Amendment to Annual Report — Form 10-K Filing Table of Contents
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2: EX-23.1 Consent of Experts or Counsel HTML 25K
3: EX-31.1 Certification per Sarbanes-Oxley Act (Section 302) HTML 12K
4: EX-31.2 Certification per Sarbanes-Oxley Act (Section 302) HTML 12K
Securities registered under Section 12 (b) of the
Exchange Act:
NONE
Securities registered under Section 12 (g) of the
Exchange Act:
Title of Each Class
Name of Each Exchange on Which Registered
Common Stock, $.01 par value
NASDAQ National Market
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15
(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. o
Indicate by check mark whether the Registrant is an accelerated
filer (as defined in Exchange
Rule 12b-2). Yes þ No o
The aggregate market value of the Common Stock issued and
outstanding and held by non-affiliates of the Registrant, based
upon the closing price for the Common Stock on the NASDAQ
National Market on June 30, 2004 was approximately
$523,300,000. All executive officers and directors of the
Registrant have been deemed, solely for the purpose of this
calculation, to be “affiliates” of the Registrant.
This determination of the affiliate status is not necessarily
conclusive.
This Amendment No. 1 on Form 10-K/ A to Safenet,
Inc.’s (the “Company“or “SafeNet”)
Annual Report on Form 10-K for the fiscal year ended
December 31, 2004 (the “Original Filing”), which
was filed with the Securities and Exchange Commission on
March 16, 2005, is being filed to amend the Original Filing
as follows:
•
Item 9A is amended to include Management’s Annual
Report on Internal Controls Over Financial Reporting.
•
Item 9A is amended to include the related Attestation
Report of the Independent Registered Public Accounting Firm.
•
Part III (Items 10, 11, 12, 13 and 14) is
amended to include the required information.
On November 30, 2004, the Securities and Exchange
Commission issued Release No. 34-50754 providing up to 45
additional days beyond the date of the Original Filing for the
filing of the reports under Item 9A noted above. As a
result of these amendments, the certifications pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, filed as
exhibits to the Original Filing, have been re-executed and
re-filed as of the date of this Form 10-K/A.
Except for the amendments described above, this Form 10-K/
A does not modify or update other disclosures in, or exhibits
to, the Original Filing.
ITEM 9A.
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this Annual Report on
Form 10-K, we carried out an evaluation, under the
supervision and participation of our management, including our
Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer assessed the
Company’s disclosure controls and procedures to be
effective.
Management’s Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in the Exchange Act Rules 13a-15(f) and
15d-15(f). Because of its inherent limitations, internal control
over financial reporting may not prevent or detect
misstatements. Projections of any evaluation of effectiveness to
future periods are subject to the risks that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
as of December 31, 2004 based on the framework in Internal
Control — Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission (COSO).
Based on that evaluation, our management concluded that our
internal control over financial reporting was effective as of
December 31, 2004.
Management’s assessment of the effectiveness of our
internal control over financial reporting as of
December 31, 2004 has been audited by Ernst &
Young LLP, an independent registered public accounting firm, as
stated in their report which is included elsewhere herein.
1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM —
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders
SafeNet, Inc.
We have audited management’s assessment, included in the
accompanying Management’s Report on Internal Control over
Financial Reporting, that SafeNet, Inc. maintained effective
internal control over financial reporting as of
December 31, 2004, based on criteria established in
Internal Control — Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(the COSO criteria). SafeNet, Inc.’s management is
responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness
of internal control over financial reporting. Our responsibility
is to express an opinion on management’s assessment and an
opinion on the effectiveness of the company’s internal
control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
management’s assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A company’s
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that SafeNet, Inc.
maintained effective internal control over financial reporting
as of December 31, 2004, is fairly stated, in all material
respects, based on the COSO criteria. Also, in our opinion,
SafeNet, Inc. maintained, in all material respects, effective
internal control over financial reporting as of
December 31, 2004, based on the COSO criteria.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of SafeNet, Inc. and subsidiaries as
of December 31, 2004 and 2003, and the related consolidated
statements of operations, comprehensive income (loss),
stockholders’ equity, and cash flows for each of the three
years in the period ended December 31, 2004 and our report
dated March 7, 2005 expressed an unqualified opinion
thereon.
