-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GQbH2Mtf3iA08NbzEU77Vn+7F9j40nShaYpioeuTRQ5MoMeW4p1C7ele4qpcoD9t 5l70Z76CQDE8B9Y662aX2Q== 0000950135-99-002802.txt : 19990518 0000950135-99-002802.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950135-99-002802 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SECURITY DYNAMICS TECHNOLOGIES INC /DE/ CENTRAL INDEX KEY: 0000932064 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 042916506 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25120 FILM NUMBER: 99628160 BUSINESS ADDRESS: STREET 1: 36 CROSBY DRIVE CITY: BEDFORD STATE: MA ZIP: 01730 BUSINESS PHONE: 6176877000 MAIL ADDRESS: STREET 1: 36 CROSBY DRIVE CITY: BEDFORD STATE: MA ZIP: 01730 10-Q 1 SECURITY DYNAMICS 10-Q 1 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM 10-Q (MARK ONE) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 COMMISSION FILE NUMBER: 000-25120 SECURITY DYNAMICS TECHNOLOGIES, INC. (Exact name of Registrant as Specified in Its Charter)
DELAWARE 04-2916506 (State or Other Jurisdiction of (I.R.S. Employer Incorporation or Organization) Identification No.)
36 CROSBY DRIVE BEDFORD, MA 01730 (Address of Principal Executive Offices) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 301-5000 --------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days: Yes [X] No [ ] --------------- As of April 30, 1999, there were 38,887,042 shares of the Registrant's Common Stock, $.01 par value per share, outstanding. ================================================================================ 1 2 SECURITY DYNAMICS TECHNOLOGIES, INC. FORM 10-Q FOR THE THREE MONTHS ENDED MARCH 31, 1999 TABLE OF CONTENTS
PAGE ---- PART I FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets as of March 31, 1999 and December 31, 1998............................................................................. 3 Condensed Consolidated Statements of Income for the three months ended March 31, 1999 and 1998.................................................... 4 Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 1999 and 1998.......................................................... 5 Notes to Condensed Consolidated Financial Statements............................. 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................................................................... 12 Item 3. Quantitative and Qualitative Disclosures About Market Risk....................... 21 PART II OTHER INFORMATION Item 1. Legal Proceedings................................................................ 22 Item 6. Exhibits and Reports on Form 8-K................................................. 22 Signature........................................................................ 23
2 3 PART I. FINANCIAL INFORMATION SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE DATA) ITEM 1. FINANCIAL STATEMENTS
MARCH 31, DECEMBER 31, 1999 1998 --------- ------------ ASSETS Current assets: Cash and cash equivalents......................................................... $ 97,262 $ 33,178 Marketable securities............................................................. 111,482 125,058 Accounts receivable (less allowance for doubtful accounts of $703 in 1999 and $710 in 1998)............................................... 35,610 36,712 Inventory......................................................................... 4,790 7,025 Prepaid expenses and other........................................................ 7,665 10,596 Prepaid income taxes.............................................................. -- 3,930 -------- --------- Total current assets......................................................... 256,809 216,499 -------- --------- Property and equipment, net............................................................ 30,912 29,568 -------- --------- Other assets: Investments....................................................................... 12,111 14,248 Deferred taxes................................................................... 19,852 19,285 Other............................................................................. 1,368 1,255 -------- --------- Total other assets........................................................... 33,331 34,788 -------- --------- Total.................................................................................. $321,052 $ 280,855 ======== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable.................................................................. $ 5,211 $ 8,169 Accrued payroll and related benefits.............................................. 6,703 9,695 Accrued expenses and other........................................................ 7,455 4,659 Income taxes payable.............................................................. 30,774 -- Deferred taxes.................................................................... 1,878 2,120 Deferred revenue.................................................................. 13,130 10,971 -------- --------- Total current liabilities.................................................... 65,151 35,614 -------- --------- Minority interests..................................................................... 2,454 2,521 -------- --------- Commitments and contingencies: (note 4) Stockholders' equity: Common stock, $.01 par value; authorized 80,000,000 shares; issued, 41,774,393 and 41,534,359 shares in 1999 and 1998; outstanding, 38,878,884 and 40,475,850 shares in 1999 and 1998................. 418 415 Additional paid-in capital........................................................ 194,722 191,185 Retained earnings................................................................. 105,292 64,302 Deferred stock compensation....................................................... (74) (74) Treasury stock, common, at cost, 2,895,509 shares in 1999 and 1,058,509 1998...... (45,462) (12,135) Accumulated other comprehensive loss.............................................. (1,449) (973) -------- --------- Total stockholders' equity................................................... 253,447 242,720 -------- --------- Total.................................................................................. $321,052 $ 280,855 ======== =========
See notes to condensed consolidated financial statements. 3 4 SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (IN THOUSANDS, EXCEPT PER SHARE DATA)
THREE MONTHS ENDED MARCH 31, --------------------- 1999 1998 -------- -------- Revenue.......................................................... $ 48,672 $ 40,246 Cost of revenue.................................................. 11,437 8,616 -------- -------- Gross profit..................................................... 37,235 31,630 -------- -------- Costs and expenses: Research and development.................................... 8,229 7,323 Marketing and selling....................................... 17,943 13,480 General and administrative.................................. 5,933 4,719 Merger and integration...................................... -- 2,600 Exit costs.................................................. 6,550 -- -------- -------- Total.................................................. 38,655 28,122 -------- -------- Income (loss) from operations.................................... (1,420) 3,508 Interest income and other........................................ 2,043 2,410 Gain on sale of VeriSign common stock............................ 74,489 -- Equity in loss from operations of equity investment.............. (358) -- -------- -------- Income before provision for income taxes......................... 74,754 5,918 Provision for income taxes....................................... 33,832 3,202 Minority interests............................................... 67 248 -------- -------- Net income....................................................... $ 40,989 $ 2,964 ======== ======== Basic earnings per share: Per share amount............................................ $ 1.03 $ 0.07 ======== ======== Weighted average shares..................................... 39,737 40,665 ======== ======== Diluted earnings per share: Per share amount............................................ $ 0.97 $ 0.07 ======== ======== Weighted average shares..................................... 39,737 40,665 Effect of dilutive options.................................. 2,314 1,486 -------- -------- Adjusted weighted average shares................................. 42,051 42,151 ======== ========
See notes to condensed consolidated financial statements. 4 5 SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (IN THOUSANDS)
THREE MONTHS ENDED MARCH 31, ---------------------- 1999 1998 ---------- -------- Cash flows from operating activities: Net income........................................................................ $ 40,989 $ 2,964 Adjustments to reconcile net income to net cash provided by operating activities: Equity in loss from operations of equity investment............................. 358 -- Deferred taxes.................................................................. (827) 189 Depreciation and amortization................................................... 2,453 1,594 Stock compensation.............................................................. 292 295 Minority interests.............................................................. (67) (248) Increase (decrease) in cash from changes in: Accounts receivable.......................................................... 1,845 356 Inventory.................................................................... 2,235 (1,880) Prepaid expenses and other................................................... 2,914 3,048 Accounts payable............................................................. (2,979) (3,860) Accrued payroll and related benefits......................................... (2,843) (3,018) Accrued expenses and other................................................... 2,341 2,713 Prepaid and income taxes payable............................................. 34,781 3,068 Deferred revenue............................................................. 2,180 (2,387) ---------- --------- Net cash provided by operating activities.................................. 83,672 2,834 ---------- -------- Cash flows from investing activities: Purchases of marketable securities................................................ (326,669) (95,056) Proceeds from sale and maturities of marketable securities........................ 265,698 43,331 Purchases of property and equipment............................................... (3,758) (3,346) Proceeds from sale of VeriSign common stock....................................... 74,489 -- Investments....................................................................... 1,679 (709) ----------- ----------- Net cash provided by (used for) investing activities....................... 11,439 (55,780) ---------- --------- Cash flows from financing activities: Proceeds from exercise of stock options and purchase plans........................ 3,247 2,104 Share repurchase program.......................................................... (33,327) -- ---------- -------- Net cash provided by (used for) financing activities....................... (30,080) 2,104 ----------- -------- Effects of exchange rate changes on cash and cash equivalents.......................... (947) (86) ----------- -------- Net increase (decrease) in cash and cash equivalents.............................. 64,084 (50,928) Cash and cash equivalents, beginning of period......................................... 33,178 96,595 ---------- -------- Cash and cash equivalents, end of period............................................... $ 97,262 $ 45,667 ========== ========
