<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Preliminary Proxy Statement [_] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
Security Dynamics Technologies, Inc.
- ------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- ------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (check the appropriate box):
[X] No fee required.
[_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
---------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
---------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which
the filing fee is calculated and state how it was determined):
---------------------------------------------------------------------------
<PAGE> 2
(4) Proposed maximum aggregate value of transaction:
---------------------------------------------------------------------------
(5) Total fee paid:
---------------------------------------------------------------------------
[_] Fee paid previously with preliminary materials.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or schedule and the date of its filing.
(1) Amount Previously Paid:
---------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
---------------------------------------------------------------------------
(3) Filing Party:
---------------------------------------------------------------------------
(4) Date Filed:
---------------------------------------------------------------------------
<PAGE> 3
PRELIMINARY COPY
SECURITY DYNAMICS TECHNOLOGIES, INC.
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 22, 1999
NOTICE IS HEREBY GIVEN that the Annual Meeting of the Stockholders of
Security Dynamics Technologies, Inc., a Delaware corporation (the "Company"),
will be held on Thursday, April 22, 1999 at 3:00 p.m. at the offices of Hale and
Dorr LLP, 60 State Street, Boston, Massachusetts (the "Meeting") for the purpose
of considering and voting upon the following matters:
1. To elect three Class II Directors for the ensuing three years;
2. To approve an amendment to the Company's Third Restated Certificate of
Incorporation, as amended, to increase the number of authorized shares
of Common Stock from 80,000,000 to 180,000,000 shares;
3. To approve an amendment to the Company's 1994 Stock Option Plan, as
amended -- 1998 Restatement to (i) increase the number of shares of
Common Stock authorized for issuance thereunder from 9,570,000 to
11,570,000 shares and (ii) increase the maximum number of shares of
Common Stock that may be issued in any calendar year to a participant
thereunder from 300,000 to 400,000 shares;
4. To approve an amendment to the Company's 1994 Director Stock Option
Plan, as amended, to increase the number of shares of Common Stock
authorized for issuance thereunder from 300,000 to 500,000 shares;
5. To ratify the appointment of Deloitte & Touche LLP as independent
auditors of the Company for the current year; and
6. To transact such other business as may properly come before the Meeting
or any adjournment thereof.
The Board of Directors has no knowledge of any other business to be
transacted at the Meeting.
The Board of Directors has fixed the close of business on Thursday, March
4, 1999 as the record date for the determination of stockholders entitled to
notice of and to vote at the Meeting and at any adjournments thereof.
A copy of the Company's Annual Report to Stockholders for the year ended
December 31, 1998, which contains consolidated financial statements and other
information of interest to stockholders, accompanies this Notice and the
enclosed Proxy Statement.
By Order of the Board of Directors,
Margaret K. Seif, Secretary
March [ ], 1999
WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE PROMPTLY COMPLETE,
DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT IN THE ACCOMPANYING
ENVELOPE. NO POSTAGE NEED BE AFFIXED IF THE PROXY CARD IS MAILED IN THE UNITED
STATES.
<PAGE> 4
PRELIMINARY COPY
SECURITY DYNAMICS TECHNOLOGIES, INC.
36 CROSBY DRIVE
BEDFORD, MASSACHUSETTS 01730
PROXY STATEMENT
FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 22, 1999
This Proxy Statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Security Dynamics Technologies, Inc. (the
"Company") for use at the Annual Meeting of Stockholders to be held on Thursday,
April 22, 1999 at 3:00 p.m. at the offices of Hale and Dorr LLP, 60 State
Street, Boston, Massachusetts and at any adjournments thereof (the "Meeting").
All proxies will be voted in accordance with the instructions of the
stockholder. If no choice is specified, the proxies will be voted in favor of
the matters set forth in the accompanying Notice of Meeting. Any proxy may be
revoked by a stockholder at any time before its exercise by delivery of a
written revocation to the Secretary of the Company. Attendance at the Meeting
will not itself be deemed to revoke a proxy unless the stockholder gives
affirmative notice at the Meeting that the stockholder intends to revoke the
proxy and vote in person.
On March 4, 1999, the record date for determination of stockholders
entitled to vote at the Meeting (the "Record Date"), there were outstanding and
entitled to vote an aggregate of [ ] shares of Common Stock of the
Company, $.01 par value per share (the "Common Stock"). Each share entitles the
record holder to one vote on each of the matters to be voted upon at the
Meeting.
THE NOTICE OF MEETING, THIS PROXY STATEMENT, THE ENCLOSED PROXY AND THE
COMPANY'S ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1998 ARE
FIRST BEING SENT OR GIVEN TO STOCKHOLDERS ON OR ABOUT MARCH [ ], 1999. THE
COMPANY WILL, UPON WRITTEN REQUEST OF ANY STOCKHOLDER, FURNISH WITHOUT CHARGE A
COPY OF ITS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998, AS
FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WITHOUT EXHIBITS. PLEASE
ADDRESS ALL SUCH REQUESTS TO THE COMPANY, 36 CROSBY DRIVE, BEDFORD,
MASSACHUSETTS 01730, ATTENTION: SECRETARY. EXHIBITS WILL BE PROVIDED UPON
WRITTEN REQUEST AND PAYMENT OF AN APPROPRIATE PROCESSING FEE.
<PAGE> 5
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of January 31, 1999
with respect to the beneficial ownership of shares of Common Stock by (i) each
person known to the Company to own beneficially more than 5% of the outstanding
shares of Common Stock, (ii) the directors and nominees for director of the
Company, (iii) the Chief Executive Officer and the four other most highly
compensated executive officers who were serving as executive officers on
December 31, 1998 (the "Named Executive Officers"), and (iv) all directors and
executive officers of the Company as a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE
OF BENEFICIAL OWNERSHIP(1)
----------------------------
NUMBER OF PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES CLASS
- ------------------------------------ ----------- ----------
<S> <C> <C>
5% STOCKHOLDERS
Franklin Resources, Inc. ................................... 2,689,430(2) 6.6%
777 Mariners Island Blvd.
San Mateo, CA 94404
Kenneth P. Weiss............................................ 2,354,516(3) 5.8%
59 Sargent Street
Newton, MA 02158
Addison M. Fischer.......................................... 2,338,048(4) 5.8%
3506 Mercantile Avenue
Naples, FL 34104-3310
Alberto W. Vilar ........................................... 2,237,900(5) 5.5%
c/o Amerindo Investment Advisors Inc.
One Embarcadero Center, Suite 2300
San Francisco, CA 94111
DIRECTORS
Charles R. Stuckey, Jr. .................................... 773,823(6) 1.9%
Arthur W. Coviello, Jr. .................................... 353,666(7) *
D. James Bidzos............................................. 777,254(8) 1.9%
Richard L. Earnest.......................................... 36,000(9) *
Taher Elgamal............................................... 1,500 *
Joseph B. Lassiter, III..................................... 21,000(10) *
George M. Middlemas......................................... 46,912(11) *
James K. Sims............................................... [41,000](12) *
OTHER NAMED EXECUTIVE OFFICERS
Gary A. Rogers.............................................. 31,915(13) *
Albert E. Sisto............................................. 9,374(14) *
John Adams.................................................. 9,374(15) *
All executive officers and directors, as a group (14 [2,197,493](16)
persons).................................................. [5.4]%
</TABLE>
- ---------------
* Less than 1%
1. The number of shares beneficially owned by each stockholder, director and
executive officer is determined under rules promulgated by the Securities
and Exchange Commission, and the information is not necessarily indicative
of beneficial ownership for any other purpose. Under such rules, beneficial
ownership includes any shares as to which the individual has sole or shared
voting power or investment power and also any shares which the individual
has the right to acquire within 60 days after January 31, 1999 through the
exercise of any stock option or other right. The inclusion herein of such
shares, however, does not constitute an admission that the named stockholder
is a direct or indirect beneficial owner of such shares. Unless otherwise
indicated, each person or entity named in the table has sole voting power
and investment power (or shares such power with his or her spouse) with
respect to all shares of capital stock listed as owned by such person or
entity.
2
<PAGE> 6
2. This information is derived from a Schedule 13G filed with the Securities
and Exchange Commission on February 2, 1999.
3. This information is derived from information provided by the stockholder to
the Company.
4. Includes 97,112 shares held by Kairdos L.L.C., a Delaware limited liability
company, of which Mr. Fischer is a director and a member. Mr. Fischer
disclaims beneficial ownership of these shares except to the extent of his
proportionate pecuniary interest therein. Also includes 206,400 shares held
by a grantor retained annuity trust of which Mr. Fischer is the trustee.
This information is derived from a Schedule 13G/A filed with the Securities
and Exchange Commission on February 9, 1998.
5. Alberto W. Vilar has sole voting and dispositive power with respect to 2,000
shares, as to only a portion of which beneficial ownership is affirmed, and
shared voting and dispositive power with respect to 2,235,900 shares, as to
all of which beneficial ownership is disclaimed. Gary A. Tanaka has shared
voting and dispositive power with respect to 2,235,900 shares, as to all of
which beneficial ownership is disclaimed. Amerindo Investment Advisors Inc.,
a California corporation ("Amerindo California"), has shared voting and
dispositive power with respect to 2,068,800 shares, as to all of which
beneficial ownership is disclaimed. Amerindo Investment Advisors, Inc., a
Panama corporation ("Amerindo Panama"), has shared voting and dispositive
power with respect to 167,100 shares, as to all of which beneficial
ownership is disclaimed. Amerindo Investment Advisors Inc. Profit Sharing
Trust (the "Trust") has sole voting and dispositive power with respect to
2,000 shares. Mr. Vilar and Mr. Tanaka are the sole shareholders and
directors of Amerindo California and Amerindo Panama. Mr. Vilar is the sole
trustee of the Trust. This information is derived from a Schedule 13G filed
with the Securities and Exchange Commission on February 13, 1998.
6. Includes 10,000 shares held by the Stuckey Family Charitable Remainder
Unitrust, 56,820 shares held by the Charles R. Stuckey, Jr. -- 1998 Grantor
Retained Annuity Trust, and 100,000 shares held by the Charles R. Stuckey,
Jr. -- 1998 Grantor Retained Annuity Trust II. Also includes 199,999 shares
which may be acquired pursuant to stock options exercisable within 60 days
after January 31, 1999.
7. Includes 332,546 shares which may be acquired pursuant to stock options
exercisable within 60 days after January 31, 1999.
8. Includes 89,252 shares held by Kairdos L.L.C., a Delaware limited liability
company of which Mr. Bidzos is the General Manager and a member. Mr. Bidzos
disclaims beneficial ownership of these shares except to the extent of his
proportionate pecuniary interest therein. Also includes 187,499 shares which
may be acquired pursuant to stock options exercisable within 60 days after
January 31, 1999.
9. Consists of 36,000 shares which may be acquired pursuant to stock options
exercisable within 60 days after January 31, 1999.
10. Consists of 21,000 shares which may be acquired pursuant to stock options
exercisable within 60 days after January 31, 1999.
11. Includes 24,000 shares which may be acquired pursuant to stock options
exercisable within 60 days after January 31, 1999.
12. Includes 16,000 shares which may be acquired pursuant to stock options
exercisable within 60 days after January 31, 1999.
13. Includes 31,249 shares which may be acquired pursuant to stock options
exercisable within 60 days after January 31, 1999. On March 4, 1999, Mr.
Rogers resigned from the Company, effective March 19, 1999.
14. Consists of 9,374 shares which may be acquired pursuant to stock options
exercisable within 60 days after January 31, 1999. As of January 29, 1999,
Mr. Sisto ceased to serve as Chief Operating Officer of RSA Data Security,
Inc.
15. Consists of 9,374 shares which may be acquired pursuant to stock options
exercisable within 60 days after January 31, 1999.
16. Includes an aggregate of 926,375 shares which may be acquired pursuant to
stock options exercisable within 60 days after January 31, 1999. Excludes
shares owned by Mr. Rogers, who resigned from the
3
<PAGE> 7
Company, effective March 19, 1999, and by Mr. Sisto, who ceased to serve as an
executive officer of the Company as of January 29, 1999.
VOTES REQUIRED
The holders of a majority of the shares of Common Stock issued and
outstanding and entitled to vote at the Meeting shall constitute a quorum for
the transaction of business at the Meeting. Shares of Common Stock present in
person or represented by proxy (including shares which abstain or do not vote
with respect to one or more of the matters presented for stockholder approval)
will be counted for purposes of determining whether a quorum exists at the
Meeting.
The affirmative vote of the holders of a plurality of the votes cast by the
stockholders entitled to vote at the Meeting is required for the election of
directors. The affirmative vote of the holders of a majority of the shares of
Common Stock outstanding on the Record Date is required to approve the amendment
to the Company's Third Restated Certificate of Incorporation, as amended. The
affirmative vote of the holders of a majority of the shares of Common Stock
present or represented by proxy and voting on the matter is required to approve
the amendment to the Company's 1994 Stock Option Plan, as amended -- 1998
Restatement and the amendment to the Company's 1994 Director Stock Option Plan,
as amended, and to ratify the appointment of the Company's independent auditors.
Shares which abstain from voting as to a particular matter, and shares held
in "street name" by brokers or nominees who indicate on their proxies that they
do not have discretionary authority to vote such shares as to a particular
matter, will not be counted as votes in favor of such matter, and will also not
be counted as votes cast or shares voting on such matter. Accordingly,
abstentions and "broker non-votes" will have no effect on the voting on the
election of directors, which requires the affirmative vote of a plurality of the
votes cast or shares voting on a matter. However, because shares which abstain
and shares represented by "broker non-votes" are nonetheless considered
outstanding shares, abstentions and "broker non-votes" will have the same effect
as a vote against the proposed amendment to the Company's Third Restated
Certificate of Incorporation, as amended, which requires the affirmative vote of
a majority of the votes represented by the outstanding shares. Finally,
abstentions and "broker non-votes" will have no effect on the voting on the
remaining matters to be voted on at the Meeting, each of which requires the
affirmative vote of a majority of the votes cast or shares voting on the matter.
PROPOSAL 1 -- ELECTION OF DIRECTORS
The Company has a classified Board of Directors consisting of two Class I
directors, three Class II directors and three Class III directors. The Class I,
Class II and Class III Directors will serve until the annual meeting of
stockholders to be held in 2001, 1999 and 2000, respectively, and until their
respective successors are elected and qualified. At each annual meeting of
stockholders, directors are elected for a full term of three years to succeed
those whose terms are expiring.
The persons named in the enclosed proxy will vote to elect, as Class II
directors, D. James Bidzos, Richard L. Earnest and Taher Elgamal, the three
director nominees named below, unless the proxy is marked otherwise. Messrs.
