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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
/x/ Quarterly report pursuant to Section 13 of 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended June 30, 1996
OR
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number: 0-25120
SECURITY DYNAMICS TECHNOLOGIES, INC.
(Exact name of Registrant as Specified in Its Charter)
DELAWARE 04-2916506
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
20 CROSBY DRIVE
BEDFORD, MA 01730
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (617) 687-7000
ONE ALEWIFE CENTER, CAMBRIDGE, MA 02140
(617) 547-7820
(Former Address, changed since last Report)
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 July 31, 1996, there were 17,064,939 shares of the Registrant's Common
Stock, $.01 par value per share, outstanding.
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SECURITY DYNAMICS TECHNOLOGIES, INC.
FORM 10-Q
FOR THE THREE MONTHS ENDED JUNE 30, 1996
TABLE OF CONTENTS
Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of June 30, 1996 and
December 31, 1995 3
Condensed Consolidated Statements of Income for the three months
and six months ended June 30, 1996 and June 30, 1995 4
Condensed Consolidated Statements of Cash Flows for the six
months ended June 30, 1996 and June 30, 1995 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security-Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
June 30, 1996 December 31, 1995
------------- -----------------
ASSETS
Current assets
Cash and equivalents $ 5,639 $ 44,583
Marketable securities 83,466 44,957
Accounts receivable (less allowance for doubtful accounts
of $257 in 1996 and $375 in 1995) 8,984 6,219
Inventory 2,365 1,445
Prepaid expenses and other 2,012 758
Deferred taxes 528 476
--------- ---------
Total current assets 102,994 98,438
Property and equipment - net 3,835 2,027
Purchased technology 139 208
Investment 686 510
Deferred taxes 285 229
Other 485 145
--------- ---------
Total $ 108,424 $ 101,557
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,661 $ 1,347
Accrued payroll and related benefits 1,949 2,210
Accrued expenses and other 874 1,176
Income taxes payable -- 190
Deferred revenue 1,993 1,614
--------- ---------
Total current liabilities 7,477 6,537
Stockholders' equity:
Common stock, $.01 par value; authorized 30,000,000 shares; issued,
13,666,478 and 13,452,851 shares in 1996 and 1995; outstanding,
13,666,330 and
13,452,703 shares in 1996 and 1995 137 135
Additional paid-in capital 91,609 90,968
Retained earnings 9,379 3,943
Deferred stock compensation (129) (170)
Treasury stock, common, at cost,
148 shares in 1996 and 1995 -- --
Cumulative translation adjustment (17) 41
Unrealized (loss) gain on marketable securities - net (32) 103
--------- ---------
Total stockholders' equity 100,947 95,020
Total $ 108,424 $ 101,557
========= =========
See notes to condensed consolidated financial statements
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SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- -----------------------
1996 1995 1996 1995
-------- -------- ---------- ---------
Revenue $14,070 $ 8,174 $26,240 $14,417
Cost of revenue 3,260 1,792 6,172 3,009
------- ------- ------- -------
Gross profit 10,810 6,382 20,068 11,408
------- ------- ------- -------
Costs and expenses:
Research and development 1,708 762 3,196 1,407
Marketing and selling 4,190 2,666 7,760 4,932
General and administrative 1,507 947 2,917 1,629
------- ------- ------- -------
Total 7,405 4,375 13,873 7,968
------- ------- ------- -------
Income from operations 3,405 2,007 6,195 3,440
Interest income 1,138 406 2,365 790
------- ------- ------- -------
Income before provision for income taxes 4,543 2,413 8,560 4,230
Provision for income taxes 1,658 928 3,124 1,628
------- ------- ------- -------
Net income $ 2,885 $ 1,485 $ 5,436 $ 2,602
======= ======= ======= =======
Net income per common and
common equivalent share $ .20 $ .12 $ .38 $ .21
======= ======= ======= =======
Weighted average number of common and
common equivalent shares outstanding 14,435 12,528 14,365 12,518
======= ======= ======= =======
See notes to condensed consolidated financial statements
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SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
Six Months Ended June 30,
-----------------------------------------
1996 1995
-------------------- --------------------
Cash flows from operating activities:
