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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 June 30, 1997
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 (I.R.S. Employer
of 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
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days:
Yes X No
------- -------
As of July 31, 1997, there were 37,815,552 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 AND SIX MONTHS ENDED JUNE 30, 1997
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets as of
June 30, 1997 (unaudited) and December 31,
1996 3
Condensed Consolidated Statements of Income
for the Three and Six Months Ended June 30,
1997 and 1996 (unaudited) 4
Condensed Consolidated Statements of Cash
Flows for the Six Months Ended June 30, 1997
and 1996 (unaudited) 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 16
Item 6. Exhibits and Reports on Form 8-K 17
Signature 18
Exhibit Index 19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
SECURITY DYNAMICS TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, 1997 DECEMBER 31, 1996
----------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and equivalents $ 21,828 $ 9,512
Marketable securities 86,437 95,320
Accounts receivable (less allowance for doubtful
accounts of $550 in 1997 and $527 in 1996) 17,391 13,293
Inventory 3,189 2,606
Prepaid expenses and other 5,837 4,204
Deferred taxes 304 --
-------- --------
Total current assets 134,986 124,935
-------- --------
Property and equipment - net 12,319 10,108
-------- --------
Other:
Investments 2,187 2,924
Capitalized software cost, net and purchased technology 139 197
Deferred taxes 1,026 1,026
Other 943 752
-------- --------
Total Other 4,295 4,899
-------- --------
Total $151,600 $139,942
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,019 $ 5,119
Accrued payroll and related benefits 5,172 4,465
Accrued expenses and other 3,121 2,187
Income taxes payable -- 51
Deferred revenue 4,181 4,877
Deferred taxes -- 603
-------- --------
Total current liabilities 16,493 17,302
-------- --------
Minority interests 2,578 1,194
-------- --------
Commitments and contingencies
Stockholders' equity:
Common stock, $.01 par value; authorized, 80,000,000 shares; issued,
35,055,430 shares in 1997 and 34,389,593 shares in 1996;
outstanding, 35,054,921 shares in 1997 and 34,389,297
shares in 1996 351 344
Additional paid-in capital 103,668 101,424
Retained earnings 26,651 16,420
Deferred stock compensation (141) (174)
Treasury stock, common, at cost,
509 shares in 1997 and 296 shares in 1996 -- --
Cumulative translation adjustment (127) (48)
Unrealized gain on marketable securities - net 2,127 3,480
-------- --------
Total stockholders' equity 132,529 121,446
-------- --------
Total $151,600 139,942
======== ========
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,
------------------------ ------------------------
1997 1996 1997 1996
---------- --------- --------- ----------
Revenue $29,662 $17,421 $56,097 $32,283
Cost of revenue 6,201 3,647 12,241 7,161
------- ------- ------- -------
Gross profit 23,461 13,774 43,856 25,122
------- ------- ------- -------
Costs and expenses:
Research and development 4,050 2,315 7,530 4,360
Marketing and selling 8,876 5,144 16,534 9,584
General and administrative 3,161 2,890 6,120 5,618
------- ------- ------- -------
Total 16,087 10,349 30,184 19,562
------- ------- ------- -------
Income from operations 7,374 3,425 13,672 5,560
Interest and other income 1,376 1,214 2,649 2,483
------- ------- ------- -------
Income before provision for income
taxes 8,750 4,639 16,321 8,043
Provision for income taxes 3,248 1,755 6,090 2,991
------- ------- ------- -------
Net income $ 5,502 $ 2,884 $10,231 $ 5,052
======= ======= ======= =======
Net income per common and
common equivalent share $ 0.15 $ 0.08 $ 0.28 $ 0.14
======= ======= ======= =======
Weighted average number of common
and common equivalent shares outstanding 36,629 36,604 36,581 36,398
======= ======= ======= =======
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,
---------------------------------
1997 1996
--------------- --------------
Cash flows from operating activities:
Net income $ 10,231 $ 5,052
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Deferred taxes (10) (108)
Depreciation and amortization 1,398 834
Stock compensation 33 166
Increase (decrease) in cash from changes in:
Accounts receivable (4,293) (3,258)
Inventory (583) (920)
Prepaid expenses and other (536) (1,441)
Accounts payable (1,091) 2,083
Accrued payroll and related benefits 736 (577)
Accrued expenses and other 932 (220)
Income taxes payable (946) (324)
Deferred revenue (696) (464)
-------- --------
Net cash provided by operating activities 5,175 823