See notes to condensed consolidated financial statements. 5 6 SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements include the accounts of Security Dynamics Technologies, Inc. (the "Company") and its wholly owned subsidiaries and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company's Annual Report on Form 10-K for the year ended December 31, 1998. In the opinion of management, the accompanying unaudited condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements, and include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year. The accompanying unaudited condensed consolidated financial statements give retroactive effect to the acquisition of Intrusion Detection, Inc. ("IDI") on March 26, 1998, which was accounted for as a pooling of interests. The Company's principal markets for its products are, in order of significance, the United States, Europe, Canada, Asia/Pacific and Latin America. 2. EARNINGS PER COMMON SHARE The Company computes earnings per share in accordance with the provisions of Statement of Financial Accounting Standards ("SFAS") No. 128 "Earnings per Share". The Company's only dilutive stock equivalents are stock options. 3. INCOME TAXES The Company provides for income taxes at the end of each interim period based on the estimated effective tax rate for the full year. Cumulative adjustments to the tax provision are recorded in the interim period in which a change in the estimated annual effective rate is determined. Cash payments for income taxes were approximately $25 and $127 for the three months ended March 31, 1999, and 1998, respectively. 4. CONTINGENCIES On or about December 11, 1998, a purported class action was filed in the United States District Court for the District of Massachusetts on behalf of all purchasers of the Company's Common Stock during the period from and including September 30, 1997 through July 15, 1998: Fitzer v. Security Dynamics Technologies, Inc., Charles R. Stuckey, Jr., D. James Bidzos, Arthur W. Coviello, Jr., John Adams, Marian G. O'Leary and Linda B. Saris, Civil Action No 98-CV-12496-WGY. The plaintiff subsequently dismissed without prejudice the claims against Ms. Saris. The complaint in the action asserts that the defendants misled the investing public concerning demand for the Company's products, the strengths of its technologies, and certain trends in the Company's business. Plaintiffs seek unspecified damages, interest, costs and fees of their attorneys, accountants and experts. No response has been made to the complaint by agreement with the plaintiff. An amended complaint, to which the defendants will respond, has not yet been filed. The Company intends to defend the lawsuit vigorously. Although the amounts claimed may be substantial, the Company cannot predict the ultimate outcome or estimate the potential loss, if any, related to the lawsuit. The Company believes that the disposition of this matter will not have a material adverse effect on the Company's consolidated financial position. However, the adverse resolution of the lawsuit could materially affect the Company's results of operations or liquidity in any one annual or quarterly reporting period. On April 6, 1999, the Company announced that it had settled on confidential terms both patent infringement lawsuits against VASCO, including all counterclaims made by VASCO against the Company. 6 7 5. INVESTMENTS VeriSign, Inc. In January 1998, VeriSign, Inc. ("VeriSign") had an initial public offering of three million shares of its common stock. The VeriSign series A and B convertible preferred stock held by the Company converted to common stock in connection with the offering. The offering diluted the Company's ownership but increased the value of the Company's equity in VeriSign. As a result of VeriSign's initial public offering, and in accordance with the equity method of accounting, the Company recognized as a gain the increase in the amount of its investment in VeriSign of $12.0 million, representing its proportionate share of VeriSign's equity as of December 31, 1997, after considering VeriSign's net proceeds from the offering. During 1998, the Company sold 895,500 shares of its VeriSign common stock for a gain of $31.3 million. In January 1999 VeriSign completed a secondary offering of 3.2 million shares of its common stock, including the sale of 1.0 million shares held by the Company. The Company realized a gain of $74.5 million on the sale in January 1999. In the second quarter of 1999, the Company will recognize, as a gain, the increase in the amount of its investment in VeriSign of $12.6 million, representing its proportionate share of VeriSign's net increase in equity from this offering. As of March 31, 1999 the Company owned approximately 2.6 million shares of VeriSign common stock, an approximate ownership percentage of 11%, with a market value of approximately $400.6 million. The Company recognizes its proportionate interest in VeriSign's operating results one quarter in arrears. The Company's proportionate share of VeriSign's 1998 fourth quarter net loss was $358. On April 22, 1999, VeriSign announced it had incurred a net loss of $2.0 million for the three months ended March 31, 1999 and at March 31, 1999 had total assets and liabilities of $189.0 million and $26.0 million respectively. A director of the Company serves as Chairman of the Board of VeriSign. VPNet Technologies, Inc. In December 1996, the Company purchased 250,000 shares of Series B Preferred Stock of VPNet Technologies, Inc. ("VPNet") of San Jose, California, for an aggregate purchase price of $1,500. VPNet was organized to develop and market products and technologies for implementing high-performance virtual private networks. In January 1998, the Company purchased $120 of VPNet 8% convertible debt. The debt is convertible into preferred stock which is convertible into common stock. The Company also received a warrant to purchase VPNet Common Stock. The Company's investment in VPNet represents a minority interest of less than 10% of VPNet's capitalization. A director of the Company serves as a director of VPNet. Trintech Group In March 1998 the Company purchased, in a non-cash transaction, 482,756 ordinary shares of Trintech Group ("Trintech") valued at $2,000. Trintech is an Irish development company organized to develop and market software products designed to enable secure payment in the electronic marketplace. In June 1998, the Company purchased 500,000 shares of Trintech's Series A Convertible Preferred Shares for $3,000 cash. The Company's investment represents a minority interest of less than 10% of Trintech's capitalization. A director of the Company serves as a director of Trintech. nCipher Corporation Limited In October 1997, the Company purchased 175,285 Ordinary Shares of nCipher Corporation Limited ("nCipher") for an aggregate purchase price of $512. nCipher is located in the United Kingdom and develops products designed to accelerate cryptographic processes in Internet security, electronic commerce and other applications. In January and July 1998, the Company purchased 93,896 and 563,910 Ordinary Shares of nCipher for aggregate purchase price of $336 and $2,460, respectively. The Company's investment in nCipher represents a minority interest of less than 20% of nCipher's capitalization. A director of the Company serves as a director of nCipher. 7 8 C2Net, Inc. In June 1998, the Company made a one-year bridge loan to C2Net, Inc. ("C2Net") in the amount of $200. The debt is convertible at the Company's option into equity of C2Net or may be used to offset any financial obligation which may arise from future licensing agreements between the Company and C2Net. C2Net is located in California and was organized to develop commercial Internet security software. Finjan Software Ltd. In August 1997, the Company purchased 877,193 Series C Preferred Shares of Finjan Software Ltd. ("Finjan") for an aggregate purchase price of $1,000. Finjan is an Israeli software company organized to develop and market products for the Java Internet security market. The Company's investment in Finjan represents a minority interest of less than 5% of Finjan's capitalization. Investment Valuation Adjustment The Company routinely evaluates the realizable value of its investments using qualitative and quantitative factors including discounted cash flow analysis and liquidation value assessments. Based on these evaluations, the Company reduced investments by $3,600 in December 1998. 6. EXIT COSTS During the first quarter of 1999, the Company commenced and substantially completed consolidation of certain operations in order to promote operational efficiency. The Company incurred costs of $6,550 which consisted of severance costs of $3,800, facility exit costs of $2,000 and legal and other direct costs of completing the consolidation plan of $750. The consolidation involved the termination of 36 employees, as well as placing for sublet, for the remainder of the lease terms, excess facilities in Bedford, Massachusetts, New York, New York, and San Mateo, California. The Company vacated the excess facilities in San Mateo, California and New York, New York during the first quarter of 1999 and plans to vacate the excess facility in Bedford, Massachusetts in June 1999. As of April 30, 1999, an initial sublease agreement had been entered for the San Mateo facility. The Company has engaged real estate brokers to seek sublease tenants for the vacated facilities. Facility exit costs consist primarily of estimated shortfalls of sublease rental income compared to minimum lease payments due under the lease agreements. Costs of approximately $3,100 were accrued and unpaid at March 31, 1999 and consisted of facility exit costs of $2,000, termination benefits of $600, payable through the first quarter of 2000, and legal and other direct costs related to the consolidation of $500, payable in the second quarter of 1999. 7. COMPREHENSIVE INCOME The Company adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income" effective January 1, 1998. For the three months ended March 31, 1999 and 1998, comprehensive income was: 8 9
THREE MONTHS ENDED MARCH 31, -------------------- 1999 1998 -------- -------- Net income ............................................................ $ 40,989 $ 2,964 Other comprehensive income, net of tax: Unrealized holding loss on securities arising during period (17) (102) Foreign currency translation adjustments ......................... (1,432) (173) -------- -------- Comprehensive income .................................................. $ 39,540 $ 2,689 ======== ========
Accumulated other comprehensive income consists of the following:
UNREALIZED FOREIGN HOLDING ACCUMULATED CURRENCY (LOSS) OTHER TRANSLATION GAIN ON COMPREHENSIVE ADJUSTMENTS SECURITIES INCOME ------------ ---------- ------------- Balance, December 31, 1998................................................. $ (1,175) $ 202 $ (973) Period change.............................................................. (257) (219) (476) -------- ------ -------- Balance, March 31, 1999.................................................... $ (1,432) $ (17) $ (1,449) ========= ======= ========
Unrealized holding losses were $365 and $170 for the three months ended March 31, 1999 and 1998, respectively, and net of related tax benefits were $219 and $102, respectively. 8. STOCKHOLDERS' EQUITY Common Stock On January 27, 1999, the Board of Directors adopted, and on May 5, 1999 the stockholders approved, an amendment to the Company's Third Restated Certificate of Incorporation to increase the number of authorized shares of Common Stock available for issuance from 80,000,000 to 150,000,000 shares. 1994 Stock Option Plan On January 27, 1999, the Board of Directors adopted, and on May 5, 1999 the stockholders approved, amendments to the 1994 Stock Option Plan, as amended (the "1998 Restatement") which, among other things, increased the aggregate number of shares of Common Stock authorized for issuance thereunder from 9,570,000 to 11,570,000 shares. 1994 Director Stock Option Plan On January 27, 1999, the Board of Directors adopted, and on May 5, 1999, the stockholders approved, an amendment to the 1994 Director Stock Option Plan increasing the number of shares of Common Stock authorized for issuance thereunder from 300,000 to 500,000 shares. 9 10 SHARE REPURCHASE PROGRAM On October 12, 1998, the Company announced that its Board of Directors had authorized the Company to repurchase up to four million shares of its Common Stock during the 12-month period ending October 11, 1999. The timing and amount of shares repurchased will be determined by the Company's management based on its evaluation of market and economic conditions. Repurchased shares will be used for the Company's stock option plans, employee stock purchase plan and other stock benefit plans, and for general corporate purposes. As of March 31, 1999 and April 30, 1999, the Company had purchased 2,895,000 and 2,940,000 shares, respectively, of its Common Stock for an aggregate purchase price of $45,462 and $46,264, respectively. 9. SEGMENTS The following is presented in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." This statement establishes new standards for defining and disclosing information about a company's business segments and requires a company to define its segments along its internal structure and reporting methodology. The Company has identified only one distinct and reportable segment that meets the criteria established under SFAS No. 131: Enterprise network and data security solutions. The segment generates revenue from two distinct product lines: Enterprise solutions (which includes sales of SecurID tokens, licensing of ACE/Server, Keon (formerly known as BoKS), Kane Security Analyst and Kane Security Monitor, RSA SecurPC software and maintenance and professional services) and OEM solutions (which includes licensing of BSAFE, TIPEM, SSL encryption engines, protocol products and maintenance and professional services). The Company's chief operating decision makers (determined to be the Chief Executive Officer and the President) and the Board of Directors do not manage any part of the Company separately, and the allocation of resources and assessment of performance is based solely on the Company's consolidated operations and operating results. The Company's operations are conducted throughout the world. Operations in the United States represent individually more than 10% of revenues or income from operations. The Company's operations in other countries are individually insignificant and have been included in "Rest of world" below. The following table presents information about the Company's operating segments: 10 11
THREE MONTHS ENDED MARCH 31, ----------------------- PRODUCTS AND SERVICES 1999 1998 - --------------------- -------- ---------- Enterprise solutions $ 36,218 $ 31,983 OEM solutions 12,454 8,263 -------- --------- Total $ 48,672 $ 40,246 ======== =========
GEOGRAPHIC AREAS
THREE MONTHS ENDED MARCH 31, ---------------------- REVENUES 1999 1998 - --------- -------- -------- United States $ 34,804 $ 29,785 Rest of world 13,868 10,461 ======== ======== Total $ 48,672 $ 40,246 ======== ========