Bidzos, Earnest and Elgamal are currently directors of the Company.
Each Class II director will be elected to hold office until the 2002 annual
meeting of stockholders and until his successor is elected and qualified. Each
of the nominees has indicated his willingness to serve, if elected; however, if
any nominee should be unable to serve, the person acting under the proxy may
vote the proxy for a substitute nominee. The Board of Directors has no reason to
believe that any of the nominees will be unable to serve if elected.
For each member of the Board of Directors, including those who are nominees
for election as Class II directors, there follows information given by each
concerning his principal occupation and business experience for at least the
past five years, the names of other publicly held companies of which he serves
as a director and his age and length of service as a director of the Company.
There are no family relationships among any of the directors, nominees for
director and executive officers of the Company.
4
<PAGE> 8
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION, OTHER BUSINESS
DIRECTOR EXPERIENCE DURING PAST FIVE YEARS
NAME AGE SINCE AND OTHER DIRECTORSHIPS
- ---- --- -------- ------------------------------------
<S> <C> <C> <C>
DIRECTORS WHOSE TERMS EXPIRE IN 2001 (CLASS I DIRECTORS)
Joseph B. Lassiter, III... 51 1996 Joined Harvard University Graduate School of Business
Administration in September 1996, where he is
currently Professor of Management; President of
Wildfire Communications, Inc., a telecommunications
software company, from July 1994 to February 1996;
Vice President of Teradyne, Inc., a manufacturer of
automatic test equipment, from January 1974 to
February 1994; Member of the Board of Directors of
Advanced Magnetics, Inc., a developer of
organ-specific contrast agents.
Charles R. Stuckey, Jr. .. 56 1987 Chairman of the Board of Directors since July 1996;
President of the Company from January 1987 to March
1999; Chief Executive Officer of the Company since
March 1987.
NOMINEES FOR TERMS EXPIRING IN 2002 (CLASS II DIRECTORS)
D. James Bidzos........... 44 1996 Vice Chairman of the Board of Directors since March
1999; Executive Vice President of the Company from
July 1996 to February 1999; President and Chief
Executive Officer of RSA Data Security, Inc. from
1988 to February 1999; Chairman of the Board of
VeriSign, Inc., a company specializing in providing
public-key certificates and related products and
services.
Richard L. Earnest........ 56 1993 Deputy Mayor of Del Mar, California since November
1997; Chief Executive Officer of Tudor Publishing
Company from April 1995 to April 1997; Independent
consultant to start-up companies from June 1994 to
March 1995; Chief Executive Officer of DEMAX
Software, a provider of centralized security
management software, from June 1993 to June 1994;
Chief Executive Officer of Advant Edge Systems Group,
a software company, from April 1991 to June 1993.
Taher Elgamal............. 43 1999 President of the Information Security Group of The
Kroll-O'Gara Company, a provider of information
security software and services, since January 1999;
Chief Executive Officer of Securify, Inc., a provider
of comprehensive security services for e-commerce and
business and government applications, from June 1998
to January 1999; Chief Scientist of Netscape
Communications Corp. from April 1995 to June 1998;
Director of Engineering of RSA Data Security, Inc.
from October 1991 to April 1995; Director of hi/fn,
inc., a provider of high-performance, multi-protocol
packet processors.
DIRECTORS WHOSE TERMS EXPIRE IN 2000 (CLASS III DIRECTORS)
Arthur W. Coviello, Jr. .. 45 President of the Company since March 1999; Executive
Vice President of the Company from September 1995 to
March 1999; Chief Financial Officer and Treasurer of
the Company from October 1995 to August 1997; Chief
Operating Officer of the Company since January 1997;
Chief Operating Officer and Chief Financial Officer,
among other capacities, for CrossComm Corporation, a
developer of internetworking products, from March
1992 to January 1994.
</TABLE>
5
<PAGE> 9
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION, OTHER BUSINESS
DIRECTOR EXPERIENCE DURING PAST FIVE YEARS
NAME AGE SINCE AND OTHER DIRECTORSHIPS
- ---- --- -------- ------------------------------------
<S> <C> <C> <C>
George M. Middlemas....... 52 1992* General Partner of Apex Management Partnership, the
General Partner of Apex Investment Fund II, L.P., a
venture capital fund, since January 1991; Member of
the Boards of Directors of Purecycle Corporation, a
manufacturer and marketer of water recycling
technologies, Tut Systems, Inc., a provider of web
design and software solutions, and e.spire
Communications, Inc., a provider of integrated voice
and data communications services.
James K. Sims............. 52 1997 Chief Executive Officer, President and member of the
Board of Directors of Cambridge Technology Partners
(Massachusetts), Inc., an international consulting
and systems integration firm, since February 1991;
Chief Executive Officer and President of Concurrent
Computer Corporation, a computer hardware
manufacturer, from October 1985 until September 1990.
</TABLE>
- ---------------
* Mr. Middlemas also served on the Board of Directors of the Company from May
1986 to June 1991.
For information relating to shares of Common Stock beneficially owned by
each of the directors, see "Security Ownership of Certain Beneficial Owners and
Management."
BOARD AND COMMITTEE MEETINGS
The Board of Directors met 14 times (including by telephone conference)
during 1998. All directors attended at least 75% of the meetings of the Board of
Directors and of the committees on which they served.
The Board of Directors has a Compensation Committee, which makes
recommendations concerning salaries and incentive compensation for employees of,
and consultants to, the Company and administers and grants awards pursuant to
certain of the Company's stock-based compensation plans. The Compensation
Committee held six meetings during 1998. The current members of the Compensation
Committee are Messrs. Elgamal, Lassiter and Sims.
The Board of Directors has an Audit Committee, which reviews the results
and scope of the audit and other services provided by the Company's independent
public accountants. The Audit Committee held five meetings during 1998. The
current members of the Audit Committee are Messrs. Earnest and Middlemas.
The Board of Directors has a Nominating Committee, which makes
recommendations to the Board of Directors concerning all facets of the director
selection process. Stockholders wishing to propose director candidates for
consideration by the Nominating Committee may do so by writing to the Secretary
of the Company and providing information specified in the Company's Bylaws,
including the candidate's name, biographical data and qualifications. The
Company's Bylaws set forth further requirements for stockholders wishing to
nominate director candidates for consideration by stockholders including, among
other things, that a stockholder must give written notice of an intent to make
such a nomination complying with the Bylaws of the Company to the Secretary of
the Company not less than 60 days nor more than 90 days prior to the
stockholders' meeting. The Nominating Committee held four meetings during 1998.
The current members of the Nominating Committee are Messrs. Lassiter, Sims and
Stuckey.
DIRECTOR COMPENSATION
All of the directors are reimbursed for expenses incurred in connection
with their attendance at Board and committee meetings. Each non-employee
director is paid $2,000 for attendance at each meeting of the Board or for each
telephonic meeting of the Board in which he participates. Each non-employee
director is further entitled to $1,000 for each meeting of a committee of the
Board attended by the director which is held
6
<PAGE> 10
on a day other than the day of, or the day before or after, the date of any
meeting of the full Board of Directors. Other directors are not entitled to
compensation in their capacities as directors. For a description of the
Company's 1994 Director Stock Option Plan, as amended, see "Proposal
4 -- Approval of Amendment to the 1994 Director Stock Option Plan."
On [ ], 1999, Mr. Bidzos, the Vice Chairman of the Board of Directors
of the Company and a nominee for director, entered into a Consulting Agreement
with the Company, pursuant to which Mr. Bidzos is paid $10,000 per month, plus
expenses (including benefit coverage), for his services as a consultant to the
Company. The Consulting Agreement has a two-year term which is renewable
annually thereafter.
COMPENSATION OF EXECUTIVE OFFICERS
Employment Agreements
The Company is a party to an Amended and Restated Employment Agreement,
dated as of November 1, 1997, as amended, with Charles R. Stuckey, Jr.,
providing for the employment of Mr. Stuckey as Chief Executive Officer of the
Company. The agreement provides for a two-year term ending on November 1, 1999,
after which time the agreement renews automatically for successive one-year
terms until either party gives written notice of non-renewal at least 90 days
prior to the expiration of the then-current term. The agreement provides for an
annual base salary of $231,000, as well as annual bonuses upon the satisfaction
of agreed-upon goals and objectives. The agreement also provides that Mr.
Stuckey shall be entitled to receive the same standard employment benefits as
other executives of the Company receive. If Mr. Stuckey is terminated other than
for cause (as defined therein), he shall be entitled to receive severance
payments equal to 24 months' base salary, acceleration of all stock options and
full medical and insurance benefits until death, and the parties shall negotiate
in good faith regarding the retention of Mr. Stuckey as a consultant to the
Company for a two-year period. In the event of a change in control of the
Company (as defined therein), Mr. Stuckey shall be entitled, at his election, to
receive, subject to certain limitations, a lump sum payment equal to 24 months'
base salary. In addition, he shall receive acceleration of all stock options if
he is terminated other than for cause within one year after a change in control
of the Company.
The Company is also a party to a letter agreement, dated August 21, 1995,
with Arthur W. Coviello, Jr., the Company's President and Chief Operating
Officer. Mr. Coviello's annual base salary is $200,000, and he is eligible to
receive annual bonuses upon the satisfaction of agreed-upon goals and
objectives. Mr. Coviello is also entitled to severance of six months' salary and
benefits in the event that his employment is terminated by the Company. In
addition, for each full year of service with the Company (up to a maximum of six
years), Mr. Coviello will receive an additional one month of severance (thus
aggregating up to 12 months of severance).
On September 4, 1998, the Company entered into a Management Employment
Agreement with Gary A. Rogers providing for his employment as Senior Vice
President, Worldwide Sales and Field Operations of the Company. The agreement
provided for an annual base salary of $190,000 and entitled Mr. Rogers to
participate in all bonus and benefit programs that the Company establishes and
makes available to its employees to the extent he was otherwise eligible. On
March 4, 1999, Mr. Rogers resigned from the Company, effective March 19, 1999.
On September 4, 1998, the Company entered into a Management Employment
Agreement with Albert E. Sisto providing for his employment as Chief Operating
Officer of RSA Data Security, Inc. The agreement provided for an annual base
salary of $195,000 and entitled Mr. Sisto to participate in all bonus and
benefit programs that the Company establishes and makes available to its
employees to the extent he was otherwise eligible. As of January 29, 1999, Mr.
Sisto ceased to serve as Chief Operating Officer of RSA Data Security, Inc., and
his employment agreement was terminated. See "-- Severance Agreements."
On September 4, 1998, the Company entered into a Management Employment
Agreement with John Adams providing for his employment as Senior Vice President,
Engineering of the Company for a period ending on March 4, 2000, unless sooner
terminated in accordance with the terms of the agreement. The agreement provides
for an annual base salary of $190,000 and entitles Mr. Adams to participate in
all bonus
7
<PAGE> 11
and benefit programs that the Company establishes and makes available to its
employees to the extent he is otherwise eligible. The agreement also provides
that Mr. Adams' employment with the Company shall not be terminated during the
term of the agreement other than for cause (as defined therein), upon death or
disability, or at the election of Mr. Adams.
Severance Agreements
On [ ], 1999 the Company entered into a Separation and Settlement
Agreement with Mr. Bidzos pursuant to which Mr. Bidzos resigned his positions as
Executive Vice President of the Company and President of RSA Data Security, Inc.
Pursuant to the terms of the agreement, the Company accelerated the vesting of
Mr. Bidzos' outstanding unvested stock options (covering an aggregate of 200,001
shares of Common Stock) such that all such options become exercisable in full.
In addition, the Company repriced all of Mr. Bidzos' outstanding stock options
such that the exercise price of such options is $[ ], the closing price
of the Common Stock on the Nasdaq National Market on the date of repricing and
the fair market value of the Common Stock as determined by the Board of
Directors. As a condition to the repricing, unless exercised prior thereto, 50%
of Mr. Bidzos' options will expire on September 1, 1999 and the remaining 50%
will expire on December 31, 1999.
On January 22, 1999, the Company entered into a Transition Agreement and
Release with Mr. Sisto pursuant to which Mr. Sisto became an inactive employee
as of January 29, 1999. Pursuant to the terms of the agreement, Mr. Sisto's
Management Employment Agreement was terminated as of January 29, 1999 and Mr.
Sisto will continue to receive his base salary and benefits through March 31,
2000. In the event that Mr. Sisto accepts an offer of employment elsewhere prior
to March 31, 2000 then the Company will have no further obligation to provide
benefits to him.
Noncompetition Agreements
Messrs. Stuckey, Rogers, Coviello and Adams have each entered into
noncompetition agreements with the Company. Pursuant to the terms of the
noncompetition agreements, each of Messrs. Stuckey, Rogers, Coviello and Adams
has agreed, through the first anniversary of the date of termination of his
respective employment with the Company, not to engage in any business activity
that is directly or indirectly in competition with the Company in the United
States with any of the products or services being developed, provided or sold by
the Company at such time. Furthermore, each executive officer has agreed that he
will not, directly or indirectly, employ any person who is employed by the
Company at any time during the term of the noncompetition agreement, or in any
manner seek to induce any such person to leave his or her employment with the
Company.
1998 Deferred Compensation Plan
On January 22, 1998, the Board of Directors adopted the Company's 1998
Deferred Compensation Plan (the "Deferred Compensation Plan"). Pursuant to the
Deferred Compensation Plan, management and certain highly compensated employees
may elect to defer up to 75% of base salary and up to 100% of annual bonus,
which amounts shall be placed into a trust established thereunder. Upon the
participant's retirement, termination, death or disability, benefits shall be
paid to the participant or his or her beneficiaries, heirs or estate. The
Company has yet to implement the Deferred Compensation Plan.
8
<PAGE> 12
Summary Compensation
The following table sets forth certain information with respect to the
annual and long-term compensation of each of the Named Executive Officers for
the three years ended December 31, 1998.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
AWARDS
ANNUAL ------------
COMPENSATION NUMBER OF
-------------------- SHARES ALL OTHER
SALARY BONUS UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) OPTIONS ($)(2)
- --------------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Charles R. Stuckey, Jr............. 1998 $231,000 $ 0 0 $8,384
Chairman of the Board and 1997 236,006 158,078 0 6,365
Chief Executive Officer 1996 219,471 170,918 200,000 5,202
Arthur W. Coviello, Jr............. 1998 200,000 0 0 6,293
President and 1997 202,628 97,760 0 5,180
Chief Operating Officer 1996 175,000 85,968 0 4,087
Gary A. Rogers(3).................. 1998 190,000 50,000 300,000(4) 5,279
Former Senior Vice President, 1997 162,847 146,533 250,000 4,163
World Wide Sales and Field
Operations
Albert E. Sisto(5)................. 1998 195,000 42,099 275,000(6) 5,346
Former Chief Operating Officer of 1997 21,875 67,307 120,000 98
RSA Data Security, Inc.