-------- --------
Cash flows from investing activities:
Purchases of marketable securities (48,027) (75,052)
Proceeds from sales and maturities of marketable securities 55,628 36,382
Purchases of property and equipment (3,853) (2,544)
Investments and other (143) (1,382)
-------- --------
Net cash provided by (used for) investing activities 3,605 (42,596)
-------- --------
Cash flows from financing activities:
Proceeds from exercise of stock options 2,261 541
Proceeds from the sale of minority interests 1,384 --
-------- --------
Net cash provided by financing activities 3,645 541
-------- --------
Effects of exchange rate changes on cash and equivalents (109)) (37)
-------- --------
Net increase (decrease) in cash and equivalents 12,316 (41,269)
Cash and equivalents, beginning of period 9,512 49,284
-------- --------
Cash and equivalents, end of period $ 21,828 $ 8,015
======== ========
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 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, 1996.
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.
In July 1996, the Company completed a merger (the "Merger") with
RSA Data Security, Inc. ("RSA"). The Merger has been accounted for as a
pooling of interests, and therefore the consolidated financial statements
for all periods prior to the Merger have been restated to include the
accounts and operations of RSA with those of the Company.
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.
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 ("SFAS No. 128"), "Earnings per Share", which is
required to be adopted in the fourth quarter of 1997. At that time, the
Company will be required to change the method currently used to compute
earnings per share and to restate all prior periods. SFAS No. 128
supersedes Accounting Principles Board Opinion No. 15 and is intended to
simplify the computation of earnings per share and to make the U.S.
computations more comparable with international computations. The pro
forma basic and diluted earnings per share (as defined by SFAS No. 128)
for the three and six months ended June 30, 1997 would have been $0.16
and $0.15 and $0.29 and $0.28, respectively, and for the three and six
months ended June 30, 1996 would have been $0.08 and $0.08 and $0.15 and
$0.14, respectively.
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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 $3,811 and
$6,953 for the three and six months ended June 30, 1997 and $2,396 and
$3,675 for the three and six months ended June 30, 1996, respectively.
4. Subsequent Events
On July 15, 1997 (the "Effective Date"), the Company acquired
DynaSoft AB ("DynaSoft"), a leading provider of security solutions for
protecting access to corporate information and applications. The Company
issued or reserved for issuance approximately 2.7 million shares of
Common Stock in exchange for approximately 95% of the outstanding shares
and certain of the outstanding options to acquire shares of DynaSoft. The
Company also paid approximately $6 million to certain stockholders of
DynaSoft in exchange for the remaining outstanding shares and options.
Based on the closing price of the Company's Common Stock on the Nasdaq
National Market on July 14, 1997, the transaction is valued at
approximately $115 million. The transaction will be accounted for as a
pooling of interests. The Company used authorized, but previously
un-issued, shares of Common Stock in the acquisition. The number of
shares of the Company's Common Stock issued in exchange for DynaSoft's
shares was determined in an "arm's length" negotiation and the
transaction was unanimously approved by the Boards of Directors of the
Company and DynaSoft.
In connection with the transaction, the Company and certain United
States stockholders of DynaSoft entered into a Registration Rights
Agreement, dated as of July 15, 1997, pursuant to which the Company has
agreed to file a Registration Statement on Form S-3, on or prior to the
40th day following the Effective Date, for the purpose of registering
under the Securities Act of 1933 the shares of Common Stock of the
Company issued to such stockholders in the transaction.
In addition, the Company, certain stockholders of DynaSoft, the
representative of such DynaSoft stockholders and State Street Bank and
Trust Company, as escrow agent, have entered into an Escrow Agreement,
dated as of July 15, 1997, providing, among other things, that 10% of the
shares of the Company's Common Stock received by such DynaSoft
stockholders in the transaction will be held in escrow to reimburse the
Company in connection with breaches of representations, warranties or
covenants made by such DynaSoft stockholders.