Anthony A. Caputo, the Chairman and Chief Executive
Officer of the Company, has served as the Chief Executive
Officer since 1987 and a director of the Company since November
1986. He joined SafeNet in 1986 as an investor. In November of
that year, he became a Director with additional marketing and
management responsibilities. Mr. Caputo led the
company’s IPO as SafeNet became a Nasdaq listed company in
1992. In 1993, Mr. Caputo was named Maryland’s High
Tech Entrepreneur of the year and Baltimore’s Extraordinary
Technology Advocate for 2003. He serves on the Governor’s
Commission on the Development of Advanced Technology Business, a
commission tasked with charting a framework for the revival of
the hi-tech economy in Maryland. Mr. Caputo is a member of
the State of Maryland Enterprise Venture Fund Advisory
Board and serves on the Board of Directors for the American
Electronics Association (AeA). Mr. Caputo holds a Bachelor
of Arts degree in History and Political Science from Iona
College. He has served as an officer in several publicly-held
companies, including Interdigital Communications, Comshare,
Inc., Value Software, now part of Computer Associates, Inc., and
served as a director at Oleran Network Solutions, Inc.
Thomas A. Brookshas served as a director of the Company
since July 1998. Mr. Brooks held various executive
positions with AT&T from 1991 through 1999. He retired from
AT&T in 1999 and continues as a consultant to AT&T
Government Markets. Mr. Brooks served 32 years as a
U.S. Navy Intelligence officer, retiring from active
military service as a Rear Admiral and Director of Naval
Intelligence in 1991. In 1995, President Clinton appointed
Mr. Brooks as one of three members of the Security Policy
Advisory Board, where he served through the end of the Clinton
Administration. From 1995 to 1997, Mr. Brooks was a member
of the Defense Policy Board. He also served on advisory boards
for the Defense Intelligence Agency and the Office of Naval
Intelligence. From 1999 to 2000, he was a member of the Federal
Government Joint Security Commission. Mr. Brooks is a
graduate of Fordham University, with a Master’s degree from
Fairleigh Dickenson University. He has done post Master’s
studies at George Washington University and the University of
California and has published several articles on cryptography in
various technical publications. He served on the Board of
Directors of Navy Mutual Aid Association from 1995 to 2004 and
also serves on the Board of Directors of several Intelligence
professional associations.
Andrew E. Clarkhas served as a director of the Company
since 2001. He is Chairman and President of Wheatfield Ventures,
LLC, a private equity firm concentrating on early stage
investing within the technology sector. Mr. Clark sits on
the Advisory Board of Spring Capital Partners, L.P., a small
business investment company providing subordinated mezzanine
debt financing in the Mid-Atlantic region. From October 1997
through December 2000, Mr. Clark held various executive
positions with Verio, Inc., including President of the
eBusiness/ Custom Web Development and East Regional business
units. Mr. Clark began his career as a professional at KPMG
Peat Marwick. He received his B.S. degree in Accounting from
Washington and Lee University and is a Certified Public
Accountant in the State of Maryland.
Division and business combination strategy. Dr. Harrison
has been Chairman of SPACEHAB Inc. (NASDAQ: SPAB) since August
1993, and served as Chief Executive Officer from April 1996 to
March 2003. Dr. Harrison co-founded and served as Chairman
and Chief Executive Officer of Symbol Technologies Inc. (NYSE:
SBL) from 1973 to 1982. Dr. Harrison is a founder and
Managing General Partner of PolyVentures I & II,
high-technology venture capital funds organized in 1987 and
1991, respectively. Dr. Harrison was a Member of Technical
Staff at Bell Telephone Laboratories and a Professor of
Electrical Sciences at the State University of New York at Stony
Brook. Dr. Harrison holds a Ph.D. and Master of Science
degree in Electrophysics from Polytechnic University and a
Bachelor’s Degree of Electrical Engineering from New York
University. Dr. Harrison is also a member of the Board of
NetManage, Inc., as well as several private technology companies.
Ira A. Hunt, Jr. has served as a director of the
Company since December 1990. Mr. Hunt is a graduate of the
U.S. Military Academy, West Point, New York. He served
33 years in various command and staff positions in the
U.S. Army, retiring from active military service as a Major
General in 1978. Subsequently, Mr. Hunt was President of
Pacific Architects and Engineers in Los Angeles, California and
a Vice President of Frank E. Basil, Inc. in
Washington, D.C. Mr. Hunt has a Master of Science
degree in civil engineering from the Massachusetts Institute of
Technology; a Master of Business Administration degree from the
University of Detroit; a Doctor of the University degree from
the University of Grenoble, France; and a Doctor of Business
Administration degree from George Washington University.