Net income $ 5,436 $ 2,602
Adjustments to reconcile net income to net cash provided by operating
activities:
Deferred taxes (108) (9)
Amortization of purchased technology and capitalized software 69 19
costs
Depreciation 535 189
Amortization of deferred stock compensation 41 34
Allowance for notes receivable -- 200
Stock option compensation 108 --
Increase (decrease) in cash from:
Accounts receivable (2,765) (1,200)
Inventory (920) (589)
Prepaid expenses and other (1,254) (299)
Accounts payable 1,314 (469)
Accrued payroll and related benefits (261) 249
Accrued expenses and other (302) (211)
Income taxes payable (190) 448
Deferred revenue 379 389
-------- --------
Net cash provided by
operating activities 2,082 1,353
-------- --------
Cash flows from investing activities:
Purchase of marketable securities (75,052) (17,897)
Maturities of marketable securities 36,382 3,350
Expenditures for property and equipment (2,343) (581)
Capitalized software costs -- (41)
Investment (176) (510)
Notes receivable -- (251)
Other assets (340) (15)
-------- --------
Net cash used for investing
activities (41,529) (15,945)
-------- --------
Cash flows from financing activities:
Proceeds from sale of common stock 535 3,826
-------- --------
Net cash provided by financing
activities 535 3,826
-------- --------
Effects of exchange rate changes on cash and equivalents (32) 45
-------- --------
Net (decrease) in cash and equivalents (38,944) (10,721)
Cash and equivalents, beginning of period 44,583 17,517
-------- --------
Cash and equivalents, end of period $ 5,639 $ 6,796
======== ========
See notes to condensed consolidated financial statements
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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
have been prepared by Security Dynamics Technologies, Inc. (the
"Company") 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 footnotes 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, 1995.
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 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.
In October 1995, the Board of Directors declared a two-for-one split of
the Company's common stock effected in the form of a stock dividend.
All share and per share data have been adjusted to reflect the
two-for-one split of the Company's common stock.
2. Income Per Common Share
Income per common share is computed using the weighted average number
of common and common equivalent shares outstanding during each period
presented.
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.
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4. Investments
On April 17, 1995 and February 20, 1996, the Company purchased 425,000
shares of Series A and 72,091 shares of Series B Convertible Preferred
Stock of VeriSign, Inc. ("VSI") of Redwood City, California for an
aggregate purchase price of $686. VSI was organized to provide digital
certificates and related services that use public-key cryptography to
ensure essential privacy and authentication features. The Company's
investment in VSI represents a minority interest of less than 10% of
VSI's capitalization.
In August 1995, the Company acquired the SecurADM technology of
Infratel S.A.R.L., one of its original equipment manufacturers. The
Company considered the acquisition cost to consist of cash
consideration of $624 plus $302 of notes receivable. The Company has
allocated the acquisition cost to purchased technology ($278) which is
being amortized over two years and to in-process research and
development ($648) which was expensed in the third quarter of 1995.
5. Accounting for Stock Options
In October 1995, the Financial Accounting Board issued SFAS 123,
"Accounting for Stock-Based Compensation," which became effective for
the Company beginning January 1, 1996. SFAS No. 123 requires expanded
disclosures of stock-based compensation arrangements with employees and
encourages (but does not require) compensation cost to be measured
based on fair value of the equity instrument awarded. Companies are
permitted, however, to continue to apply APB No. 25, which recognizes
compensation cost based on the intrinsic value of the equity instrument
awarded. The Company will continue to apply APB Opinion No. 25 to its
stock based compensation awards to employees and will disclose the
required pro forma effect on net income and earnings per share in the
annual consolidated financial statements for 1996.