DynaSoft is based in Stockholm, Sweden and offers a range of
security solutions, including secure single sign-on (SSSO) solutions,
through its BoKS product family. DynaSoft markets its products worldwide
through subsidiaries and also through OEM licensing agreements with Sun
Microsystems, Inc., Hewlett-Packard Company, and other companies.
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The following Unaudited Pro Forma Combined Financial Data has been
derived from the historical financial statements of the Company and
DynaSoft and give effect to the acquisition of DynaSoft as a pooling of
interests. For the purposes of the pro forma combined financial data, the
Company's financial data for the three and six months ended June 30, 1997
and for the three and six months ended June 30, 1996 have been combined
with DynaSoft'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 DynaSoft had been consumated
prior to June 30, 1997 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,
---------------------------- --------------------------
1997 1996 1997 1996
----------- ----------- ------------ -----------
Revenue $32,955 $19,821 $61,374 $36,111
Net income 5,515 3,111 10,076 5,454
Net income per common
and common equivalent share $ .14 $ .08 $ .26 $ .14
======= ======= ======= =======
Weighted average number of common and
common equivalent shares outstanding 39,527 39,039 39,418 38,398
======= ======= ======= =======
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(IN THOUSANDS)
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. For this purpose, any statements contained herein that are not
statements of historical fact may bedeemed 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 and six months ended June 30, 1997 and 1996.
Percentage Percentage
of Total Period-to-Period of Total Period-to-Period
Revenue Change Revenue Change
------- ------ ------- ------
Three months Ended June 30, Six months Ended June 30,
1997 1996 1997 1996
---- ---- ---- ----
- ----------------------
Revenue 100.0% 100.0% 70.3% 100.0% 100.0% 73.8%
Cost of revenue 20.9 20.9 70.0 21.8 22.2 70.9
----- ----- ----- ----- ----- -----
Gross profit 79.1 79.1 70.3 78.2 77.8 74.6
----- ----- ----- ----- ----- -----
Costs and expenses:
Research and development 13.6 13.3 74.9 13.4 13.5 72.7
Marketing and selling 29.9 29.5 72.6 29.5 29.7 72.5
General and administrative 10.7 16.6 9.4 10.9 17.4 8.9
----- ----- ----- ----- ----- -----
Total 54.2 59.4 55.4 53.8 60.6 54.3
----- ----- ----- ----- ----- -----
Income from operations 24.9 19.7 115.3 24.4 17.2 145.9
Interest income and other 4.6 6.9 13.3 4.7 7.7 6.7
----- ----- ----- ----- ----- -----
Income before provision for
income taxes 29.5 26.6 88.6 29.1 24.9 102.9
Provision for income taxes 11.0 10.0 85.1 10.9 9.3 103.7
----- ----- ----- ----- ----- -----
Net income 18.5% 16.6% 90.7% 18.2% 15.6% 102.5%
===== ===== ===== ===== ===== =====
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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,
licensing of B/Safe, Tipem and B/Cert toolkits, licensing of patented
technology, sales of ACM hardware products and revenues from maintenance and
professional services.
Total revenue increased 70.3% in the second quarter of 1997 to $29,662
from $17,421 in the second quarter of 1996. Total revenue increased 73.8% in the
first six months of 1997 to $56,097 from $32,283 in the first six months of
1996. This increase in revenue reflects increases in unit sales of all of the
Company's products, except ACM/400 and ACM/1600 hardware products. During the
second quarter and first six months of 1997 approximately 40% and 44%,
respectively, of the increase in revenue was attributable to increased sales of
SecurID tokens, approximately 30% and 27%, respectively, of the increase in
revenue was attributable to increased toolkit licensing, and approximately 21%
and 18%, respectively, of the increase in revenue was attributable to increased
sales of ACE/Server and ACM software products. The balance of the increase in
revenue resulted from increased fees from patent licenses and maintenance
services offset by decreased hardware revenue. The Company believes that the
overall increase in sales was attributable in part to growth of the information
security market, with the Internet and corporate intranets continuing to play
significant roles in developing new opportunities for the Company.