John Adams(7)...................... 1998 190,000 10,000 253,100(8) 7,479
Senior Vice President,
Engineering 1997 190,000 54,384 0 5,433
1996 127,885 21,969 200,000 164
</TABLE>
- ---------------
(1) Amounts in this column represent bonuses earned under the Company's
executive compensation program for the respective fiscal years.
(2) Amounts shown in this column for fiscal 1998 represent the aggregate value
of the Company's contributions on behalf of the executives to Group Term
Life Insurance ($2,777 for Mr. Stuckey, $870 for Mr. Coviello, $531 for Mr.
Rogers, $848 for Mr. Sisto and $2,112 for Mr. Adams), the Company's 401(k)
savings plan ($3,607 for Mr. Stuckey, $3,424 for Mr. Coviello, $2,748 for
Mr. Rogers, $2,498 for Mr. Sisto and $3,367 for Mr. Adams), and the
Company's Profit Sharing Plan ($2,000 for each of Messrs. Stuckey, Coviello,
Rogers, Sisto and Adams).
(3) Mr. Rogers joined the Company as Senior Vice President, World Wide Sales and
Field Operations in February 1997. On March 4, 1999, Mr. Rogers resigned
from the Company, effective March 19, 1999.
(4) On June 26, 1998, Mr. Rogers was granted an option to purchase 50,000 shares
of Common Stock. On August 12, 1998, Mr. Rogers' 300,000 then-outstanding
options were exchanged for new options pursuant to the Company's Option
Repricing Program. See "Option Grants" and "Option Repricing."
(5) Mr. Sisto joined the Company as Chief Operating Officer of RSA Data
Security, Inc. in October 1997. As of January 29, 1999, Mr. Sisto ceased to
serve as Chief Operating Officer of RSA Data Security, Inc.
(6) On June 26, 1998, Mr. Sisto was granted an option to purchase 75,000 shares
of Common Stock. On August 12, 1998, 195,000 of Mr. Sisto's then-outstanding
options were exchanged for new options pursuant to the Company's Option
Repricing Program. On July 16, 1998, Mr. Sisto was granted an option to
purchase 80,000 shares of Common Stock which were not repriced pursuant to
the Company's Option Repricing Program. See "Option Grants" and "Option
Repricing."
(7) Mr. Adams joined the Company as Senior Vice President, Engineering in March
1996.
9
<PAGE> 13
(8) On June 26, 1998, Mr. Adams was granted an option to purchase 75,000 shares
of Common Stock. On August 12, 1998, Mr. Adams' 253,100 then-outstanding
options were exchanged for new options pursuant to the Company's Option
Repricing Program. See "Option Grants" and "Option Repricing."
Option Grants
The following table sets forth certain information concerning grants of
stock options during the year ended December 31, 1998 to each of the Named
Executive Officers. The Company granted no stock appreciation rights during
fiscal 1998.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------
PERCENT OF POTENTIAL REALIZABLE
TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF STOCK
SHARES GRANTED TO EXERCISE PRICE APPRECIATION FOR
UNDERLYING EMPLOYEES IN PRICE PER OPTION TERM ($)(2)
OPTIONS FISCAL YEAR SHARE EXPIRATION -----------------------
GRANTED (%) ($)(1) DATE 5% 10%
---------- ------------ --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Charles R. Stuckey, Jr......... 0 0 N/A N/A N/A N/A
Arthur W. Coviello, Jr......... 0 0 N/A N/A N/A N/A
Gary A. Rogers................. 50,000(3) 1.0% $19.00 6/25/08 N/A N/A
50,000(4) 1.0 12.06 6/25/08 $ 370,000 $ 931,000
250,000(4) 4.0 12.06 1/26/07 1,550,000 3,763,000
Albert E. Sisto................ 75,000(3) 1.2 19.00 6/25/08 N/A N/A
80,000 1.3 16.00 7/15/08 805,000 2,040,000
75,000(4) 1.2 12.06 6/25/08 555,000 1,397,000
120,000(4) 1.9 12.06 11/11/07 831,000 2,064,000
John Adams..................... 75,000(3) 1.2 19.00 6/25/08 N/A N/A
75,000(4) 1.2 12.06 6/25/08 555,000 1,397,000
178,100(4) 2.8 12.06 4/1/06 964,000 2,284,000
</TABLE>
- ---------------
(1) Options become exercisable over a four-year period and generally terminate
three months following termination of the executive officer's employment
with the Company or the expiration date, whichever occurs earlier. The
exercise price of each option was determined to be equal to the fair market
value per share of the Common Stock on the date of grant.
(2) Amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration date. The gains shown are net of the option exercise price,
but do not include deductions for taxes or other expenses associated with
the exercise of the option or the sale of the underlying shares. The actual
gains, if any, on the exercises of stock options will depend on the future
performance of the Common Stock, the optionholder's continued employment
through the option period, and the date on which the options are exercised.
(3) Option granted on June 26, 1998 and subsequently exchanged for a new option
pursuant to the Company's Option Repricing Program. Accordingly, this option
is no longer outstanding. See "Option Repricing."
(4) Option granted on August 12, 1998 pursuant to the Company's Option Repricing
Program in exchange for the surrender of then-outstanding options. See
"Option Repricing."
10
<PAGE> 14
Aggregated Option Exercises and Year-End Option Table
The following table summarizes certain information regarding stock options
exercised during the year ended December 31, 1998 and stock options held as of
December 31, 1998 by each of the Named Executive Officers.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SHARES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY OPTIONS
NUMBER OPTIONS AT FISCAL AT FISCAL YEAR-END
OF SHARES VALUE YEAR-END (EXERCISABLE/
ACQUIRED ON REALIZED (EXERCISABLE/ UNEXERCISABLE)
NAME EXERCISE (#) ($)(1) UNEXERCISABLE)(#) ($)(2)
- ---- ------------ ---------- ----------------- --------------------
<S> <C> <C> <C> <C>
Charles R. Stuckey, Jr...... 250,000 $2,993,750 187,499/62,500 $ 1,145,000/$0
Arthur W. Coviello, Jr...... 25,000 631,405 298,218/102,982 3,970,027/1,370,948
Gary A. Rogers.............. 0 0 109,374/190,625 1,196,278/2,084,961
Albert E. Sisto............. 0 0 30,000/245,000 328,125/2,364,688
John Adams.................. 0 0 103,100/150,000 1,126,563/1,640,625
</TABLE>
- ---------------
(1) Represents the difference between the exercise price and the fair market
value of the Common Stock on the date of exercise.
(2) Value based on the last sales price per share ($23.00) of the Company's
Common Stock on December 31, 1998, as reported on the Nasdaq National
Market, less the exercise price.
Option Repricing
The following table sets forth information concerning all repricings of
options since the Company became subject to the reporting requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), held by
executive officers of the Company. All such repricings were effected through the
grant of replacement options in exchange for existing options. Messrs. Stuckey,
Coviello and Bidzos did not participate in the Company's Option Repricing
Program in August 1998.
TEN-YEAR OPTION REPRICINGS
<TABLE>
<CAPTION>
NUMBER OF MARKET
SECURITIES PRICE OF EXERCISE LENGTH OF ORIGINAL
UNDERLYING STOCK AT PRICE AT NEW OPTION TERM
OPTIONS TIME OF TIME OF EXERCISE REMAINING AT DATE
NAME DATE REPRICED REPRICING($) REPRICING($) PRICE($) OF REPRICING
- ---- -------- ---------- ------------ ------------ --------- ------------------
<S> <C> <C> <C> <C> <C> <C>
John Adams................... 08/12/98 178,100 $12.06 $24.30 $12.06 7 years, 7 months
Senior Vice President, 08/12/98 75,000 12.06 19.00 12.06 9 years, 10 months
Engineering
Marian G. O'Leary............ 08/12/98 150,000 12.06 38.08 12.06 8 years, 11 months
Senior Vice President,
Finance, Chief
Financial Officer and
Treasurer
Gary A. Rogers............... 08/12/98 250,000 12.06 30.50 12.06 8 years, 6 months
Former Senior Vice 08/12/98 50,000 12.06 19.00 12.06 9 years, 10 months
President, World Wide
Sales and Field
Operations
</TABLE>
11
<PAGE> 15
<TABLE>
<CAPTION>
NUMBER OF MARKET
SECURITIES PRICE OF EXERCISE LENGTH OF ORIGINAL
UNDERLYING STOCK AT PRICE AT NEW OPTION TERM
OPTIONS TIME OF TIME OF EXERCISE REMAINING AT DATE
NAME DATE REPRICED REPRICING($) REPRICING($) PRICE($) OF REPRICING
- ---- -------- ---------- ------------ ------------ --------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Linda E. Saris............... 08/12/98 30,000 12.06 24.76 12.06 7 years, 6 months
Senior Vice President, 08/12/98 50,000 12.06 19.00 12.06 9 years, 10 months
Customer Support
and Operations
Scott T. Schnell............. 08/12/98 65,000 12.06 19.00 12.06 9 years, 10 months
Senior Vice President,
Marketing
Margaret K. Seif............. 08/12/98 50,000 12.06 24.13 12.06 4 years, 9 months
Vice President, 08/12/98 50,000 12.06 19.00 12.06 9 years, 10 months
General Counsel and
Secretary
Albert E. Sisto.............. 08/12/98 120,000 12.06 33.25 12.06 9 years, 4 months
Former Chief Operating 08/12/98 75,000 12.06 19.00 12.06 9 years, 10 months
Officer of RSA Data
Security, Inc.
</TABLE>
COMPENSATION COMMITTEE REPORT ON REPRICING OF OPTIONS
In July 1998, the Board of Directors approved an Option Repricing Program
pursuant to which each holder of an outstanding stock option (other than Messrs.
Stuckey, Coviello and Bidzos) granted between January 1, 1996 and June 30, 1998
was entitled to exchange his or her outstanding options (the "Old Options") for
new options exercisable at the fair market value of the Common Stock on August
12, 1998 (the "New Options"). Because of declines in the market value of the
Company's Common Stock, certain then-outstanding options were exercisable at
prices which substantially exceeded the market value of the Common Stock. In
view of such declines in market value and in keeping with the Company's
philosophy of utilizing equity incentives to motivate and retain qualified
employees, the Board of Directors and the Compensation Committee determined that
it was important to regain the incentive intended to be provided by options to
purchase shares of the Company's Common Stock. The repricing was effected on
August 12, 1998 by cancelling any Old Options surrendered for cancellation by
persons participating in the Option Repricing Program and granting such persons
New Options exercisable at $12.06 per share, the fair market value of the Common
Stock at close of business on such date. Each New Option covers the same number
of shares of Common Stock as the Old Option it replaced and has the identical
vesting schedule as the Old Option, provided, however, that each New Option has
certain restrictions on exercisability through November 12, 1999.
Joseph B. Lassiter, III
James K. Sims
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is responsible for recommending compensation
policies with respect to the Company's executive officers, and for making
decisions about awards under certain of the Company's stock-based compensation
plans. Each member of the Committee is a "non-employee director" within the
meaning of Rule 16b-3 under the Exchange Act and an "outside director" within
the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code"). This report addresses the Company's compensation policies for 1998
as they affected the Chief Executive Officer and the Company's other executive
officers, including the Named Executive Officers.
Compensation Policies
The Compensation Committee's executive compensation policies are designed
to provide competitive compensation opportunities, reward executives consistent
with the Company's performance, recognize
12
<PAGE> 16
individual performance and responsibility, underscore the importance of
stockholder value creation and assist the Company in attracting and retaining
qualified executives. The principal elements of compensation employed by the
Compensation Committee to meet these objectives are base salaries, annual cash
incentives and long-term stock-based incentives.
All compensation decisions are determined following a detailed review of
many factors that the Compensation Committee believes are relevant, including
external competitive data, the Company's achievements over the past year, the
individual's contributions to the Company's success, any significant changes in
role or responsibility, and the internal equity of compensation relationships.
In general, the Compensation Committee intends that the overall total
compensation opportunities provided to the executive officers should reflect
competitive compensation for executives with corresponding responsibilities in
comparable firms providing similar products and services. To the extent
determined to be appropriate, the Compensation Committee also considers general
economic conditions, the Company's financial performance, and the individual's
performance in establishing the compensation opportunities of the executive
officers. Total compensation opportunities for the executive officers are
adjusted over time as necessary to meet this objective. Actual compensation
earned by the executive officers reflects both their contributions to the
Company's actual stockholder value creation and the Company's actual financial
performance.
The competitiveness of the Company's total compensation
program -- including base salaries, annual cash incentives and long-term
stock-based incentives -- is regularly assessed with the assistance of the
Compensation Committee's outside compensation consultant. Data for external
comparisons are drawn from a number of sources, including the publicly available
disclosures of selected comparable firms with similar products and national
compensation surveys of information technology firms of similar size.
While the targeted total compensation levels for the executive officers are
intended to be competitive, compensation paid in any particular year may be more
or less than the average, depending upon the Company's actual performance.
Base Salary
Base salaries for all executive officers, including the Chief Executive
Officer, are reviewed by the Compensation Committee on an annual basis. In
determining appropriate base salaries, the Compensation Committee considers
external competitiveness, the roles and responsibilities of the individual, the
internal equity of compensation relationships and the contributions of the
individual to the Company's success.
Annual Cash Incentive Opportunities
The Company believes that executives should be rewarded for their
contributions to the success and profitability of the business and, as such,
approves the annual cash incentive awards. Incentive awards are linked to the
achievement of revenue and net income goals by the Company and/or specific
business units, and the achievement by the executives of certain assigned
objectives. The individual objectives set for executive officers of the Company
are generally objective in nature and include such goals as revenue, profit and
budget objectives, increased departmental productivity and improved quality
control. The Compensation Committee believes that these arrangements tie the
executive's performance closely to key measures of success of the Company or the
executive's business unit. All executive officers, including the Chief Executive
Officer, are eligible to participate in this program.
Long-Term Stock-Based Incentives
The Compensation Committee also believes that it is essential to link
executive and stockholder interests. As such, from time to time the Compensation
Committee grants stock options to executive officers and other employees under
the Company's 1994 Stock Option Plan, as amended -- 1998 Restatement. In
determining actual awards, the Compensation Committee considers the externally
competitive market, the contributions of the individual to the success of the
Company, and the need to retain the individual over time. All executive
13
<PAGE> 17
officers, including the Chief Executive Officer, are eligible to receive awards
under the 1994 Stock Option Plan, as amended -- 1998 Restatement.
