-----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, T1YmW3Ud0nEWY4vYTfsjsQs5VuTx4QxgHF2NxMX+AVXF/UYEQEDQV+epUFk8Vjn4 NIdol3j6rpqIa5oeaQp2xw== 0000950135-99-001400.txt : 19990322 0000950135-99-001400.hdr.sgml : 19990322 ACCESSION NUMBER: 0000950135-99-001400 CONFORMED SUBMISSION TYPE: DEF 14A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 19990422 FILED AS OF DATE: 19990319 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: DEF 14A SEC ACT: SEC FILE NUMBER: 000-25120 FILM NUMBER: 99568838 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 DEF 14A 1 SECURITY DYNAMICS TECHNOLOGIES, INC. 1 SCHEDULE 14A INFORMATION PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934 (AMENDMENT NO. ) Filed by the Registrant [X] Filed by a Party other than the Registrant [_] Check the appropriate box: [ ] Preliminary Proxy Statement [_] Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) [X] Definitive Proxy Statement [_] Definitive Additional Materials [_] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12 Security Dynamics Technologies, Inc. - ------------------------------------------------------------------------------ (Name of Registrant as Specified In Its Charter) - ------------------------------------------------------------------------------ (Name of Person(s) Filing Proxy Statement, if other than the Registrant) Payment of Filing Fee (check the appropriate box): [X] No fee required. [_] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. (1) Title of each class of securities to which transaction applies: --------------------------------------------------------------------------- (2) Aggregate number of securities to which transaction applies: --------------------------------------------------------------------------- (3) Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): --------------------------------------------------------------------------- 2 (4) Proposed maximum aggregate value of transaction: --------------------------------------------------------------------------- (5) Total fee paid: --------------------------------------------------------------------------- [_] Fee paid previously with preliminary materials. [_] Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the form or schedule and the date of its filing. (1) Amount Previously Paid: --------------------------------------------------------------------------- (2) Form, Schedule or Registration Statement No.: --------------------------------------------------------------------------- (3) Filing Party: --------------------------------------------------------------------------- (4) Date Filed: --------------------------------------------------------------------------- 3 SECURITY DYNAMICS TECHNOLOGIES, INC. NOTICE OF ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 22, 1999 NOTICE IS HEREBY GIVEN that the Annual Meeting of the Stockholders of Security Dynamics Technologies, Inc., a Delaware corporation (the "Company"), will be held on Thursday, April 22, 1999 at 3:00 p.m. at the offices of Hale and Dorr LLP, 60 State Street, Boston, Massachusetts (the "Meeting") for the purpose of considering and voting upon the following matters: 1. To elect three Class II Directors for the ensuing three years; 2. To approve an amendment to the Company's Third Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of Common Stock from 80,000,000 to 150,000,000 shares; 3. To approve an amendment to the Company's 1994 Stock Option Plan, as amended -- 1998 Restatement to (i) increase the number of shares of Common Stock authorized for issuance thereunder from 9,570,000 to 11,570,000 shares and (ii) increase the maximum number of shares of Common Stock that may be issued in any calendar year to a participant thereunder from 300,000 to 400,000 shares; 4. To approve an amendment to the Company's 1994 Director Stock Option Plan, as amended, to increase the number of shares of Common Stock authorized for issuance thereunder from 300,000 to 500,000 shares; 5. To ratify the appointment of Deloitte & Touche LLP as independent auditors of the Company for the current year; and 6. To transact such other business as may properly come before the Meeting or any adjournment thereof. The Board of Directors has no knowledge of any other business to be transacted at the Meeting. The Board of Directors has fixed the close of business on Thursday, March 4, 1999 as the record date for the determination of stockholders entitled to notice of and to vote at the Meeting and at any adjournments thereof. A copy of the Company's Annual Report to Stockholders for the year ended December 31, 1998, which contains consolidated financial statements and other information of interest to stockholders, accompanies this Notice and the enclosed Proxy Statement. By Order of the Board of Directors, /s/ Margaret K. Seif Margaret K. Seif, Secretary March 22, 1999 WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING, PLEASE PROMPTLY COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT IN THE ACCOMPANYING ENVELOPE. NO POSTAGE NEED BE AFFIXED IF THE PROXY CARD IS MAILED IN THE UNITED STATES. 4 SECURITY DYNAMICS TECHNOLOGIES, INC. 36 CROSBY DRIVE BEDFORD, MASSACHUSETTS 01730 PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 22, 1999 This Proxy Statement is furnished in connection with the solicitation of proxies by the Board of Directors of Security Dynamics Technologies, Inc. (the "Company") for use at the Annual Meeting of Stockholders to be held on Thursday, April 22, 1999 at 3:00 p.m. at the offices of Hale and Dorr LLP, 60 State Street, Boston, Massachusetts and at any adjournments thereof (the "Meeting"). All proxies will be voted in accordance with the instructions of the stockholder. If no choice is specified, the proxies will be voted in favor of the matters set forth in the accompanying Notice of Meeting. Any proxy may be revoked by a stockholder at any time before its exercise by delivery of a written revocation to the Secretary of the Company. Attendance at the Meeting will not itself be deemed to revoke a proxy unless the stockholder gives affirmative notice at the Meeting that the stockholder intends to revoke the proxy and vote in person. On March 4, 1999, the record date for determination of stockholders entitled to vote at the Meeting (the "Record Date"), there were outstanding and entitled to vote an aggregate of 39,182,097 shares of Common Stock of the Company, $.01 par value per share (the "Common Stock"). Each share entitles the record holder to one vote on each of the matters to be voted upon at the Meeting. THE NOTICE OF MEETING, THIS PROXY STATEMENT, THE ENCLOSED PROXY AND THE COMPANY'S ANNUAL REPORT TO STOCKHOLDERS FOR THE YEAR ENDED DECEMBER 31, 1998 ARE FIRST BEING SENT OR GIVEN TO STOCKHOLDERS ON OR ABOUT MARCH 22, 1999. THE COMPANY WILL, UPON WRITTEN REQUEST OF ANY STOCKHOLDER, FURNISH WITHOUT CHARGE A COPY OF ITS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION, WITHOUT EXHIBITS. PLEASE ADDRESS ALL SUCH REQUESTS TO THE COMPANY, 36 CROSBY DRIVE, BEDFORD, MASSACHUSETTS 01730, ATTENTION: CHIEF FINANCIAL OFFICER. EXHIBITS WILL BE PROVIDED UPON WRITTEN REQUEST AND PAYMENT OF AN APPROPRIATE PROCESSING FEE. 5 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information as of January 31, 1999 with respect to the beneficial ownership of shares of Common Stock by (i) each person known to the Company to own beneficially more than 5% of the outstanding shares of Common Stock, (ii) the directors and nominees for director of the Company, (iii) the Chief Executive Officer and the four other most highly compensated executive officers who were serving as executive officers on December 31, 1998 (the "Named Executive Officers"), and (iv) all directors and executive officers of the Company as a group.
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP(1) ---------------------------- NUMBER OF PERCENT OF NAME AND ADDRESS OF BENEFICIAL OWNER SHARES CLASS - ------------------------------------ ----------- ---------- 5% STOCKHOLDERS Franklin Resources, Inc. ................................... 2,689,430(2) 6.6% 777 Mariners Island Blvd. San Mateo, CA 94404 Kenneth P. Weiss............................................ 2,354,516(3) 5.8% 59 Sargent Street Newton, MA 02158 Addison M. Fischer.......................................... 2,338,048(4) 5.8% 3506 Mercantile Avenue Naples, FL 34104-3310 DIRECTORS Charles R. Stuckey, Jr. .................................... 773,823(5) 1.9% Arthur W. Coviello, Jr. .................................... 353,666(6) * D. James Bidzos............................................. 777,254(7) 1.9% Richard L. Earnest.......................................... 36,000(8) * Taher Elgamal............................................... 1,500 * Joseph B. Lassiter, III..................................... 21,000(9) * George M. Middlemas......................................... 46,912(10) * James K. Sims............................................... 41,000(11) * OTHER NAMED EXECUTIVE OFFICERS Gary A. Rogers.............................................. 31,915(12) * Albert E. Sisto............................................. 9,374(13) * John Adams.................................................. 28,899(14) * All executive officers and directors, as a group (13 2,238,116(15) persons).................................................. 5.4%