International revenue (excluding Canada and Latin America) increased
110.7% in the second quarter of 1997 to $7,212 from $3,422 in the second quarter
of 1996 and increased 101.8% in the first six months of 1997 to $11,577 from
$5,738 in the first six months of 1996. International revenue accounted for
24.3% and 19.6% of total revenue in the second quarters of 1997 and 1996,
respectively, and 20.6% and 17.8% of total revenue in the first six months of
1997 and 1996, respectively. These increases in international revenue were
primarily attributable to the continuing expansion of the Company's
international direct sales force and increased market penetration of the
Company's products in foreign markets.
COST OF REVENUE AND GROSS PROFIT
The Company's 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 patented technology, 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.
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The Company's gross profit increased 70.3% in the second quarter of 1997
to $23,461, or 79.1% of revenue, from $13,774, or 79.1% of revenue, in the
second quarter of 1996, and increased 74.6% in the first six months of 1997 to
$43,856, or 78.2% of revenue, from $25,122, or 77.8% of revenue, in the first
six months of 1996. During the second quarter and first six months of 1997
approximately 36% and 42%, respectively, of the increases in gross profit were
attributable to increased unit sales of SecurID tokens, approximately 33% and
32%, respectively, of the increases in gross profit were attributable to
increased licensing sales of toolkit technology, and approximately 24% and 20%,
respectively, of the increases in gross profit were attributable to increased
licensing sales of ACE/Server software. In addition, gross profit increased
primarily due to increased patent licensing fees, royalties and maintenance
revenues, offset by reduced sales of ACM/400 and ACM/1600 hardware units. Gross
profit as a percentage of revenue increased primarily due to increased sales of
software products and patent licensing fees, which have higher margins, relative
to sales of hardware products.
In the future, gross profit 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,
increased costs 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 expenses increased 74.9% in the second quarter
of 1997 to $4,050 from $2,315 in the second quarter of 1996, and increased 72.7%
in the first six months of 1997 to $7,530 from $4,360 in the first six months of
1996. Research and development expenses increased as a percentage of revenue in
the second quarter of 1997 to 13.6% from 13.3% in the second quarter of 1996,
but decreased as a percentage of revenue in the first six months of 1997 to
13.4% from 13.5% in the first six months of 1996. During the second quarter and
first six months of 1997 approximately 83.4% and 74.1%, respectively, of the
increases in research and development expenses resulted from employment of
additional staff. The remainder of the increases in research and development
were attributable to purchases of computer equipment, resulting in higher
depreciation charges, occupancy expenses and consulting expenses.
MARKETING AND SELLING
Marketing and selling expenses consist primarily of salaries, commissions
and travel expenses of direct sales and marketing personnel and marketing
program expenses.
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Marketing and selling expenses increased 72.6% in the second quarter of
1997 to $8,876 from $5,144 in the second quarter of 1996, and increased 72.5% in
the first six months of 1997 to $16,534 from $9,584 in the first six months of
1996. Marketing and selling expenses increased as a percentage of revenue in the
second quarter of 1997 to 29.9% from 29.5% in the second quarter of 1996, and
decreased as a percentage of revenue in the first six months of 1997 to 29.5%
from 29.7% in the first six months of 1996. During the second quarter and first
six months of 1997 approximately 46% and 46%, respectively, of the increase in
marketing and selling expenses resulted from employment of additional staff,
approximately 10% and 13%, respectively, of the increases in marketing and
selling expenses were attributable to sales commissions on increased revenues,
and approximately 19% and 19%, respectively, of the increases in marketing and
selling expenses resulted from increased travel expenses and marketing program
expenses.
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 accounting expenses.