11 12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (IN THOUSANDS, EXCEPT SHARE, PERCENTAGE AND SQUARE FOOTAGE DATA) OVERVIEW This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and Section 27A of the Securities Act of 1933, as amended. For this purpose, any statements contained herein that are not statements of historical fact may be deemed to be forward-looking statements. Without limiting the foregoing, the words "believes," "anticipates," "plans," "expects," and similar expressions are intended to identify forward-looking statements. There are a number of factors that could cause the Company's actual results to differ materially from those indicated by such forward-looking statements. These factors include, without limitation, those set forth below under the caption "Certain Factors That May Affect Future Results." The Company is a leading provider of enterprise network and data security solutions to corporate end users ("Enterprise") and to original equipment manufacturer ("OEM") customers. The Company was founded in 1984, began shipping its SecurID tokens and Access Control Module ("ACM") hardware products in 1986, and introduced its first ACM software products for minicomputers and mainframe computers in 1988. Prior to 1986, the Company was primarily engaged in research and development activities. In December 1991, the Company introduced its ACE/Server software products for enterprise information protection using client/server architecture. The Company believes that its growth has historically been driven by the emergence of local and wide-area networks and a corresponding increase in users with direct access to core enterprise systems and confidential data. The Company also believes that the number of users with such direct access is increasing because of the growth of the Internet and corporate intranets and extranets. The Company's revenue is derived primarily from two distinct product lines: Enterprise solutions (which includes sales of SecurID tokens, licensing of ACE/Server, Keon (formerly known as BoKS), Kane Security Analyst and Kane Security Monitor, RSA SecurPC software and maintenance and professional services) and OEM solutions (which includes licensing of BSAFE, TIPEM, SSL encryption engines, protocol products and maintenance and professional services). Sales to existing customers typically include sales of SecurID tokens and ACE/Server software for use by different branches or divisions, sales of replacement tokens (which are programmed at the request of the customer to operate for a fixed period of up to four years) and sales of additional tokens for use by vendors, suppliers, customers and clients of the Company's customers. Sales to existing ACE/Server and Keon customers are typically associated with an increase in the number of users authorized under a license, and the sales of additional functionality that can be added to the customer installation. ACE/Server, Keon, Kane Security Analyst and Kane Security Monitor software license fees are typically based on the number of users authorized under a license. Sales to existing customers also include revenue associated with amendments to encryption engine and patent licensing agreements, usually in order to accommodate licensing of new software or technology to the customer, to increase the field of use rights of the customer, or both. Encryption engine and protocol software licensing terms vary by product, and are typically composed of both initial fees plus ongoing royalties paid as a percentage of the OEM's product or service revenues. Sales of ACM hardware and software products have been decreasing relative to sales of ACE/Server software for several years due to increased emphasis by the Company on sales to customers with larger security needs better met by client/server software solutions such as ACE/Sever software. The Company believes that this trend will continue. The Company's direct sales to customers in countries outside of the United States are denominated in the local currency. As a result, fluctuations in currency exchange rates could affect the profitability in U.S. dollars of the Company's products sold in these markets. See Note 9 of Notes to the Company's Condensed Consolidated Financial Statements. The Company's sales through indirect distribution channels are generally denominated in U.S. dollars. The Company's cost of revenue consists primarily of costs associated with the manufacture and delivery of SecurID tokens and hardware products. The Company utilizes assembly contractors for most manufacturing. Cost of revenue also includes royalty fees incurred on the sale of ACE/Server software, royalty fees payable on the licensing of patent technology and royalties payable under certain OEM agreements. Cost of revenue includes customer support costs and production costs, which include labor costs associated with the programming of SecurID tokens, inspection and quality control functions and shipping costs. In the future, gross profit may be affected by several factors, including changes in product mix and distribution channels, price reductions (resulting from volume discounts or otherwise), competition, changes in the cost of revenue (including any software license fees or royalties payable by the Company) and other factors. Operating expenses are incurred for research and development, marketing and selling and general and administrative activities. Research and development expenses consist primarily of personnel expenses as well as fees for development services provided by consultants. From time to time the Company has also purchased, and expensed, research and development technology. Marketing and selling expenses consist primarily of personnel expenses, commissions and travel expenses of direct sales and marketing personnel and marketing program expenses. General and administrative expenses consist primarily of personnel expenses for administration, finance, human resources, general management and legal and accounting fees. Interest and other income consists primarily of interest earned on the Company's cash balances and marketable securities. 12 13 RESULTS OF OPERATIONS The following table sets forth income and expense items as a percentage of total revenue, and the percentage change in dollar amounts of such items, for the three months ended March 31, 1999 and 1998.
PERCENTAGE OF PERIOD-TO- TOTAL PERIOD REVENUE CHANGE ------------------ --------- THREE MONTHS ENDED MARCH 31, ------------------------------ 1999 1998 ------ ------ Revenue................................................. 100.0% 100.0% 20.9% Cost of revenue......................................... 23.5 21.4 32.7 ----- ----- ------- Gross profit............................................ 76.5 78.6 17.7 ----- ----- ------- Costs and expenses: Research and development.............................. 16.9 18.2 12.4 Marketing and selling................................. 36.9 33.5 33.1 General and administrative............................ 12.2 11.7 25.7 Merger and integration................................ -- 6.5 (100.0) Exit costs............................................ 13.4 -- 100.0 ----- ----- ------- Total.......................................... 79.4 69.9 37.5 ----- ----- ------- Income (loss) from operations........................... (2.9) 8.7 (140.5) Interest income and other............................... 4.2 6.0 (15.2) Gain on sale of VeriSign common stock................... 153.0 -- 100.0 Equity in loss from operations of equity investment..... (0.7) -- (100.0) ----- ----- ------- Income before provision for income taxes................ 153.6 14.7 1,163.2 Provision for income taxes.............................. 69.5 8.0 956.6 Minority interests...................................... 0.1 .6 (73.0) ----- ----- ------- Net income.............................................. 84.2% 7.3% 1282.9% ===== ===== =======
REVENUE Total revenue increased 20.9% in the first quarter of 1999 to $48,672 from $40,246 in the first quarter of 1998. Approximately 50% of the increase in revenue was attributable to increased sales from the Enterprise product line, primarily SecurID tokens and licensing of Ace/Server software. The remaining 50% of the increase in revenue was attributable to increased sales from the OEM product line, primarily licensing of BSAFE cryptography products. International revenue (outside of the United States) increased 32.6% in the first quarter of 1999 to $13,868 from $10,461 in the first quarter of 1998. International revenue accounted for 28.5% and 26.0% of total revenue in the first quarters of 1999 and 1998, respectively. The increases in international revenue was primarily attributable to the continuing expansion of the Company's international sales force and increased market penetration of the Company's products in foreign markets. COST OF REVENUE AND GROSS PROFIT The Company's gross profit increased 17.7% in the first quarter of 1999 to $37,235 from $31,630 in the first quarter of 1998. Gross profit as a percentage of revenue declined in the first quarter of 1999 to 76.5% from 78.6% of revenues in the first quarter of 1998. The percentage decline in the first quarter of 1999 was attributable to a higher proportion of lower margin products and services in the Enterprise product line as compared to the first quarter of 1998. 13 14 RESEARCH AND DEVELOPMENT Research and development expenses increased 12.4% in the first quarter of 1999 to $8,229 from $7,323 in the first quarter of 1998. Research and development expenses decreased as a percentage of revenue to 16.9% in the first quarter, from 18.2% in the first quarter of 1998. The majority of the increase in research and development expenses resulted from increased payroll and overhead expenses associated with the employment of additional staff. During the first quarter of 1998, the Company purchased and recorded as purchased research and development expense certain technology from a third party for $210. MARKETING AND SELLING Marketing and selling expenses increased 33.1% in the first quarter of 1999 to $17,943 from $13,480 in the first quarter of 1998. Marketing and selling expenses increased as a percentage of revenue to 36.9% in the first quarter of 1999 from 33.5% in the first quarter of 1998. Approximately 56% of the increase in marketing and selling expenses during the first quarter of 1999 resulted from an increase in payroll and overhead costs associated with the employment of additional staff and approximately 37% of the increase was attributable to increased sales commissions. Sales commissions increased due to increased revenues as well as the employment of additional staff. The remainder of the increase in marketing and selling expenses resulted primarily from increased marketing program costs. GENERAL AND ADMINISTRATIVE General and administrative expenses increased 25.7% in the first quarter of 1999 to $5,933, from $4,719 in the first quarter of 1998. General and administrative expenses increased as a percentage of revenue to 12.2% in the first quarter of 1999 from 11.7% in the first quarter of 1998. Approximately 51% of the increase in general and administrative expenses was due to an increase in legal expenses associated with patent infringement lawsuits and approximately 21% of the increase in general and administrative expenses was due to increased professional fees. The remainder of the increase in general and administrative expenses resulted primarily from increased payroll and overhead costs. MERGER AND INTEGRATION EXPENSE Merger and integration expenses, consisting of legal, accounting, investment banking and other expenses, incurred in connection with the acquisition of IDI were $2,600 in the first quarter of 1998. EXIT COSTS During the first quarter of 1999, the Company commenced and substantially completed consolidation of certain operations in order to promote operational efficiency. The Company incurred costs, primarily severance and facility exit costs, of $6,550 in connection with this effort. See Note 6 of Notes to Condensed Consolidated Financial Statements. INTEREST INCOME AND OTHER Interest income decreased 15.2% in the first quarter of 1999 to $2,043 from $2,410 in the first quarter of 1998 primarily due to movement of a portion of the Company's marketable securities portfolio from taxable investments to tax exempt obligations. GAIN ON SALE OF VERISIGN COMMON STOCK During the first quarter of 1999, the Company sold 1,000,000 shares of its VeriSign common stock for a gain of $74,489. See Note 5 of Notes to Condensed Consolidated Financial Statements. EQUITY IN LOSS FROM OPERATIONS OF EQUITY INVESTMENT The Company recognizes its proportionate interest in VeriSign's operating results one quarter in arrears. The Company's proportionate share of VeriSign's 1998 fourth quarter loss was $358. See Note 5 of Notes to Condensed Consolidated Financial Statements. 