- --------------- * Less than 1% 1. The number of shares beneficially owned by each stockholder, director and executive officer is determined under rules promulgated by the Securities and Exchange Commission, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days after January 31, 1999 through the exercise of any stock option or other right. The inclusion herein of such shares, however, does not constitute an admission that the named stockholder is a direct or indirect beneficial owner of such shares. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares such power with his or her spouse) with respect to all shares of capital stock listed as owned by such person or entity. 2. This information is derived from a Schedule 13G filed with the Securities and Exchange Commission on February 2, 1999. 3. This information is derived from information provided by the stockholder to the Company. 2 6 4. Includes 97,112 shares held by Kairdos L.L.C., a Delaware limited liability company, of which Mr. Fischer is a director and a member. Mr. Fischer disclaims beneficial ownership of these shares except to the extent of his proportionate pecuniary interest therein. Also includes 206,400 shares held by a grantor retained annuity trust of which Mr. Fischer is the trustee. This information is derived from a Schedule 13G/A filed with the Securities and Exchange Commission on February 9, 1998. 5. Includes 10,000 shares held by the Stuckey Family Charitable Remainder Unitrust, 56,820 shares held by the Charles R. Stuckey, Jr. -- 1998 Grantor Retained Annuity Trust, and 100,000 shares held by the Charles R. Stuckey, Jr. -- 1998 Grantor Retained Annuity Trust II. Also includes 199,999 shares which may be acquired pursuant to stock options exercisable within 60 days after January 31, 1999. 6. Includes 332,546 shares which may be acquired pursuant to stock options exercisable within 60 days after January 31, 1999. 7. Includes 89,252 shares held by Kairdos L.L.C., a Delaware limited liability company of which Mr. Bidzos is the General Manager and a member. Mr. Bidzos disclaims beneficial ownership of these shares except to the extent of his proportionate pecuniary interest therein. Also includes 187,499 shares which may be acquired pursuant to stock options exercisable within 60 days after January 31, 1999. 8. Consists of 36,000 shares which may be acquired pursuant to stock options exercisable within 60 days after January 31, 1999. 9. Consists of 21,000 shares which may be acquired pursuant to stock options exercisable within 60 days after January 31, 1999. 10. Includes 24,000 shares which may be acquired pursuant to stock options exercisable within 60 days after January 31, 1999. 11. Includes 16,000 shares which may be acquired pursuant to stock options exercisable within 60 days after January 31, 1999. 12. Includes 31,249 shares which may be acquired pursuant to stock options exercisable within 60 days after January 31, 1999. On March 4, 1999, Mr. Rogers resigned from the Company, effective March 19, 1999. 13. Consists of 9,374 shares which may be acquired pursuant to stock options exercisable within 60 days after January 31, 1999. As of January 29, 1999, Mr. Sisto ceased to serve as Chief Operating Officer of RSA Data Security, Inc. 14. Consists of 28,899 shares which may be acquired pursuant to stock options exercisable within 60 days after January 31, 1999. 15. Includes an aggregate of 914,651 shares which may be acquired pursuant to stock options exercisable within 60 days after January 31, 1999. Excludes shares owned by Mr. Rogers, who resigned from the Company, effective March 19, 1999, and by Mr. Sisto, who ceased to serve as an executive officer of the Company as of January 29, 1999. VOTES REQUIRED The holders of a majority of the shares of Common Stock issued and outstanding and entitled to vote at the Meeting shall constitute a quorum for the transaction of business at the Meeting. Shares of Common Stock present in person or represented by proxy (including shares which abstain or do not vote with respect to one or more of the matters presented for stockholder approval) will be counted for purposes of determining whether a quorum exists at the Meeting. The affirmative vote of the holders of a plurality of the votes cast by the stockholders entitled to vote at the Meeting is required for the election of directors. The affirmative vote of the holders of a majority of the shares of Common Stock outstanding on the Record Date is required to approve the amendment to the Company's Third Restated Certificate of Incorporation, as amended. The affirmative vote of the holders of a majority of the shares of Common Stock present or represented by proxy and voting on the matter is required to approve the amendment to the Company's 1994 Stock Option Plan, as amended -- 1998 Restatement and the amendment to the Company's 1994 Director Stock Option Plan, as amended, and to ratify the appointment of the Company's independent auditors. 3 7 Shares which abstain from voting as to a particular matter, and shares held in "street name" by brokers or nominees who indicate on their proxies that they do not have discretionary authority to vote such shares as to a particular matter, will not be counted as votes in favor of such matter, and will also not be counted as votes cast or shares voting on such matter. Accordingly, abstentions and "broker non-votes" will have no effect on the voting on the election of directors, which requires the affirmative vote of a plurality of the votes cast or shares voting on a matter. However, because shares which abstain and shares represented by "broker non-votes" are nonetheless considered outstanding shares, abstentions and "broker non-votes" will have the same effect as a vote against the proposed amendment to the Company's Third Restated Certificate of Incorporation, as amended, which requires the affirmative vote of a majority of the votes represented by the outstanding shares. Finally, abstentions and "broker non-votes" will have no effect on the voting on the remaining matters to be voted on at the Meeting, each of which requires the affirmative vote of a majority of the votes cast or shares voting on the matter. PROPOSAL 1 -- ELECTION OF DIRECTORS The Company has a classified Board of Directors consisting of two Class I directors, three Class II directors and three Class III directors. The Class I, Class II and Class III Directors will serve until the annual meeting of stockholders to be held in 2001, 1999 and 2000, respectively, and until their respective successors are elected and qualified. At each annual meeting of stockholders, directors are elected for a full term of three years to succeed those whose terms are expiring. The persons named in the enclosed proxy will vote to elect, as Class II directors, D. James Bidzos, Richard L. Earnest and Taher Elgamal, the three director nominees named below, unless the proxy is marked otherwise. Messrs. Bidzos, Earnest and Elgamal are currently directors of the Company. Each Class II director will be elected to hold office until the 2002 annual meeting of stockholders and until his successor is elected and qualified. Each of the nominees has indicated his willingness to serve, if elected; however, if any nominee should be unable to serve, the person acting under the proxy may vote the proxy for a substitute nominee. The Board of Directors has no reason to believe that any of the nominees will be unable to serve if elected. For each member of the Board of Directors, including those who are nominees for election as Class II directors, there follows information given by each concerning his principal occupation and business experience for at least the past five years, the names of other publicly held companies of which he serves as a director and his age and length of service as a director of the Company. There are no family relationships among any of the directors, nominees for director and executive officers of the Company. 4 8
PRINCIPAL OCCUPATION, OTHER BUSINESS DIRECTOR EXPERIENCE DURING PAST FIVE YEARS NAME AGE SINCE AND OTHER DIRECTORSHIPS ---- --- -------- ------------------------------------ DIRECTORS WHOSE TERMS EXPIRE IN 2001 (CLASS I DIRECTORS) Joseph B. Lassiter, III... 51 1996 Joined Harvard University Graduate School of Business Administration in September 1996, where he is currently Professor of Management; President of Wildfire Communications, Inc., a telecommunications software company, from July 1994 to February 1996; Vice President of Teradyne, Inc., a manufacturer of automatic test equipment, from January 1974 to February 1994; Member of the Board of Directors of Advanced Magnetics, Inc., a developer of organ-specific contrast agents. Charles R. Stuckey, 56 1987 Chairman of the Board of Directors since July 1996; Jr. .................... President of the Company from January 1987 to March 1999; Chief Executive Officer of the Company since March 1987. NOMINEES FOR TERMS EXPIRING IN 2002 (CLASS II DIRECTORS) D. James Bidzos........... 44 1996 Vice Chairman of the Board of Directors since March 1999; Executive Vice President of the Company from July 1996 to February 1999; President and Chief Executive Officer of RSA Data Security, Inc. from 1988 to February 1999; Chairman of the Board of VeriSign, Inc., a company specializing in providing public-key certificates and related products and services. Richard L. Earnest........ 56 1993 Deputy Mayor of Del Mar, California since November 1997; Chief Executive Officer of Tudor Publishing Company from April 1995 to April 1997; Independent consultant to start-up companies from June 1994 to March 1995; Chief Executive Officer of DEMAX Software, a provider of centralized security management software, from June 1993 to June 1994; Chief Executive Officer of Advant Edge Systems Group, a software company, from April 1991 to June 1993. Taher Elgamal............. 43 1999 President of the Information Security Group of The Kroll-O'Gara Company, a provider of information security software and services, since January 1999; Chief Executive Officer of Securify, Inc., a provider of comprehensive security services for e-commerce and business and government applications, from June 1998 to January 1999; Chief Scientist of Netscape Communications Corp. from April 1995 to June 1998; Director of Engineering of RSA Data Security, Inc. from October 1991 to April 1995; Director of hi/fn, inc., a provider of high-performance, multi-protocol packet processors. DIRECTORS WHOSE TERMS EXPIRE IN 2000 (CLASS III DIRECTORS) Arthur W. Coviello, 45 1999 President of the Company since March 1999; Executive Jr. .................... Vice President of the Company from September 1995 to March 1999; Chief Financial Officer and Treasurer of the Company from October 1995 to August 1997; Chief Operating Officer of the Company since January 1997; Chief Operating Officer and Chief Financial Officer, among other capacities, for CrossComm Corporation, a developer of internetworking products, from March 1992 to January 1994.
5 9
PRINCIPAL OCCUPATION, OTHER BUSINESS DIRECTOR EXPERIENCE DURING PAST FIVE YEARS NAME AGE SINCE AND OTHER DIRECTORSHIPS ---- --- -------- ------------------------------------ George M. Middlemas....... 52 1992* General Partner of Apex Management Partnership, the General Partner of Apex Investment Fund II, L.P., a venture capital fund, since January 1991; Member of the Boards of Directors of Purecycle Corporation, a manufacturer and marketer of water recycling technologies, and Tut Systems, Inc., a provider of web design and software solutions. James K. Sims............. 52 1997 Chief Executive Officer, President and member of the Board of Directors of Cambridge Technology Partners (Massachusetts), Inc., an international consulting and systems integration firm, since February 1991; Chief Executive Officer and President of Concurrent Computer Corporation, a computer hardware manufacturer, from October 1985 until September 1990.