Section 162(m) of the Code generally disallows a tax deduction to public
companies for compensation over $1,000,000 paid to its Named Executive Officers.
Qualifying performance-based compensation will not be subject to the deduction
limit if certain requirements are met. Although no Named Executive Officer
received compensation exceeding this limit in 1998, the Company has limited the
number of shares subject to stock options which may be granted to Company
employees in a manner that complies with the performance-based requirements of
Section 162(m). While the Compensation Committee does not currently intend to
qualify its annual cash incentive awards as a performance-based plan, it will
continue to monitor the impact of Section 162(m) on the Company.
1998 Compensation
Base salaries paid in 1998, for all executive officers other than the Chief
Executive Officer, reflect the Compensation Committee's review of external
competitiveness, the roles and responsibilities of the individuals, the internal
equity of compensation relationships and the contributions of the individual.
The Company and Mr. Stuckey, the Chief Executive Officer of the Company, are
parties to an Amended and Restated Employment Agreement, dated as of November 1,
1997, as amended, which provides for an annual base salary of $231,000, as well
as annual bonuses. See "Compensation of Executive Officers -- Employment
Agreements." The Compensation Committee believes that the base salary paid the
Chief Executive Officer in 1998 was approximately competitive with base salaries
paid to chief executive officers at comparable firms.
Annual cash incentives paid to certain executive officers for 1998 were
determined in conjunction with the Compensation Committee's assessment of the
Company's and the individual's performance with respect to predetermined
objectives as outlined above. No bonuses were awarded for fiscal 1998 for
Messrs. Stuckey, Coviello and Bidzos.
Stock options awarded in 1998 to certain executive officers were based on
an assessment of individual contribution, Company success and competitive
practice, and were intended to help retain the executives over time and to
provide rewards consistent with stockholder returns. As such, all options
granted in 1998 vest ratably over a predetermined period of time, with an
exercise price equal to the fair market value on the date of the grant. With
respect to these grants, no compensation will be earned unless the share price
increases beyond the grant price, thereby creating stockholder returns.
Joseph B. Lassiter, III
James K. Sims
14
<PAGE> 18
COMPARATIVE STOCK PERFORMANCE
The graph below compares the cumulative total stockholder return on the
Common Stock of the Company for the period from December 31, 1994 through
December 31, 1998 with the cumulative total return on (i) Standard and Poor's
SmallCap 600 Index and (ii) Hambrecht & Quist's Growth Index. The comparison
assumes the investment of $100 on December 31, 1994 in the Company's Common
Stock and in each of the indices and, in each case, assumes reinvestment of all
dividends. Prior to December 1994, the Company's Common Stock was not registered
under the Exchange Act.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
SECURITY DYNAMICS TECHNOLOGIES, INC. 100.00 585.24 676.51 767.79 493.96
- -------------------------------------------------------------------------------------------
S&P SMALLCAP 600 INDEX 100.00 129.96 157.67 198.02 195.43
- -------------------------------------------------------------------------------------------
HAMBRECHT & QUIST GROWTH INDEX 100.00 166.83 174.57 178.74 259.25
- -------------------------------------------------------------------------------------------
</TABLE>
PROPOSAL 2 -- APPROVAL OF AMENDMENT TO THE
THIRD RESTATED CERTIFICATE OF INCORPORATION, AS AMENDED
The Company's Third Restated Certificate of Incorporation, as amended (the
"Certificate of Incorporation"), currently authorizes the issuance of 80,000,000
shares of Common Stock. In January 1999, the Board of Directors adopted
resolutions, subject to stockholder approval, proposing that the Certificate of
Incorporation be amended to increase the authorized number of shares of Common
Stock to 180,000,000 shares. As of March 4, 1999, the Company had
[ ] shares of Common Stock outstanding, and an aggregate of
[ ] shares of Common Stock reserved for future issuance in
connection with the Company's stock option, stock purchase and other stock-based
benefit plans.
Proposed Amendment to Certificate of Incorporation
The Board of Directors has adopted resolutions setting forth the proposed
amendment to the first paragraph of Article Fourth of the Certificate of
Incorporation (the "Amendment"), the advisability of the Amendment, and a call
for submission of the Amendment for approval by the Company's stockholders at
the
15
<PAGE> 19
Meeting. The following is the text of the first paragraph of Article Fourth of
the Certificate of Incorporation, as proposed to be amended:
FOURTH. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is One Hundred Eighty Million
(180,000,000) shares of Common Stock, $.01 par value per share ("Common
Stock").
Purpose and Effect of the Proposed Amendment
The Board of Directors believes that it is in the Company's best interest
to increase the number of authorized shares of Common Stock in order to give the
Company additional flexibility to maintain a reasonable stock price with future
stock splits and stock dividends. Since the Company's initial public offering in
1994, the Company has completed two separate 2-for-1 splits of the Common Stock.
The current number of authorized shares of Common Stock that are not outstanding
or reserved is not sufficient to enable the Company to complete another 2-for-1
stock split. Although there can be no guarantee that the Board will declare a
stock split at any specific stock price or at all, the Board believes that the
increase in the number of authorized shares will provide the Company with the
flexibility necessary to maintain a reasonable stock price through future stock
splits and stock dividends without the expense of a special stockholder meeting
or having to wait until the next annual meeting.
The Company has acquired a number of companies as part of implementing its
strategy to broaden its portfolio of product offerings, to augment its
technological capabilities and to expand its geographic markets and distribution
channels. The Company has stated that, as part of its strategy, it may acquire
additional companies for these and other business reasons. From time to time,
the Company uses shares of Common Stock to pay for acquisitions. The Board
believes that the proposed increase in the number of authorized shares of Common
Stock is desirable to maintain the Company's flexibility in choosing how to pay
for acquisitions. While the Company may consider issuing shares of Common Stock
in the future for acquisitions, the Company does not presently have any plans,
agreements, understandings or arrangements that will or could result in the
issuance of any such shares.
The Board also believes that the availability of additional shares of
Common Stock will provide the Company with the flexibility to issue shares for a
variety of other purposes that the Board of Directors may deem advisable without
further action by the Company's stockholders, unless required by law, regulation
or stock market rule. These purposes could include, among other things, the sale
of stock to obtain additional capital funds, the purchase of property, the use
of additional shares for various equity compensation and other employee benefit
plans, and other bona fide corporate purposes. In some situations, the issuance
of additional shares of Common Stock could have a dilutive effect on earnings
per share, and, for a person who does not purchase additional shares to maintain
his or her pro rata interest, on a stockholder's percentage voting power in the
Company. In addition, depending upon the nature and terms thereof, such
issuances could enable the Board to render more difficult or discourage an
attempt to obtain a controlling interest in the Company or the removal of the
incumbent Board and may discourage unsolicited takeover attempts which might be
desirable to stockholders. For example, the issuance of shares of Common Stock
in a public or private sale, merger or similar transaction would increase the
number of the Company's outstanding shares, thereby diluting the interest of a
party seeking to take over the Company. Furthermore, many companies have issued
warrants or other rights to acquire additional shares to the holders of Common
Stock to discourage or defeat unsolicited stock accumulation programs and
acquisition proposals. If this amendment is adopted, more Common Stock of the
Company would be available for such purposes than is currently available.
The Board of Directors is not proposing the Amendment in response to any
effort to accumulate the Company's stock or to obtain control of the Company by
means of a merger, tender offer or solicitation in opposition to management. In
addition, the Amendment is not part of any plan by management to recommend a
series of similar amendments to the Board of Directors and the stockholders.
Finally, the Board does not currently contemplate recommending the adoption of
any other amendments to the Certificate of Incorporation which could be
construed to affect the ability of third parties to take over or change control
of the Company.
16
<PAGE> 20
Holders of Common Stock do not have preemptive rights to subscribe to
additional securities that may be issued by the Company. This means that current
stockholders do not have a prior right to purchase any new issue of Common Stock
of the Company in order to maintain their proportionate ownership interest.
THE BOARD OF DIRECTORS BELIEVES THAT THE APPROVAL OF THE AMENDMENT IS IN
THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE IN
FAVOR OF THIS PROPOSAL.
PROPOSAL 3 -- APPROVAL OF AMENDMENT TO THE
1994 STOCK OPTION PLAN, AS AMENDED -- 1998 RESTATEMENT
On July 24, 1998, the Board of Directors adopted resolutions authorizing an
amendment (the "1998 Amendment") to the Company's 1994 Stock Option Plan, as
amended -- 1998 Restatement (the "1998 Restatement"), to increase the maximum
number of shares of Common Stock which may be granted to any individual under
the 1998 Restatement in any calendar year from 300,000 to 400,000 shares. The
Board has adopted the 1998 Amendment because it believes that it will provide
increased flexibility in providing equity compensation to current and potential
key officers of the Company while maintaining the availability of tax deductions
that might otherwise be unavailable. Section 162(m) of the Code disallows a tax
deduction to public companies for certain compensation in excess of $1 million
paid to certain of its executive officers. The 1998 Restatement, as originally
adopted, limited to 300,000 the maximum number of shares of Common Stock which
may be granted to any individual under the 1998 Restatement in any calendar
year. Such a limitation is required under Section 162(m) in order to exclude the
"performance-based compensation" under the 1998 Restatement from the $1 million
limitation. If the 1998 Amendment is approved, the Company will have additional
flexibility in encouraging stock ownership by current and potential key officers
of the Company through the granting of stock options and other stock-based
awards under the 1998 Restatement.
On January 27, 1999, the Board of Directors adopted resolutions, subject to
stockholder approval, to approve an amendment (the "1999 Amendment") to the 1998
Restatement to increase the number of shares of Common Stock authorized for
issuance under the 1998 Restatement from 9,570,000 to 11,570,000 shares. The
Board has adopted the 1999 Amendment because it believes that the number of
shares currently available under the 1998 Restatement will not be sufficient to
satisfy the Company's incentive compensation needs through fiscal 1999. The
Board of Directors believes that continued grants of stock options, as well as
grants of restricted stock and other stock-based awards, will be an important
element in attracting and retaining key employees who are expected to contribute
to the Company's growth and success. If the 1999 Amendment is approved, the
Company will have additional authorized shares of Common Stock available for
future awards, including awards in connection with any merger, consolidation or
acquisition by the Company.
As of March 4, 1999, and subject to stockholder approval of the 1999
Amendment, [ ] shares of Common Stock were available for issuance under the
1998 Restatement.
THE BOARD OF DIRECTORS BELIEVES THAT THE APPROVAL OF THE AMENDMENTS TO THE
1998 RESTATEMENT IS IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS
AND RECOMMENDS A VOTE IN FAVOR OF THIS PROPOSAL.
SUMMARY OF THE 1998 RESTATEMENT
The following is a summary of the material provisions of the 1998
Restatement.
Description of Awards
The 1998 Restatement provides for the grant of incentive stock options
within the meaning of Section 422 of the Code ("incentive stock options"), or
options not intended to qualify as incentive stock options ("nonstatutory
options"), restricted stock awards and other stock-based awards, including the
grant of shares based upon certain conditions, the grant of securities
convertible into Common Stock and the grant of stock appreciation rights.
Generally, awards under the 1998 Restatement are not assignable or transferable
except by
17
<PAGE> 21
will or the laws of descent and distribution and, in the case of nonstatutory
options, pursuant to a qualified domestic relations order (as defined in the
Code).
Incentive Stock Options and Nonstatutory Stock Options. Optionees receive
the right to purchase a specified number of shares of Common Stock at a
specified option price and subject to such other terms and conditions as are
specified in connection with the option grant. Subject to the limitations
described below, options may be granted at an exercise price which may be less
than, equal to or greater than the fair market value of the Common Stock on the
date of grant. Under present law, however, incentive stock options and options
intended to qualify as performance-based compensation under Section 162(m) of
the Code may not be granted at an exercise price less than the fair market value
of the Common Stock on the date of grant (or less than 110% of the fair market
value in the case of incentive stock options granted to optionees holding more
than 10% of the voting power of the Company). Options may not be granted for a
term in excess of ten years. The 1998 Restatement permits the administrator to
determine the manner of payment of the exercise price of options, including
through payment by cash, check or in connection with a "cashless exercise"
through a broker, by surrender to the Company of shares of Common Stock, by
delivery to the Company of a promissory note, or by any other lawful means. Any
optionee who is a participant in a deferred compensation plan of the Company may
elect to defer, subject to certain limitations, the receipt of shares issuable
upon the exercise of an option.
Restricted Stock Awards. Restricted stock awards entitle recipients to
acquire shares of Common Stock, subject to the right of the Company to
repurchase all or part of such shares from the recipient in the event that the
conditions specified in the applicable award are not satisfied prior to the end
of the applicable restriction period established for such award.
Other Stock-Based Awards. Under the 1998 Restatement, the Board of
Directors has the right to grant other awards based upon the Common Stock having
such terms and conditions as the Board may determine, including the grant of
shares based upon certain conditions, the grant of securities convertible into
Common Stock and the grant of stock appreciation rights.
Eligibility to Receive Awards
Officers, employees, directors, consultants and advisors of the Company and
its subsidiaries are eligible to be granted awards under the 1998 Restatement.
Under present law, however, incentive stock options may only be granted to
employees. The maximum number of shares with respect to which an award may be
granted to any participant under the 1998 Restatement may not exceed 300,000
shares per calendar year.
As of January 31, 1999, the Company had approximately 758 employees and
five non-employee directors, all of whom were eligible to participate in the
1998 Restatement. The number of individuals receiving awards varies from year to
year depending on various factors, such as the number of promotions and the
Company's hiring needs during the year, and thus the Company cannot now
determine award recipients. From the initial adoption of the Company's 1994
Stock Option Plan through January 31, 1999: options to purchase an aggregate of
337,500 shares thereunder had been granted to Charles R. Stuckey, Jr., the
Chairman of the Board of Directors and Chief Executive Officer of the Company;
options to purchase an aggregate of 737,500 shares thereunder had been granted
to Arthur W. Coviello, Jr., the President and Chief Operating Officer, and a
member of the Board of Directors, of the Company; options to purchase an
aggregate of 300,000 shares thereunder had been granted to Gary A. Rogers, the
former Senior Vice President, World Wide Sales and Field Operations of the
Company; options to purchase an aggregate of 270,000 shares thereunder had been
granted to Albert E. Sisto, the former Chief Operating Officer of RSA Data
Security, Inc.; options to purchase an aggregate of 275,000 shares thereunder
had been granted to John Adams, the Senior Vice President, Engineering of the
Company; options to purchase an aggregate of 380,000 shares thereunder had been
granted to all current directors who are not executive officers of the Company
as a group; options to purchase an aggregate of 1,995,000 shares thereunder had
been granted to all current executive officers of the Company as a group;
options to purchase an aggregate of 350,000 shares thereunder had been granted
to D. James Bidzos, the Vice Chairman of the Board of Directors of the Company
and a nominee for director; no options to purchase shares thereunder had been
granted to any associate of any director, executive officer or
18
<PAGE> 22
nominee for director of the Company; and options to purchase an aggregate of
9,086,250 shares thereunder had been granted to all employees of the Company who
are not executive officers.