14 15 PROVISION FOR INCOME TAXES The provision for income taxes increased to $33,832 during the first quarter of 1999 from $3,202 in the first quarter of 1998, primarily due to higher income subject to taxation. The Company's effective tax rates were 45.3% for the first quarter of 1999 compared to 54.1% for the first quarter of 1998. The effective tax rate for the first quarter of 1999 decreased compared to the effective tax rate for the first quarter of 1998 primarily due to benefits resulting from the Company's investment strategies which include the migration of the marketable securities portfolio from taxable investments to tax exempt obligations. In addition, the Company's first quarter of 1998 tax rate also reflected non-deductible expenses associated with the acquisition of IDI. MINORITY INTERESTS An aggregate of 26% interest of the Company's RSA Japan subsidiary is held by minority interest shareholders. Minority interests in the subsidiary's net loss was $67 during the first quarter of 1999 and $248 in the first quarter of 1998. NET INCOME As a result of the above factors, net income in the first quarter of 1999 increased to $40,989 or 84.2% of revenue from $2,964 or 7.3% of revenue in the first quarter of 1998. LIQUIDITY AND CAPITAL RESOURCES Liquidity At March 31, 1999, the Company had cash, cash equivalents and marketable securities of $208,744 and working capital of $191,658. The Company has historically funded its operations primarily from cash generated from its operating activities. The Company believes that working capital will be sufficient to meet its anticipated cash requirements through at least 2001. Mergers and Acquisitions On March 26, 1998 the Company issued approximately 784,000 shares of Common Stock in exchange for all of IDI's outstanding common stock in an acquisition accounted for as a pooling of interests. Investment banks, professional fees and other direct expenses incurred in connection with the acquisition were approximately $2,600. The Company intends to seek acquisitions of businesses, strategic investments, products and technologies that are complementary to those of the Company. The Company is continuing to identify and prioritize additional security technologies which it may wish to develop, either internally or through the licensing or acquisition of products from third parties. While the Company engages from time to time in discussions with respect to potential acquisitions, there can be no assurances that any such acquisitions will be made or that the Company will be able to successfully integrate any acquired business. In order to finance such acquisitions, it may be necessary for the Company to raise additional funds through public or private financings. Any equity or debt financings, if available at all, may be on terms which are not favorable to the Company and, in the case of equity financings, may result in dilution to the Company's stockholders. Sales of Common Stock The Company generated $2,050 of cash from employees exercising stock options and employee stock purchase plan purchases during the first three months of 1999. Strategic Investments VeriSign, Inc. In January 1998, VeriSign had an initial public offering of three million shares of its common stock. The VeriSign series A and B convertible preferred stock held by the Company converted to common stock in connection with the offering. The offering diluted the Company's ownership but increased the value of the Company's equity in VeriSign. 15 16 As a result of VeriSign's initial public offering, in accordance with the equity method of accounting, the Company recognized as a gain the increase in the amount of its investment in VeriSign of $12.0 million, representing its proportionate share of VeriSign's equity as of December 31, 1997, after considering VeriSign's net proceeds from the offering. The Company sold 895,500 shares of its VeriSign common stock for a gain of $31.3 million in 1998. In January 1999 VeriSign completed a secondary offering of 3.2 million shares of its common stock, including the sale of 1.0 million shares held by the Company. The Company realized a gain of $74.5 million on the sale in January 1999. In the second quarter of 1999, the Company will recognize, as a gain, the increase in the amount of its investment in VeriSign of $12.6 million, representing its proportionate share of VeriSign's net increase in equity from this offering. As of March 31, 1999 the Company owned approximately 2.6 million shares of VeriSign common stock, an approximate ownership percentage of 11%, with a market value of approximately $400.6 million. The Company recognizes its proportionate interest in VeriSign's operating results one quarter in arrears. The Company's proportionate share of VeriSign's 1998 fourth quarter net loss was $358. On April 22, 1999, VeriSign announced it had incurred a net loss of $2.0 million for the three months ended March 31, 1999 and as of March 31, 1999 had total assets and liabilities of $189.0 million and $26.0 million respectively. A director of the Company serves as Chairman of the Board of VeriSign. VPNet Technologies, Inc. In December 1996, the Company purchased 250,000 shares of Series B Preferred Stock of VPNet of San Jose, California, for an aggregate purchase price of $1,500. VPNet was organized to develop and market products and technologies for implementing high-performance virtual private networks. In January 1998, the Company purchased $120 of VPNet 8% convertible debt. The debt is convertible into preferred stock which, is convertible into common stock. The Company also received a warrant to purchase VPNet common stock. The Company's investment in VPNet represents a minority interest of less than 10% of VPNet's capitalization. A director of the Company serves as a director of VPNet. Trintech Group In March 1998 the Company purchased, in a non-cash transaction, 482,756 ordinary shares of Trintech Group ("Trintech") valued at $2,000. Trintech Group is an Irish development company organized to develop and market software products designed to enable secure payment in the electronic marketplace. In June 1998 the Company purchased an additional 500,000 shares of Trintech's Series A Convertible Preferred Shares for $3,000 cash. The Company's investment represents a minority interest of less than 10% of Trintech's capitalization. A director of the Company serves as a director of Trintech. nCipher Corporation Limited In October 1997, the Company purchased 175,285 Ordinary Shares of nCipher for an aggregated purchase price of $512. nCipher is located in the United Kingdom and develops products designed to accelerate cryptographic processes in Internet security, electronic commerce and other applications. In January and July 1998, the Company purchased 93,896 and 563,910 Ordinary Shares of nCipher for aggregate purchase prices of $336 and $2,460, respectively. The Company's investment in nCipher represents a minority interest of less than 20% of nCipher's capitalization. A director of the Company serves as a director of nCipher. C2Net, Inc. In June 1998, the Company made a one year bridge loan to C2Net in the amount of $200. The debt is convertible at the Company's option into equity of C2Net or may be used to offset any financial obligation which may arise from future licensing agreements between the Company and C2Net. C2Net is located in California and was organized to develop commercial Internet security software. Finjan Software, Ltd. In August 1997, the Company purchased 877,193 Series C Preferred Shares of Finjan for an aggregate purchase price of $1,000. Finjan is an Israeli software company organized to develop and market products for the Java Internet security market. The Company's investment in Finjan represents a minority interest of less than 5% of Finjan's capitalization. Investment Valuation Adjustment The Company routinely evaluates the realizable value of its investments using qualitative and quantitative factors including discounted cash flow analysis and liquidation value assessments. Based on these evaluations the Company reduced investments by $3,600 in December 1998. 16 17 Capital Expenditures The Company's capital expenditures during the first three months of 1999 were $3,758, related to additional leasehold improvements, office furniture and equipment, as well as computer equipment for product development, testing and support to accommodate the Company's continued growth. During the fourth quarter of 1997, the Company commenced implementation of an information system which is designed to better meet the Company's growing worldwide information and business process needs. The system, which is represented by the manufacturer to be Year 2000 compliant, became operational in October 1998. See "Year 2000 Issues". The Company incurred costs of approximately $5,300 in connection with the implementation of the system, of which $500 was spent in the first quarter of 1999. The Company does not anticipate any additional spending of significant amounts on the system, as well as remediation of Year 2000 issues relating to systems for the remainder of 1999. Leasing Expenditures The Company's principal administrative, sales and marketing, research and development and support facilities are located in Bedford, Massachusetts under non-cancelable ten year leases expiring in August 2008. The facilities aggregate approximately 183,000 square feet of office space, and the annual base rents aggregate approximately $3,000 including certain operating expenses. The Company also leases facilities for research and development and sales and marketing in San Mateo, California under non-cancelable ten-year leases expiring in 2008. The facilities aggregate approximately 58,000 square feet of office space, and the annual base rents aggregate approximately $2,000 including certain operating expenses. Annual rent escalation provisions for all of theses leases are based on the Consumer Price Index. The Company also leases facilities for administration, field sales and customer support throughout the United States, Canada, Asia, Japan and Europe at annual base rents aggregating approximately $1,400. In connection with the consolidation of certain operations that commenced in January 1999, the Company sublet approximately 10,000 square feet of its San Mateo, California facility and is actively seeking to sublet approximately 40,000 square feet of facilities at various locations. The successful sublet of all of these facilities will reduce the Company's annual rental payment obligations by approximately $100 per month. See Note 6 of Notes to Condensed Consolidated Financial Statements. Certain Agreements The Company has an agreement with Progress Software Corporation ("Progress Software") for the right to use certain of its software to enhance the functionality of the Company's ACE/Server and Keon software. The agreement has been amended several times. In order to obtain favorable pricing, the Company has, from time to time, prepaid Progress Software royalties due under the agreement. In 1998 the Company prepaid an aggregate of $6,000 in three installments. The prepaid royalty is recorded as a component of cost of sales as the related products are sold. Un-amortized prepaid royalties were $4,000 at March 31, 1999. During September 1998, the Company entered into Employment Agreements with substantially all of the Company's management team, including most of the Company's executive officers. The Board of Directors determined that such Employment Agreements were necessary to effectively incent and retain key management team members in a competitive employment marketplace. The Employment Agreements generally provide for minimum annual salaries aggregating $1,900 and, among other things, that during the period commencing on September 1, 1998 and ending on March 1, 2000, the Company may terminate the employee only for nonperformance of his or her duties, or for cause, subject to criteria and definitions set forth therein. In December 1998, the Company amended its Development Agreement with VeriSign (the "Amendment") to appoint the Company the exclusive distributor of VeriSign's certificate authority software. The Amendment provides, among other things, that each year during the first five years following the date of the Amendment, the Company may elect to retain its exclusive status, subject to payment by the Company of certain prepaid license fees each year during that five year period. In addition to $500 paid at the execution of the agreement, prepaid license fees are due in minimum quarterly installments and aggregate $1,100 in 1999, of which $250 was paid in March 1999, $2,300 in 2000, $3,000 in 2001, $4,000 in 2002, and $4,000 in 2003. 17 18 Stock Option Repricing On July 24, 1998 and August 6, 1998, the Board of Directors of the Company approved a stock option repricing program pursuant to which each holder (other than certain executive officers and the directors of the Company) of an outstanding stock option granted under the Plan during the period commencing on January 1, 1996 and ending on June 30, 1998 (collectively, the "Old Options"), could elect to receive a new stock option (collectively, "New Options") granted on August 12, 1998 under the Plan in exchange for cancellation of such holder's Old Option. The Company repriced the options because the exercise prices of such options were significantly higher than the fair market value of the Company's Common Stock, and therefore did not provide the desired incentive to employees. The Company believes that stock options are a valuable tool in retaining employees. Each New Option is, among other things, (i) exercisable for the number of shares of the Company's Common Stock covered by the outstanding unexercised portion of the Old Option canceled in exchange therefore; (ii) has an exercise price of $12.062525 (equal to the closing price of the Common Stock on the Nasdaq National Market on August 12, 1998 and the fair market value of the Common Stock on such date); and (iii) has the identical vesting schedule as the Old Option, provided, however, that each such New Option shall not be exercisable prior to February 12, 1999, with such prohibition on exercise expiring at a rate of 25% at the end of each three-month period thereafter. New Options to purchase an aggregate of approximately 5.3 million shares of Common Stock were granted in exchange for Old Options with exercise prices ranging from $19.00 to $44.125. Share Repurchase Program On October 12, 1998 the Company announced that its Board of Directors had authorized the Company to repurchase up to four million shares of its Common Stock during the 12-month period ending October 11, 1999. The timing and amount of shares repurchased will be determined by the Company's management based on its evaluation of market and economic conditions. Repurchased shares will be used for the Company's stock option plans, employee stock purchase plan and other stock benefit plans, and for general corporate purposes. As of March 31, 1999 and April 30, 1999, the Company had repurchased 2,895,509 and 2,940,000 shares, respectively, of its Common Stock, for an aggregate purchase price of $45,462 and $46,264, respectively. Year 2000 Issues Overview Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. These date code fields must accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, software and computer