On April 1, 1996 and April 24, 1996, options to purchase 100,000 shares
and 19,450 shares were granted at exercise prices of $48.60 and $76.40,
respectively, subject to stockholder approval of an amendment to the
Company's 1994 Plan increasing the number of shares available for
grant to 2,410,000 shares. On May 22, 1996, the stockholders approved
the amendment to the 1994 Plan.
For options granted prior to April 1, 1996, because approval of the
stockholders was required and considered perfunctory, the Company
measured compensation expense on the date of grant by the Board of
Directors or the Compensation Committee of the Board of Directors. As a
result of discussions with the staff of the Securities and Exchange
Commission, the Company changed its accounting policy on options
requiring stockholder approval to measure compensation expense on the
approval date. This change resulted in an aggregate compensation
expense of approximately $4,500 relating to the April 1, 1996 and April
24, 1996 option grants, which the Company will recognize over the
remainder of the four-year vesting period of the options from May 22,
1996. The effect of this change was to reduce income from operations
by $108 in the second quarter of 1996. The Company does not plan to
grant options in the future that are subject to approval by the
stockholders.
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6. Subsequent Events
On July 26, 1996 at a Special Meeting of Stockholders of the Company,
the stockholders approved an amendment to the Company's Third Restated
Certificate of Incorporation increasing the authorized number of
shares of Common Stock from 30,000,000 to 80,000,000 shares.
On July 26, 1996, pursuant to a merger agreement (the "Agreement")
dated as of April 14, 1996, the Company acquired RSA Data Security,
Inc. ("RSA"), a Redwood City, California vendor of encryption software,
for approximately 3.3 million shares of its common stock. The Company
is also reserving for issuance approximately 700,000 shares of its
common stock issuable upon exercise of the outstanding options of RSA.
The transaction will be accounted for as a pooling of interests.
The following Unaudited Pro Forma Combined Financial Data give effect
to the acquisition of RSA as a pooling of interests. For the purposes
of the pro forma combined financial data, the Company's financial data
for the three months and six months ended June 30, 1996 and for the
three months and six months ended June 30, 1995 have been combined
with RSA's financial data for the same periods.
The pro forma information is presented for illustrative purposes only
and is not necessarily indicative of the operating results or financial
position that would have occurred if the acquisition of RSA had been
consumated or of future operating results or financial position of
the combined companies.
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(In thousands, except per share data)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- --------------------------
1996 1995 1996 1995
-------- -------- ---------- ---------
Revenue $17,422 $10,079 $32,284 $16,909
Net income 2,885 523 5,052 378
Net income per common and common equivalent share $ .16 $ .03 $ .28 $ .02
======= ======= ======= =======
Weighted average number of common and
common equivalent shares outstanding 18,302 15,642 18,199 15,613
======= ======= ======= =======
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(In thousands, except share and per share data)
OVERVIEW
This Quarterly Report on Form 10-Q contains forward-looking statements. 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."
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 and six months ended June 30, 1996 and 1995.
Percentage of Total Period-to-Period Percentage of Total Period-to-Period
Revenue Change Revenue Change
------- ------ ------- ------
Three Months Ended June 30 Six Months Ended June 30
----------------------------------------------- ------------------------------------------------
1996 1995 1996 1995
---- ---- ---- ----
Revenue 100.0 % 100.0 % 72.1 % 100.0 % 100.0 % 82.0 %
Cost of revenue 23.2 21.9 82.0 23.5 20.9 105.1
-------- --------- --------- -------
Gross margin 76.8 78.1 69.4 76.5 79.1 75.9
-------- --------- --------- -------
Costs and expenses:
Research and development 12.1 9.3 124.2 12.2 9.8 127.2
Marketing and selling 29.8 32.6 57.2 29.6 34.2 57.3
General and administrative 10.7 11.6 59.1 11.1 11.3 79.1
-------- --------- --------- -------
Total 52.6 53.5 69.3 52.9 55.3 74.1
-------- --------- --------- -------
Income from operations 24.2 24.6 69.6 23.6 23.8 80.1
Interest income 8.1 5.0 180.3 9.0 5.5 199.4
-------- --------- --------- -------
Income before provision for
income taxes 32.3 29.6 88.2 32.6 29.3 102.4
Provision for income taxes 11.8 11.4 78.7 11.9 11.3 91.9
-------- --------- --------- -------
Net income 20.5 % 18.2 % 94.2 % 20.7 % 18.0 % 108.9 %
======== ======== ======== =======
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REVENUE
The Company's revenue is derived principally from the sales of SecurID tokens,
software license fees from ACE/Server and ACM software products, sales of ACM
hardware products and charges for maintenance services.