- --------------- * Mr. Middlemas also served on the Board of Directors of the Company from May 1986 to June 1991. For information relating to shares of Common Stock beneficially owned by each of the directors, see "Security Ownership of Certain Beneficial Owners and Management." BOARD AND COMMITTEE MEETINGS The Board of Directors met 14 times (including by telephone conference) during 1998. All directors attended at least 75% of the meetings of the Board of Directors and of the committees on which they served. The Board of Directors has a Compensation Committee, which makes recommendations concerning salaries and incentive compensation for employees of, and consultants to, the Company and administers and grants awards pursuant to certain of the Company's stock-based compensation plans. The Compensation Committee held six meetings during 1998. The current members of the Compensation Committee are Messrs. Elgamal, Lassiter and Sims. The Board of Directors has an Audit Committee, which reviews the results and scope of the audit and other services provided by the Company's independent public accountants. The Audit Committee held five meetings during 1998. The current members of the Audit Committee are Messrs. Earnest and Middlemas. The Board of Directors has a Nominating Committee, which makes recommendations to the Board of Directors concerning all facets of the director selection process. Stockholders wishing to propose director candidates for consideration by the Nominating Committee may do so by writing to the Secretary of the Company and providing information specified in the Company's Bylaws, including the candidate's name, biographical data and qualifications. The Company's Bylaws set forth further requirements for stockholders wishing to nominate director candidates for consideration by stockholders including, among other things, that a stockholder must give written notice of an intent to make such a nomination complying with the Bylaws of the Company to the Secretary of the Company not less than 60 days nor more than 90 days prior to the stockholders' meeting. The Nominating Committee held four meetings during 1998. The current members of the Nominating Committee are Messrs. Lassiter, Sims and Stuckey. DIRECTOR COMPENSATION All of the directors are reimbursed for expenses incurred in connection with their attendance at Board and committee meetings. Each non-employee director is paid $2,000 for attendance at each meeting of the Board or for each telephonic meeting of the Board in which he participates. Each non-employee director is further entitled to $1,000 for each meeting of a committee of the Board attended by the director which is held on a day other than the day of, or the day before or after, the date of any meeting of the full Board of Directors. Other directors are not entitled to compensation in their capacities as directors. For a description of 6 10 the Company's 1994 Director Stock Option Plan, as amended, see "Proposal 4 -- Approval of Amendment to the 1994 Director Stock Option Plan." Mr. Bidzos, the Vice Chairman of the Board of Directors of the Company and a nominee for director, entered into a Consulting Agreement with the Company, effective February 18, 1999, pursuant to which Mr. Bidzos is paid $10,000 per month, plus expenses (including benefit coverage), for his services as a consultant to the Company. The Consulting Agreement has a two-year term which is renewable annually thereafter. COMPENSATION OF EXECUTIVE OFFICERS Employment Agreements The Company is a party to an Amended and Restated Employment Agreement, dated as of November 1, 1997, as amended, with Charles R. Stuckey, Jr., providing for the employment of Mr. Stuckey as Chief Executive Officer of the Company. The agreement provides for a two-year term ending on November 1, 1999, after which time the agreement renews automatically for successive one-year terms until either party gives written notice of non-renewal at least 90 days prior to the expiration of the then-current term. The agreement provides for an annual base salary of $231,000, as well as annual bonuses upon the satisfaction of agreed-upon goals and objectives. The agreement also provides that Mr. Stuckey shall be entitled to receive the same standard employment benefits as other executives of the Company receive. If Mr. Stuckey is terminated other than for cause (as defined therein), he shall be entitled to receive severance payments equal to 24 months' base salary, acceleration of all stock options and full medical and insurance benefits until death, and the parties shall negotiate in good faith regarding the retention of Mr. Stuckey as a consultant to the Company for a two-year period. In the event of a change in control of the Company (as defined therein), Mr. Stuckey shall be entitled, at his election, to receive, subject to certain limitations, a lump sum payment equal to 24 months' base salary. In addition, he shall receive acceleration of all stock options if he is terminated other than for cause within one year after a change in control of the Company. The Company is also a party to a letter agreement, dated August 21, 1995, with Arthur W. Coviello, Jr., the Company's President and Chief Operating Officer. Mr. Coviello's annual base salary is $200,000, and he is eligible to receive annual bonuses upon the satisfaction of agreed-upon goals and objectives. Mr. Coviello is also entitled to severance of six months' salary and benefits in the event that his employment is terminated by the Company. In addition, for each full year of service with the Company (up to a maximum of six years), Mr. Coviello will receive an additional one month of severance (thus aggregating up to 12 months of severance). On September 4, 1998, the Company entered into a Management Employment Agreement with Gary A. Rogers providing for his employment as Senior Vice President, World Wide Sales and Field Operations of the Company. The agreement provided for an annual base salary of $190,000 and entitled Mr. Rogers to participate in all bonus and benefit programs that the Company establishes and makes available to its employees to the extent he was otherwise eligible. On March 4, 1999, Mr. Rogers resigned from the Company, effective March 19, 1999. On September 4, 1998, the Company entered into a Management Employment Agreement with Albert E. Sisto providing for his employment as Chief Operating Officer of RSA Data Security, Inc. The agreement provided for an annual base salary of $195,000 and entitled Mr. Sisto to participate in all bonus and benefit programs that the Company establishes and makes available to its employees to the extent he was otherwise eligible. As of January 29, 1999, Mr. Sisto ceased to serve as Chief Operating Officer of RSA Data Security, Inc., and his employment agreement was terminated. See "-- Severance Agreements." On September 4, 1998, the Company entered into a Management Employment Agreement with John Adams providing for his employment as Senior Vice President, Engineering of the Company for a period ending on March 4, 2000, unless sooner terminated in accordance with the terms of the agreement. The agreement provides for an annual base salary of $190,000 and entitles Mr. Adams to participate in all bonus and benefit programs that the Company establishes and makes available to its employees to the extent he is 7 11 otherwise eligible. The agreement also provides that Mr. Adams' employment with the Company shall not be terminated during the term of the agreement other than for cause (as defined therein), upon death or disability, or at the election of Mr. Adams. Severance Agreements The Company entered into a Separation and Settlement Agreement with Mr. Bidzos, effective February 18, 1999, pursuant to which Mr. Bidzos resigned his positions as Executive Vice President of the Company and President of RSA Data Security, Inc. Pursuant to the terms of the agreement, the Company accelerated the vesting of Mr. Bidzos' outstanding unvested stock options (covering an aggregate of 200,001 shares of Common Stock) such that all such options become exercisable in full. In addition, the Company repriced all of Mr. Bidzos' outstanding stock options (covering an aggregate of 350,000 shares of Common Stock) such that the exercise price of such options is $16.00, the closing price of the Common Stock on the Nasdaq National Market on the date of repricing and the fair market value of the Common Stock as determined by the Board of Directors. As a condition to the repricing, unless exercised prior thereto, 50% of Mr. Bidzos' options will expire on September 1, 1999 and the remaining 50% will expire on December 31, 1999. On January 22, 1999, the Company entered into a Transition Agreement and Release with Mr. Sisto pursuant to which Mr. Sisto became an inactive employee as of January 29, 1999. Pursuant to the terms of the agreement, Mr. Sisto's Management Employment Agreement was terminated as of January 29, 1999 and Mr. Sisto will continue to receive his base salary and benefits through March 31, 2000. In the event that Mr. Sisto accepts an offer of employment elsewhere prior to March 31, 2000 then the Company will have no further obligation to provide benefits to him. Noncompetition Agreements Messrs. Stuckey, Rogers, Coviello and Adams have each entered into noncompetition agreements with the Company. Pursuant to the terms of the noncompetition agreements, each of Messrs. Stuckey, Rogers, Coviello and Adams has agreed, through the first anniversary of the date of termination of his respective employment with the Company, not to engage in any business activity that is directly or indirectly in competition with the Company in the United States with any of the products or services being developed, provided or sold by the Company at such time. Furthermore, each executive officer has agreed that he will not, directly or indirectly, employ any person who is employed by the Company at any time during the term of the noncompetition agreement, or in any manner seek to induce any such person to leave his or her employment with the Company. 