systems may need to be upgraded or replaced in order to comply with such "Year 2000" requirements. State of Readiness Company Products The Company has implemented a testing program to ensure that its products continue to operate after December 31, 1999. The testing program has been completed for the most recent versions of all of the Company's software products, and the Company is in the process of testing prior versions of certain of the Company's ACE/Server software products and the Company's ACE/Sentry hardware product. The Company does not expect to implement a test plan for the Company's ACM 100, 400 or 1600 hardware products. In measuring Year 2000 readiness, the Company has applied the following specifications: "Year 2000 Ready" means that: (1) no value for current date will cause any interruption in operation; (2) date-based functionality must be consistent for dates prior to, during and after Year 2000; (3) in all interfaces and data storage, the century in any date must be specified either explicitly or by unambiguous algorithms or inferencing rules; and (4) Year 2000 must be recognized as a leap year. The Company's SecurID Tokens are Year 2000 Ready. Assuming that a customer is utilizing the Company's software products in conjunction with a Year 2000 Ready operating system, then the Company's most recent software releases, ACE/Server v3.3, Kane Security Analyst v4.5, Kane Security Monitor v3.2, Keon Security Server v4, Keon Desktop v4, Keon Agents v4, Keon Agent SDK, Keon UNIX Platform Security v4, (Keon software products were formerly known as BoKS), SoftID, RSA SecurPC, BSAFE-Crypto-C, BSAFECrypto-J, BSAFE Cert-C, BSAFE SSL-C and BSAFE SSL-J, are Year 2000 Ready. Certain prior versions of the Company's software products, as well as the Company's ACE/Sentry, ACM 100, 400 and 1600 hardware products, are not fully Year 2000 Ready, and customers have been informed of the status of the Company's products in the ordinary course of business. In certain circumstances, the Company may make available to customers 18 19 who have implemented prior releases of the Company's software products software patches to make the products Year 2000 Ready. The Company is currently seeking to obtain written representations from third-party vendors of software contained in the Company's ACE/Server and Kane software products that such components are Year 2000 Ready. While the Company has created and implemented what it believes to be an effective Year 2000 Readiness testing program for its products, the Company's products may contain undetected errors or defects associated with Year 2000 date functions. Such errors or defects in the Company's products could result in delay or loss of revenue and diversion of development resources, which might materially adversely affect the Company's business, financial condition or results of operations. Company Systems The Company has established a Year 2000 task force to determine the state of readiness of all Company information technology ("IT") and non-IT systems, including the microprocessors contained in infrastructure products, such as card-swipe entry devices, which are used at the Company's facilities. The task force consists of employees with expertise in areas the Company believes could be affected if any system is not Year 2000 Ready. The task force has established a Year 2000 compliance plan. The scope of the plan is to (i) identify the third-party equipment, software, vendors, systems and suppliers used by the Company which are not Year 2000 Ready, and (ii) replace non-Year 2000 Ready third-party equipment and software with Year 2000 Ready equipment and software. The Year 2000 compliance plan is divided into the following phases: (1) the Inventory Phase, in which the Company identifies all products and systems which are created or used by the Company in the course of its operations; (2) the Analysis Phase, in which the Company determines what, if any, Year 2000 Readiness issues may exist with respect to any product or system; (3) the Solution Development Phase, in which the Company designs and/or obtains from third-party vendors methods to correct any Year 2000 Readiness issues which were identified in the prior phase; and (4) the Implementation Phase, in which the Company deploys solutions for the identified problems. The Company's Year 2000 task force has substantially completed the Inventory and Analysis Phases for all of the Company's IT and non-IT systems. The task force has commenced the Solution Development and Implementation Phases for all of the Company's systems. The Company expects the project to be substantially completed by June 30, 1999 for the Company's significant business databases and systems, and by September 30, 1999 for the Company's secondary business systems. The Year 2000 task force has identified certain IT systems licensed by the Company's Customer Support and Engineering groups that must be upgraded in order to make the systems Year 2000 Ready. In each case, the Company has purchased maintenance and support from those application vendors, and expects to receive upgrades from the vendors at no additional cost. With respect to certain other business applications and systems licensed by the Company from third parties (including but not limited to the Company's PBX and the Company's management information system installed in 1998), the Company is relying on those licensors' written representations that the applications are Year 2000 Ready. Costs to Address Year 2000 Issues The Company anticipates that it will incur direct costs to modify or replace existing systems used by the Company in the operation of its business to ensure that all systems will become Year 2000 Ready. Except for the implementation of the worldwide management information system described above, the Company believes that total amounts spent by it to date and which it expects to spend during 1999 addressing this issue are not material. See "Capital Expenditures." In addition, the Company has spent substantial time and effort testing and evaluating its own products to determine Year 2000 Readiness of those products. In the case of prior product releases which are not Year 2000 Ready, the Company expects to devote internal engineering and customer support resources to resolving issues for existing customers of those products. This effort may result in a longer development cycle for new Company products. Risks to the Company In the event of a failure of some or all of the Company's IT and non-IT systems on January 1, 2000, the Company's operations may be substantially curtailed until the Company or its third-party suppliers develop a solution to address each system's failure. In such event, the Company might be unable to: (a) produce SecurID tokens, (b) track development of Company software products, (c) book orders for products, (d) access customer support records, (e) operate its Internet site, (f) receive email, or (g) prepare its financial statements for fourth quarter 1999 or periods thereafter. 19 20 In addition, the Company has made representations and warranties, both in contracts and in written communications, to certain of its customers regarding the Year 2000 Readiness of its products. The Company has reviewed all of those representations to determine the accuracy of those statements, given the ongoing Year 2000 testing of the Company's products. The Company has determined that it made Year 2000 Readiness representations in fewer than 10% of its customer contracts; many of those customers have requested, and received, Year 2000 Ready versions of the Company products. The cost of compliance with these representations and warranties has not been and is not expected to be material. In the event that any contractual representation made by the Company regarding Year 2000 Readiness is not accurate, the Company will seek to upgrade the affected customer to the Company's current, Year 2000 Ready, version of the product(s) being used by that customer. In the event any affected customer chooses not to upgrade to the most recent versions of the Company's products, the Company will seek to amend the affected license agreement to address the error. In the event that the Company: (i) has made a materially inaccurate statement regarding Year 2000 Readiness of its products, and (ii) is not able to amend the contract to address the error, the Company may face the risk of one or more lawsuits from its customers alleging breach of representation. Contingency Plans As described above, the Company has identified potential vulnerabilities associated with the change of the century, both in its own product offerings and in the systems utilized by the Company in the ordinary course of business. The Company is devoting resources to resolving the issues inherent in its own product offerings, as well as working with providers of systems to the Company to ensure that business is not substantially interrupted as a result of the date change. However, given the possibility of system failure as a result of the century change, the Company is currently in the process of formulating one or more contingency plans. The Company anticipates implementing contingency plans on or before June 30, 1999. The foregoing shall be considered a Year 2000 readiness disclosure to the maximum extent allowed under the Year 2000 Information and Readiness Disclosure Act. Conversion to Euro Certain of the common member countries of the European Union have agreed to adopt a new currency, the Euro, as their legal currency. On January 1, 1999, the countries established fixed conversion rates between their existing currencies and the Euro. The Company's systems are configured to process Euro denominated transactions. The Company does not believe the Euro will have a significant effect on its business, financial position, cash flows or the results of its operations. Certain Factors That May Affect Future Results A number of uncertainties exist that could affect the Company's future operating results, including, without limitation, general economic conditions, the Company's continued ability to develop and introduce products, the introduction of new products by competitors, pricing practices of competitors, expansion of the Company's sales distribution capability, the cost and availability of components and the Company's ability to control costs. The Company's success is dependent on the success of its Keon product line, which is a family of enterprise security solutions being developed by the Company that would enable organizations to support and manage the growing use of public and private keys, digital signatures and digital certificates for verifying user identities and establishing information access privileges for such users in an enterprise. The success of the Keon software is dependent on a number of factors, including without limitation delays in product development, undetected software errors or bugs, competitive pressures, technical difficulties, market acceptance of new technologies, including without limitation the use and implementation of various certificate management and key 20 21 management technologies, changes in customer requirements and government regulations, delays in developing strategic partnerships and general economic conditions. The Company's success is highly dependent on its ability to enhance its existing products and to develop and introduce new products in a timely manner. If the Company were to fail to introduce new products on a timely basis, the Company's operating results could be adversely affected. To date, substantially all of the Company's revenues have been attributable to sales of its enterprise network and data security products. Existing and new versions of such products are expected to continue to represent a high percentage of the Company's revenue for the foreseeable future. As a result, any factor adversely affecting sales of these products and services could have a materially adverse effect on the Company's financial condition and results of operations. Certain components of the Company's products are currently purchased from single or limited sources and any interruption in the supply of such components could adversely affect the Company's operating results. The Company's quarterly operating results may vary significantly depending on a number of factors, including the timing of the introduction or enhancement of products by the Company or its competitors, the sizes, timing and shipment of individual orders, market acceptance of new products, changes in the Company's operating expenses, personnel changes, mix of products sold, changes in product pricing, development of the Company's direct and indirect distribution channels and general economic conditions. International sales have represented a significant portion of the Company's sales. The international business and financial performance of the Company may be affected by general economic conditions abroad, fluctuations in foreign exchange rates, difficulties in managing accounts receivable, tariff regulations and difficulties in obtaining export licenses. All of the Company's products are subject to U.S. export control laws and applicable foreign government import, export, and/or use restrictions. Minimal U.S. export restrictions apply to all products, whether or not they perform encryption. Current U.S. export regulations require export licenses, or at least a one-time technical review, before most encryption products may be exported to countries other than Canada. The Company believes that it has obtained necessary approvals for the export of the products it currently exports. There can be no assurance, however, that the list of products and countries requiring government approvals and the applicable regulatory policies will not be revised from time to