Total revenue increased 72% in the second quarter of 1996 to $14,070 from $8,174
in the second quarter of 1995. This increase in revenue reflected the increase
in unit sales of all of the Company's products to existing and new customers,
except for a decrease in the sale of ACM/100 products. Average selling prices of
the Company's products also increased (except the average selling price of the
Company's ACM/400 and ACM/1600 products). Approximately 35% and 10% of the
increase in revenue was attributable to the increase in unit sales and the
average prices of SecurID tokens, respectively. Approximately 37% of the
increase in revenue was attributable to increases in the sale of the Company's
software (ACE/Server and ACM software products). A further 6% of the increase in
revenue in the second quarter of 1996 was attributable to an increase in
maintenance revenue over the second quarter of 1995. The Company believes that
the increase in unit sales was attributable in part to continued levels of
growth and refinement in the information security market, with the Internet and
corporate intranets continuing to play crucial roles in developing new
opportunities for the Company's business. Average prices change generally due to
the sales product mix and number of user licenses sold rather than changes in
the Company's price list.
International revenue (excluding Canada and Latin America) increased to $3,416
in the second quarter of 1996 from $1,146 in the second quarter of 1995 and
accounted for 24% and 14% of total revenue in the second quarters of 1996 and
1995, respectively. This increase in international revenue was primarily
attributable to the continuing expansion of the Company's international direct
sales force and increased market penetration of the Company's products in
foreign markets.
Total revenue increased 82% in the first six months of 1996 to $26,240 from
$14,417 in the first six months of 1995. This increase in revenue reflected
increases in unit sales of all of the Company's products (other than the
Company's ACM/100 hardware product). Approximately 44% and 6% of the increase in
revenue was attributable to the increase in unit sales and the average prices of
SecurID tokens, respectively. Approximately 34% of the increase in revenue was
attributable to the increases in sales of the Company's software (ACE/Server and
ACM software products). Approximately 6% of the increase in revenues was
attributable to an increase in the unit sales of ACM/1600's and a further 6% of
the increase in revenue was attributable to higher maintenance revenues.
International revenue (excluding Canada and Latin America) increased to $5,591
in the first six months of 1996 from $2,135 in the first six months of 1995 and
accounted for 21% and 15% of total revenue in the first six months of 1996 and
1995, respectively. This increase in international revenue was primarily
attributable to the expansion of the Company's international direct sales force
and increased market penetration in foreign markets.
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COST OF REVENUE AND GROSS PROFIT
The Company's cost of revenue consists primarily of costs associated with the
manufacture and delivery of the Company's SecurID tokens and hardware products
from the Company's assembly contractors. Royalty costs, customer support costs
and production costs, which include labor costs associated with the programming
of SecurID tokens, inspection and quality control functions and shipping are
also included in cost of revenue.
The Company's gross profit increased 69% in the second quarter of 1996 to
$10,810, or 76.8% of revenue, from $6,382, or 78.1% of revenue, in the second
quarter of 1995. Approximately 51% of the increase in gross profit was
attributable to an increase in the unit sales and gross profit from the sale of
SecurID tokens. In addition, approximately 40% of the increase in gross profit
was attributable to an increase in the sales of the Company's ACE/Server
software and software product upgrades. Gross profit as a percentage of revenue
declined due to the continuing development of the customer support
infrastructure and royalty expenses related to the Company's ACE/Server
software.