On March 4, 1999, the last reported sale price of the Company's Common
Stock on the Nasdaq National Market was $16.50.
Administration
The 1998 Restatement is administered by the Compensation Committee of the
Board of Directors. Subject to the provisions of the 1998 Restatement, the
Compensation Committee has the authority to select the persons to whom awards
are granted and determine the terms of each award, including (i) the number of
shares of Common Stock covered by options and the dates upon which such options
become exercisable, (ii) the exercise price of options, (iii) the duration of
options, and (iv) the number of shares of Common Stock subject to any restricted
stock or other stock-based awards and the terms and conditions of such awards,
including conditions for repurchase, issue price and repurchase price.
The Compensation Committee may, in its sole discretion, include additional
provisions in any award granted or made under the 1998 Restatement, including
without limitation restrictions on transfer, repurchase rights, commitments to
pay cash bonuses, to make, arrange for or guarantee loans or to transfer other
property to optionees upon exercise of options, or such other provisions as
shall be determined by the Compensation Committee, so long as not inconsistent
with the 1998 Restatement or applicable law. The Compensation Committee may
also, in its sole discretion, accelerate or extend the date or dates on which
all or any particular option or options granted under the 1998 Restatement may
be exercised.
The Board of Directors is required to make appropriate adjustments in
connection with the 1998 Restatement and any outstanding awards to reflect stock
dividends, stock splits and certain other events. In the event of a merger,
liquidation or other Acquisition Event (as defined in the 1998 Restatement), the
Board of Directors is authorized to provide for outstanding options or other
stock-based awards to be assumed or substituted for, to accelerate the awards to
make them fully exercisable prior to consummation of the Acquisition Event or to
provide for a cash out of the value of any outstanding options. If any award
expires or is terminated, surrendered, canceled or forfeited, the unused shares
of Common Stock covered by such award will again be available for grant under
the 1998 Restatement.
The 1998 Restatement will remain in effect until October 3, 2004 (except
that it will continue in effect as to equity-related securities outstanding on
that date), unless earlier terminated by the Board of Directors. The Board of
Directors may amend, suspend or terminate the 1998 Restatement or any portion
thereof at any time, provided that no amendment shall be made without
stockholder approval if such approval is necessary to comply with any applicable
tax or regulatory requirement.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the United States federal income tax
consequences that generally will arise with respect to awards granted under the
1998 Restatement and with respect to the sale of Common Stock acquired under the
1998 Restatement.
Incentive Stock Options
In general, a participant will not recognize taxable income upon the grant
or exercise of an incentive stock option. Instead, a participant will recognize
taxable income with respect to an incentive stock option only upon the sale of
Common Stock acquired through the exercise of the option ("ISO Stock"). The
exercise of an incentive stock option, however, may subject the participant to
the alternative minimum tax.
Generally, the tax consequences of selling ISO Stock will vary with the
length of time that the participant has owned the ISO Stock at the time it is
sold. If the participant sells ISO Stock after having owned it for at least two
years from the date the option was granted (the "Grant Date") and one year from
the date the option was exercised (the "Exercise Date"), then the participant
will recognize long-term capital gain in an amount equal to the excess of the
sale price of the ISO Stock over the exercise price.
19
<PAGE> 23
If the participant sells ISO Stock for more than the exercise price prior
to having owned it for at least two years from the Grant Date and one year from
the Exercise Date (a "Disqualifying Disposition"), then all or a portion of the
gain recognized by the participant will be ordinary compensation income and the
remaining gain, if any, will be a capital gain. This capital gain will be a
long-term capital gain if the participant has held the ISO Stock for more than
one year prior to the date of sale.
If a participant sells ISO Stock for less than the exercise price, then the
participant will recognize capital loss equal to the excess of the exercise
price over the sale price of the ISO Stock. This capital loss will be a
long-term capital loss if the participant has held the ISO Stock for more than
one year prior to the date of sale.
Nonstatutory Stock Options
As in the case of an incentive stock option, a participant will not
recognize taxable income upon the grant of a nonstatutory stock option. Unlike
the case of an incentive stock option, however, a participant who exercises a
nonstatutory stock option generally will recognize ordinary compensation income
in an amount equal to the excess of the fair market value of the Common Stock
acquired through the exercise of the option ("NSO Stock") on the Exercise Date
over the exercise price.
With respect to any NSO Stock, a participant will have a tax basis equal to
the exercise price plus any income recognized upon the exercise of the option.
Upon selling NSO Stock, a participant generally will recognize capital gain or
loss in an amount equal to the excess of the sale price of the NSO Stock over
the participant's tax basis in the NSO Stock. This capital gain or loss will be
a long-term gain or loss if the participant has held the NSO Stock for more than
one year prior to the date of the sale.
Restricted Stock Awards
A participant will not recognize taxable income upon the grant of a
restricted stock award, unless the participant makes an election under Section
83(b) of the Code (a "Section 83(b) Election"). If the participant makes a
Section 83(b) Election within 30 days of the date of the grant, then the
participant will recognize ordinary income, for the year in which the award is
granted, in an amount equal to the difference between the fair market value of
the Common Stock at the time the award is granted and the purchase price paid
for the Common Stock. If a Section 83(b) Election is not made, the participant
will recognize ordinary income, at the time that the forfeiture provisions or
restrictions on transfer lapse, in an amount equal to the difference between the
fair market value of the Common Stock at the time of such lapse and the original
purchase price paid for the Common Stock. The participant will have a basis in
the Common Stock acquired equal to the sum of the price paid and the amount of
ordinary compensation income recognized.
Upon the disposition of the Common Stock acquired pursuant to a restricted
stock award, the participant will recognize a capital gain or loss equal to the
difference between the sale price of the Common Stock and the participant's
basis in the Common Stock. The gain or loss will be a long-term gain or loss if
the shares are held for more than one year. For this purpose, the holding period
shall begin just after the date on which the forfeiture provisions or
restrictions lapse if a Section 83(b) Election is not made, or just after the
award is granted if a Section 83(b) Election is made.
Other Stock-Based Awards
The tax consequences associated with any other stock-based award granted
under the 1998 Restatement will vary depending on the specific terms of such
award. Among the relevant factors are whether or not the award has a readily
ascertainable fair market value, whether or not the award is subject to
forfeiture provisions or restrictions on transfer, the nature of the property to
be received by the participant under the award and the participant's holding
period and tax basis for the award or underlying Common Stock.
Maximum Income Tax Rates on Capital Gain and Ordinary Income
Long-term capital gain will be taxable at a maximum rate of 20% if
attributable to Common Stock held for more than eighteen months and at a maximum
rate of 28% if attributable to Common Stock held for more
20
<PAGE> 24
than one year but not more than eighteen months. Short-term capital gain and
ordinary income will be taxable at a maximum rate of 39.6%. Phaseouts of
personal exemptions and reductions of allowable itemized deductions at higher
levels of income may result in slightly higher marginal tax rates. Ordinary
compensation income will also be subject to a medicare tax and, under certain
circumstances, a social security tax.
Tax Consequences to the Company
The grant of an award under the 1998 Restatement will have no tax
consequences to the Company. Moreover, in general, neither the exercise of an
incentive stock option nor the sale of any Common Stock acquired under the 1998
Restatement will have any tax consequences to the Company. The Company generally
will be entitled to a business-expense deduction, however, with respect to any
ordinary compensation income recognized by a participant under the 1998
Restatement, including in connection with a restricted stock award or as a
result of the exercise of a nonstatutory stock option or a Disqualifying
Disposition. Any such deduction will be subject to the limitations of Section
162(m) of the Code. The Company will have a withholding obligation with respect
to any ordinary compensation income recognized by participants under the 1998
Restatement who are employees or otherwise subject to withholding in connection
with a restricted stock award or the exercise of a nonstatutory stock option.
PROPOSAL 4 -- APPROVAL OF AMENDMENT TO THE
1994 DIRECTOR STOCK OPTION PLAN
On January 27, 1999, the Board of Directors adopted resolutions, subject to
stockholder approval, to approve an amendment (the "Director Plan Amendment") to
the Company's 1994 Director Stock Option Plan, as amended (the "Director Plan"),
to increase the number of shares of Common Stock authorized for issuance under
the Director Plan from 300,000 shares to 500,000 shares. The Board has adopted
the Director Plan Amendment because the number of shares currently available
under the Director Plan is insufficient to satisfy further option grant
requirements thereunder.
As of March 4, 1999, and subject to stockholder approval of the Director
Plan Amendment, [ ] shares of Common Stock were available for issuance
under the Director Plan.
THE BOARD OF DIRECTORS BELIEVES THAT THE APPROVAL OF THE DIRECTOR PLAN
AMENDMENT IS IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS AND
RECOMMENDS A VOTE IN FAVOR OF THIS PROPOSAL.
SUMMARY OF THE DIRECTOR PLAN
The Director Plan was adopted by the Board of Directors and approved by the
stockholders of the Company in October 1994. Under the terms of the Director
Plan, directors of the Company who are not employees of the Company or any
subsidiary of the Company are eligible to receive nonstatutory options to
purchase shares of Common Stock.
Each eligible director is entitled to receive options under the Director
Plan to purchase shares of Common Stock upon his or her initial election to the
Board of Directors. Such options cover the number of shares of Common Stock
determined by multiplying (i) 12,000 by (ii) the quotient of (x) the number of
whole calendar months between the option grant date and the date of the next
annual meeting of stockholders and (y) 12.
In addition, annual options to purchase 12,000 shares of Common Stock will
also be granted under the Director Plan to each eligible director on the date of
each annual meeting of stockholders, provided that such director continues to
serve as director immediately after such annual meeting. Options to purchase
12,000 shares of Common Stock at an exercise price of $24.125 per share were
granted under the Director Plan to each of Messrs. Earnest, Lassiter, Middlemas
and Sims on April 30, 1998, the date of the Company's 1998 Annual Meeting of
Stockholders. An option to purchase 1,000 shares of Common Stock at an exercise
price of $22.00 per share was granted to Mr. Elgamal on February 3, 1999, the
date of his election to the Board of Directors of the Company.
21
<PAGE> 25
All options granted under the Director Plan vest on the first anniversary
of the date of grant (or, in the case of annual options, the day prior to the
first annual meeting of stockholders of the Company following the date of grant,
if earlier). On February 3, 1999, in connection with his resignation from the
Board of Directors of the Company, the Company accelerated the vesting of the
option granted to Sanford M. Sherizen on April 30, 1998 such that the option
became fully exercisable as of such date. The exercise price of options granted
under the Director Plan will equal the lesser of (i) the closing price of the
Common Stock on the date of grant or (ii) the average of the closing prices of
the Common Stock on the Nasdaq National Market (or such other nationally
recognized exchange or trading system if the Common Stock is no longer traded on
the Nasdaq National Market) for a period of ten consecutive trading days prior
to such date.
Except as otherwise provided by the Board of Directors, options granted
under the Director Plan generally are not transferrable by the optionee except
by will or by the laws of descent and distribution. In the event an optionee
ceases to serve as a director, each option may be exercised by the optionee for
the portion then exercisable at any time within 60 days after the optionee
ceases to serve as a director; provided, however, that in the event that the
optionee ceases to serve as a director due to his death or disability, then the
optionee, or his or her administrator, executor or heirs may exercise the
exercisable portion of the option for up to 180 days following the date the
optionee ceased to serve as a director. No option is exercisable after the
expiration of ten years from the date of grant.
As of February 3, 1999, the Company had five non-employee directors who
were eligible to participate in the Director Plan. From the initial adoption of
the Director Plan through February 3, 1999: options to purchase an aggregate of
52,000 shares thereunder had been granted to Richard L. Earnest; options to
purchase an aggregate of 1,000 shares thereunder had been granted to Taher
Elgamal; options to purchase an aggregate of 33,000 shares thereunder had been
granted to Joseph B. Lassiter, III; options to purchase an aggregate of 52,000
shares thereunder had been granted to George M. Middlemas; and options to
purchase an aggregate of 18,000 shares thereunder had been granted to James K.
Sims.
On March 4, 1999, the last reported sale price of the Company's Common
Stock on the Nasdaq National Market was $16.50.
The Director Plan is administered by the Board of Directors. Grants of
stock options under the Director Plan and the amount and nature of the awards to
be granted shall be automatic in accordance with the provisions of the Director
Plan. However, all questions concerning interpretation of the Director Plan or
any options granted thereunder shall be resolved by the Board of Directors. The
Board of Directors is required to make appropriate adjustments in connection
with the Director Plan and any outstanding grants to reflect stock dividends,
stock splits and certain other events, including mergers. Subject to the
provisions of the Director Plan, the Board of Directors may modify or amend
outstanding options, and may amend, suspend, terminate or discontinue the
Director Plan.
FEDERAL INCOME TAX CONSEQUENCES
The following is a summary of the United States federal income tax
consequences that generally will arise with respect to the grant and exercise of
stock options under the Director Plan and with respect to the sale of Common
Stock acquired under the Director Plan. It does not address the tax consequences
that may arise with respect to any gift or disposition other than by sale of
Common Stock acquired under the Director Plan.
Tax Consequences to Directors
A director will not recognize taxable income upon the grant of an option
under the Director Plan. However, a director will recognize ordinary
compensation income upon the exercise of the option in an amount equal to the
excess of the fair market value of the Common Stock acquired through the
exercise of the option (the "Option Stock") on the exercise date over the
exercise price.
A director will have a tax basis for any Option Stock equal to the exercise
price plus any income recognized with respect to the option. Upon selling Option
Stock, a director generally will recognize capital gain or loss in an amount
equal to the difference between the sale price of the Option Stock and the
director's
22
<PAGE> 26
tax basis in the Option Stock. This capital gain or loss will be a long-term
capital gain or loss if the director has held the Option Stock for more than one
year prior to the date of the sale and will be a short-term capital gain or loss
if the director has held the Option Stock for a shorter period.