1998 Deferred Compensation Plan On January 22, 1998, the Board of Directors adopted the Company's 1998 Deferred Compensation Plan (the "Deferred Compensation Plan"). Pursuant to the Deferred Compensation Plan, management and certain highly compensated employees may elect to defer up to 75% of base salary and up to 100% of annual bonus, which amounts shall be placed into a trust established thereunder. Upon the participant's retirement, termination, death or disability, benefits shall be paid to the participant or his or her beneficiaries, heirs or estate. The Company has yet to implement the Deferred Compensation Plan. 8 12 Summary Compensation The following table sets forth certain information with respect to the annual and long-term compensation of each of the Named Executive Officers for the three years ended December 31, 1998. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION AWARDS ANNUAL ------------ COMPENSATION NUMBER OF -------------------- SHARES ALL OTHER SALARY BONUS UNDERLYING COMPENSATION NAME AND PRINCIPAL POSITION YEAR ($) ($)(1) OPTIONS ($)(2) - --------------------------- ---- -------- -------- ------------ ------------ Charles R. Stuckey, Jr............. 1998 $231,000 $ 0 0 $8,384 Chairman of the Board and 1997 231,000 158,078 0 6,365 Chief Executive Officer 1996 219,471 170,918 200,000 5,202 Arthur W. Coviello, Jr............. 1998 200,000 0 0 6,293 President and 1997 200,000 97,760 0 5,180 Chief Operating Officer 1996 175,000 85,968 0 4,087 Gary A. Rogers(3).................. 1998 190,000 50,000 300,000(4) 5,279 Former Senior Vice President, 1997 162,847 146,533 250,000 4,163 World Wide Sales and Field Operations Albert E. Sisto(5)................. 1998 195,000 42,099 275,000(6) 5,346 Former Chief Operating Officer of 1997 67,307 21,875 120,000 98 RSA Data Security, Inc. John Adams(7)...................... 1998 190,000 10,000 253,100(8) 7,479 Senior Vice President, Engineering 1997 183,750 54,384 0 5,433 1996 127,885 21,969 200,000 164
- --------------- (1) Amounts in this column represent bonuses earned under the Company's executive compensation program for the respective fiscal years. (2) Amounts shown in this column for fiscal 1998 represent the aggregate value of the Company's contributions on behalf of the executives to Group Term Life Insurance ($2,777 for Mr. Stuckey, $870 for Mr. Coviello, $531 for Mr. Rogers, $848 for Mr. Sisto and $2,112 for Mr. Adams), the Company's 401(k) savings plan ($3,607 for Mr. Stuckey, $3,424 for Mr. Coviello, $2,748 for Mr. Rogers, $2,498 for Mr. Sisto and $3,367 for Mr. Adams), and the Company's Profit Sharing Plan ($2,000 for each of Messrs. Stuckey, Coviello, Rogers, Sisto and Adams). (3) Mr. Rogers joined the Company as Senior Vice President, World Wide Sales and Field Operations in February 1997. On March 4, 1999, Mr. Rogers resigned from the Company, effective March 19, 1999. (4) On June 26, 1998, Mr. Rogers was granted an option to purchase 50,000 shares of Common Stock. On August 12, 1998, Mr. Rogers' 300,000 then-outstanding options were exchanged for new options pursuant to the Company's Option Repricing Program. See "Option Grants" and "Option Repricing." (5) Mr. Sisto joined the Company as Chief Operating Officer of RSA Data Security, Inc. in October 1997. As of January 29, 1999, Mr. Sisto ceased to serve as Chief Operating Officer of RSA Data Security, Inc. (6) On June 26, 1998, Mr. Sisto was granted an option to purchase 75,000 shares of Common Stock. On August 12, 1998, 195,000 of Mr. Sisto's then-outstanding options were exchanged for new options pursuant to the Company's Option Repricing Program. On July 16, 1998, Mr. Sisto was granted an option to purchase 80,000 shares of Common Stock which were not repriced pursuant to the Company's Option Repricing Program. See "Option Grants" and "Option Repricing." (7) Mr. Adams joined the Company as Senior Vice President, Engineering in March 1996. (8) On June 26, 1998, Mr. Adams was granted an option to purchase 75,000 shares of Common Stock. On August 12, 1998, Mr. Adams' 253,100 then-outstanding options were exchanged for new options pursuant to the Company's Option Repricing Program. See "Option Grants" and "Option Repricing." 9 13 Option Grants The following table sets forth certain information concerning grants of stock options during the year ended December 31, 1998 to each of the Named Executive Officers. The Company granted no stock appreciation rights during fiscal 1998. OPTION GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS -------------------------------------------------- PERCENT OF POTENTIAL REALIZABLE TOTAL VALUE AT ASSUMED NUMBER OF OPTIONS ANNUAL RATES OF STOCK SHARES GRANTED TO EXERCISE PRICE APPRECIATION FOR UNDERLYING EMPLOYEES IN PRICE PER OPTION TERM ($)(2) OPTIONS FISCAL YEAR SHARE EXPIRATION ----------------------- GRANTED (%) ($)(1) DATE 5% 10% ---------- ------------ --------- ---------- ---------- ---------- Charles R. Stuckey, Jr......... 0 0 N/A N/A N/A N/A Arthur W. Coviello, Jr......... 0 0 N/A N/A N/A N/A Gary A. Rogers................. 50,000(3) 1.0% $19.00 6/25/08 N/A N/A 50,000(4) 1.0 12.06 6/25/08 $ 370,000 $ 931,000 250,000(4) 4.0 12.06 1/26/07 1,550,000 3,763,000 Albert E. Sisto................ 75,000(3) 1.2 19.00 6/25/08 N/A N/A 80,000 1.3 16.00 7/15/08 805,000 2,040,000 75,000(4) 1.2 12.06 6/25/08 555,000 1,397,000 120,000(4) 1.9 12.06 11/11/07 831,000 2,064,000 John Adams..................... 75,000(3) 1.2 19.00 6/25/08 N/A N/A 75,000(4) 1.2 12.06 6/25/08 555,000 1,397,000 178,100(4) 2.8 12.06 4/1/06 964,000 2,284,000
- --------------- (1) Options become exercisable over a four-year period and generally terminate three months following termination of the executive officer's employment with the Company or the expiration date, whichever occurs earlier. The exercise price of each option was determined to be equal to the fair market value per share of the Common Stock on the date of grant. (2) Amounts represent hypothetical gains that could be achieved for the respective options if exercised at the end of the option term. These gains are based on assumed rates of stock price appreciation of 5% and 10% compounded annually from the date the respective options were granted to their expiration date. The gains shown are net of the option exercise price, but do not include deductions for taxes or other expenses associated with the exercise of the option or the sale of the underlying shares. The actual gains, if any, on the exercises of stock options will depend on the future performance of the Common Stock, the optionholder's continued employment through the option period, and the date on which the options are exercised. (3) Option granted on June 26, 1998 and subsequently exchanged for a new option pursuant to the Company's Option Repricing Program. Accordingly, this option is no longer outstanding. See "Option Repricing." (4) Option granted on August 12, 1998 pursuant to the Company's Option Repricing Program in exchange for the surrender of then-outstanding options. See "Option Repricing." 10 14 Aggregated Option Exercises and Year-End Option Table The following table summarizes certain information regarding stock options exercised during the year ended December 31, 1998 and stock options held as of December 31, 1998 by each of the Named Executive Officers. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
NUMBER OF SHARES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED IN-THE-MONEY OPTIONS NUMBER OPTIONS AT FISCAL AT FISCAL YEAR-END OF SHARES VALUE YEAR-END (EXERCISABLE/ ACQUIRED ON REALIZED (EXERCISABLE/ UNEXERCISABLE) NAME EXERCISE (#) ($)(1) UNEXERCISABLE)(#) ($)(2) - ---- ------------ ---------- ----------------- -------------------- Charles R. Stuckey, Jr...... 250,000 $2,993,750 187,499/62,500 $ 1,145,000/$0 Arthur W. Coviello, Jr...... 25,000 631,405 298,218/102,982 3,970,027/1,370,948 Gary A. Rogers.............. 0 0 109,374/190,625 1,196,278/2,084,961 Albert E. Sisto............. 0 0 30,000/245,000 328,125/2,364,688 John Adams.................. 0 0 103,100/150,000 1,126,563/1,640,625
- --------------- (1) Represents the difference between the exercise price and the fair market value of the Common Stock on the date of exercise. (2) Value based on the last sales price per share ($23.00) of the Company's Common Stock on December 31, 1998, as reported on the Nasdaq National Market, less the exercise price. Option Repricing The following table sets forth information concerning all repricings of options since the Company became subject to the reporting requirements of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), held by executive officers of the Company. All such repricings were effected through the grant of replacement options in exchange for existing options. Messrs. Stuckey, Coviello and Bidzos did not participate in the Company's Option Repricing Program in August 1998. TEN-YEAR OPTION REPRICINGS
NUMBER OF MARKET SECURITIES PRICE OF EXERCISE LENGTH OF ORIGINAL UNDERLYING STOCK AT PRICE AT NEW OPTION TERM OPTIONS TIME OF TIME OF EXERCISE REMAINING AT DATE NAME DATE REPRICED REPRICING($) REPRICING($) PRICE($) OF REPRICING ---- -------- ---------- ------------ ------------ --------- ------------------ John Adams................... 08/12/98 178,100 $12.06 $24.30 $12.06 7 years, 7 months Senior Vice President, 08/12/98 75,000 12.06 19.00 12.06 9 years, 10 months Engineering Marian G. O'Leary............ 08/12/98 150,000 12.06 38.08 12.06 8 years, 11 months Senior Vice President, Finance, Chief Financial Officer and Treasurer Gary A. Rogers............... 08/12/98 250,000 12.06 30.50 12.06 8 years, 6 months Former Senior Vice 08/12/98 50,000 12.06 19.00 12.06 9 years, 10 months President, World Wide Sales and Field Operations
11 15
NUMBER OF MARKET SECURITIES PRICE OF EXERCISE LENGTH OF ORIGINAL UNDERLYING STOCK AT PRICE AT NEW OPTION TERM OPTIONS TIME OF TIME OF EXERCISE REMAINING AT DATE NAME DATE REPRICED REPRICING($) REPRICING($) PRICE($) OF REPRICING ---- -------- ---------- ------------ ------------ --------- ------------------ Linda E. Saris............... 08/12/98 30,000 12.06 24.76 12.06 7 years, 6 months Senior Vice President, 08/12/98 50,000 12.06 19.00 12.06 9 years, 10 months Customer Support and Operations Scott T. Schnell............. 08/12/98 65,000 12.06 19.00 12.06 9 years, 10 months Senior Vice President, Marketing Margaret K. Seif............. 08/12/98 50,000 12.06 24.13 12.06 4 years, 9 months Vice President, 08/12/98 50,000 12.06 19.00 12.06 9 years, 10 months General Counsel and Secretary Albert E. Sisto.............. 08/12/98 120,000 12.06 33.25 12.06 9 years, 4 months Former Chief Operating 08/12/98 75,000 12.06 19.00 12.06 9 years, 10 months Officer of RSA Data Security, Inc.