Mr. Hunt also serves on the Boards of Biometric Associates,
Inc. and Gales Industries.
Arthur L. Moneywas appointed to the Company’s Board
of Directors on March 16, 2004. He was a director of
Rainbow Technologies, Inc. from September 2002 until the
consummation of the merger of the Company and Rainbow in March
2004. He is currently president of ALM Consulting, specializing
in command control and communications, intelligence, signal
processing, and information processing. Mr. Money is also a
director of the following publicly traded companies: Silicon
Graphics, CACI International, Essex Corp., Intevac, Terremark
Worldwide and Intelli-Check. From 1999 to 2001, Mr. Money
was the assistant secretary of defense (C3I) and Department of
Defense CIO. Prior to 1999, Mr. Money served as the
assistant secretary of the Air Force for Research, Development,
and Acquisition, and was vice president and deputy general
manager of TRW. Mr. Money graduated from the University of
Santa Clara and San Jose State University where he
earned his MSME and BSME, respectively. He has received
distinguished public service awards from the
U.S. Department of Defense (Bronze Palm), the U.S. Air
Force, and the U.S. Navy.
Walter W. Straubwas appointed to the Company’s
Board of Directors on March 16, 2004. A co-founder of
Rainbow Technologies, Inc., Mr. Straub was a director of
Rainbow from its inception in 1982 until the consummation of the
merger of the Company and Rainbow in March 2004, and served as
President and Chief Executive Officer of Rainbow from 1983
through March 2004. Since 1989, Mr. Straub has served as
director of CAM Commerce Solutions, a manufacturer of
computerized point of sale and inventory management systems.
Mr. Straub received a BSEE and an MBA in Finance from
Drexel University. In May 1993, Mr. Straub was elected to
the Board of Trustees of Drexel University.
Bruce R. Thawhas served as a director of the Company
since December 1990. From 1987 to March 31, 2000,
Mr. Thaw served as general counsel to the Company.
Mr. Thaw is currently President and Chief Executive Officer
of Bulbtronics, Inc., a national distributor of specialty light
sources and related products. Mr. Thaw was admitted to the
bar of the State of New York in 1978 and the California State
Bar in 1983. Mr. Thaw is also a director of Amtech Systems,
Inc., a publicly-traded company engaged in the semiconductor
industry, and Nastech Pharmaceutical Company, Inc., a
publicly-traded company engaged in drug delivery technology.
OFFICERS
The executive officers of the Company as of the date of this
filing are set forth in the table below. All executive officers
are appointed at the annual meeting or interim meetings of the
Board of Directors. Each
4
executive officer is appointed by the Board of Directors to hold
office until his or her successor is duly appointed and
qualified.
Chief Financial Officer, Senior Vice President and Treasurer
Steve Lesem
51
Senior Vice President of Worldwide Sales
Chris S. Fedde
54
Senior Vice President and General Manager, Enterprise Security
Division
Certain biographical information regarding the executive
officers, except for Mr. Caputo (see above), is set forth
below:
Carole D. Argo has served as Senior Vice President and
CFO of SafeNet since 1999. She was named President and COO in
June of 2004. Ms. Argo is responsible for the
company’s day-to-day global operations. Her primary focus
is executing the company’s growth strategy with a
continuing role in merger and acquisition activity. Her
leadership has been integral to the successful identification,
closing and integration of three strategic acquisitions totaling
over $170 million in annual revenues since January 2003. In
July 2003, she successfully led an $84 million, net,
secondary public offering, the largest equity follow-on offering
in the security sector that year. Before joining SafeNet,
Ms. Argo was chief financial officer of Optelecom, Inc., a
publicly traded fiber optics company. Earlier, she spent eight
years as vice president of finance and operations at Byk
Gardner, an international color and appearance instrumentation
company where she was responsible for worldwide manufacturing,
product development, and financial operations. She also has
seven years of public accounting experience with
Deloitte & Touche as an audit manager. She received an
executive Master of Business Administration from Loyola College
of Maryland, a Bachelor of Science in Accounting from the
University of Arizona, and is a Certified Public Accountant.
Kenneth A. Muellerjoined SafeNet in June 2004 as Chief
Financial Officer, Senior Vice President and Treasurer, from
Microsoft Corp., where he held the position of Chief Financial
Officer, Microsoft Business Solutions, a $700 million
business unit. As SafeNet CFO, he is responsible for all
accounting, finance, treasury and legal functions.