General and administrative expenses increased 9.4% in the second quarter
of 1997 to $3,161 from $2,890 in the second quarter of 1996, and increased 8.9%
in the first six months of 1997 to $6,120 from $5,618 in the first six months of
1996. General and administrative expenses decreased as a percentage of revenue
in the second quarter of 1997 to 10.7% from 16.6% in the second quarter of 1996,
and decreased as a percentage of revenue in the first six months of 1997 to
10.9% from 17.4% in the first six months of 1996. The increases in general and
administrative expenses were due to the employment of additional staff offset by
reduced legal expenses. Legal expenses decreased approximately $545 and $1,299
from the second quarter and first six months of 1996, respectively, compared to
the second quarter quarter and first six months of 1997 due to the settlement of
legal proceedings in 1996.
INTEREST AND OTHER INCOME
Interest and other income consists primarily of interest earned on the
Company's cash balances and marketable securities.
Interest income increased 13.3% in the second quarter of 1997 to $1,376
from $1,214 in the second quarter of 1996, and increased 6.7% in the first six
months of 1997 to $2,649 from $2,483 in the first six months of 1996.
PROVISION FOR INCOME TAXES
The provision for income taxes increased to $3,248 during the second
quarter of 1997 from $1,755 in the second quarter of 1996, and increased to
$6,090 during the first six months of 1997 from $2,991 in the first six months
of 1996 due to higher pre-tax income and a higher effective tax rate during the
first six months of 1997. The Company's estimated effective tax rate decreased
to 37.1% in the second quarter of 1997 from 37.8% in the second quarter of 1996,
and increased to 37.3% in the first six months of 1997 from 37.2% in the first
six months of 1996.
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NET INCOME
As a result of the above factors, net income in the second quarter and
the first six months of 1997 increased to $5,502 and $10,231, or 18.5% and 18.2%
of revenue, respectively, from $2,884 and $5,052, or 16.6% and 15.6% of revenue,
respectively, in the second quarter and the first six months of 1996.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1997, the Company had cash and marketable securities of
$108,265 and working capital of $118,493. The Company has historically funded
its operations primarily from cash generated from its operating activities.
During the first six months of each of 1996 and 1997, the Company used the cash
provided by operations principally for working capital needs.
On July 15, 1997, the Company acquired DynaSoft AB, a Stockholm,
Sweden-based provider of enterprise security and single sign-on solutions, for
approximately 2.7 million shares of its Common Stock in exchange for
approximately 95% of the outstanding shares and options to acquire shares of
DynaSoft. The Company also paid approximately $6 million to certain stockholders
of DynaSoft in exchange for the remaining outstanding shares and options. The
transaction will be accounted for as a pooling of interests. See Note 4 of Notes
to Condensed Consolidated Financial Statements.
The Company's capital expenditures for the first six months of 1997 were
$3,853 and 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. The Company
generated $2,261 of cash from the exercise of stock options and generated $1,384
of cash from the sale of minority interests in RSA's Japan subsidiary in the
first six months of 1997.
In March 1996, the Company entered into a noncancelable operating lease
expiring in 2006 for corporate executive offices in Bedford, Massachusetts. The
Company commenced its tenancy in August 1996. The new facility consists of
approximately 75,000 square feet of office space, and the annual base rent for
the first year is $956, increasing annually up to $1,180 for years five through
ten.
In June 1997, the Company entered into a noncancelable operating lease
expiring in 2006 for additional facilities in Bedford, Massachusetts. The
Company will commence its tenancy in August 1997. The new facility consists of
approximately 32,000 square feet of office space, and the annual base rent for
the first four years is $599, increasing up to $662 for years five through ten.
In November 1996, the Company amended its agreement with Progress
Software for the right to use certain of its software to enhance the
functionality of the Company's ACE/Server software. In order to obtain favorable
pricing the Company, pre-paid $1,500 and $1,250 during the first and fourth
quarters of 1996, respectively, and pre-paid $2,500 during the first quarter of
1997.
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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 working capital will be sufficient to meet its
anticipated cash requirements through at least 1998.
ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128 ("SFAS 128"), "Earnings per Share", which is required to be
adopted in the fourth quarter of 1997. At that time, the Company will be
required to change the method currently used to compute earnings per share and
to restate all prior periods. SFAS 128 supersedes Accounting Principles Board
Opinion No. 15 and is intended to simplify the computation of earnings per share
and to make the U.S. computations more comparable with international
computations. See Note 2 to Notes to Condensed Consolidated Financial
Statements.