time or that the Company will be able to obtain necessary regulatory approvals for the export of future products. The inability of the Company to obtain required approvals under these regulations could adversely affect the ability of the Company to make international sales. Exports of RSA's encryption products, or third-party products bundled with RSA encryption technology, are expected to continue to be restricted by the United States and various foreign governments. Exports of commercial encryption products are regulated by the Export Administration Regulations of the U.S. Commerce Department, while exports of encryption products designed or adapted for military use require export licenses under the International Traffic in Arms Regulations of the U.S. State Department. Until recently, the U.S. government generally prohibited exports of encryption products with key lengths of greater than 40 bits. Under new regulations issued in 1996 and 1998, commercial encryptions products with key lengths of up to 56 bits may be widely exported after a one-time technical review by the U.S. Commerce Department. "Key recovery" encryption products which enable authorized law enforcement agencies to obtain readable text without the knowledge or cooperation of the end-user may be exported, regardless of key length, after a one-time technical review. Certain non-recovery products of any key length are eligible for export to limited classes of end-users in certain countries, following a one-time technical review and subject to various post-shipment reporting requirements; eligible recipients include subsidiaries of U.S. companies, banks and financial institutions, health and medical organizations, and online merchants. Other non-recovery encryption products may be exported to other countries and end-users under special Encryption Licensing Agreements or individual export licenses which may be issued at the discretion of the U.S. Commerce Department. These regulations may be modified at any time, and there can be no assurance that RSA will be authorized to export encryption products from the United States in the future. As a result, RSA may be at a disadvantage in competing for international sales compared to companies located outside the United States that are not subject to such restrictions. In the fourth quarter of 1998, the Company established a subsidiary in Australia which developed a protocol-level encryption technology known as "SSL" without using any export-controlled U.S.-origin encryption technologies or software and without "technical assistance" from any U.S. persons. Accordingly, the Company obtained a written opinion from the U.S. Commerce Department that this technology is not subject to the jurisdiction of the U.S. export laws. The technology, however, is subject to the export laws of Australia, and the Company has received a one-year license from the Australian Government to export object code versions of the SSL technology to specified countries, including the United States. In order to remain outside of U.S. export control jurisdiction, the Company has implemented policies and procedures to ensure that U.S. personnel working for the Company do not inadvertently provide technical assistance to the Company's Australian subsidiary which is developing future versions of the SSL technology. However, there can be no assurance that the U.S. government will not deem the SSL technology to be subject to U.S. export laws in the future, or that the applicable Australian export restrictions will not be modified in the future, or that the Company will continue to receive the required Australian export authorizations. 22 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk The Company does not use derivative financial instruments. The Company generally places its marketable security investments in high credit quality instruments, primarily U.S. Government and Federal Agency obligations, tax-exempt municipal obligations and corporate obligations with contractual maturities of ten years or less. The Company does not expect any material loss from its marketable security investments and therefore believes that its potential interest rate exposure is not material. The Company also makes strategic equity investments determined by the Board of Directors to be strategically synergistic to the Company. The Company routinely evaluates the realizable value of these investments using qualitative and quantitative factors including discounted cash flow analysis and liquidation value assessments. Based on these evaluations the Company reduced investments by $3.6 million in December 1998. The Company invoices customers primarily in U.S. Dollars and in local currency in those countries in which the Company has branch and subsidiary operations. The Company is exposed to foreign exchange rate fluctuations from when customers are invoiced in local currency until collection occurs. The Company does not enter into foreign currency hedge transactions. Through March 31, 1999, foreign currency fluctuations have not had a material impact on the Company's financial position or results of operation, and therefore the Company believes that its potential foreign currency exchange rate exposure is not material. The forgoing risk management discussion and the effects thereof are forward-looking statements. Actual results in the future may differ materially from these projected results due to actual developments in global financial markets. The analytical methods used by the Company to assess and mitigate risk discussed above should not be considered projections of future events or losses. 21 23 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS On or about December 11, 1998, a purported class action was filed in the United States District Court for the District of Massachusetts on behalf of all purchasers of the Company's Common Stock during the period from and including September 30, 1997 through July 15, 1998: Fitzer v. Security Dynamics Technologies, Inc., Charles R. Stuckey, Jr., D. James Bidzos, Arthur W. Coviello, Jr., John Adams, Marian G. O'Leary and Linda B. Saris, Civil Action No. 98-CV-12496-WGY. The plaintiff subsequently dismissed without prejudice the claims against Ms. Saris. The complaint in the action asserts that the defendants misled the investing public concerning demand for the Company's products, the strength of its technologies, and certain trends in the Company's business. Plaintiffs seek unspecified damages, interest, costs and fees of their attorneys, accountant and experts. No response has been made to the complaint by agreement with the plaintiff. An amended complaint, to which the defendants will respond, has not yet been filed. The Company intends to defend the lawsuit vigorously. Although the amounts claimed may be substantial, the Company cannot predict the ultimate outcome or estimate the potential loss, if any, related to the lawsuit. The Company believes that the disposition of this matter will not have a material adverse effect on the Company's consolidated financial position. However, the adverse resolution of the lawsuit could materially affect the Company's results of operations or liquidity in any one annual or quarterly reporting period. On November 2, 1998 the company commenced litigation in a patent infringement lawsuit filed in the United States District Court for the District of Massachusetts against VASCO Data Security, Inc. ("VASCO"). The suit alleges that VASCO's Digipass token products infringe certain of the Company's patents. The company seeks monetary damages for such infringement and injunctive relief. In connection with this litigation, VASCO has filed counterclaims against the Company seeking a declaratory judgement of noninfringement and invalidation of the Company's patents at issue and alleging that the Company's infringement suit against VASCO represents a breach of contract between the parties. On January 6, 1999, the Company commenced litigation in a patent infringement lawsuit filed in the United States District Court for the District of Massachusetts against VASCO. The suit alleges that VASCO's RSA cards and RSA chips products infringe the RSA patent. The Company seeks monetary damages for such infringement and injunctive relief. In connection with this litigation, VASCO has filed counterclaims against the Company seeking a declaratory judgement of non-infringement and invalidation of the patent at issue, and alleging that the Company's suit against VASCO represents a violation of antitrust laws. On April 6, 1999, the Company announced that it had settled on confidential terms both patent infringement lawsuits against VASCO, including all counterclaims made by VASCO against the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS The Exhibits listed in the Exhibit Index immediately preceding such Exhibits are filed as part of or are included in this Quarterly Report on Form 10-Q. (b) REPORTS ON FORM 8-K: On February 1, 1999, the Company filed a Current Report on Form 8-K, dated January 28, 1999, to report under Item 5 (Other Events), among other things, the Company's financial results for the fourth quarter and year ended December 31, 1998. No financial statements were required to be filed with such report. 22 24 SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SECURITY DYNAMICS TECHNOLOGIES, INC. /s/ MARIAN G. O'LEARY -------------------------------------------- Marian G. O'Leary Senior Vice President, Finance, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer) Dated: May 17, 1999 23 25 EXHIBIT INDEX
ITEM DESCRIPTION - ----- ----------- 10.1 Amendment No. 1 to amended and Restated Employment Agreement, dated as of March 4, 1999, by and between the Registrant and Charles R. Stuckey, Jr. 10.2 Agreement and Release, dated as of February 18, 1999, by and between the Registrant and D. James Bidzos 10.3 Consulting Agreement, dated as of February 18, 1999, by and between the Registrant and D. James Bidzos 10.4 Transition Agreement and Release, dated as of January 22, 1999, by and between the Registrant and Albert E. Sisto 10.5 1994 Stock Option Plan, as amended - 1998 Restatement, as amended, is incorporated herein by reference to Appendix A to the Registrant's Preliminary Schedule 14A filed March 5, 1999 (File No. 000-25120) 10.6 1994 Director Stock Option Plan, as amended, is incorporated herein by reference to Appendix B to the Registrant's Preliminary Schedule 14A filed March 5, 1999 (File No. 000-25120) 11 Computation of Income Per Common and Common Equivalent Share. 27 Financial Data Schedule.
24 EX-10.1 2 AMENDED EMPLOYMENT AGREEMENT W/C.STUCKEY, JR. 1 EXHIBIT 10.1 AMENDMENT NO. 1 TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDMENT NO. 1 TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT (the "Agreement") is made as of the 4th day of March, 1999, by and between Security Dynamics Technologies, Inc., a Delaware corporation ("Employer"), and Charles R. Stuckey, Jr. ("Employee"). WHEREAS, Employer and Employee are parties to an Amended and Restated Employment Agreement, dated as of November 1, 1997 (the "Agreement"); and WHEREAS, Employer and Employee are desirous of continuing Employee's employment with Employer for the period, and on the terms and conditions, set forth in the Agreement, subject to the amendment set forth herein; NOW, THEREFORE, in consideration of the foregoing and intending to be bound, the parties hereby agree that Section 3(a) of the Agreement is amended and restated in its entirety to read as follows: "(a) Employee will occupy the position of Chief Executive Officer of Employer. Employee will also be a member of the Employer's Board of Directors (the "Board of Directors"), subject to the terms of the Employer's Third Restated Certificate of Incorporation as amended from time to time. Any subsequent substantial diminution in the position, office or duties of Employee (other than any such diminution resulting from a Change in Control (as such term is defined in Section 12 hereof)) or material breach by the Employer of its obligations under this Agreement shall be deemed a termination of this Agreement other than "for cause" as defined in Section 9 hereof. Employee will report directly to the Board of Directors and shall have such duties and responsibilities as are set forth in the Employer's Amended and Restated By-Laws, as amended from time to time, which duties and responsibilities shall include, but not be limited to, overall management responsibility for the operations and administration of Employer as well as such other duties and responsibilities, consistent with Employee's position as Chief Executive Officer, as shall be defined by the Board of Directors." Except as amended hereby, the Agreement shall remain unchanged and shall remain in full force and effect. Capitalized terms used herein and not otherwise defined shall have the respective meanings given to them in the Agreement. 2 IN WITNESS WHEREOF, this Amendment No. 1 to Amended and Restated Employment Agreement is executed as of the date first above written. EMPLOYER: SECURITY DYNAMICS TECHNOLOGIES, INC. /s/ Joseph B. Lassiter, III ------------------------------------- Joseph B. Lassiter, III Director and Chairman of the Compensation Committee of the Board of Directors EMPLOYEE: /s/ Charles R. Stuckey, Jr. ------------------------------------- Charles R. Stuckey, Jr. EX-10.2 3 AGREEMENT AND RELEASE W/ D.J. BIDZOS 1 EXHIBIT 10.2 AGREEMENT AND RELEASE AGREEMENT made as of the 18th day of February, 1999, by and between Security Dynamics Technologies, Inc. (the "Company) and D. James Bidzos (the "Employee"). WHEREAS, the parties wish to resolve amicably the Employee's separation from the Company and establish the terms of the Employee's severance agreement; NOW, THEREFORE, in consideration of the promises and conditions set forth herein, the sufficiency of which is hereby acknowledged, the Company and the Employee agree as follows: 1. TERMINATION DATE. The Employee's effective date of termination from the Company is February 18, 1999. 