Mr. Mueller has over 20 years of senior finance
experience working in high growth tech companies like Platinum
Technology, Galileo International, Apple Computer, and Digital
Equipment. During his tenure with Microsoft Business Solutions,
Mr. Mueller led the effort to build out the worldwide
finance organization, completed the integration of two
businesses, and helped relocate a new finance Shared Service
Center to Fargo, N.D. Mr. Mueller received a Bachelor of
Science degree from Northwestern University and a Masters in
Business Administration from DePaul University, and is a
Certified Public Accountant.
Steve Lesem joined SafeNet in January of 2005 as Senior
Vice President of Worldwide Sales, responsible for the
company’s overall revenue and senior sales leadership
across all business lines globally. Mr. Lesem has over
20 years of sales and marketing experience with large sales
organizations. Prior to SafeNet, Mr. Lesem was an executive
with BMC Software. His last position was Vice President, Asia
Pacific. In this role he orchestrated the sales execution of
channels and alliances, actively developed BMC Software business
opportunities and investments in China, and managed all lines of
business across Asia Pacific. Mr. Lesem previously served
as Vice President, Worldwide Sales and Marketing for BMC’s
Security Business Unit. He also held multiple senior level,
executive sales and marketing positions at IBM including General
Manager, PC Server Sales and Marketing for North America.
Mr. Lesem holds a Bachelor of Science in Electrical
Engineering from the University of Texas.
Chris S. Fedde joined SafeNet in February 2001 as the
Director of Corporate Product Management and Business
Development. Since Mr. Fedde joined SafeNet, he has been a
key contributor to building the company’s security presence
in the Federal Government and the financial community. Since his
appointment as Senior Vice President and General Manager of
SafeNet’s Enterprise Security Division, the company has
seen a significantly increased demand for the company’s
technology solutions and managed services. Prior to
5
coming to SafeNet, Mr. Fedde was Director of Secure
Products at Harris Corporation, where he started the security
business and led its growth into a business unit. Mr. Fedde
was responsible for the general management of the custom ASIC
security business and turnkey secure systems and managed the
business development and engineering departments. The business
was particularly successful with customers requiring very high
levels of security, including the U.S. Government. Before
his employment at Harris, Mr. Fedde was the Engineering
Manager at Motorola, developing wireless two-way products for
the global markets. He holds several patents related to wireless
technologies. Mr. Fedde received a BSEE degree from the
University of Iowa.
IDENTIFICATION OF AUDIT COMMITTEE
The Audit Committee is composed of Andrew E. Clark, Thomas A.
Brooks, Arthur L. Money and Ira A. Hunt, Jr. The Board of
Directors has determined that Mr. Clark is an “audit
committee financial expert,” as defined under Item 401
of Regulation S-K promulgated by the Securities and
Exchange Commission. The Audit Committee is governed by a
written charter approved by the Board of Directors. Each of the
members of the Audit Committee is independent, as defined by the
Nasdaq Rules the rules promulgated by the Securities and
Exchange Commission under and the Sarbanes-Oxley Act of 2002.
The purpose of the Audit Committee is to oversee the financial
reporting process, the internal audit function, the systems of
internal accounting and financial controls, the performance of
the Chief Financial Officer and the performance and independence
of the Company’s independent registered public accounting
firm, and to review and approve the plans for and results of the
annual audit engagement. The Audit Committee recommends to the
Board the appointment of a firm to serve as independent
auditors, subject to ratification by the stockholders at the
annual meeting.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Section 16(a) of the Securities Exchange Act of 1934, as
amended, requires the Company’s executive officers and
directors, and persons who own more than 10% of the outstanding
shares of Common Stock, to file reports of ownership and changes
in ownership with the Securities and Exchange Commission. Based
solely on a review of the copies of such reports furnished to
the Company and written representations from the executive
officers and directors, the Company is unaware of any instances
of noncompliance or late compliance with such filings during the
fiscal year ended December 31, 2004 by its executive
officers and directors.
CODE OF ETHICS
The Company has adopted a Code of Ethics that applies to all of
its directors, officers and employees performing financial
functions for the Company, including its chief executive
officer, chief financial officer, controller and any person
performing similar functions. The Company has made this Code of
Ethics available on its website at www.safenetinvestor.com. The
Company intends to disclose future amendments to the code of
ethics, or waivers from the provisions of the code of ethics
granted to the chief executive officer, chief financial officer,
controller and any person performing similar functions on this
website.
ITEM 11.