The Company's gross profit increased 76% in the first six months of 1996 to
$20,068, or 76.5% of revenue, from $11,408, or 79.1% of revenue, in the first
six months of 1995. Approximately 55% of the increase in gross profit was
attributable to an increase in the unit sales and gross profit from the sale of
SecurID tokens. Software revenue as a percentage of total revenue in the first
six months of 1996 increased to 28% of revenue from 22% of revenue in the first
six months of 1995. These factors, which contributed to an improvement in the
gross margin in the first six months of 1996, were partially offset by increases
in production costs associated with the development of the Company's quality
management programs, royalties and the expansion of the Company's customer
support infrastructure.
In the future, gross margin may continue to be affected by several factors,
including changes in product mix and distribution channels, price reductions
(resulting from volume discounts or otherwise), competition, increase in the
cost of revenue (including increases in material costs associated with the
manufacture of SecurID tokens and hardware products) and other factors.
RESEARCH AND DEVELOPMENT
Research and development expenses consist primarily of personnel costs as well
as fees for development services provided by consultants.
Research and development expense increased 124% in the second quarter of 1996 to
$1,708 from $762 in the second quarter of 1995, and increased as a percentage of
revenue to 12.1% from 9.3%. Approximately 38% of the increase in research and
development expenses in the first quarter of 1996 resulted from employment of
additional staff and approximately 29% of the increase was attributable to
increases in consulting expenses to develop enhancements to the Company's
product lines, primarily the Company's ACE/Server software line. Research and
development expenses also increased due to a general increase in investment in
new computer equipment resulting in higher depreciation charges and maintenance
fees.
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Research and development expense increased 127% in the first six months of 1996
to $3,196 from $1,407 in the first six months of 1995, and increased as a
percentage of revenue to 12.2% from 9.8%. Approximately 38% of the increase in
research and development expenses in the first six months of 1996 resulted from
employment of additional staff and approximately 32% of the increase was
attributable to increases in consulting expenses to develop enhancements to the
Company's product lines, primarily the Company's ACE/Server software line.
Research and development expenses also increased due to continuing investment in
new computer equipment resulting in higher depreciation charges and maintenance
fees.
MARKETING AND SELLING
Marketing and selling expenses consist principally of salaries, commissions and
travel expenses of direct sales and marketing personnel and costs associated
with marketing programs.
Marketing and selling expenses increased 57% in the second quarter of 1996 to
$4,190 from $2,666 in the second quarter of 1995, but decreased as a percentage
of revenue to 29.8% from 32.6%. Approximately 42% of the increase in marketing
and selling expenses was attributable to the employment of additional staff.
Approximately 25% of the increase in marketing and selling expenses was
attributable to the increase in sales commissions on products sold by the
Company's sales force and results from the increase in revenue. Approximately 5%
of the increase in marketing and selling expenses resulted from an expansion of
the Company's general marketing programs, such as trade show and seminar
activity, direct mailing and public relations campaigns.
Marketing and selling expenses increased 57% in the first six months of 1996 to
$7,760 from $4,932 in the first six months of 1995, but decreased as a
percentage of revenue to 29.6% from 34.2%. Approximately 44% of the increase in
marketing and selling expenses was attributable to the employment of additional
staff. Approximately 24% of the increase in marketing and selling expenses was
attributable to the increase in sales commissions on products sold by the
Company's sales force and results from the increase in revenue. Approximately 6%
of the increase in marketing and selling expenses resulted from an expansion of
the Company's general marketing programs, such as trade show and seminar
activity, direct mailing and public relations campaigns.
In addition, international sales expenses increased due to the continuing
expansion of the Company's United Kingdom, German, French and Pacific/Asian
sales offices and the opening of a sales office in Norway in January of 1996.
GENERAL AND ADMINISTRATIVE
General and administrative expenses consist primarily of personnel costs for
administration, finance, human resources and general management as well as legal
and auditing expenses.