2. MONETARY CONSIDERATION. In return for the execution of this Agreement and Release, the Company Agrees: (a) VESTING OF OPTIONS. To accelerate the vesting of all of the Employee's stock options; inclusive of the grant of 300,000 options made to him July 26, 1996 at a price of $32.275 per share and the grant of 50,000 options on January 6, 1999 at $25.875 per share. (b) REPRICING OF STOCK. In addition to the acceleration of vesting of the option grants, the Board of Directors of the Company has on the date hereof authorized the repricing of these options at the fair market value of Security Dynamics common stock on the date hereof. (c) EXERCISE OF OPTIONS. The Employee will have until September 1, 1999 to 2 exercise fifty (50) percent of these options, and until December 31, 1999 to exercise the remaining fifty (50) percent of these options. (d) BENEFITS. The Employee's accrued unused vacation time through February 18, 1999 has been paid to him by check. The premium for medical and dental benefits will be provided to the Employee pursuant to the Consulting Agreement entered into between the Company and the Employee on February 18, 1999. All other benefits, including but not limited to, life and disability insurance will cease as of February 26, 1999. 3. EMPLOYMENT AGREEMENT. The Employee and the Company hereby acknowledge and agree that: (a) the Employment Agreement dated April 14, 1996 and any amendments to that Agreement have been terminated and are of no further force or effect, and (b) all obligations of the Employee which would otherwise have survived the termination of the Employment Agreement shall be immediately terminated as of the date of this agreement. 4. RELEASE. (a) The Employee hereby fully, forever, irrevocably and unconditionally releases and discharges the Company, its subsidiaries, their officers, directors, stockholders, corporate affiliates, agents and employees from any and all claims, charges, complaints, demands, actions, causes of action, suits, rights, debts, sums of money, costs, accounts, reckonings, covenants, contracts, agreements, promises, doings, omissions, damages, executions, obligations, liabilities, and expenses (including attorney's fees and costs), of every kind and nature which he ever had -2- 3 or now has against the Company, its subsidiaries, their officers, directors, stockholders, corporate affiliates, agents and employees, relating to the Employee's Employment Agreement with the Company, and claims arising out of his employment and/or the termination of his employment, including all employment discrimination claims under Title VII of the Civil Right Act of 1964, 42 U.S.C. ss.2000e ET SEQ., the Age Discrimination in Employment Act, 29 U.S.C. ss.621 ET SEQ., M.G.L. c. 151B, ss.1 ET SEQ., the Americans With Disabilities Act, 29 U.S.C. ss.706 ET SEQ., and the National Labor Relations Act, 29 U.S.C. ss.151 ET SEQ.; damages arising out of all employment discrimination claims; the Massachusetts Fair Employment Practices Act, M.G.L. c.151B ss.1 ET SEQ., all claims under the Massachusetts Civil Rights Act, the Employee Retirement Income Security Act, 29 U.S.C. ss.1001 ET SEQ., the Family and Medical Leave Act, 29 U.S.C. ss.2601 ET SEQ., and California Government Code ss. 19200 ET SEQ.; wrongful discharge claims, breach of contract claims and all other statutory or common law claims and damages. (b) The Company hereby fully, forever, irrevocably and unconditionally releases and discharges the Employee from any and all claims, charges, complaints, demands, actions, causes of action, suits, rights, debts, sums of money, costs, accounts, reckonings, covenants, contracts, agreements, promises, doings, omissions, damages, executions, obligations, liabilities, and expenses (including attorney's fees and costs) of every kind and nature which it ever had or now has against the Employee relating to the Employee's Employment -3- 4 Agreement with the Company, and claims arising out of his employment and/or the termination of his employment, including breach of contract claims and all other statutory or common law claims and damages. 5. REPRESENTATION BY EMPLOYEE. The Employee further represents and warrants that he has not filed any complaints, charges, or claims for relief against the Company, its subsidiaries, its officers, directors, stockholders, corporate affiliates, agents or employees with any local, state or federal court or administrative agency which currently are outstanding. 6. CIVIL CODE. The Employee agrees that this Agreement is intended to apply to claims not known or suspected to exist at the time of the execution of this Agreement. After an opportunity to confer with counsel, the Employee hereby waives all of his rights under ss.1542 of the California Civil Code, which states as follows: A general release does not extend to claims, which a creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. 7. NATURE OF AGREEMENT. The Employee understands and agrees that this Agreement is a separation agreement and does not constitute an admission of liability or wrongdoing on the part of the Company. 8. AMENDMENT. This Agreement shall be binding upon the parties and may not be abandoned, supplemented, changed or modified in any manner, orally or otherwise, except by an instrument in writing of concurrent or subsequent date sighed by a duly authorized representative of the parties hereto. This Agreement -4- 5 is binding upon and shall inure to the benefit of the parties and their respective agents, assigns, heirs, executors, successors and administrators. 9. VALIDITY. Should any provision of this Agreement be declared or be determined by any court of competent jurisdiction to be illegal or invalid, the validity of the remaining parts, terms, or provisions shall not be affected thereby and said illegal and invalid part, term or provision shall be deemed not to be a part of this Agreement. 10. CONFIDENTIALITY. The Employee understands and agrees that the terms and contents of this Agreement, and the contents of the negotiations and discussions resulting in the Agreement, shall be maintained as confidential by the Employee, his agents and representatives, and none of the above shall be disclosed except to the extent required by federal or state law or as otherwise agreed to in writing by the authorized agent of each party. The Employee further agrees that he will not, at any time, reveal to any person or entity any of the trade secrets or confidential information concerning the organization, business or finances of the Company or of any third party which the Company is under an obligation to keep confidential (including but not limited to trade secrets or confidential information respecting inventions, products, designs, methods, know-how, techniques, systems, processes, software programs, works of authorship, customer lists, projects, plans and proposals), and he shall keep secret all matters entrusted to him and shall not use or attempt to use any such information in any manner which may injure or cause loss or may be -5- 6 calculated to injure or cause loss or may be calculated to injure or cause loss, whether directly or indirectly, to the Company. 11. ENTIRE AGREEMENT. This Agreement contains and constitutes the entire understanding and agreement between the parties hereto with respect to this arrangement and cancels all previous oral and written negotiations, agreements, commitments, and writings in connection therewith including the Employee's Employment Agreement with the Company. 12. APPLICABLE LAW. This Agreement shall be governed by the laws of the Commonwealth of Massachusetts. 13. VOLUNTARY ASSENT. The Employee affirms that no other promises or agreements of any kind have been made to or with him by any person or entity whatsoever to cause him to sign this Agreement, and that he fully understands the meaning and intent of this Agreement. The Employee states and represents that he has had an opportunity to fully discuss and review the terms of this Agreement with an attorney. The Employee further states and represents that he has carefully read this Agreement and understands the contents herein, freely and voluntarily assents to all of the terms and conditions hereof, and signs his name of his own free act. 14. ACKNOWLEDGMENTS. The Employee acknowledges that he has been given twenty-one (21) days to consider this Agreement and that the Company advised him to consult with any attorney of his own choosing prior to signing this Agreement. The Employee may revoke this Agreement for a period of seven (7) days after the -6- 7 execution of this Agreement, and the Agreement shall not be effective or enforceable until the expiration of this seven (7) day revocation period. IN WITNESS WHEREOF, all parties have set their hand and seal to this Agreement as of the date written above. SECURITY DYNAMICS TECHNOLOGIES, INC. By: /s/ Arthur W. Coviello, Jr. /s/ D. James Bidzos ------------------------------- ----------------------------------- Title: President D. James Bidzos ---------------------------- -7- EX-10.3 4 CONSULTING AGREEMENT W/ D.J. BIDZOS 1 EXHIBIT 10.3 CONSULTING AGREEMENT The parties to this Agreement are Security Dynamics Technologies, Inc. (the "Company"), having a principal business address at 36 Crosby Drive, Bedford, Massachusetts 01730, and Demetrios James Bidzos (the "Consultant"), having an address at 361 Ridgewood Ave., Mill Valley, CA 94941. The Company desires that the Consultant be available to the Company for consultation and advice. It is therefore agreed as follows: 1. SERVICES. (a) The Consultant shall act as a consultant to the Company for an initial period commencing on February 19, 1999 and terminating on February 16, 2001, unless terminated by the Company or by the Consultant on at least ninety (90) days written notice. During the term of the consultation, the Consultant shall be deemed an independent contractor and not an employee of the Company. (b) The Consultant shall perform the services described in EXHIBIT A attached to this Agreement (the "Services"). The Services shall be performed at such times and places as the Company reasonably requests. 2. COMPENSATION. As full consideration for Consultant's performance of the Services, the Consultant shall be entitled to compensation at the rate of Ten Thousand Dollars ($10,000) per month, plus an amount equal to the Consultant's monthly medical insurance premium during the term of this Agreement, payable in accordance with the Company's regular policy. The Company will not withhold any taxes from amounts paid to Consultant hereunder, and Consultant remains solely liable to pay any taxes due to any taxing authority. In addition, the Company will pay expenses incurred by Consultant in connection with the performance of the Services upon presentation by Consultant of appropriate documentation covering those expenses. 3. FULL BENEFIT OF SERVICES. It is the intent of the Company to obtain from the Consultant, and the intent of the Consultant to deliver to the Company, the full benefit of the Consultant's Services. Therefore, to protect and secure to the Company its competitive market position, goodwill, know-how, trade secrets and customer relationships, the Consultant agrees as follows: 2 (a) The Consultant hereby assigns, transfers and grants to the Company all rights and interests in and to any and all materials, developments, know-how, trade secrets, customer relationships, and other information which may be made, developed, conceived or discovered by or disclosed to the Consultant in the course of performing the Services. The Consultant shall assist the Company in all respects in obtaining, maintaining and securing any patent, copyright and/or other statutory or non-statutory protection which may be obtained for the foregoing as the Company may request and hereby assigns to the Company all rights and interests in and to any such patents, copyrights and other protection. (b) The physical embodiment of the Consultant's Services, including, without limitation, any writings, reports, programs, devices and drawings, shall at all times be the sole property of the Company. The Consultant shall deliver the originals and all copies of the same to the Company upon the termination of this Agreement. Upon such return, any computer entries, database entries or other recordations of the physical embodiment of the Consultant's Services which are not capable of being delivered to the Company shall be destroyed; and Consultant shall certify to the Company that Consultant has retained no such copies. 4. CONFIDENTIALITY. (a) The Consultant shall not, either during the consultancy or at any time thereafter, use or disclose to anyone (except as authorized in the regular course of the Company's business) any of the Company's Confidential Information (as described below), except that this prohibition shall not apply to any of the Company's Confidential Information which (i) was in Consultant's possession or was known to Consultant prior to receipt from the Company, as evidenced by written documentation, (ii) is or becomes public knowledge without Consultant's fault, or (iii) is or becomes lawfully available to Consultant from a source other than the Company. (b) As used in this agreement the term "Confidential Information" includes, but is not limited to: (i) the Company's proprietary software products and algorithms, (ii) the Company's business methods and practices, (iii) the names of the Company's customers and the nature of the Company's relationship with them, (iv) confidential, proprietary or trade secret information submitted by the Company's suppliers or coventurers to the Company for study, evaluation or use and (v) other information relating to the Company that is not generally known to the public (including information about the Company's personnel, products, services, or future business plans). 