EXECUTIVE COMPENSATION
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding
compensation paid by the Company during each of the
Company’s last three fiscal years to (1) the
Company’s Chief Executive Officer and (2) the other
6
four most highly compensated executive officers of the Company
whose aggregate cash compensation in fiscal year 2004 exceeded
$100,000 (the “Named Executive Officers”):
Perquisites and other personal benefits to the Named Executive
Officer was less than both $50,000 and 10% of the total annual
salary and bonus reported for such Named Executive Officers,
and, therefore, information has not been included.
(2)
Mr. Mueller became an employee of the Company in June 2004.
(3)
Mr. Potts became an employee of the Company in April 2003.
Mr. Potts is no longer a Named Executive Officer, as of
March 2005.
(4)
Represents taxable relocation expenses.
(5)
Represents premiums paid under a variable life insurance policy.
The table below sets forth certain information with respect to
stock options for shares of the Company’s common stock
granted during fiscal year 2004 to the Named Executive Officers
under the Company’s employee stock option plans. The
Company did not grant any stock appreciation rights in 2004.
The option became immediately exercisable on the grant date.
(2)
The option becomes exercisable in cumulative annual installments
of 25% of the shares on each of the first, second, third and
fourth anniversaries of the grant date.
(3)
There were 946,000 options granted to employees in 2004.
(4)
The potential realizable value has been calculated in conformity
with Securities and Exchange Commission proxy statement
disclosure rules and is not intended to forecast possible future
appreciation of the common stock. No gain to the options is
possible without stock price appreciation, which will benefit
all shareholders. If the stock price does not increase above the
exercise price, compensation to the named executive will be zero.
The table below sets forth certain information with respect to
options for shares of the Company’s common stock exercised
by the Named Executive Officers during fiscal year 2004 and with
respect to options held by the Named Executive Officers at the
end of fiscal year 2004.
Aggregated Option Exercises in Last Fiscal Year and Fiscal
Year-End Option Values
No stock appreciation rights were exercised by any Company
employee, executive officer or director in 2004, and there are
no outstanding stock appreciation rights held by any employee,
executive officer or director of the Company.
(2)
The value of unexercised stock options at December 31, 2004
is based on the last reported sale price of $36.74 for the
common stock, as reported by The Nasdaq National Market on that
date.
Compensation of Directors
The Company pays a meeting fee of $4,500 to each non-employee
director for each board meeting attended, up to $18,000
annually. No fees are paid for telephonic board meetings.
Members of the Audit Committee receive an additional $1,250
($2,500 for the chairman) per quarter and members of the
Compensation Committee receive an additional $875 ($1,125 for
the chairman) per quarter. The Company reimburses all directors
for travel and other reasonable business expenses incurred in
the performance of their services for the Company.
After each annual meeting of stockholders, each non-employee
director of the Company who attended at least 75% of the
aggregate number of meetings of the Board during the previous
calendar year and who stood for election at the preceding annual
meeting is granted a stock option exercisable for
20,000 shares of common stock. The per share option price
is the closing price on the grant date. The option has a
ten-year term and is fully vested on the grant date.
Newly appointed directors receive an initial stock option grant
for 20,000 shares of Common Stock. The per share option
price is the closing price on the grant date. The option has a
ten-year term and is fully vested on the grant date.
All directors are parties to change of control agreements that
provide that all of such directors’ options shall become
immediately exercisable upon a change of control, and that such
options shall remain exercisable through their full term.
8
Employment Contracts, Termination of Employment and Change in
Control Arrangements
In September 2004, the Company and Mr. Caputo entered into
an amendment to his employment agreement, originally executed in
December 2001. The amendment extended the term of the agreement
until September 2007. Pursuant to the terms of the agreement as
amended, Mr. Caputo is to receive an annual salary of
$329,422 adjusted annually based on a review by the Compensation
Committee and a cost of living increase of no less than
10% per year. Mr. Caputo is also entitled to incentive
compensation targeted at no less than 100% of annual salary if
the Company’s business objectives as set forth in the
Company’s annual business plan are achieved. During the
term of Mr. Caputo’s employment agreement the Company
agrees to provide to Mr. Caputo the benefits of a fully
funded $2 million dollar Variable Life Insurance Policy
(the “Variable Life Insurance Policy”) under an
endorsement form of split-dollar arrangement. Ownership of the
policy will transfer to a family trust formed by Mr. Caputo
at the termination of his employment by the Company without
“cause” or by Mr. Caputo for “good
reason” (as such terms are defined in the agreement) and
may be purchased by the trust from the Company for amounts
stated in the split-dollar arrangement for termination
otherwise. Upon transfer of the Variable Life Insurance Policy,
Mr. Caputo is entitled to receive an additional amount
equal to any federal, state and local income and employment
taxes (including any taxes, interest or penalties imposed with
respect to such additional payment) payable by Mr. Caputo
as a result of such transfer.