COMPENSATION COMMITTEE REPORT ON REPRICING OF OPTIONS In July 1998, the Board of Directors approved an Option Repricing Program pursuant to which each holder of an outstanding stock option (other than Messrs. Stuckey, Coviello and Bidzos) granted between January 1, 1996 and June 30, 1998 was entitled to exchange his or her outstanding options (the "Old Options") for new options exercisable at the fair market value of the Common Stock on August 12, 1998 (the "New Options"). Because of declines in the market value of the Company's Common Stock, certain then-outstanding options were exercisable at prices which substantially exceeded the market value of the Common Stock. In view of such declines in market value and in keeping with the Company's philosophy of utilizing equity incentives to motivate and retain qualified employees, the Board of Directors and the Compensation Committee determined that it was important to regain the incentive intended to be provided by options to purchase shares of the Company's Common Stock. The repricing was effected on August 12, 1998 by cancelling any Old Options surrendered for cancellation by persons participating in the Option Repricing Program and granting such persons New Options exercisable at $12.06 per share, the fair market value of the Common Stock at close of business on such date. Each New Option covers the same number of shares of Common Stock as the Old Option it replaced and has the identical vesting schedule as the Old Option, provided, however, that each New Option has certain restrictions on exercisability through November 12, 1999. Joseph B. Lassiter, III James K. Sims COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION The Compensation Committee is responsible for recommending compensation policies with respect to the Company's executive officers, and for making decisions about awards under certain of the Company's stock-based compensation plans. Each member of the Committee is a "non-employee director" within the meaning of Rule 16b-3 under the Exchange Act and an "outside director" within the meaning of Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). This report addresses the Company's compensation policies for 1998 as they affected the Chief Executive Officer and the Company's other executive officers, including the Named Executive Officers. Compensation Policies The Compensation Committee's executive compensation policies are designed to provide competitive compensation opportunities, reward executives consistent with the Company's performance, recognize 12 16 individual performance and responsibility, underscore the importance of stockholder value creation and assist the Company in attracting and retaining qualified executives. The principal elements of compensation employed by the Compensation Committee to meet these objectives are base salaries, annual cash incentives and long-term stock-based incentives. All compensation decisions are determined following a detailed review of many factors that the Compensation Committee believes are relevant, including external competitive data, the Company's achievements over the past year, the individual's contributions to the Company's success, any significant changes in role or responsibility, and the internal equity of compensation relationships. In general, the Compensation Committee intends that the overall total compensation opportunities provided to the executive officers should reflect competitive compensation for executives with corresponding responsibilities in comparable firms providing similar products and services. To the extent determined to be appropriate, the Compensation Committee also considers general economic conditions, the Company's financial performance, and the individual's performance in establishing the compensation opportunities of the executive officers. Total compensation opportunities for the executive officers are adjusted over time as necessary to meet this objective. Actual compensation earned by the executive officers reflects both their contributions to the Company's actual stockholder value creation and the Company's actual financial performance. The competitiveness of the Company's total compensation program -- including base salaries, annual cash incentives and long-term stock-based incentives -- is regularly assessed with the assistance of the Compensation Committee's outside compensation consultant. Data for external comparisons are drawn from a number of sources, including the publicly available disclosures of selected comparable firms with similar products and national compensation surveys of information technology firms of similar size. While the targeted total compensation levels for the executive officers are intended to be competitive, compensation paid in any particular year may be more or less than the average, depending upon the Company's actual performance. Base Salary Base salaries for all executive officers, including the Chief Executive Officer, are reviewed by the Compensation Committee on an annual basis. In determining appropriate base salaries, the Compensation Committee considers external competitiveness, the roles and responsibilities of the individual, the internal equity of compensation relationships and the contributions of the individual to the Company's success. Annual Cash Incentive Opportunities The Company believes that executives should be rewarded for their contributions to the success and profitability of the business and, as such, approves the annual cash incentive awards. Incentive awards are linked to the achievement of revenue and net income goals by the Company and/or specific business units, and the achievement by the executives of certain assigned objectives. The individual objectives set for executive officers of the Company are generally objective in nature and include such goals as revenue, profit and budget objectives, increased departmental productivity and improved quality control. The Compensation Committee believes that these arrangements tie the executive's performance closely to key measures of success of the Company or the executive's business unit. All executive officers, including the Chief Executive Officer, are eligible to participate in this program. Long-Term Stock-Based Incentives The Compensation Committee also believes that it is essential to link executive and stockholder interests. As such, from time to time the Compensation Committee grants stock options to executive officers and other employees under the Company's 1994 Stock Option Plan, as amended -- 1998 Restatement. In determining actual awards, the Compensation Committee considers the externally competitive market, the contributions of the individual to the success of the Company, and the need to retain the individual over time. All executive 13 17 officers, including the Chief Executive Officer, are eligible to receive awards under the 1994 Stock Option Plan, as amended -- 1998 Restatement. Section 162(m) of the Code generally disallows a tax deduction to public companies for compensation over $1,000,000 paid to its Named Executive Officers. Qualifying performance-based compensation will not be subject to the deduction limit if certain requirements are met. Although no Named Executive Officer received compensation exceeding this limit in 1998, the Company has limited the number of shares subject to stock options which may be granted to Company employees in a manner that complies with the performance-based requirements of Section 162(m). While the Compensation Committee does not currently intend to qualify its annual cash incentive awards as a performance-based plan, it will continue to monitor the impact of Section 162(m) on the Company. 1998 Compensation Base salaries paid in 1998, for all executive officers other than the Chief Executive Officer, reflect the Compensation Committee's review of external competitiveness, the roles and responsibilities of the individuals, the internal equity of compensation relationships and the contributions of the individual. The Company and Mr. Stuckey, the Chief Executive Officer of the Company, are parties to an Amended and Restated Employment Agreement, dated as of November 1, 1997, as amended, which provides for an annual base salary of $231,000, as well as annual bonuses. See "Compensation of Executive Officers -- Employment Agreements." The Compensation Committee believes that the base salary paid the Chief Executive Officer in 1998 was approximately competitive with base salaries paid to chief executive officers at comparable firms. Annual cash incentives paid to certain executive officers for 1998 were determined in conjunction with the Compensation Committee's assessment of the Company's and the individual's performance with respect to predetermined objectives as outlined above. No bonuses were awarded for fiscal 1998 for Messrs. Stuckey, Coviello and Bidzos. Stock options awarded in 1998 to certain executive officers were based on an assessment of individual contribution, Company success and competitive practice, and were intended to help retain the executives over time and to provide rewards consistent with stockholder returns. As such, all options granted in 1998 vest ratably over a predetermined period of time, with an exercise price equal to the fair market value on the date of the grant. With respect to these grants, no compensation will be earned unless the share price increases beyond the grant price, thereby creating stockholder returns. Joseph B. Lassiter, III James K. Sims CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS In March 1999, the Company reached an agreement in principle with Cambridge Technology Partners (Massachusetts), Inc. ("CTP") pursuant to which CTP will provide technology consulting services to the Company in 1999 at a cost of $215,000 plus expenses. James K. Sims, a member of the Board of Directors of the Company, is currently the Chief Executive Officer, President and member of the Board of Directors of CTP. 14 18 COMPARATIVE STOCK PERFORMANCE The graph below compares the cumulative total stockholder return on the Common Stock of the Company for the period from December 31, 1994 through December 31, 1998 with the cumulative total return on (i) Standard and Poor's SmallCap 600 Index and (ii) Hambrecht & Quist's Growth Index. The comparison assumes the investment of $100 on December 31, 1994 in the Company's Common Stock and in each of the indices and, in each case, assumes reinvestment of all dividends. Prior to December 1994, the Company's Common Stock was not registered under the Exchange Act.
SECURITY DYNAMICS HAMBRECHT & QUIST GROWTH TECHNOLOGIES, INC. S&P SMALLCAP 600 INDEX INDEX ------------------ ---------------------- ------------------------ '1994' 100.00 100.00 100.00 '1995' 585.24 129.96 166.83 '1996' 676.51 157.67 174.57 '1997' 767.79 198.02 178.74 '1998' 493.96 195.43 259.25
PROPOSAL 2 -- APPROVAL OF AMENDMENT TO THE THIRD RESTATED CERTIFICATE OF INCORPORATION, AS AMENDED The Company's Third Restated Certificate of Incorporation, as amended (the "Certificate of Incorporation"), currently authorizes the issuance of 80,000,000 shares of Common Stock. In January 1999, the Board of Directors adopted resolutions, subject to stockholder approval, proposing that the Certificate of Incorporation be amended to increase the authorized number of shares of Common Stock to 150,000,000 shares. As of March 4, 1999, the Company had 39,182,097 shares of Common Stock outstanding, and approximately 2,513,376 shares of Common Stock reserved for future issuance in connection with the Company's stock option, stock purchase and other stock-based benefit plans. Proposed Amendment to Certificate of Incorporation The Board of Directors has adopted resolutions setting forth the proposed amendment to the first paragraph of Article Fourth of the Certificate of Incorporation (the "Amendment"), the advisability of the Amendment, and a call for submission of the Amendment for approval by the Company's stockholders at the 15 19 Meeting. The following is the text of the first paragraph of Article Fourth of the Certificate of Incorporation, as proposed to be amended: FOURTH. The total number of shares of all classes of stock which the Corporation shall have authority to issue is One Hundred Fifty Million (150,000,000) shares of Common Stock, $.01 par value per share ("Common Stock"). Purpose and Effect of the Proposed Amendment The Board of Directors believes that it is in the Company's best interest to increase the number of authorized shares of Common Stock in order to give the Company additional flexibility to maintain a reasonable stock price with future stock splits and stock dividends. Since the Company's initial public offering in 1994, the Company has completed two separate 2-for-1 splits of the Common Stock. The current number of authorized shares of Common Stock that are not outstanding or reserved is not sufficient to enable the Company to complete another 2-for-1 stock split. Although there can be no guarantee that the Board will declare a stock split at any specific stock price or at all, the Board believes that the increase in the number of authorized shares will provide the Company with the flexibility necessary to maintain a reasonable stock price through future stock splits and stock dividends without the expense of a special stockholder meeting or having to wait until the next annual meeting. The Company has acquired a number of