Maximum Income Tax Rates on Capital Gain and Ordinary Income
Long-term capital gain will be taxable at a maximum rate of 20%. Short-term
capital gain and ordinary income will be taxable at a maximum rate of 39.6%.
Phaseouts of personal exemptions and reductions of allowable itemized deductions
at higher levels of income may result in slightly higher marginal tax rates.
Ordinary compensation income will also be subject to a medicare tax and, under
certain circumstances, a social security tax.
Tax Consequences to the Company
The grant of a stock option under the Director Plan will have no tax
consequences to the Company except that the Company generally will be entitled
to a business-expense deduction with respect to any ordinary compensation income
recognized by a director under the Director Plan.
PROPOSAL 5 -- RATIFICATION OF THE APPOINTMENT OF AUDITORS
The Board of Directors has selected Deloitte & Touche LLP as auditors of
the Company for the year ending December 31, 1999, subject to ratification by
stockholders at the Meeting. If the stockholders do not ratify the selection of
Deloitte & Touche LLP, the Board of Directors will reconsider the matter. A
representative of Deloitte & Touche LLP, which served as the Company's auditors
for the year ended December 31, 1998, is expected to be present at the Meeting
to respond to appropriate questions, and to make a statement if he or she so
desires.
STOCKHOLDER PROPOSALS FOR 2000 ANNUAL MEETING
Any proposal that a stockholder of the Company wishes to be considered for
inclusion in the Company's proxy statement and proxy card for the Company's 2000
Annual Meeting of Stockholders (the "2000 Annual Meeting") must be submitted to
the Secretary of the Company at its offices, 36 Crosby Drive, Bedford,
Massachusetts 01730, no later than December [ ], 1999.
If a stockholder of the Company wishes to present a proposal before the
2000 Annual Meeting, but does not wish to have the proposal considered for
inclusion in the Company's proxy statement and proxy card, such stockholder must
also give written notice to the Secretary of the Company at the address noted
above. The Secretary must receive such notice not less than 60 days nor more
than 90 days prior to the 2000 Annual Meeting; provided that, in the event that
less than 70 days' notice or prior public disclosure of the date of the 2000
Annual Meeting is given or made, notice by the stockholder must be received not
later than the close of business on the 10th day following the date on which
such notice of the date of the meeting was mailed or such public disclosure was
made, whichever occurs first. If a stockholder fails to provide timely notice of
a proposal to be presented at the 2000 Annual Meeting, the proxies designated by
the Board of Directors of the Company will have discretionary authority to vote
on any such proposal.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Exchange Act requires the Company's directors,
executive officers and holders of more than 10% of the Company's Common Stock
("Reporting Persons") to file with the Securities and Exchange Commission
initial reports of ownership and reports of changes in ownership of Common Stock
and other equity securities of the Company. Except as described below, and based
solely on its review of copies of Section 16(a) reports filed by the Reporting
Persons furnished to the Company, the Company believes that during 1998 the
Reporting Persons complied with all Section 16(a) filing requirements.
23
<PAGE> 27
D. James Bidzos, a member of the Board of Directors of the Company,
reported the exercise of options for 307,271 shares of Common Stock which
occurred on August 14, 1998 on a Form 4 filed on September 24, 1998.
Richard L. Earnest, a member of the Board of Directors of the Company,
reported the exercise of options for 4,000 shares of Common Stock which occurred
on September 8, 1998, and sales of an aggregate 4,516 shares of Common Stock
which occurred on September 8, 1998 in two separate transactions, on a Form 4
filed on October 28, 1998.
OTHER MATTERS
The Board of Directors knows of no other business which will be presented
for consideration at the Meeting other than that described above. However, if
any other business should come before the Meeting, it is the intention of the
persons named in the enclosed proxy card to vote, or otherwise act, in
accordance with their best judgment on such matters.
The Company will bear the costs of soliciting proxies. In addition to
solicitations by mail, the Company's directors, officers and regular employees
may, without additional remuneration, solicit proxies by telephone, facsimile
and personal interviews. The Company will also request brokerage houses,
custodians, nominees and fiduciaries to forward copies of the proxy materials to
those persons for whom they hold shares and request instructions for voting the
proxies. The Company will reimburse such brokerage houses and other persons for
their reasonable expenses in connection with this distribution. The Company has
also retained MacKenzie Partners, Inc. at an estimated expense of $4,000 plus
reimbursement of expenses, to assist in the solicitation of proxies by telephone
and mail.
THE BOARD OF DIRECTORS HOPES THAT STOCKHOLDERS WILL ATTEND THE MEETING.
WHETHER OR NOT YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, DATE AND SIGN THE
ENCLOSED PROXY CARD AND RETURN IT IN THE ACCOMPANYING ENVELOPE. PROMPT RESPONSE
WILL GREATLY FACILITATE ARRANGEMENTS FOR THE MEETING AND YOUR COOPERATION IS
APPRECIATED. STOCKHOLDERS WHO ATTEND THE MEETING MAY VOTE THEIR SHARES
PERSONALLY EVEN THOUGH THEY HAVE SENT IN THEIR PROXY CARDS.
By Order of the Board of Directors,
Margaret K. Seif, Secretary
March [ ], 1999
24
<PAGE> 28
APPENDIX A
SECURITY DYNAMICS TECHNOLOGIES, INC.
1994 STOCK OPTION PLAN, AS AMENDED
1998 Restatement
1. Restatement; Purpose
(a) This is a restatement (the "1998 Restatement") of the 1994 Stock
Option Plan (the "Plan") of Security Dynamics Technologies, Inc., a Delaware
corporation (the "Company"). The 1998 Restatement shall govern all awards made
under the Plan on or after the date the 1998 Restatement is adopted by the Board
of Directors of the Company (the "Board") and approved by the Company's
stockholders. Options granted under the Plan prior to the approval of the 1998
Restatement shall be governed by the terms of the Plan as in effect immediately
prior to the date of such adoption.
(b) The purpose of the Plan is to advance the interests of the Company's
stockholders by enhancing the Company's ability to attract, retain and motivate
persons who make (or are expected to make) important contributions to the
Company by providing such persons with equity ownership opportunities and
performance-based incentives and thereby better aligning the interests of such
persons with those of the Company's stockholders. Except where the context
otherwise requires, the term "Company" shall include any present or future
subsidiary corporations of Security Dynamics Technologies, Inc. as defined in
Section 424(f) of the Internal Revenue Code of 1986, as amended, and any
regulations promulgated thereunder (the "Code").
2. Eligibility
All of the Company's employees, officers, directors, consultants and
advisors are eligible to be granted options, restricted stock, or other
stock-based awards (each, an "Award") under the Plan. Each person who has been
granted an Award under the Plan shall be deemed a "Participant."
3. Administration, Delegation
(a) Administration by Board of Directors. The Plan will be administered by
the Board. The Board shall have authority to grant Awards and to adopt, amend
and repeal such administrative rules, guidelines and practices relating to the
Plan as it shall deem advisable. The Board may correct any defect, supply any
omission or reconcile any inconsistency in the Plan or any Award in the manner
and to the extent it shall
A-1
<PAGE> 29
deem expedient to carry the Plan into effect and it shall be the sole and final
judge of such expediency. All decisions by the Board shall be made in the
Board's sole discretion and shall be final and binding on all persons having or
claiming any interest in the Plan or in any Award. No director or person acting
pursuant to the authority delegated by the Board shall be liable for any action
or determination relating to or under the Plan made in good faith.
(b) Delegation to Executive Officers. To the extent permitted by
applicable law, the Board may delegate to one or more executive officers of the
Company the power to make Awards and exercise such other powers under the Plan
as the Board may determine, provided that the Board shall fix the maximum number
of shares subject to Awards and the maximum number of shares for any one
Participant to be made by such executive officers.
(c) Appointment of Committees. To the extent permitted by applicable law,
the Board may delegate any or all of its powers under the Plan to one or more
committees or subcommittees of the Board (a "Committee"). The Board shall
appoint one such Committee of not less than two members, each member of which
shall be an "outside director" within the meaning of Section 162(m) of the Code
and a "non-employee director" as defined in Rule 16b-3 promulgated under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). All references
in the Plan to the "Board" shall mean the Board or a Committee of the Board or
the executive officer referred to in Section 3(b) to the extent that the Board's
powers or authority under the Plan have been delegated to such Committee or
executive officer.
4. Stock Available for Awards
(a) Number of Shares. Subject to adjustment under Section 8, Awards may be
made under the Plan for up to 9,570,000 shares of the common stock, $.01 par
value per share, of the Company (the "Common Stock"). If any Award expires or is
terminated, surrendered or canceled without having been fully exercised or is
forfeited in whole or in part or results in any Common Stock not being issued,
the unused Common Stock covered by such Award shall again be available for the
grant of Awards under the Plan, subject, however, in the case of Incentive Stock
Options (as hereinafter defined), to any limitation required under the Code.
Shares issued under the Plan may consist in whole or in part of authorized but
unissued shares or treasury shares.
(b) Per-Participant Limit. Subject to adjustment under Section 8, the
maximum number of shares of Common Stock with respect to which an Award may be
granted to any Participant under the Plan shall be 300,000 per calendar year.
The per-Participant limit described in this Section 4(b) shall be construed and
applied consistently with Section 162(m) of the Code.
A-2
<PAGE> 30
5. Stock Options
(a) General. The Board may grant options to purchase Common Stock (each,
an "Option") and determine the number of shares of Common Stock to be covered by
each Option, the exercise price of each Option and the conditions and
limitations applicable to the exercise of each Option, including conditions
relating to applicable federal or state securities laws, as it considers
necessary or advisable. An Option which is not intended to be an Incentive Stock
Option (as hereinafter defined) shall be designated a "Nonstatutory Stock
Option."
(b) Incentive Stock Options. An Option that the Board intends to be an
"incentive stock option" as defined in Section 422 of the Code (an "Incentive
Stock Option") shall only be granted to employees of the Company and shall be
subject to and shall be construed consistently with the requirements of Section
422 of the Code. The Company shall have no liability to a Participant, or any
other party, if an Option (or any part thereof) which is intended to be an
Incentive Stock Option is not an Incentive Stock Option.
(c) Exercise Price. The Board shall establish the exercise price at the
time each Option is granted and specify it in the applicable option agreement.
(d) Duration of Options. Each Option shall be exercisable at such times
and subject to such terms and conditions as the Board may specify in the
applicable option agreement; provided that Options may not be granted for a term
in excess of ten years.
(e) Exercise of Option. Options may be exercised only by delivery to the
Company of a written notice of exercise signed by the proper person together
with payment in full as specified in Section 5(f) for the number of shares for
which the Option is exercised.
(f) Payment Upon Exercise. Common Stock purchased upon the exercise of an
Option granted under the Plan shall be paid for as follows:
(i) in cash or by check, payable to the order of the Company;
(ii) except as the Board may, in its sole discretion, otherwise
provide in an option agreement, (A) delivery of an irrevocable
and unconditional undertaking by a creditworthy broker to
deliver promptly to the Company sufficient funds to pay the
exercise price or (B) delivery by the Participant to the
Company of a copy of irrevocable and unconditional
instructions to a creditworthy broker to deliver promptly to
the Company cash or a check sufficient to pay the exercise
price;
A-3
<PAGE> 31
(iii) at such time as the Common Stock is registered under the
Exchange Act, delivery of shares of Common Stock owned by the
Participant valued at their fair market value as determined by
(or in a manner approved by ) the Board in good faith ("Fair
Market Value"), which Common Stock was owned by the
Participant at least six months prior to such delivery;
(iv) to the extent permitted by the Board, in its sole discretion
(A) by delivery of a promissory note of the Participant to the
Company on terms determined by the Board, or (B) by payment of
such other lawful consideration as the Board may determine; or
(v) any combination of the above permitted forms of payment.
(g) Deferral. Any Participant who is a participant in a deferred
compensation plan established by the Company may elect with the permission of
the Board and in accordance with rules established by the Board to defer the
receipt of any shares of Common Stock issuable upon the exercise of an option
provided that such election is irrevocable and made at least that number of days
prior to the exercise of the option which shall be determined by the Board. The
Participant's account under such deferred compensation plan shall be credited
with a number of stock units equal to the number of shares so deferred.
6. Restricted Stock
(a) Grants. The Board may grant Awards entitling recipients to acquire
shares of Common Stock, subject to the right of the Company to repurchase all or
part of such shares at their issue price or other stated or formula price (or to
require forfeiture of such shares if issued at no cost) from the recipient in
the event that conditions specified by the Board in the applicable Award are not
satisfied prior to the end of the applicable restriction period or periods
established by the Board for such Award (each, a "Restricted Stock Award").
(b) Terms and Conditions. The Board shall determine the terms and
conditions of any such Restricted Stock Award, including the conditions for
repurchase (or forfeiture) and the issue price, if any. Any stock certificates
issued in respect of a Restricted Stock Award shall be registered in the name of
the Participant and, unless otherwise determined by the Board, deposited by the
Participant, together with a stock power endorsed in blank, with the Company (or
its designee). At the expiration of the applicable restriction periods, the
Company (or such designee) shall deliver the certificates no longer subject to
such restrictions to the Participant or if the Participant has died, to the
beneficiary designated, in a manner determined by the Board, by a Participant to
receive amounts due or exercise rights of the Participant in the event of
A-4
<PAGE> 32
the Participant's death (the "Designated Beneficiary"). In the absence of an
effective designation by a Participant, Designated Beneficiary shall mean the
Participant's estate.
7. Other Stock-Based Awards
The Board shall have the right to grant other Awards based upon the Common
Stock having such terms and conditions as the Board may determine, including the
grant of shares based upon certain conditions, the grant of securities
convertible into Common Stock and the grant of stock appreciation rights.
8. Adjustments for Changes in Common Stock and Certain Other Events
(a) Changes in Capitalization. In the event of any stock split, reverse
stock split, stock dividend, recapitalization, combination of shares,
reclassification of shares, spin-off or other similar change in capitalization
or event, or any distribution to holders of Common Stock other than a normal
cash dividend, (i) the number and class of securities available under this Plan,
(ii) the per-Participant limit set forth in Section 4(b), (iii) the number and
class of securities and exercise price per share subject to each outstanding
Option, (iv) the repurchase price per share subject to each outstanding
Restricted Stock Award, and (v) the terms of each other outstanding Award shall
be appropriately adjusted by the Company (or substituted Awards may be made, if
applicable) to the extent the Board shall determine, in good faith, that such an
adjustment (or substitution) is necessary and appropriate. If this Section 8(a)
applies and Section 8(c) also applies to any event, Section 8(c) shall be
applicable to such event, and this Section 8(a) shall not be applicable.