If the Company terminates Mr. Caputo’s employment
without “cause” or if Mr. Caputo terminates for
“good reason,” each as defined in the agreement, he is
entitled to salary and target incentive compensation accrued
through the termination date plus the lesser of
(i) $600,000 or (ii) the balance of his compensation
under the contract to the end of the agreement computed using
the latest applicable salary rate. He is also entitled in that
event to full funding of the Variable Life Insurance Policy.
Additionally, if the Company terminates Mr. Caputo’s
employment without cause or if he terminates for good reason,
all stock options will become exercisable and will remain
exercisable for a three-year period.
In the event Mr. Caputo’s employment with the Company
is terminated either by the Company without cause or by
Mr. Caputo for good reason, within one year following the
occurrence of a change in control, he is entitled to receive, in
lieu of the severance payment otherwise payable, his annual
salary multiplied by three, his then current target incentive
compensation multiplied by three, the payment of all unpaid
premiums which are required to fully fund the Variable Life
Insurance Policy, and all of his stock options under Company
plans shall be fully vested and exercisable and will remain
exercisable for their full term. Also, if Mr. Caputo is
subject to an excise tax under Section 4999 of the Internal
Revenue Code of 1986, as amended (the “Code”) with
respect to the payments or distributions in the nature of
compensation made to him by the Company in connection with a
change in control, he will be entitled to receive an additional
amount so as to place him in the same after-tax position he
would have been in had the excise tax not applied. If
Mr. Caputo voluntarily terminates his employment then
Mr. Caputo shall be entitled to receive accrued vacation in
accordance with Company records and six months severance pay.
In June 2004 the Company and Ms. Argo entered into an
employment agreement for a term of five years. Pursuant to the
terms of the agreement, Ms. Argo is to receive an annual
salary of $275,000 adjusted annually based on a review by the
Compensation Committee and a cost of living increase of no less
than 10% per year. Ms. Argo is also entitled to
incentive compensation targeted at no less than 100% of annual
salary if the Company’s business objectives as set forth in
the Company’s annual business plan are achieved.
If the Company terminates Ms. Argo’s employment
without “cause” or if Ms. Argo terminates for
“good reason,” each as defined in the agreement, she
is entitled to salary and target incentive compensation accrued
through the termination date plus the lesser of
(i) $550,000 or (ii) the balance of her compensation
under the contract to the end of the agreement computed using
the latest applicable salary rate. Additionally, if the Company
terminates Ms. Argo’s employment without cause or if
she terminates for good reason, all stock options will become
exercisable and will remain exercisable for a three-year period.
In the event Ms. Argo’s employment with the Company is
terminated either by the Company without cause or by
Ms. Argo for good reason, within one year following the
occurrence of a change in control, she is entitled to receive,
in lieu of the severance payment otherwise payable, her annual
salary multiplied by three, her then current target incentive
compensation multiplied by three, and all of her stock options
under
9
Company plans shall be fully vested and exercisable and will
remain exercisable for their full term. Also, if Ms. Argo
is subject to an excise tax under Section 4999 of the Code
with respect to the payments or distributions in the nature of
compensation made to her by the Company in connection with a
change in control, she will be entitled to receive an additional
amount so as to place her in the same after-tax position she
would have been in had the excise tax not applied. If
Ms. Argo voluntarily terminates her employment then she
shall be entitled to receive accrued vacation in accordance with
Company records and six months severance pay.
In June 2004 the Company and Mr. Mueller entered into an
employment agreement for a term of five years. Pursuant to the
terms of the agreement, Mr. Mueller is to receive an annual
salary of $275,000 adjusted annually based on a review by the
Compensation Committee and a cost of living increase of no less
than 10% per year. Mr. Mueller is also entitled to
incentive compensation targeted at no less than 50% of annual
salary if the Company’s business objectives as set forth in
the Company’s annual business plan are achieved.