companies as part of implementing its strategy to broaden its portfolio of product offerings, to augment its technological capabilities and to expand its geographic markets and distribution channels. The Company has stated that, as part of its strategy, it may acquire additional companies for these and other business reasons. From time to time, the Company uses shares of Common Stock to pay for acquisitions. The Board believes that the proposed increase in the number of authorized shares of Common Stock is desirable to maintain the Company's flexibility in choosing how to pay for acquisitions. While the Company may consider issuing shares of Common Stock in the future for acquisitions, the Company does not presently have any plans, agreements, understandings or arrangements that will or could result in the issuance of any such shares. The Board also believes that the availability of additional shares of Common Stock will provide the Company with the flexibility to issue shares for a variety of other purposes that the Board of Directors may deem advisable without further action by the Company's stockholders, unless required by law, regulation or stock market rule. These purposes could include, among other things, the sale of stock to obtain additional capital funds, the purchase of property, the use of additional shares for various equity compensation and other employee benefit plans, and other bona fide corporate purposes. In some situations, the issuance of additional shares of Common Stock could have a dilutive effect on earnings per share, and, for a person who does not purchase additional shares to maintain his or her pro rata interest, on a stockholder's percentage voting power in the Company. In addition, depending upon the nature and terms thereof, such issuances could enable the Board to render more difficult or discourage an attempt to obtain a controlling interest in the Company or the removal of the incumbent Board and may discourage unsolicited takeover attempts which might be desirable to stockholders. For example, the issuance of shares of Common Stock in a public or private sale, merger or similar transaction would increase the number of the Company's outstanding shares, thereby diluting the interest of a party seeking to take over the Company. Furthermore, many companies have issued warrants or other rights to acquire additional shares to the holders of Common Stock to discourage or defeat unsolicited stock accumulation programs and acquisition proposals. If this amendment is adopted, more Common Stock of the Company would be available for such purposes than is currently available. The Board of Directors is not proposing the Amendment in response to any effort to accumulate the Company's stock or to obtain control of the Company by means of a merger, tender offer or solicitation in opposition to management. In addition, the Amendment is not part of any plan by management to recommend a series of similar amendments to the Board of Directors and the stockholders. Finally, the Board does not currently contemplate recommending the adoption of any other amendments to the Certificate of Incorporation which could be construed to affect the ability of third parties to take over or change control of the Company. 16 20 Holders of Common Stock do not have preemptive rights to subscribe to additional securities that may be issued by the Company. This means that current stockholders do not have a prior right to purchase any new issue of Common Stock of the Company in order to maintain their proportionate ownership interest. THE BOARD OF DIRECTORS BELIEVES THAT THE APPROVAL OF THE AMENDMENT IS IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE IN FAVOR OF THIS PROPOSAL. PROPOSAL 3 -- APPROVAL OF AMENDMENT TO THE 1994 STOCK OPTION PLAN, AS AMENDED -- 1998 RESTATEMENT On July 24, 1998, the Board of Directors adopted resolutions authorizing an amendment (the "1998 Amendment") to the Company's 1994 Stock Option Plan, as amended -- 1998 Restatement (the "1998 Restatement"), to increase the maximum number of shares of Common Stock which may be granted to any individual under the 1998 Restatement in any calendar year from 300,000 to 400,000 shares. The Board has adopted the 1998 Amendment because it believes that it will provide increased flexibility in providing equity compensation to current and potential key officers of the Company while maintaining the availability of tax deductions that might otherwise be unavailable. Section 162(m) of the Code disallows a tax deduction to public companies for certain compensation in excess of $1 million paid to certain of its executive officers. The 1998 Restatement, as originally adopted, limited to 300,000 the maximum number of shares of Common Stock which may be granted to any individual under the 1998 Restatement in any calendar year. Such a limitation is required under Section 162(m) in order to exclude the "performance-based compensation" under the 1998 Restatement from the $1 million limitation. If the 1998 Amendment is approved, the Company will have additional flexibility in encouraging stock ownership by current and potential key officers of the Company through the granting of stock options and other stock-based awards under the 1998 Restatement. On January 27, 1999, the Board of Directors adopted resolutions, subject to stockholder approval, to approve an amendment (the "1999 Amendment") to the 1998 Restatement to increase the number of shares of Common Stock authorized for issuance under the 1998 Restatement from 9,570,000 to 11,570,000 shares. The Board has adopted the 1999 Amendment because it believes that the number of shares currently available under the 1998 Restatement will not be sufficient to satisfy the Company's incentive compensation needs through fiscal 1999. The Board of Directors believes that continued grants of stock options, as well as grants of restricted stock and other stock-based awards, will be an important element in attracting and retaining key employees who are expected to contribute to the Company's growth and success. If the 1999 Amendment is approved, the Company will have additional authorized shares of Common Stock available for future awards, including awards in connection with any merger, consolidation or acquisition by the Company. As of March 4, 1999, and subject to stockholder approval of the 1999 Amendment, 2,196,984 shares of Common Stock were available for issuance under the 1998 Restatement. THE BOARD OF DIRECTORS BELIEVES THAT THE APPROVAL OF THE AMENDMENTS TO THE 1998 RESTATEMENT IS IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE IN FAVOR OF THIS PROPOSAL. SUMMARY OF THE 1998 RESTATEMENT The following is a summary of the material provisions of the 1998 Restatement. Description of Awards The 1998 Restatement provides for the grant of incentive stock options within the meaning of Section 422 of the Code ("incentive stock options"), or options not intended to qualify as incentive stock options ("nonstatutory options"), restricted stock awards and other stock-based awards, including the grant of shares based upon certain conditions, the grant of securities convertible into Common Stock and the grant of stock appreciation rights. Generally, awards under the 1998 Restatement are not assignable or transferable except by 17 21 will or the laws of descent and distribution and, in the case of nonstatutory options, pursuant to a qualified domestic relations order (as defined in the Code). Incentive Stock Options and Nonstatutory Stock Options. Optionees receive the right to purchase a specified number of shares of Common Stock at a specified option price and subject to such other terms and conditions as are specified in connection with the option grant. Subject to the limitations described below, options may be granted at an exercise price which may be less than, equal to or greater than the fair market value of the Common Stock on the date of grant. Under present law, however, incentive stock options and options intended to qualify as performance-based compensation under Section 162(m) of the Code may not be granted at an exercise price less than the fair market value of the Common Stock on the date of grant (or less than 110% of the fair market value in the case of incentive stock options granted to optionees holding more than 10% of the voting power of the Company). Options may not be granted for a term in excess of ten years. The 1998 Restatement permits the administrator to determine the manner of payment of the exercise price of options, including through payment by cash, check or in connection with a "cashless exercise" through a broker, by surrender to the Company of shares of Common Stock, by delivery to the Company of a promissory note, or by any other lawful means. Any optionee who is a participant in a deferred compensation plan of the Company may elect to defer, subject to certain limitations, the receipt of shares issuable upon the exercise of an option. Restricted Stock Awards. Restricted stock awards entitle recipients to acquire shares of Common Stock, subject to the right of the Company to repurchase all or part of such shares from the recipient in the event that the conditions specified in the applicable award are not satisfied prior to the end of the applicable restriction period established for such award. Other Stock-Based Awards. Under the 1998 Restatement, the Board of Directors has the right to grant other awards based upon the Common Stock having such terms and conditions as the Board may determine, including the grant of shares based upon certain conditions, the grant of securities convertible into Common Stock and the grant of stock appreciation rights. Eligibility to Receive Awards Officers, employees, directors, consultants and advisors of the Company and its subsidiaries are eligible to be granted awards under the 1998 Restatement. Under present law, however, incentive stock options may only be granted to employees. The maximum number of shares with respect to which an award may be granted to any participant under the 1998 Restatement may not exceed 300,000 shares per calendar year. As of January 31, 1999, the Company had approximately 758 employees and five non-employee directors, all of whom were eligible to participate in the 1998 Restatement. The number of individuals receiving awards varies from year to year depending on various factors, such as the number of promotions and the Company's hiring needs during the year, and thus the Company cannot now determine award recipients. From the initial adoption of the Company's 1994 Stock Option Plan through January 31, 1999: options to purchase an aggregate of 337,500 shares thereunder had been granted to Charles R. Stuckey, Jr., the Chairman of the Board of Directors and Chief Executive Officer of the Company; options to purchase an aggregate of 737,500 shares thereunder had been granted to Arthur W. Coviello, Jr., the President and Chief Operating Officer, and a member of the Board of Directors, of the Company; options to purchase an aggregate of 300,000 shares thereunder had been granted to Gary A. Rogers, the former Senior Vice President, World Wide Sales and Field Operations of the Company; options to purchase an aggregate of 270,000 shares thereunder had been granted to Albert E. Sisto, the former Chief Operating Officer of RSA Data Security, Inc.; options to purchase an aggregate of 275,000 shares thereunder had been granted to John Adams, the Senior Vice President, Engineering of the Company; options to purchase an aggregate of 380,000 shares thereunder had been granted to all current directors who are not executive officers of the Company as a group; options to purchase an aggregate of 1,995,000 shares thereunder had been granted to all current executive officers of the Company as a group; options to purchase an aggregate of 350,000 shares thereunder had been granted to D. James Bidzos, the Vice Chairman of the Board of Directors of the Company and a nominee for director; no options to purchase shares thereunder had been granted to any associate of any director, executive officer or 18 22 nominee for director of the Company; and options to purchase an aggregate of 9,086,250 shares thereunder had been granted to all employees of the Company who are not executive officers. On March 4, 1999, the last reported sale price of the Company's Common Stock on the Nasdaq National Market was $16.50. Administration The 1998 Restatement is administered by the Compensation Committee of the Board of Directors. Subject to the provisions of the 1998 Restatement, the Compensation Committee has the authority to select the persons to whom awards are granted and determine the terms of each award, including (i) the number of shares of Common Stock covered by options and the dates upon which such options become exercisable, (ii) the exercise price of options, (iii) the duration of options, and (iv) the number of shares of Common Stock subject to any restricted stock or other stock-based awards and the terms and conditions of such awards, including conditions for repurchase, issue price and repurchase price. The Compensation Committee may, in its sole discretion, include additional provisions in any award granted or made under the 1998 Restatement, including without limitation restrictions on transfer, repurchase rights, commitments to pay cash bonuses, to make, arrange for or guarantee loans or to transfer other