(b) Liquidation or Dissolution. In the event of a proposed liquidation or
dissolution of the Company, the Board shall upon written notice to the
Participants provide that all then unexercised Options will (i) become
exercisable in full as of a specified time at least 10 business days prior to
the effective date of such liquidation or dissolution and (ii) terminate
effective upon such liquidation or dissolution, except to the extent exercised
before such effective date. The Board may specify the effect of a liquidation or
dissolution on any Restricted Stock Award or other Award granted under the Plan
at the time of the grant of such Award.
(c) Acquisition Events
(1) Definition. An "Acquisition Event" shall mean: (a) any merger or
consolidation of the Company with or into another entity as a result of which
the Common Stock is converted into or exchanged for the right to receive cash,
securities or other property or (b) any exchange of shares of the Company for
cash, securities or other property pursuant to a statutory share exchange
transaction.
A-5
<PAGE> 33
(2) Consequences of an Acquisition Event on Options. Upon the
occurrence of an Acquisition Event, or the execution by the Company of any
agreement with respect to an Acquisition Event, the Board may take any one or
more of the following actions:
(i) provide that outstanding Options shall be assumed, or
equivalent options shall be substituted, by the acquiring or
succeeding corporation (or an affiliate thereof), provided
that any options substituted for Incentive Stock Options shall
satisfy, in the determination of the Board, the requirements
of Section 424(a) of the Code;
(ii) upon written notice to the Participants, provide that all then
unexercised Options will become exercisable in full as of a
specified time (the "Acceleration Time") prior to the
Acquisition Event and will terminate immediately prior to the
consummation of such Acquisition Event, except to the extent
exercised by the Participants before the consummation of such
Acquisition Event;
(iii) in the event of an Acquisition Event under the terms of which
holders of Common Stock will receive upon consummation thereof
a cash payment for each share of Common Stock surrendered
pursuant to such Acquisition Event (the "Acquisition Price"),
provide that all outstanding Options shall terminate upon
consummation of such Acquisition Event and each Participant
shall receive, in exchange therefor, a cash payment equal to
the amount (if any) by which (A) the Acquisition Price
multiplied by the number of shares of Common Stock subject to
such outstanding Options (to the extent then exercisable),
exceeds (B) the aggregate exercise price of such Options; and
(iv) provide that all or any outstanding options shall become
exercisable in full immediately prior to such event.
(3) Consequences of an Acquisition Event on Restricted Stock Awards.
Upon the occurrence of an Acquisition Event, the repurchase and other rights of
the Company under each outstanding Restricted Stock Award shall inure to the
benefit of the Company's successor and shall apply to the cash, securities or
other property which the Common Stock was converted into or exchanged for
pursuant to such Acquisition Event in the same manner and to the same extent as
they applied to the Common Stock subject to such Restricted Stock Award.
A-6
<PAGE> 34
(4) Consequences of an Acquisition Event on Other Awards. The Board
shall specify the effect of an Acquisition Event on any other Award granted
under the Plan at the time of the grant of such Award.
9. General Provisions Applicable to Awards
(a) Transferability of Awards. Except as the Board may otherwise determine
or provide in an Award, Awards shall not be sold, assigned, transferred, pledged
or otherwise encumbered by the person to whom they are granted, either
voluntarily or by operation of law, except by will or the laws of descent and
distribution, and, during the life of the Participant, shall be exercisable only
by the Participant. References to a Participant, to the extent relevant in the
context, shall include references to authorized transferees.
(b) Documentation. Each Award shall be evidenced by a written instrument
in such form as the Board shall determine. Such written instrument may be in the
form of an agreement signed by the Company and the Participant or a written
confirming memorandum to the Participant from the Company. Each Award may
contain terms and conditions in addition to those set forth in the Plan.
(c) Board Discretion. Except as otherwise provided by the Plan, each Award
may be made alone or in addition or in relation to any other Award. The terms of
each Award need not be identical, and the Board need not treat Participants
uniformly.
(d) Termination of Status. The Board shall determine the effect on an
Award of the disability, death, retirement, authorized leave of absence or other
change in the employment or other status of a Participant and the extent to
which, and the period during which, the Participant, the Participant's legal
representative, conservator, guardian or Designated Beneficiary may exercise
rights under the Award.
(e) Withholding. Each Participant shall pay to the Company, or make
provision satisfactory to the Board for payment of, any taxes required by law to
be withheld in connection with Awards to such Participant no later than the date
of the event creating the tax liability. Except as the Board may otherwise
provide in an Award, Participants may satisfy such tax obligations in whole or
in part by delivery of shares of Common Stock, including shares retained from
the Award creating the tax obligation, valued at their Fair Market Value. The
Company may, to the extent permitted by law, deduct any such tax obligations
from any payment of any kind otherwise due to a Participant.
(f) Amendment of Award. The Board may amend, modify or terminate any
outstanding Award, including but not limited to, substituting therefor another
Award of the same or a different type, changing the date of exercise or
realization, and converting an Incentive Stock Option to a Nonstatutory Stock
Option, provided that the
A-7
<PAGE> 35
Participant's consent to such action shall be required unless the Board
determines that the action, taking into account any related action, would not
materially and adversely affect the Participant. Without intending to limit the
generality of the preceding sentence, the Board may, without amending the Plan,
modify Awards granted to Participants who are foreign nationals or employed
outside the United States to reorganize differences in laws, rules, regulations
or customers of such foreign jurisdiction with respect to tax, securities,
currency, employee benefits or other matters.
(g) Conditions on Delivery of Stock. The Company will not be obligated to
deliver any shares of Common Stock pursuant to the Plan or to remove
restrictions from shares previously delivered under the Plan until (i) all
conditions of the Award have been met or removed to the satisfaction of the
Company, (ii) in the opinion of the Company's counsel, all other legal matters
in connection with the issuance and delivery of such shares have been satisfied,
including any applicable securities laws and any applicable stock exchange or
stock market rules and regulations, and (iii) the Participant has executed and
delivered to the Company such representations or agreements as the Company may
consider appropriate to satisfy the requirements of any applicable laws, rules
or regulations.
(h) Acceleration. The Board may at any time provide that any Options shall
become immediately exercisable in full or in part, that any Restricted Stock
Awards shall be free of all restrictions or that any other stock-based Awards
may become exercisable in full or in part or free of some or all restrictions or
conditions, or otherwise realizable in full or in part, as the case may be.
10. Miscellaneous
(a) No Right To Employment or Other Status. No person shall have any claim
or right to be granted an Award, and the grant of an Award shall not be
construed as giving a Participant the right to continued employment or any other
relationship with the Company. The Company expressly reserves the right at any
time to dismiss or otherwise terminate its relationship with a Participant free
from any liability or claim under the Plan, except as expressly provided in the
applicable Award.
(b) No Rights As Stockholder. Subject to the provisions of the applicable
Award, no Participant or Designated Beneficiary shall have any rights as a
stockholder with respect to any shares of Common Stock to be distributed with
respect to an Award until becoming the record holder of such shares.
Notwithstanding the foregoing, in the event the Company effects a split of the
Common Stock by means of a stock dividend and the exercise price of and the
number of shares subject to such Option are adjusted as of the date of the
distribution of the dividend (rather than as of the record date for such
dividend), then an optionee who exercises an Option between the close of
business on the record date for such stock dividend and the close of business on
the distribution date for such stock dividend shall be entitled to receive, on
the distribution date, the
A-8
<PAGE> 36
stock dividend with respect to the shares of Common Stock acquired upon such
Option exercise, notwithstanding the fact that such shares were not outstanding
as of the close of business on the record date for such stock dividend.
(c) Effective Date and Term of Plan. The 1998 Restatement of Plan shall
become effective on the date on which it is adopted by the Board and approved by
the Company's stockholders. No Awards shall be granted under the Plan after the
completion of ten years from the earlier of (i) the date on which the Plan was
adopted by the Board or (ii) the date the Plan was approved by the Company's
stockholders, but Awards previously granted may extend beyond that date.
(d) Amendment of Plan. The Board may amend, suspend or terminate the Plan
or any portion thereof at any time, provided that, to the extent required by
Section 162(m), no Award granted to a Participant designated as subject to
Section 162(m) by the Board after the date of such amendment shall become
exercisable, realizable or vested, as applicable to such Award (to the extent
that such amendment to the Plan was required to grant such Award to a particular
Participant), unless and until such amendment shall have been approved by the
Company's stockholders.
(e) Stockholder Approval. For purposes of this Plan, stockholder approval
shall mean approval by a vote of the stockholders in accordance with the
requirements of Section 162(m) of the Code.
(f) Governing Law. The provisions of the Plan and all Awards made
hereunder shall be governed by and interpreted in accordance with the laws of
the State of Delaware without regard to any applicable conflicts of law.
Adopted by the Board of Directors on March 8, 1998.
Approved by the Company's stockholders on April 30,1998.
A-9
<PAGE> 37
SECURITY DYNAMICS TECHNOLOGIES, INC.
AMENDMENT NO. 1
TO
1994 STOCK OPTION PLAN, AS AMENDED - 1998 RESTATEMENT
The 1994 Stock Option Plan, as amended - 1998 Restatement (the "Plan") is
hereby amended as follows (capitalized terms used herein and not defined herein
shall have the respective meaning ascribed to such terms in the Plan):
The first sentence of Subsection 4(b) of the Plan shall be deleted in its
entirety and replaced with the following:
"Subject to adjustment under Section 8, the maximum number of shares of
Common Stock with respect to which an Award may be granted to any
Participant under the Plan shall be 400,000 per calendar year."
Except as aforesaid, the Plan shall remain in full force and effect.
Adopted by the Board of Directors on July 24, 1998
A-10
<PAGE> 38
SECURITY DYNAMICS TECHNOLOGIES, INC.
AMENDMENT NO. 2
TO
1994 STOCK OPTION PLAN, AS AMENDED - 1998 RESTATEMENT, AS AMENDED
The 1994 Stock Option Plan, as amended - 1998 Restatement, as amended (the
"Plan"), is hereby amended as follows (capitalized terms used herein and not
defined herein shall have the respective meaning ascribed to such terms in the
Plan):
The first sentence of Subsection 4(a) of the Plan shall be deleted in its
entirety and replaced with the following:
"Subject to adjustment under Section 8, Awards may be made under the Plan
for up to 11,570,000 shares of the common stock, $.01 par value per share,
of the Company (the "Common Stock")."
Except as aforesaid, the Plan shall remain in full force and effect.
Adopted by the Board of Directors on January 27, 1999
A-11
<PAGE> 39
APPENDIX B
SECURITY DYNAMICS TECHNOLOGIES, INC.
1994 DIRECTOR STOCK OPTION PLAN
1. Purpose.
The purpose of this 1994 Director Stock Option Plan (the "Plan") of
Security Dynamics Technologies, Inc. (the "Company") is to encourage ownership
in the Company by outside directors of the Company whose continued services are
considered essential to the Company's future progress and to provide them with a
further incentive to remain as directors of the Company.
2. Administration.
The Board of Directors shall supervise and administer the Plan. Grants of
stock options under the Plan and the amount and nature of the awards to be
granted shall be automatic in accordance with Section 5. However, all questions
concerning interpretation of the Plan or any options granted under it shall be
resolved by the Board of Directors and such resolution shall be final and
binding upon all persons having an interest in the Plan.
3. Participation in the Plan.
Directors of the Company who are not full-time employees of the Company or
any subsidiary of the Company ("outside directors") shall be eligible to receive
options under the Plan.
4. Stock Subject to the Plan.
(a) The maximum number of shares of the Company's Common Stock, par value
$.01 per share ("Common Stock"), which may be issued under the Plan shall be
75,000 shares (after giving effect to the Company's one-for-two reverse stock
split effective as of October 24, 1994), subject to adjustment as provided in
Section 7.
(b) If any outstanding option under the Plan for any reason expires or is
terminated without having been exercised in full, the shares covered by the
unexercised portion of such option shall again become available for issuance
pursuant to the Plan.
B-1
<PAGE> 40
(c) All options granted under the Plan shall be non-statutory options not
entitled to special tax treatment under Section 422 of the Internal Revenue Code
of 1986, as amended (the "Code").
5. Terms, Conditions and Form of Options.
Each option granted under the Plan shall be evidenced by a written
agreement in such form as the Board of Directors shall from time to time
approve, which agreements shall comply with and be subject to the following
terms and conditions:
(a) Option Grant Dates. Options shall automatically be granted to all
eligible outside directors as follows:
(i) each person who is an eligible outside director on the closing
date (the "Closing Date") of the Company's initial public offering of Common
Stock pursuant to an effective registration statement under the Securities Act
of 1933, as amended, shall be granted an option to purchase the Pro Rata Number
of shares of Common Stock calculated pursuant to Section 5(b) on the Closing
Date;
(ii) each person who first becomes an eligible outside director
after the Closing Date shall be granted an option to purchase the Pro Rata
Number of shares of Common Stock calculated pursuant to Section 5(b) on the date
of his or her initial election to the Board of Directors, provided that such
eligible director is elected on a date other than the date of an Annual Meeting
of Stockholders; and
(iii) each eligible outside director shall be granted an additional
option to purchase 3,000 shares of Common Stock on the date of each Annual
Meeting of Stockholders of the Company commencing with the 1995 Annual Meeting
of Stockholders, provided that he or she continues to serve as a director
immediately following such Annual Meeting.
(b) Shares Subject to Option. Each option described in clauses (i) and
(ii) of Section 5(a) shall be for such number (and if such number is not a whole
number, rounded up to the nearest whole number) of shares of Common Stock (the
"Pro Rata Number"), if any, as is determined by multiplying (x) 3,000 by (y) the
quotient of (A) the number of whole calendar months between the applicable
Option Grant Date and the date of the next Annual Meeting of Stockholders
(which, for purposes of the Plan, shall be assumed to occur in the month of May)
and (B) 12. For example, if an eligible outside director were first elected on
October 15th, he or she would receive an option to purchase 1,500 shares of
Common Stock (3,000 x (6 (the number of whole calendar months between the Option
Grant Date and May (i.e., November through April)) / 12)).