If the Company terminates Mr. Mueller’s employment
without “cause” or if Mr. Mueller terminates for
“good reason,” each as defined in the agreement, he is
entitled to salary and target incentive compensation accrued
through the termination date plus the lesser of
(i) $275,000 or (ii) the balance of his compensation
under the contract to the end of the agreement computed using
the latest applicable salary rate. Additionally, if the Company
terminates Mr. Mueller’s employment without cause or
if he terminates for good reason, all stock options will become
exercisable and will remain exercisable for a three-year period.
In the event Mr. Mueller’s employment with the Company
is terminated either by the Company without cause or by
Mr. Mueller for good reason, within one year following the
occurrence of a change in control, he is entitled to receive, in
lieu of the severance payment otherwise payable, his annual
salary multiplied by three, his then current target incentive
compensation multiplied by three, and all of his stock options
under Company plans shall be fully vested and exercisable and
will remain exercisable for their full term. Also, if
Mr. Mueller is subject to an excise tax under
Section 4999 the Code with respect to the payments or
distributions in the nature of compensation made to him by the
Company in connection with a change in control, he will be
entitled to receive an additional amount so as to place him in
the same after-tax position he would have been in had the excise
tax not applied. If Mr. Mueller voluntarily terminates his
employment then he shall be entitled to receive accrued vacation
in accordance with Company records and six months severance pay.
Mr. Fedde’s employment offer letter provides for the
payment of six months salary should the Company terminate his
employment without cause. In addition, in April 2004, the
Company and Mr. Fedde entered into a change in control
agreement. This agreement provides that if there is a change in
control of the Company and Mr. Fedde is terminated by the
Company without “cause” or terminates his employment
for “good reason” (as such terms are defined in the
agreement) within one year after such change in control, then he
is entitled to receive, in lieu of the severance payment
otherwise payable, a lump sum payment equal to the sum of
(i) twelve months of his then annual salary plus
(ii) the greater of his then current target incentive
compensation or the average of his incentive compensation for
the three years prior to the year of his termination. Also, in
the event of such termination, all of Mr. Fedde’s
stock options under Company plans shall be fully vested and
exercisable and will remain exercisable for their full term. If
Mr. Fedde is subject to an excise tax under
Section 4999 of the Code with respect to the payments or
distributions in the nature of compensation made to him by the
Company in connection with a change in control, he will be
entitled to receive an additional amount so as to place him in
the same after-tax position he would have been in had the excise
tax not applied.
Mr. Lesem’s employment offer letter provides for the
payment of six months salary should the Company terminate his
employment without cause. In addition, in April 2005, the
Company and Mr. Lesem entered into a change in control
agreement. This agreement provides that if there is a change in
control of the Company and Mr. Lesem is terminated by the
Company without “cause” or terminates his employment
for “good reason” (as such terms are defined in the
agreement) within one year after such change in control, then he
is entitled to receive, in lieu of the severance payment
otherwise payable, a lump sum payment equal to the sum of
(i) twelve months of his then annual salary plus
(ii) the greater of his then current target incentive
compensation or the average of his incentive compensation for
the three years prior to the year of his
10
termination. Also, in the event of such termination, all of
Mr. Lesem’s stock options under Company plans shall be
fully vested and exercisable and will remain exercisable for
their full term. If Mr. Lesem is subject to an excise tax
under Section 4999 of the Code with respect to the payments
or distributions in the nature of compensation made to him by
the Company in connection with a change in control, he will be
entitled to receive an additional amount so as to place him in
the same after-tax position he would have been in had the excise
tax not applied.
2004 Compensation Committee Interlocks and Insider
Participation
The Compensation Committee for fiscal year 2004 was comprised of
Bruce R. Thaw, Thomas A. Brooks and Arthur L. Money. No member
of the Compensation Committee has ever been an employee or
officer of the Company or any of its subsidiaries. None of the
Company’s executive officers serves as a member of the
compensation committee of any other entity that has one or more
executive officers serving as a member of the Company’s
Board of Directors or Compensation Committee.
Report of Compensation Committee on Executive Compensation
The Compensation Committee of the Board of Directors (the
“Committee”) reviews and approves the general
compensation policies of the Company, specific compensation for
each executive officer of the Company, the Company’s equity
compensation plans and makes recommendations to the Board of
Directors regarding these matters. The Company’s policy, as
administered through the Committee, is to provide compensation
packages to the executive officers of the Company sufficient to
attract and retain persons of exceptional quality and to provide
effective incentives to motivate and reward such executives for
achieving the technical, financial and strategic goals of the
Company essential to the Company’s long-term success and to
growth in stockholder value. Consequently, a significant portion
of the compensation of the executive officers and directors is
dependent on company performance and maintenance of value in the
marketplace. The Company’s typical executive compensation
package consists primarily of three components: (1) base
salary; (2) incentive cash bonuses; and (3) stock
options. Competitive fringe benefits are also provided.