property to optionees upon exercise of options, or such other provisions as shall be determined by the Compensation Committee, so long as not inconsistent with the 1998 Restatement or applicable law. The Compensation Committee may also, in its sole discretion, accelerate or extend the date or dates on which all or any particular option or options granted under the 1998 Restatement may be exercised. The Board of Directors is required to make appropriate adjustments in connection with the 1998 Restatement and any outstanding awards to reflect stock dividends, stock splits and certain other events. In the event of a merger, liquidation or other Acquisition Event (as defined in the 1998 Restatement), the Board of Directors is authorized to provide for outstanding options or other stock-based awards to be assumed or substituted for, to accelerate the awards to make them fully exercisable prior to consummation of the Acquisition Event or to provide for a cash out of the value of any outstanding options. If any award expires or is terminated, surrendered, canceled or forfeited, the unused shares of Common Stock covered by such award will again be available for grant under the 1998 Restatement. The 1998 Restatement will remain in effect until October 3, 2004 (except that it will continue in effect as to equity-related securities outstanding on that date), unless earlier terminated by the Board of Directors. The Board of Directors may amend, suspend or terminate the 1998 Restatement or any portion thereof at any time, provided that no amendment shall be made without stockholder approval if such approval is necessary to comply with any applicable tax or regulatory requirement. FEDERAL INCOME TAX CONSEQUENCES The following is a summary of the United States federal income tax consequences that generally will arise with respect to awards granted under the 1998 Restatement and with respect to the sale of Common Stock acquired under the 1998 Restatement. Incentive Stock Options In general, a participant will not recognize taxable income upon the grant or exercise of an incentive stock option. Instead, a participant will recognize taxable income with respect to an incentive stock option only upon the sale of Common Stock acquired through the exercise of the option ("ISO Stock"). The exercise of an incentive stock option, however, may subject the participant to the alternative minimum tax. Generally, the tax consequences of selling ISO Stock will vary with the length of time that the participant has owned the ISO Stock at the time it is sold. If the participant sells ISO Stock after having owned it for at least two years from the date the option was granted (the "Grant Date") and one year from the date the option was exercised (the "Exercise Date"), then the participant will recognize long-term capital gain in an amount equal to the excess of the sale price of the ISO Stock over the exercise price. 19 23 If the participant sells ISO Stock for more than the exercise price prior to having owned it for at least two years from the Grant Date and one year from the Exercise Date (a "Disqualifying Disposition"), then all or a portion of the gain recognized by the participant will be ordinary compensation income and the remaining gain, if any, will be a capital gain. This capital gain will be a long-term capital gain if the participant has held the ISO Stock for more than one year prior to the date of sale. If a participant sells ISO Stock for less than the exercise price, then the participant will recognize capital loss equal to the excess of the exercise price over the sale price of the ISO Stock. This capital loss will be a long-term capital loss if the participant has held the ISO Stock for more than one year prior to the date of sale. Nonstatutory Stock Options As in the case of an incentive stock option, a participant will not recognize taxable income upon the grant of a nonstatutory stock option. Unlike the case of an incentive stock option, however, a participant who exercises a nonstatutory stock option generally will recognize ordinary compensation income in an amount equal to the excess of the fair market value of the Common Stock acquired through the exercise of the option ("NSO Stock") on the Exercise Date over the exercise price. With respect to any NSO Stock, a participant will have a tax basis equal to the exercise price plus any income recognized upon the exercise of the option. Upon selling NSO Stock, a participant generally will recognize capital gain or loss in an amount equal to the excess of the sale price of the NSO Stock over the participant's tax basis in the NSO Stock. This capital gain or loss will be a long-term gain or loss if the participant has held the NSO Stock for more than one year prior to the date of the sale. Restricted Stock Awards A participant will not recognize taxable income upon the grant of a restricted stock award, unless the participant makes an election under Section 83(b) of the Code (a "Section 83(b) Election"). If the participant makes a Section 83(b) Election within 30 days of the date of the grant, then the participant will recognize ordinary income, for the year in which the award is granted, in an amount equal to the difference between the fair market value of the Common Stock at the time the award is granted and the purchase price paid for the Common Stock. If a Section 83(b) Election is not made, the participant will recognize ordinary income, at the time that the forfeiture provisions or restrictions on transfer lapse, in an amount equal to the difference between the fair market value of the Common Stock at the time of such lapse and the original purchase price paid for the Common Stock. The participant will have a basis in the Common Stock acquired equal to the sum of the price paid and the amount of ordinary compensation income recognized. Upon the disposition of the Common Stock acquired pursuant to a restricted stock award, the participant will recognize a capital gain or loss equal to the difference between the sale price of the Common Stock and the participant's basis in the Common Stock. The gain or loss will be a long-term gain or loss if the shares are held for more than one year. For this purpose, the holding period shall begin just after the date on which the forfeiture provisions or restrictions lapse if a Section 83(b) Election is not made, or just after the award is granted if a Section 83(b) Election is made. Other Stock-Based Awards The tax consequences associated with any other stock-based award granted under the 1998 Restatement will vary depending on the specific terms of such award. Among the relevant factors are whether or not the award has a readily ascertainable fair market value, whether or not the award is subject to forfeiture provisions or restrictions on transfer, the nature of the property to be received by the participant under the award and the participant's holding period and tax basis for the award or underlying Common Stock. Maximum Income Tax Rates on Capital Gain and Ordinary Income Long-term capital gain will be taxable at a maximum rate of 20% if attributable to Common Stock held for more than eighteen months and at a maximum rate of 28% if attributable to Common Stock held for more 20 24 than one year but not more than eighteen months. Short-term capital gain and ordinary income will be taxable at a maximum rate of 39.6%. Phaseouts of personal exemptions and reductions of allowable itemized deductions at higher levels of income may result in slightly higher marginal tax rates. Ordinary compensation income will also be subject to a medicare tax and, under certain circumstances, a social security tax. Tax Consequences to the Company The grant of an award under the 1998 Restatement will have no tax consequences to the Company. Moreover, in general, neither the exercise of an incentive stock option nor the sale of any Common Stock acquired under the 1998 Restatement will have any tax consequences to the Company. The Company generally will be entitled to a business-expense deduction, however, with respect to any ordinary compensation income recognized by a participant under the 1998 Restatement, including in connection with a restricted stock award or as a result of the exercise of a nonstatutory stock option or a Disqualifying Disposition. Any such deduction will be subject to the limitations of Section 162(m) of the Code. The Company will have a withholding obligation with respect to any ordinary compensation income recognized by participants under the 1998 Restatement who are employees or otherwise subject to withholding in connection with a restricted stock award or the exercise of a nonstatutory stock option. PROPOSAL 4 -- APPROVAL OF AMENDMENT TO THE 1994 DIRECTOR STOCK OPTION PLAN On January 27, 1999, the Board of Directors adopted resolutions, subject to stockholder approval, to approve an amendment (the "Director Plan Amendment") to the Company's 1994 Director Stock Option Plan, as amended (the "Director Plan"), to increase the number of shares of Common Stock authorized for issuance under the Director Plan from 300,000 shares to 500,000 shares. The Board has adopted the Director Plan Amendment because the number of shares currently available under the Director Plan is insufficient to satisfy further option grant requirements thereunder. As of March 4, 1999, and subject to stockholder approval of the Director Plan Amendment, 254,000 shares of Common Stock were available for issuance under the Director Plan. THE BOARD OF DIRECTORS BELIEVES THAT THE APPROVAL OF THE DIRECTOR PLAN AMENDMENT IS IN THE BEST INTERESTS OF THE COMPANY AND ITS STOCKHOLDERS AND RECOMMENDS A VOTE IN FAVOR OF THIS PROPOSAL. SUMMARY OF THE DIRECTOR PLAN The Director Plan was adopted by the Board of Directors and approved by the stockholders of the Company in October 1994. Under the terms of the Director Plan, directors of the Company who are not employees of the Company or any subsidiary of the Company are eligible to receive nonstatutory options to purchase shares of Common Stock. Each eligible director is entitled to receive options under the Director Plan to purchase shares of Common Stock upon his or her initial election to the Board of Directors. Such options cover the number of shares of Common Stock determined by multiplying (i) 12,000 by (ii) the quotient of (x) the number of whole calendar months between the option grant date and the date of the next annual meeting of stockholders and (y) 12. In addition, annual options to purchase 12,000 shares of Common Stock will also be granted under the Director Plan to each eligible director on the date of each annual meeting of stockholders, provided that such director continues to serve as director immediately after such annual meeting. Options to purchase 12,000 shares of Common Stock at an exercise price of $24.125 per share were granted under the Director Plan to each of Messrs. Earnest, Lassiter, Middlemas and Sims on April 30, 1998, the date of the Company's 1998 Annual Meeting of Stockholders. An option to purchase 1,000 shares of Common Stock at an exercise price of $22.00 per share was granted to Mr. Elgamal on February 3, 1999, the date of his election to the Board of Directors of the Company. 21 25 All options granted under the Director Plan vest on the first anniversary of the date of grant (or, in the case of annual options, the day prior to the first annual meeting of stockholders of the Company following the date of grant, if earlier). On February 3, 1999, in connection with his resignation from the Board of Directors of the Company, the Company accelerated the vesting of the option granted to Sanford M. Sherizen on April 30, 1998 such that the option became fully exercisable as of such date. The exercise price of options granted under the Director Plan will equal the lesser of (i) the closing price of the Common Stock on the date of grant or (ii) the average of the closing prices of the Common Stock on the Nasdaq National Market (or such other nationally recognized exchange or trading system if the Common Stock is no longer traded on the Nasdaq National Market) for a period of ten consecutive trading days prior to such date. Except as otherwise provided by the Board of Directors, options granted under the Director Plan generally are not transferrable by the optionee except by will or by the laws of descent and distribution. In the event an optionee ceases to serve as a director, each option may be exercised by the optionee for the portion then exercisable at any time within 60 days after the optionee ceases to serve as a director; provided, however, that in the event that the optionee ceases to serve as a director due to his death or disability, then the optionee, or his or her administrator, executor or heirs may exercise the exercisable portion of the option for up to 180 days following the date the optionee ceased to serve as a director. No option is exercisable after the expiration of ten years from the date of grant. As of February 3, 1999, the Company had five non-employee directors who were eligible to participate in the Director Plan. From the initial adoption of the Director Plan through February 3, 1999: options to purchase an aggregate of 52,000 shares thereunder had been granted to Richard L. Earnest; options to purchase an aggregate of 1,000 shares thereunder had been granted to Taher Elgamal; options to purchase an aggregate of 33,000 shares