General and administrative expenses increased 59% in the second quarter of 1996
to $1,507, or 10.7% of revenue, from $947, or 11.6% of revenue, in the second
quarter of 1995. Approximately 52% of the increase in general and administrative
expenses was due to the growth in the Company's staff needed to support
increased levels of operation. Approximately 24% of the increase was
attributable to increased amortization of leasehold improvements resulting from
the
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Company's decision to relocate its corporate offices to Bedford, Massachusetts,
which took place on August 2, 1996.
General and administrative expenses increased 79% in the first six months of
1996 to $2,917, or 11.1% of revenue, from $1,629, or 11.3% of revenue, in the
first six months of 1995. Approximately 46% of the increase in general and
administrative expenses was due to the growth in the Company's staff needed to
support increased levels of operation. Approximately 25% of the increase was
attributable to increased amortization of leasehold improvements resulting from
the Company's aforementioned decision to relocate its Corporate headquarters.
INTEREST INCOME
Interest income consists of interest earned on the Company's cash balances and
marketable securities.
Interest income increased 180% to $1,138 in the second quarter of 1996 from $406
in the second quarter of 1995. Interest income increased to $2,365 in the first
six months of 1996 from $790 in the first six months of 1995. These increases
were due to higher average daily balances of invested cash resulting from the
Company's follow-on public offering in November 1995.
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $1,658 in the second quarter of 1996
from $928 in the second quarter of 1995, and the provision for income taxes
increased to $3,124 in the first six months of 1996 from $1,628 in the first six
months of 1995. These increases were primarily a result of higher income.
The Company's estimated effective tax rate was reduced to 36.5% in the second
quarter and first six months of 1996 from 38.5% in the second quarter and first
six months of 1995 to reflect the benefit of the Company's foreign sales
corporation.
NET INCOME
As a result of the above factors, net income in the second quarter of 1996
increased to $2,885, or 20.5% of revenue, from $1,485, or 18.2% of revenue, in
the second quarter of 1995. Net income in the first six months of 1996 increased
to $5,436, or 20.7% of revenue, from $2,602, or 18.0% of revenue, in the first
six months of 1995.
ACCOUNTING FOR CERTAIN STOCK OPTIONS
On October 18, 1995, January 24, 1996, April 1, 1996 and April 24, 1996, the
Company's Board of Directors or the Compensation Committee of the Company's
Board granted stock options to employees to purchase 16,000, 302,800, 100,000
and 19,450 shares of the Company's Common Stock at exercise prices of $28.50,
$49.525, $48.60 and $76.40, respectively, subject to stockholder approval
(obtained on May 22, 1996) of an increase in the number of shares available for
grant. The exercise prices represented the fair market value of the Company's
Common Stock on the dates of
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grant. As permitted by SFAS No. 123, which became effective on January 1, 1996,
the Company has elected to continue to apply the intrinsic value method of APB
Opinion No. 25 for stock-based compensation to employees.
For options granted prior to April 1, 1996, because approval of the
stockholders was required and considered perfunctory, the Company measured
compensation expense on the date of the grant by the Company's Board of
Directors or the Compensation Committee of the Company's Board. As a result of
discussions with the staff of the Securities and Exchange Commission, the
Company changed its accounting policy on options requiring stockholder approval
to measure compensation expense on the approval date. This change is effective
for options granted on or after April 1, 1996. This change resulted in
aggregate compensation expense of approximately $4,500 relating to the April 1,
1996 and April 24, 1996 option grants, which the Company will recognize over
the remainder of the four-year vesting period of the options from May 22, 1996.
The effect of this change was to reduce income from operations by $108 in the
second quarter of 1996. The Company does not plan to grant options in the
future that are subject to approval by the stockholders.
LIQUIDITY AND CAPITAL RESOURCES
In December 1994, the Company sold 3,000,000 shares of Common Stock in its
initial public offering which generated $21,600 of net cash proceeds to the
Company. In January 1995, the Company sold 510,000 shares of Common Stock under
the terms of an over-allotment option granted to the underwriters as part of
the initial public offering, generating an additional $3,800 in net cash
proceeds. In November 1995, the Company sold an additional 1,560,000 shares of
Common Stock in its follow-on offering, which generated $55,900 of net cash
proceeds to the Company.