5. INJUNCTIVE RELIEF. The Consultant acknowledges that any remedy at law for breach of Consultant's covenants under Section 3 and 4 above will be inadequate and, accordingly, in the event of any breach or threatened breach by the -2- 3 Consultant of the provisions of Sections 3 or 4, the Company shall be entitled, in addition to all other remedies, to injunctive relief restraining any such breach, without any bond or other security being required. 6. NO ASSIGNMENT. The parties acknowledge that this Agreement contemplates the personal services of the Consultant and, accordingly, neither this Agreement nor any obligation of the Consultant may be assigned, transferred or otherwise delegated by the Consultant without the prior written consent of the Company. 7. MISCELLANEOUS. (a) Any notice or other communication under this Agreement shall be in writing and shall be considered given when delivered personally or mailed by registered mail, return receipt requested, to the parties at their respective addresses set forth above (or at such other address as a party may specify by notice to the other). A copy of any notice to the Company should also be sent to the Company's legal department at the same address. (b) This Agreement contains, and is intended as, a complete statement of all of the terms of the arrangement between the parties with respect to its subject matter, supersedes all previous agreements and understanding with respect to those matters, and cannot be changed or terminated except by an agreement in writing signed by the parties. (c) This Agreement shall be governed by and construed in accordance with the law of the Commonwealth of Massachusetts applicable to agreements made and to be performed in Massachusetts. (d) The failure of a party to insist upon strict adherence to any term of the Agreement on any occasion shall not be considered a waiver or deprive that party of the right thereafter to insist upon strict adherence to that term or any other term of this Agreement. Any waiver must be in writing. The parties have executed this Agreement as an agreement under seal as of the date set forth below. SECURITY DYNAMICS TECHNOLOGIES, INC. By: /s/ Arthur W. Coviello, Jr. /s/ D. James Bidzos ------------------------------- ----------------------------------- Title: President D. James Bidzos ---------------------------- -3- 4 EXHIBIT A SERVICES: Consultant will serve as Vice Chairman of the Company's Board of Directors. In such capacity, Consultant will assist the Company in matters relating to business and product strategy, corporate development matters, and the RSA conference. EX-10.4 5 TRANSITION AGREEMENT AND RELEASE RE: A.E. SISTO 1 EXHIBIT 10.4 TRANSITION AGREEMENT AND RELEASE This TRANSITION AGREEMENT AND RELEASE (the "Agreement") is made as of the 22nd day of January, 1999, by and between Security Dynamics Technologies, Inc. (the "Company) and Albert E. Sisto (the "Employee"). WHEREAS, the parties wish to resolve amicably the Employee's transition from active employment with the Company to inactive status; NOW, THEREFORE, in consideration of the promises and conditions set forth herein, the sufficiency of which is hereby acknowledged, the Company and the Employee agree as follows: 1. TRANSITION DATE. The Employee shall become an inactive employee on January 29, 1999 thereafter this date shall be referred to as the "Transition Date"). Until the Transition Date, the Employee will devote his entire business time, attention and energies to the business and interests of the Company. 2. CONSIDERATION. In consideration for the execution of this Agreement, during the period commencing on the Transition Date and, unless extended pursuant to the terms of Paragraph 2(d) of this Agreement, terminating on March 31, 2000 (inclusive of 160 hours or 4 weeks vacation time accrued) (the "Wind-down Period"): (a) The Company will pay the Employee his base salary in effect on the Transition Date, less all applicable state and federal taxes, and 401(k) contributions, on the same schedule as the Employee's salary is currently paid; (b) The Company will provide the Employee with medical, dental and other 2 insurance benefits on the same cost-sharing basis as the Company provides such benefits to its other employees; PROVIDED HOWEVER, that in the event that the Employee accepts a new offer of employment during the Wind-down Period, the Employee will give the Company notice of this event, and the Company shall have no further obligation to provide Employee with such benefits as of the date on which the Employee becomes eligible to receive benefits coverage from his new employer; and (c) The Employee's stock options dated November 12, 1997, June 26, 1998 and July 16, 1998 will continue to vest in accordance with the schedules set forth in Attachments A, B and C and under the terms of their repricing effective August 12, 1999 (see Attachment D). The Employee acknowledges and agrees that the arrangement described in this paragraph 2 (c) may result in the conversion of Employee's incentive stock options to nonqualified stock options, and the Company makes no representations regarding any tax treatment of Employee's stock options as a result of the Employee's execution of this Agreement. These options will expire on the 91st day following termination of the Wind-down Period. 3. EFFECT ON EMPLOYEE'S EMPLOYMENT AGREEMENT. Upon execution of this Agreement, the Employment Agreement dated September 4, 1998 between the Employee and the Company shall be terminated and of no further force and effect. 4. RELEASE. The Employee hereby fully, forever, irrevocably and unconditionally releases and discharges the Company, its officers, directors, stockholders, corporate -2- 3 affiliates, agents and employees from any and all claims, charges, complaints, demands, actions, causes of action, suits, rights, debts, sums of money, costs, accounts, reckonings, covenants, contracts, agreements, promises, doings, omissions, damages, executions, obligations, liabilities, and expenses (including attorney's fees and costs), of every kind and nature which he ever had or now has against the Company, its officers, directors, stockholders, corporate affiliates, agents and employees, including, but not limited to, all claims relating to the Employment Agreement, and claims arising out of his employment; all employment discrimination claims under Title VII of the Civil Right Act of 1964, 42 U.S.C. ss.2000e ET SEQ., the Age Discrimination in Employment Act, 29 U.S.C. ss.621 ET SEQ., M.G.L. c. 151B, ss.1 ET SEQ., the Americans With Disabilities Act, 29 U.S.C. ss.706 ET SEQ., and the National Labor Relations Act, 29 U.S.C. ss.151 ET SEQ.; damages arising out of all employment discrimination claims; the Massachusetts Fair Employment Practices Act, M.G.L. c.151B ss.1 ET SEQ., all claims under the Massachusetts Civil Rights Act, the Employee Retirement Income Security Act, 29 U.S.C. ss.1001 ET SEQ., the Family and Medical Leave Act, 29 U.S.C. ss.2601 ET SEQ., and California Government Code ss. 19200 ET SEQ.; wrongful discharge claims, breach of contract claims and all other statutory or common law claims and damages. 5. REPRESENTATION BY EMPLOYEE. The Employee further represents and warrants that he has not filed any complaints, charges, or claims for relief against the Company, its officers, directors, stockholders, corporate affiliates, agents or employees with any local, state or federal court or administrative agency which currently are outstanding. 6. CIVIL CODE. The Employee agrees that this Agreement is intended to apply to -3- 4 claims not known or suspected to exist at the time of the execution of this Agreement. After an opportunity to confer with counsel, the Employee hereby waives all of his rights under ss. 1542 of the California Civil Code, which states as follows: A general release does not extend to claims, which a creditor does not know or suspect to exist in his favor at the time of executing the release, which if known by him must have materially affected his settlement with the debtor. 7. NO REINSTATEMENT. The Employee understands and agrees that as a condition for payment to him of the above-described sums, he shall not be entitled to any employment with the Company or with any of its corporate affiliates at any time in the future, and he will not apply for employment with the Company or with any of its corporate affiliates. 8. NATURE OF AGREEMENT. The Employee understands and agrees that this Agreement is a transition agreement and does not constitute an admission of liability or wrongdoing on the part of the Company. 9. AMENDMENT. This Agreement shall be binding upon the parties and may not be abandoned, supplemented, changed or modified in any manner, orally or otherwise, except by an instrument in writing of concurrent or subsequent date sighed by a duly authorized representative of the parties hereto. This Agreement is binding upon and shall inure to the benefit of the parties and their respective agents, assigns, heirs, executors, successors and administrators. 10. VALIDITY. Should any provision of this Agreement be declared or be determined by any court of competent jurisdiction to be illegal or invalid, the validity of the remaining parts, terms, or provisions shall not be affected thereby and said illegal and -4- 5 invalid part, term or provision shall be deemed not to be a part of this Agreement. 11. CONFIDENTIALITY. The Employee understands and agrees that the terms and contents of this Agreement, and the contents of the negotiations and discussions resulting in the Agreement, shall be maintained as confidential by the Employee, his agents and representatives, and none of the above shall be disclosed except to the extent required by federal or state law or as otherwise agreed to in writing by the authorized agent of each party. 12. ENTIRE AGREEMENT. This Agreement contains and constitutes the entire understanding and agreement between the parties hereto with respect to this arrangement and cancels all previous oral and written negotiations, agreements, commitments, and writings in connection therewith including the Employment Agreement; PROVIDED that the Employee acknowledges that he has continuing obligations to the Company under his "Employee Nondisclosure and Developments Agreement" (the "Nondisclosure Agreement"), a copy of which is attached as EXHIBIT A. Any violation by the Employee of this Agreement or the Nondisclosure Agreement or any other agreement shall entitle the Company to cease salary and benefits continuation and recoup any amounts paid hereunder. In addition, Employee's stock options shall cease to vest as of the date of any such violation. 13. APPLICABLE LAW. This Agreement shall be governed by the laws of the Commonwealth of Massachusetts. 14. VOLUNTARY ASSENT. The Employee affirms that no other promises or agreements of any kind have been made to or with him by any person or entity whatsoever to cause -5- 6 him to sign this Agreement, and that he fully understands the meaning and intent of this Agreement. The Employee states and represents that he has had an opportunity to fully discuss and review the terms of this Agreement with an attorney. The Employee further states and represents that he has carefully read this Agreement and understands the contents herein, freely and voluntarily assents to all of the terms and conditions hereof, and signs his name of his own free act. 15. ACKNOWLEDGMENTS. The Employee acknowledges that he has been given twenty-one (21) days to consider this Agreement and that the Company advised him to consult with any attorney of his own choosing prior to signing this Agreement. The Employee may revoke this Agreement for a period of seven (7) days after the execution of this Agreement, and the Agreement shall not be effective or enforceable until the expiration of this seven (7) day revocation period. IN WITNESS WHEREOF, all parties have set their hand and seal to this Agreement as of the date written above. By: /s/ Arthur W. Coviello, Jr. Date: -------------------------------- ----------------------------- By: /s/ D. James Bidzos Date: -------------------------------- ----------------------------- -6- EX-11 6 COMPUTATION OF EARNINGS PER SHARE 1 EXHIBIT 11 SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES COMPUTATION OF INCOME PER COMMON AND COMMON EQUIVALENT SHARE THREE MONTHS ENDED MARCH 31, 1998 AND 1999 (IN THOUSANDS, EXCEPT PER SHARE DATA)
1998 1999 --------- --------- Basic earnings per share: Net income per common share ........................... $ 0.07 $ 1.03 ========= ========= Weighted average number of shares outstanding ......... 40,665 39,737 ========= ========= Diluted earnings per share: Net income per common share ........................... $ 0.07 $ 0.97 ========= ========= Shares: Weighted average number of shares outstanding ......... 40,665 39,737 ========= ========= Effect of dilutive options ............................ 1,486 2,314 ========= ========= Adjusted weighted average number of shares outstanding .. 42,151 42,051 ========= =========
- ------------------ EX-27 7 FINANCIAL DATA SCHEDULE
5 1,000 US DOLLARS 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 1 97,262 111,482 35,610 703 4,790 256,809 47,202 (16,290) 321,052 65,151 0 0 0 418 253,029 321,052 48,672 48,672 11,437 32,105 6,550 0 0 74,754 33,832 40,989 0 0 0 40,989 1.03 0.97 OTHER EXPENSES REFERS TO EXPENSES OF $6,550 INCURRED IN CONJUNCTION WITH CERTAIN EXIT COSTS INCURRED IN 1999.
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