thereunder had been granted to Joseph B. Lassiter, III; options to purchase an aggregate of 52,000 shares thereunder had been granted to George M. Middlemas; and options to purchase an aggregate of 18,000 shares thereunder had been granted to James K. Sims. On March 4, 1999, the last reported sale price of the Company's Common Stock on the Nasdaq National Market was $16.50. The Director Plan is administered by the Board of Directors. Grants of stock options under the Director Plan and the amount and nature of the awards to be granted shall be automatic in accordance with the provisions of the Director Plan. However, all questions concerning interpretation of the Director Plan or any options granted thereunder shall be resolved by the Board of Directors. The Board of Directors is required to make appropriate adjustments in connection with the Director Plan and any outstanding grants to reflect stock dividends, stock splits and certain other events, including mergers. Subject to the provisions of the Director Plan, the Board of Directors may modify or amend outstanding options, and may amend, suspend, terminate or discontinue the Director Plan. FEDERAL INCOME TAX CONSEQUENCES The following is a summary of the United States federal income tax consequences that generally will arise with respect to the grant and exercise of stock options under the Director Plan and with respect to the sale of Common Stock acquired under the Director Plan. It does not address the tax consequences that may arise with respect to any gift or disposition other than by sale of Common Stock acquired under the Director Plan. Tax Consequences to Directors A director will not recognize taxable income upon the grant of an option under the Director Plan. However, a director will recognize ordinary compensation income upon the exercise of the option in an amount equal to the excess of the fair market value of the Common Stock acquired through the exercise of the option (the "Option Stock") on the exercise date over the exercise price. A director will have a tax basis for any Option Stock equal to the exercise price plus any income recognized with respect to the option. Upon selling Option Stock, a director generally will recognize capital gain or loss in an amount equal to the difference between the sale price of the Option Stock and the director's 22 26 tax basis in the Option Stock. This capital gain or loss will be a long-term capital gain or loss if the director has held the Option Stock for more than one year prior to the date of the sale and will be a short-term capital gain or loss if the director has held the Option Stock for a shorter period. Maximum Income Tax Rates on Capital Gain and Ordinary Income Long-term capital gain will be taxable at a maximum rate of 20%. Short-term capital gain and ordinary income will be taxable at a maximum rate of 39.6%. Phaseouts of personal exemptions and reductions of allowable itemized deductions at higher levels of income may result in slightly higher marginal tax rates. Ordinary compensation income will also be subject to a medicare tax and, under certain circumstances, a social security tax. Tax Consequences to the Company The grant of a stock option under the Director Plan will have no tax consequences to the Company except that the Company generally will be entitled to a business-expense deduction with respect to any ordinary compensation income recognized by a director under the Director Plan. PROPOSAL 5 -- RATIFICATION OF THE APPOINTMENT OF AUDITORS The Board of Directors has selected Deloitte & Touche LLP as auditors of the Company for the year ending December 31, 1999, subject to ratification by stockholders at the Meeting. If the stockholders do not ratify the selection of Deloitte & Touche LLP, the Board of Directors will reconsider the matter. A representative of Deloitte & Touche LLP, which served as the Company's auditors for the year ended December 31, 1998, is expected to be present at the Meeting to respond to appropriate questions, and to make a statement if he or she so desires. STOCKHOLDER PROPOSALS FOR 2000 ANNUAL MEETING Any proposal that a stockholder of the Company wishes to be considered for inclusion in the Company's proxy statement and proxy card for the Company's 2000 Annual Meeting of Stockholders (the "2000 Annual Meeting") must be submitted to the Secretary of the Company at its offices, 36 Crosby Drive, Bedford, Massachusetts 01730, no later than November 23, 1999. If a stockholder of the Company wishes to present a proposal before the 2000 Annual Meeting, but does not wish to have the proposal considered for inclusion in the Company's proxy statement and proxy card, such stockholder must also give written notice to the Secretary of the Company at the address noted above. The Secretary must receive such notice not less than 60 days nor more than 90 days prior to the 2000 Annual Meeting; provided that, in the event that less than 70 days' notice or prior public disclosure of the date of the 2000 Annual Meeting is given or made, notice by the stockholder must be received not later than the close of business on the 10th day following the date on which such notice of the date of the meeting was mailed or such public disclosure was made, whichever occurs first. If a stockholder fails to provide timely notice of a proposal to be presented at the 2000 Annual Meeting, the proxies designated by the Board of Directors of the Company will have discretionary authority to vote on any such proposal. SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Exchange Act requires the Company's directors, executive officers and holders of more than 10% of the Company's Common Stock ("Reporting Persons") to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of Common Stock and other equity securities of the Company. Except as described below, and based solely on its review of copies of Section 16(a) reports filed by the Reporting Persons furnished to the Company, the Company believes that during 1998 the Reporting Persons complied with all Section 16(a) filing requirements. 23 27 D. James Bidzos, the Vice Chairman of the Board of Directors of the Company, reported the exercise of options for 307,271 shares of Common Stock which occurred on August 14, 1998 on a Form 4 filed on September 24, 1998. Richard L. Earnest, a member of the Board of Directors of the Company, reported the exercise of options for 4,000 shares of Common Stock which occurred on September 8, 1998, and sales of an aggregate 4,516 shares of Common Stock which occurred on September 8, 1998 in two separate transactions, on a Form 4 filed on October 28, 1998. OTHER MATTERS The Board of Directors knows of no other business which will be presented for consideration at the Meeting other than that described above. However, if any other business should come before the Meeting, it is the intention of the persons named in the enclosed proxy card to vote, or otherwise act, in accordance with their best judgment on such matters. The Company will bear the costs of soliciting proxies. In addition to solicitations by mail, the Company's directors, officers and regular employees may, without additional remuneration, solicit proxies by telephone, facsimile and personal interviews. The Company will also request brokerage houses, custodians, nominees and fiduciaries to forward copies of the proxy materials to those persons for whom they hold shares and request instructions for voting the proxies. The Company will reimburse such brokerage houses and other persons for their reasonable expenses in connection with this distribution. The Company has also retained MacKenzie Partners, Inc. at an estimated expense of $4,000 plus reimbursement of expenses, to assist in the solicitation of proxies by telephone and mail. THE BOARD OF DIRECTORS HOPES THAT STOCKHOLDERS WILL ATTEND THE MEETING. WHETHER OR NOT YOU PLAN TO ATTEND, YOU ARE URGED TO COMPLETE, DATE AND SIGN THE ENCLOSED PROXY CARD AND RETURN IT IN THE ACCOMPANYING ENVELOPE. PROMPT RESPONSE WILL GREATLY FACILITATE ARRANGEMENTS FOR THE MEETING AND YOUR COOPERATION IS APPRECIATED. STOCKHOLDERS WHO ATTEND THE MEETING MAY VOTE THEIR SHARES PERSONALLY EVEN THOUGH THEY HAVE SENT IN THEIR PROXY CARDS. By Order of the Board of Directors, /s/ Margaret K. Seif Margaret K. Seif, Secretary March 22, 1999 24 28 SDMCM-PS-99 29 APPENDIX A SECURITY DYNAMICS TECHNOLOGIES, INC. PROXY FOR THE ANNUAL MEETING OF STOCKHOLDERS TO BE HELD APRIL 22, 1999 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF THE COMPANY AND SHOULD BE RETURNED AS SOON AS POSSIBLE The undersigned, having received notice of the Annual Meeting of Stockholders and the Board of Directors' proxy statement therefor, and revoking all prior proxies, hereby appoint(s) Charles R. Stuckey, Jr. and Arthur W. Coviello, Jr., and each of them, attorneys or attorney of the undersigned (with full power of substitution in them and each of them) for and in the name(s) of the undersigned to attend the Annual Meeting of Stockholders of SECURITY DYNAMICS TECHNOLOGIES, INC. (the "Company") to be held on Thursday, April 22, 1999 at 3:00 p.m. at the offices of Hale and Dorr LLP, 60 State Street, Boston, Massachusetts, and any adjournments thereof, and there to vote and act upon the following matters proposed by the Company in respect of all shares of stock of the Company which the undersigned may be entitled to vote or act upon, with all the powers the undersigned would possess if personally present. None of the following proposals is conditioned upon the approval of any other proposal. In their discretion, the proxy holders are authorized to vote upon such other matters as may properly come before the meeting or any adjournments thereof. The shares represented by this proxy will be voted as directed by the undersigned. IF NO DIRECTION IS GIVEN WITH RESPECT TO ANY ELECTION TO OFFICE OR PROPOSAL, THIS PROXY WILL BE VOTED AS RECOMMENDED BY THE BOARD OF DIRECTORS. Attendance of the undersigned at the meeting or at any adjournment thereof will not be deemed to revoke this proxy unless the undersigned shall revoke this proxy in writing. THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY THE UNDERSIGNED STOCKHOLDER(S). IF NO OTHER INDICATION IS MADE, THE PROXIES SHALL VOTE "FOR" EACH OF THE DIRECTOR NOMINEES AND "FOR" EACH OF PROPOSALS 2 THROUGH 5. WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, YOU ARE URGED TO COMPLETE, DATE AND SIGN THIS PROXY AND RETURN IT IN THE ACCOMPANYING ENVELOPE. A VOTE "FOR" EACH OF THE DIRECTOR NOMINEES AND A VOTE "FOR" EACH OF PROPOSALS 2 THROUGH 5 ARE RECOMMENDED BY THE BOARD OF DIRECTORS. PLEASE MARK, SIGN, DATE AND RETURN PROMPTLY IN THE ENCLOSED ENVELOPE. NOTE: PLEASE SIGN EXACTLY AS NAME APPEARS HEREON. WHEN SHARES ARE HELD BY JOINT OWNERS, BOTH SHOULD SIGN. WHEN SIGNING AS ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL TITLE AS SUCH. IF A CORPORATION, PLEASE SIGN IN FULL CORPORATE NAME BY AUTHORIZED OFFICER, GIVING FULL TITLE. IF A PARTNERSHIP, PLEASE SIGN IN PARTNERSHIP NAME BY AUTHORIZED PERSON, GIVING FULL TITLE. HAS YOUR ADDRESS CHANGED? DO YOU HAVE ANY COMMENTS? - ----------------------------- ---------------------------------- - ----------------------------- ---------------------------------- 30 - ----------------------------- ---------------------------------- [X] PLEASE MARK VOTES AS IN THIS EXAMPLE SECURITY DYNAMICS TECHNOLOGIES, INC. MARK BOX AT MARK BOX AT RIGHT IF RIGHT IF YOU [ ] AN ADDRESS CHANGE [ ] PLAN TO OR COMMENT HAS BEEN ATTEND THE NOTED ON THE REVERSE MEETING SIDE OF THIS CARD 1. To elect the following nominees for Class II Director to serve for the ensuing three years (except as marked below): D. James Bidzos Richard L. Earnest Taher Elgamal [ ] FOR ALL NOMINEES [ ] WITHHOLD [ ] FOR ALL EXCEPT Note: If you do not wish your shares voted "For" a particular nominee, mark the "For All Except" box and strike a line through the name(s) of the nominee(s). Your shares will be voted for the remaining nominee(s). 2. To approve an amendment to the Company's Third Restated Certificate of Incorporation, as amended, to increase the number of authorized shares of Common Stock from 80,000,000 to 150,000,000 shares. [ ] FOR [ ] AGAINST [ ] ABSTAIN 31 3. To approve an amendment to the Company's 1994 Stock Option Plan, as amended - 1998 Restatement to (i) increase the number of shares of Common Stock authorized for issuance thereunder from 9,570,000 to 11,570,000 shares and (ii) increase the maximum number of shares of Common Stock that may be issued in any calendar year to a participant thereunder from 300,000 to 400,000 shares. [ ] FOR [ ] AGAINST [ ] ABSTAIN 4. To approve an amendment to the Company's 1994 Director Stock Option Plan, as amended, to increase the number of shares of Common Stock authorized for issuance thereunder from 300,000 to 500,000 shares. [ ] FOR [ ] AGAINST [ ] ABSTAIN 5. To ratify the appointment of Deloitte & Touche LLP as the Company's independent auditors for the current year. [ ] FOR [ ] AGAINST [ ] ABSTAIN IN THEIR DISCRETION, THE PROXIES ARE AUTHORIZED TO VOTE UPON SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE ANNUAL MEETING AND ANY ADJOURNMENT THEREOF. 32 RECORD DATE SHARES: Please be sure to sign and date this Proxy. Date: ______________________ ___________________________________ Stockholder sign here ___________________________________ Co-owner sign here DETACH CARD DETACH CARD -----END PRIVACY-ENHANCED MESSAGE-----