At June 30, 1996, the Company had cash and marketable securities of $89,105 and
working capital of $95,517. Since 1990, the Company has funded its operations
primarily from cash generated from its operating activities. During 1995 and
1996, the Company used the cash provided by operations principally for working
capital needs and property and equipment additions necessary to support the
Company's growth.
The Company's capital expenditures for the second quarter and first six months
of 1996 were $1,379 and $2,343, respectively. Capital expenditures for the
second quarter and first six months of 1996 related primarily 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.
On February 20, 1996, the Company increased its investment in VeriSign by
purchasing 72,091 shares of Series B Convertible Preferred for an aggregate
purchase price of $176. VeriSign was organized to provide digital certificates
and related services that use public key cryptography to protect the privacy of
electronic transmissions on public and private networks. The Company's
investments in VeriSign represent a minority interest of less than 10% of
Verisign's capitalization. The Company is accounting for its investment at cost.
On July 26, 1996, the Company acquired RSA Data Security, Inc., a Redwood City,
California vendor of encryption software ("RSA"). Transaction costs in
connection with the acquisition of RSA are estimated to
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approximate $6,100 ($5,400, net of related tax effects). See Note 6 of Notes to
Condensed Consolidated Financial Statements.
In March 1996, the Company entered into a noncancelable operating lease expiring
in 2006 for a new corporate executive office in Bedford, Massachusetts and
commenced its tenancy in August 1996. The new facility consists of 75,000 square
feet of office space and the annual base rent for the first year is $956,
increasing annually up to $1,180 from years five through ten.
In December 1994, the Company entered into an agreement with Progress Software
for the right to use certain of its software to enhance the functionality of the
Company's ACE/Server software. The Company began incurring royalties under the
Progress Software agreement in the fourth quarter of 1995 and in order to obtain
favorable pricing, paid $1,500 during the first quarter of 1996.
The Company intends to seek acquisitions of businesses, products and
technologies that are complementary to those of the Company. The Company is
continuing to identify and prioritize additional security technologies which it
may wish to develop, either internally or through the licensing or acquisition
of products from third parties. While the Company engages from time to time in
discussions with respect to potential acquisitions, there can be no assurances
that any such acquisitions will be made or that the Company will be able to
successfully integrate any acquired business. In order to finance such
acquisitions, it may be necessary for the Company to raise additional funds
through public or private financings. Any equity or debt financings, if
available at all, may be on terms which are not favorable to the Company and, in
the case of equity financings, may result in dilution to the Company's
stockholders.
The Company believes that the net proceeds from its initial public and follow-on
offerings, together with cash flows from operations and existing cash balances,
will be sufficient to meet its cash requirements through at least 1998.
CERTAIN FACTORS THAT MAY AFFECT FUTURE RESULTS
The following important factors, among others, could cause actual results to
differ materially from those indicated by forward-looking statements made in
this Quarterly Report on Form 10-Q and presented elsewhere by management from
time to time.
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
its sales distribution capability, the cost and availability of components and
the Company's ability to control costs.
The Company's success is dependent in part on its ability to integrate the
operations of RSA in an efficient and effective manner. The successful
combination of the Company and RSA in a rapidly changing high technology
industry may be more difficult to accomplish than in other industries. The
combination of the two companies will require, among other things, integration
of the companies' respective product offerings and coordination of their sales
and marketing and research and development efforts. There can be no assurance
that such integration will be accomplished
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smoothly or successfully. The difficulties of such integration may be increased
by the necessity of coordinating geographically separated organizations. The
integration of certain operations will require the dedication of management
resources which may temporarily distract attention from the day-to-day business
of the combined company. The inability of management to successfully integrate
the operations of the two companies could have a material adverse effect on the
business and results of operations of the Company.
