<INCOME-TAX> 2,781
<INCOME-CONTINUING> 4,561
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,561
<EPS-PRIMARY> 0.12
<EPS-DILUTED> 0.12
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<EXCHANGE-RATE> 1
<CASH> 24,316
<SECURITIES> 86,437
<RECEIVABLES> 20,321
<ALLOWANCES> 802
<INVENTORY> 3,189
<CURRENT-ASSETS> 139,609
<PP&E> 18,035
<DEPRECIATION> 5,151
<TOTAL-ASSETS> 157,068
<CURRENT-LIABILITIES> 19,951
<BONDS> 0
0
0
<COMMON> 379
<OTHER-SE> 134,160
<TOTAL-LIABILITY-AND-EQUITY> 157,068
<SALES> 61,374
<TOTAL-REVENUES> 61,374
<CGS> 13,147
<TOTAL-COSTS> 48,172
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 124
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 16,116
<INCOME-TAX> 6,040
<INCOME-CONTINUING> 10,076
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,076
<EPS-PRIMARY> 0.27
<EPS-DILUTED> 0.26
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 36,988
<SECURITIES> 70,774
<RECEIVABLES> 21,044
<ALLOWANCES> 787
<INVENTORY> 2,744
<CURRENT-ASSETS> 137,663
<PP&E> 21,290
<DEPRECIATION> 5,823
<TOTAL-ASSETS> 161,059
<CURRENT-LIABILITIES> 27,669
<BONDS> 0
0
0
<COMMON> 380
<OTHER-SE> 129,978
<TOTAL-LIABILITY-AND-EQUITY> 161,059
<SALES> 96,202
<TOTAL-REVENUES> 96,202
<CGS> 19,995
<TOTAL-COSTS> 77,375
<OTHER-EXPENSES> 7,000
<LOSS-PROVISION> 187
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 19,899
<INCOME-TAX> 7,508
<INCOME-CONTINUING> 12,391
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,391
<EPS-PRIMARY> 0.33
<EPS-DILUTED> 0.31
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 95,747
<SECURITIES> 68,064
<RECEIVABLES> 26,935
<ALLOWANCES> 742
<INVENTORY> 3,035
<CURRENT-ASSETS> 206,311
<PP&E> 25,370
<DEPRECIATION> 7,878
<TOTAL-ASSETS> 231,672
<CURRENT-LIABILITIES> 29,300
<BONDS> 0
0
0
<COMMON> 397
<OTHER-SE> 198,876
<TOTAL-LIABILITY-AND-EQUITY> 231,672
<SALES> 135,930
<TOTAL-REVENUES> 135,930
<CGS> 28,502
<TOTAL-COSTS> 111,079
<OTHER-EXPENSES> 5,700
<LOSS-PROVISION> 249
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 29,624
<INCOME-TAX> 13,142
<INCOME-CONTINUING> 16,368
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,368
<EPS-PRIMARY> 0.43
<EPS-DILUTED> 0.41
<FN>
OTHER EXPENSES REFERS TO EXPENSES INCURRED IN CONJUNCTION WITH THE
ACQUISITION AND INTEGRATION OF DYNASOFT AB
</FN>
</TABLE>