In June 1997 the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards Nos. 130 and 131, "Reporting Comprehensive
Income" and "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS 130" and "SFAS 131", respectively). The Company will be
required to adopt the provisions of these statements in 1998. SFAS 130 provides
new standards for reporting items considered to be "comprehensive income."
Currently the only items presented in the Company's consolidated financial
statements which meet these criteria are the unrealized gains and losses on
marketable securities recorded as a component of stockholders' equity. SFAS 130
would not affect this classification, but would require more prominent
disclosure of unrealized gains and losses on marketable securities. SFAS 131
establishes new standards for reporting information about operating segments.
The provisions of SFAS 130 or SFAS 131 will not, when adopted, have a material
impact on the Company's net income or financial position.
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 the Company's sales distribution capability, the cost and
availability of components and the Company's ability to control costs.
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The Company's success is dependent in part on its ability to complete its
integration of the operations of DynaSoft and RSA in an efficient and effective
manner. The successful combination of the Company, DynaSoft and 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 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 three companies could have a material adverse effect on
the business and results of operations of the Company.
The Company's success is also dependent on the success of its Enterprise
Security Services, which is a security solution being developed by the Company
that would enable organizations to support and manage the growing use of public
and private keys, digital signatures and digital certificates for assuring
confidentiality and privacy on an enterprise-wide scale. The success of
Enterprise Security Services is dependent on a number of factors, including
without limitation delays in product development, undetected software errors or
bugs, competitive pressures, technical difficulties, market acceptance of new
technologies, including without limitation the use and implementation of various
certificate management and key management technologies, changes in customer
requirements and government regulations, delays in developing strategic
partnerships and general economic conditions.
The Company's success is highly dependent on its ability to enhance its
existing products and to develop and introduce new products in a timely manner.
If the Company were to fail to introduce new products on a timely basis, the
Company's operating results could be adversely affected. To date, substantially
all of the Company's revenues have been attributable to sales of its computer
and network security products and related services, all of which are currently
used with the Company's SecurID token technology and the licensing of toolkits
and patent 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 1997 Annual Meeting of Stockholders of the Company (the "Annual
Meeting") held on April 24, 1997, the following matters were acted upon by the
stockholders of the Company:
1. The election of George M. Middlemas and Marino R. Polestra as
Class III 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 4,820,000 to 6,570,000 the number of shares of
Common Stock authorized under the 1994 Plan and the continuance of the 1994
Plan, as amended (the "Plan Amendment"); and
3. 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 34,956,261. The other directors of the Company, whose
terms of office as directors continued after the Annual Meeting, are Charles R.
Stuckey, Jr., D. James Bidzos, Richard L. Earnest , Joseph B. Lassiter III and
Sanford M. Sherizen. 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 III Directors:
George M. Middlemas 29,934,223 80,342 N.A N.A. N.A.
Marino R. Polestra 29,933,623 80,942 N.A. N.A. N.A.
2. Plan Amendment 18,426,146 N.A. 5,618,109 61,771 5,908,539
3. Ratification of
Independent Auditors 29,970,684 N.A. 6,969 36,912 N.A.
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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 this Quarterly Report on Form 10-Q.
b) Reports on Form 8-K:
None.
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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.
Dated: August 11, 1997 /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
10.1 Amendment No. 3 to 1994 Stock Plan Option Plan, as amended
10.2 First Amendment to Lease, dated as of May 10, 1997, between the
Registrant and Beacon Properties, L.P.
*10.3 Second Amendment to Progress Software Application Partner
Agreement, dated as of November 29, 1995, between the Registrant
and Progress Software Corporation
*10.4 Third Amendment to Progress Software Application Partner
Agreement, dated as of November 15, 1996, between the Registrant
and Progress Software Corporation
11 Computation of Income Per Common and Common Equivalent Share.
27 Financial Data Schedule.
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*Confidential treatment requested as to certain portions, which portions are
omitted and filed separately with the Securities and Exchange Commission.
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