The Company'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 computer and network
security products and related services, all of which are currently used with the
Company's SecurID token technology. As a result, any factor adversely affecting
sales of these products and services could have a material adverse effect on the
Company's financial condition and results of operations.
Certain components of the Company's products are currently purchased from sole
or limited sources and any interruption in the supply of such components could
adversely affect the Company's operating results.
The Company's quarterly operating results may vary significantly depending on a
number of factors, including the timing of the introduction or enhancement of
products by the Company or its competitors, the sizes, timing and shipment of
individual orders, market acceptance of new products, changes in the Company's
operating expenses, personnel changes, mix of products sold, changes in product
pricing, development of the Company's direct and indirect distribution channels
and general economic conditions.
International sales have represented a significant portion of the Company's
sales. The international business and financial performance of the Company may
be affected by fluctuations in foreign exchange rates, difficulties in managing
accounts receivable, tariff regulations and difficulties in obtaining export
licenses.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
At the 1996 Annual Meeting of Stockholders of the Company (the "Annual
Meeting") held on May 22, 1996, the following matters were acted upon by the
stockholders of the Company:
1. The election of Richard L. Earnest and Sanford M. Sherizen as Class
II Directors for the ensuing three years;
2. The approval of an amendment to the Company's 1994 Stock Option Plan
(the "1994 Plan") increasing from 300,000 to 2,410,000 the number of shares of
Common Stock authorized under the 1994 Plan ("Plan Amendment No. 1");
3. Approval of an amendment to the 1994 Plan increasing to 300,000 the
number of shares of Common Stock that may be issued in any calendar year to any
employee of the Company thereunder ("Plan Amendment No. 2"); and
4. Ratification of the appointment of Deloitte & Touche LLP as
independent auditors of the Company for the current year.
The number of shares of Common Stock outstanding and entitled to vote
at the Annual Meeting was 13,650,870. The other directors of the Company, whose
terms of office as directors continued after the Annual Meeting, were Charles R.
Stuckey, Jr., George M. Middlemas and Marino R. Polestra. The results of the
voting on each of the matters presented to stockholders at the Annual Meeting
are set forth below:
Votes Votes Votes Broker
For Withheld Against Abstentions Non-Votes
----- -------- ------- ----------- ---------
1. Election of Class II Directors:
Richard L. Earnest 9,362,338 91,410 N.A N.A. N.A.
Sanford M. Sherizen 9,362,338 91,410 N.A. N.A. N.A.
2. Plan Amendment No. 1 6,036,147 N.A. 2,585,641 54,691 777,269
3. Plan Amendment No. 2 9,096,301 N.A. 173,568 181,379 2,500
4. Ratification of
Independent Auditors 9,333,284 N.A. 5,629 106,699 8,136
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits
(a) Exhibits - The Exhibits listed in the Exhibit Index immediately
preceding such Exhibits are filed as part of this Quarterly Report on Form 10-Q.
b) Reports on Form 8-K:
On May 23, 1996, the Company filed a Current Report on Form 8-K, dated
May 21, 1996, announcing under Item 6 (Resignations of Registrant's Directors)
that Kenneth P. Weiss had announced his immediate resignation as a director and
as Chairman of the Board and Chief Technical Officer of the Company, citing
material disagreements with the operations, policy and practices of the Company
and certain directors of the Company. On June 4 and June 13, 1996, the Company
filed Amendments No. 1 and 2, respectively, to its Current Report on Form 8-K
providing additional disclosure relating to the resignation of Mr. Weiss.
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SIGNATURES
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.
Dated: August 13, 1996 /s/ Arthur W. Coviello, Jr.
-------------------------------------
Arthur W. Coviello, Jr.
Executive Vice President,
Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer)
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EXHIBIT INDEX
ITEM DESCRIPTION
3 Third Restated Certificate of Incorporation, as amended, of
the Company.
11 Computation of Income (Loss) Per Common Share.
18 Letter regarding change in accounting principles.
27 Financial Data Schedule.
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