B-2
<PAGE> 41
(c) Option Exercise Price. The option exercise price per share for each
option described in clause (i) of Section 5(a) shall be equal to the reported
last sale price of the Common Stock on the Nasdaq National Market on the Closing
Date. The option exercise price per share for each option described in clauses
(ii) and (iii) of Section 5(a) shall be determined as follows: (i) if the Common
Stock is listed on the Nasdaq National Market or another nationally recognized
exchange or trading system as of the Option Grant Date, the option exercise
price shall be deemed to be the lesser of (x) the reported last sale price per
share of Common Stock thereon on such date (or if no such price is reported on
such date, such price on the nearest preceding date on which such a price is
reported) or (y) the average of the reported last sales prices per share of
Common Stock, as published in The Wall Street Journal, for a period of ten
consecutive trading days prior to such date; and (ii) if the Common Stock is not
listed on the Nasdaq National Market or another nationally recognized exchange
or trading system as of the Option Grant Date, the exercise price per share
shall be deemed to be the fair market value of the Common Stock as of the Option
Grant Date as determined in good faith by the Board of Directors.
(d) Options Non-Transferable. To the extent required to qualify for the
exemption provided by Rule 16b-3 under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), any option granted under the Plan to an optionee
shall not be transferable by the optionee other than by will or the laws of
descent and distribution or pursuant to a qualified domestic relations order as
defined by the Code or Title I of the Employee Retirement Income Security Act,
or the rules thereunder, and shall be exercisable during the optionee's lifetime
only by the optionee or the optionee's guardian or legal representative.
(e) Vesting Period.
(i) General. Each option described in clauses (i) and (ii) of
Section 5(a) shall become exercisable on the first anniversary of the Option
Grant Date, and each option described in clause (iii) of Section 5(a) shall
become exercisable on the earlier of (x) the first anniversary of the Option
Grant Date or (y) the day prior to the fist Annual Meeting of Stockholders
following the Option Grant Date; provided, however, that in each instance
described herein the optionee continue to serve as a director on such dates.
(ii) Acceleration Upon Change in Control. Notwithstanding the
foregoing, each outstanding option granted under the Plan shall immediately
become exercisable in full in the event a Change in Control (as defined in
Section 8) of the Company occurs.
(f) Termination. Each option shall terminate, and may no longer be
exercised, on the earlier of the (i) the date 10 years after the Option Grant
Date or (ii) the date 60 days after the optionee ceases to serve as a director
of the Company;
B-3
<PAGE> 42
provided that, in the event an optionee ceases to serve as a director due to his
or her death or disability (within the meaning of Section 22(e)(3) of the Code
or any successor provision), then the exercisable portion of the option may be
exercised, within the period of 180 days following the date the optionee ceases
to serve as a director (but in no event later than 10 years after the Option
Grant Date), by the optionee or by the person to whom the option is transferred
by will, by the laws of descent and distribution, or by written notice pursuant
to Section 5(h).
(g) Exercise Procedure. An option may be exercised only by written notice
to the Company at its principal office accompanied by payment in cash of the
full consideration for the shares as to which the option is exercised.
(h) Exercise by Representative Following Death of Director. An optionee,
by written notice to the Company, may designate one or more persons (and from
time to time change such designation), including his or her legal
representative, who, by reason of the optionee's death, shall acquire the right
to exercise all or a portion of the option. If the person or persons so
designated wish to exercise any portion of the option, they must do so within
the term of the option as provided herein. Any exercise by a representative
shall be subject to the provisions of the Plan.
6. Limitation of Rights.
(a) No Right to Continue as a Director. Neither the Plan, nor the granting
of an option nor any other action taken pursuant to the Plan, shall constitute
or be evidence of any agreement or understanding, express or implied, that the
Company will retain the optionee as a director for any period of time.
(b) No Stockholders' Rights for Options. An optionee shall have no rights
as a stockholder with respect to the shares covered by his or her option until
the date of the issuance to him or her of a stock certificate therefor, and no
adjustment will be made for dividends or other rights (except as provided in
Section 7) for which the record date is prior to the date such certificate is
issued.
7. Adjustment Provisions for Mergers, Recapitalizations and Related
Transactions.
If, through or as a result of any merger, consolidation, reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split (other than the Company's one-for-two reverse stock split effective as of
October 24, 1994), or other similar transaction, (i) the outstanding shares of
Common Stock are exchanged for a different number or kind of securities of the
Company or of another entity, or (ii) additional shares or new or different
shares or other securities of the Company or of another entity are distributed
with respect to such shares of Common Stock, the Board of Directors shall make
an appropriate and proportionate adjustment in (x) the maximum number and kind
of shares reserved for issuance under the Plan,
B-4
<PAGE> 43
(y) the number and kind of shares or other securities subject to then
outstanding options under the Plan, and/or (z) the price for each share subject
to any then outstanding options under the Plan (without changing the aggregate
purchase price for such options), to the end that each option shall be
exercisable, for the same aggregate exercise price, for such securities as such
optionholder would have held immediately following such event if he had
exercised such option immediately prior to such event. No fractional shares will
be issued under the Plan on account of any such adjustments.
8. Change in Control.
For purposes of the Plan, a "Change in Control" shall be deemed to have
occurred only if any of the following events occurs: (i) any "person", as such
term is used in Sections 13(d) and 14(d) of the Exchange Act (other than the
Company, any trustee or other fiduciary holding securities under an employee
benefit plan of the Company, or any corporation owned directly or indirectly by
the stockholders of the Company in substantially the same proportion as their
ownership of stock of the Company), is or becomes the "beneficial owner" (as
defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of
securities of the Company representing 50% or more of the combined voting power
of the Company's then outstanding securities; (ii) the stockholders of the
Company approve a merger or consolidation of the Company with any other
corporation, other than a merger or consolidation which would result in the
voting securities of the Company outstanding immediately prior thereto
continuing to represent (either by remaining outstanding or by being converted
into voting securities of the surviving entity) more than 50% of the combined
voting power of the voting securities of the Company or such surviving entity
outstanding immediately after such merger or consolidation; (iii) the
stockholders of the Company approve a plan of complete liquidation of the
Company or an agreement for the sale or disposition by the Company of all or
substantially all of the Company's assets; or (iv) individuals who, on the date
on which the Plan was adopted by the Board of Directors, constituted the Board
of Directors of the Company, together with any new director whose election by
the Board of Directors or nomination for election by the Company's stockholders
was approved by a vote of at least a majority of the directors then still in
office who were directors on the date on which the Plan was adopted by the Board
of Directors or whose election or nomination was previously so approved, cease
for any reason to constitute at least a majority of the Board of Directors.
9. Modification, Extension and Renewal of Options.
The Board of Directors shall have the power to modify or amend outstanding
options; provided, however, that no modification or amendment may (i) have the
effect of altering or impairing any rights or obligations of any option
previously
B-5
<PAGE> 44
granted without the consent of the optionee, or (ii) modify the number of shares
of Common Stock subject to the option (except as provided in Section 7).
10. Termination and Amendment of the Plan.
The Board of Directors may suspend, terminate or discontinue the Plan or
amend it in any respect whatsoever; provided, however, that without approval of
the stockholders of the Company, no amendment may (i) increase the number of
shares subject to the Plan (except as provided in Section 7), (ii) materially
modify the requirements as to eligibility to receive options under the Plan, or
(iii) materially increase the benefits accruing to participants in the Plan; and
provided further that the Board of Directors may not amend the provisions of
Sections 3, 5(a), 5(b) or 5(c) more frequently than once every six months, other
than to comply with changes in the Code or the rules thereunder.
11. Notice.
Any written notice to the Company required by any of the provisions of the
Plan shall be addressed to the Controller of the Company and shall become
effective when it is received.
12. Governing Law.
The Plan and all determinations made and actions taken pursuant hereto
shall be governed by the laws of the State of Delaware.
13. Stockholder Approval.
The Plan is conditional upon stockholder approval of the Plan within one
year from its date of adoption by the Board of Directors. No option under the
Plan may be exercised until such stockholder approval is obtained, and the Plan
and all options granted under the Plan shall be null and void if the Plan is not
so approved by the Company's stockholders.
Adopted by the Board of Directors on October 4, 1994
Approved by the stockholders on October 24, 1994
B-6
<PAGE> 45
SECURITY DYNAMICS TECHNOLOGIES, INC.
AMENDMENT NO. 1
TO
1994 DIRECTOR STOCK OPTION PLAN
1. That the 1994 Director Stock Option Plan be amended to delete subsection
5(d) thereof and replace such subsection in its entirety with the
following:
"(d) Transferability of Options. Except as the Board of Directors may
otherwise determine or provide in the applicable option agreement, options
shall not be sold, assigned, transferred, pledged or otherwise encumbered
by the optionee to whom they are granted, either voluntarily or by
operation of law, except by will or the laws of descent and distribution,
and, during the life of the optionee, shall be exercisable only by the
optionee. References to an optionee, to the extent relevant in the
context, shall include references to authorized transferees."
2. That the Director Plan be further amended to delete the phrase
"; and provided further that the Board of Directors may not amend the
provisions of Sections 3, 5(a), 5(b) or 5(c) more frequently than once
every six months, other than to comply with changes in the Code or the
rules thereunder"
appearing at the end of Section 10 of the Director Plan.
Adopted by the Board of Directors on February 12, 1997
B-7
<PAGE> 46
SECURITY DYNAMICS TECHNOLOGIES, INC.
AMENDMENT NO. 2
TO
1994 DIRECTOR STOCK OPTION PLAN, AS AMENDED
The 1994 Director Stock Option Plan, as amended (the "Plan"), is hereby
amended to delete subsection 4(a) thereof and replace such subsection in its
entirety with the following:
"The maximum number of shares of the Company's Common Stock, par value
$.01 per share ("Common Stock"), which may be issued under the Plan shall
be 500,000 shares, subject to adjustment as provided in Section 7."
Except as aforesaid, the Plan shall remain in full force and effect.
Adopted by the Board of Directors on January 27, 1999
B-8
<PAGE> 47
APPENDIX C
SECURITY DYNAMICS TECHNOLOGIES, INC.
PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD APRIL 22, 1999
THIS PROXY IS SOLICITED ON BEHALF OF
THE BOARD OF DIRECTORS OF THE COMPANY
AND SHOULD BE RETURNED AS SOON AS POSSIBLE
The undersigned, having received notice of the Annual Meeting of
Stockholders and the Board of Directors' proxy statement therefor, and revoking
all prior proxies, hereby appoint(s) Charles R. Stuckey, Jr. and Arthur W.
Coviello, Jr., and each of them, attorneys or attorney of the undersigned (with
full power of substitution in them and each of them) for and in the name(s) of
the undersigned to attend the Annual Meeting of Stockholders of SECURITY
DYNAMICS TECHNOLOGIES, INC. (the "Company") to be held on Thursday, April 22,
1999 at 3:00 p.m. at the offices of Hale and Dorr LLP, 60 State Street, Boston,
Massachusetts, and any adjournments thereof, and there to vote and act upon the
following matters proposed by the Company in respect of all shares of stock of
the Company which the undersigned may be entitled to vote or act upon, with all
the powers the undersigned would possess if personally present. None of the
following proposals is conditioned upon the approval of any other proposal.
In their discretion, the proxy holders are authorized to vote upon such
other matters as may properly come before the meeting or any adjournments
thereof. The shares represented by this proxy will be voted as directed by the
undersigned. IF NO DIRECTION IS GIVEN WITH RESPECT TO ANY ELECTION TO OFFICE OR
PROPOSAL, THIS PROXY WILL BE VOTED AS RECOMMENDED BY THE BOARD OF DIRECTORS.
Attendance of the undersigned at the meeting or at any adjournment thereof will
not be deemed to revoke this proxy unless the undersigned shall revoke this
proxy in writing.
PLEASE VOTE, DATE AND SIGN ON REVERSE AND RETURN PROMPTLY IN THE ENCLOSED
ENVELOPE.
NOTE: PLEASE SIGN EXACTLY AS NAME APPEARS HEREON. WHEN SHARES ARE HELD BY JOINT
OWNERS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR,
TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE
SIGN IN FULL CORPORATE NAME BY AUTHORIZED OFFICER, GIVING FULL TITLE. IF A
PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON, GIVING FULL
TITLE.
HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS?
- ----------------------------- ----------------------------------
- ----------------------------- ----------------------------------
<PAGE> 48
- ----------------------------- ----------------------------------
[X] PLEASE MARK VOTES AS IN THIS EXAMPLE
SECURITY DYNAMICS TECHNOLOGIES, INC.
MARK BOX AT MARK BOX AT RIGHT IF
RIGHT IF YOU [ ] AN ADDRESS CHANGE [ ]
PLAN TO OR COMMENT HAS BEEN
ATTEND THE NOTED ON THE REVERSE
MEETING SIDE OF THIS CARD
1. To elect the following nominees for Class II Director to serve for the
ensuing three years (except as marked below):
D. James Bidzos
Richard L. Earnest
Taher Elgamal
[ ] FOR ALL NOMINEES [ ] WITHHOLD [ ] FOR ALL EXCEPT
Note: If you do not wish your shares voted "For" a particular nominee,
mark the "For All Except" box and strike a line through the name(s) of the
nominee(s). Your shares will be voted for the remaining nominee(s).
2. To approve an amendment to the Company's Third Restated Certificate of
Incorporation, as amended, to increase the number of authorized shares of
Common Stock from 80,000,000 to 180,000,000 shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
<PAGE> 49
3. To approve an amendment to the Company's 1994 Stock Option Plan, as
amended - 1998 Restatement to (i) increase the number of shares of Common
Stock authorized for issuance thereunder from 9,570,000 to 11,570,000
shares and (ii) increase the maximum number of shares of Common Stock that
may be issued in any calendar year to a participant thereunder from
300,000 to 400,000 shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. To approve an amendment to the Company's 1994 Director Stock Option Plan,
as amended, to increase the number of shares of Common Stock authorized
for issuance thereunder from 300,000 to 500,000 shares.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. To ratify the appointment of Deloitte & Touche LLP as the Company's
independent auditors for the current year.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED
BY THE UNDERSIGNED STOCKHOLDER(S). IF NO OTHER INDICATION IS MADE, THE PROXIES
SHALL VOTE "FOR" EACH OF THE DIRECTOR NOMINEES AND "FOR" EACH OF PROPOSALS 2
THROUGH 5.
WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, YOU ARE URGED TO
COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT IN THE ACCOMPANYING ENVELOPE.
A VOTE "FOR" EACH OF THE DIRECTOR NOMINEES AND A VOTE "FOR" EACH OF
PROPOSALS 2 THROUGH 5 ARE RECOMMENDED BY THE BOARD OF DIRECTORS.
IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER
BUSINESS AS MAY PROPERLY COME BEFORE THE ANNUAL MEETING AND ANY ADJOURNMENT
THEREOF.
<PAGE> 50
RECORD DATE SHARES:
Please be sure to sign
and date this Proxy. Date: ______________________
___________________________________
Stockholder sign here
___________________________________
Co-owner sign here
DETACH CARD DETACH CARD