Base Compensation
The Committee’s approach is to offer executive salaries
highly competitive with those of other executives in the
industry in which the Company operates. To that end, the
Committee evaluates the competitiveness of its base salaries
based upon information drawn from various sources, including
published and proprietary survey data, consultants’ reports
and the Company’s own experience recruiting and training
executives and professionals. The Company’s base salary
levels are intended to be consistent with competitive practice
and level of responsibility, with salary increases reflecting
competitive trends, the overall financial performance of the
Company and the performance of the individual executive.
Bonuses
In addition to base salary, executives are eligible to receive
discretionary bonuses, from time to time, upon the achievement
of certain technical/engineering, financial and sales/marketing
milestones. The amount of the bonus and any performance criteria
vary with the position and role of the executive within the
Company. In addition, for all executives, the Committee, with
the assistance of the Company’s Chief Financial Officer,
reviews the Company’s actual financial performance against
its internally budgeted performance in determining year-end
bonuses, if any. However, the Committee does not set objective
performance targets for employees other than executive officers.
Stock Option Grants
The Company, from time to time, grants stock options in order to
provide certain executives with a competitive total compensation
package and to reward them for their contribution to the
long-term price performance of the Company’s Common Stock.
Grants of stock options are designed to align the
executive’s interest with that of the stockholders of the
Company. In awarding option grants, the Committee will consider,
11
among other things, the amount of stock and options presently
held by the executive, the executive’s past performance and
contributions, and the executive’s anticipated future
contributions and responsibilities. Stock options are also
provided to all new employees as well as occasional grants in
recognition of superior performance, etc. The overall objective
of the stock option program is to cause employees to identify
with the success of the company and to incent superior
performance.
Compensation for the Chief Executive Officer in 2004
The Committee approved an annual salary for Mr. Caputo of
$377,000 for 2004. Based on Mr. Caputo’s employment
agreement, his incentive compensation is targeted at no less
than 100% of his current base salary and is based on achievement
of the Company’s business objectives as set forth in the
Company’s annual business plan. In determining the total
bonus to be paid to Mr. Caputo, for 2004 the Committee
considered several factors, including financial performance,
complete integration of acquired businesses, growth of the
Company in terms of customers and channels of distribution,
development of new products, achievement of (or exceeding)
strategic corporate goals and increasing the brand awareness of
the Company and its product offerings. In making compensation
decisions based on the criteria set forth above, the Committee
believes that the compensation paid to Mr. Caputo is
closely tied to the performance of the Company. The Committee
recommended granting a total bonus of 150% of base salary for
2004.
The chart below compares the total return (change in year-end
stock price plus reinvested dividends) of the Company’s
Common Stock, the Total Return Index for the NASDAQ Stock Market
(U.S.) and the NASDAQ Computer and Data Processing Services
Stock Index. The graph assumes that $100 was invested in the
Company’s Common Stock and in each of the foregoing indices
on January 1, 1999. The graph also assumes that all
dividends were reinvested.
There can be no assurance as to the future trends in the total
return of the Company’s Common Stock or of the foregoing
indices. The Company does not make nor does it endorse any
predictions as to future stock price performance.
1999
2000
2001
2002
2003
2004
Nasdaq Computer and Data Processing Services Index
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN OTHER BENEFICIAL
OWNERS
The following table sets forth as of April 18, 2005 (unless
otherwise specified) the beneficial ownership of the
Company’s Common Stock by persons known to the Company to
be beneficial owners of more than five percent of the
outstanding shares of the Company’s common stock, each
director, each of the Named Executive Officers (as defined under
“Executive Compensation”) and by all executive
officers and directors of the Company as a group.
All Current Executive Officers and Directors as a
Group (12 persons)
2,532,615
10.3
(1)
The Company believes that all persons named in the table have
sole voting and investment power with respect to all shares of
common stock beneficially owned by them. A person is deemed to
be the beneficial owner of securities that can be acquired by
such person within 60 days from the date hereof upon the
exercise of warrants or options. Each beneficial owner’s
percentage ownership is determined by assuming that options or
warrants held by such person (but not those held by any other
person) and which are exercisable within 60 days have been
exercised.
(2)
Based on information contained in a Schedule 13G/ A filed
with the Securities and Exchange Commission on February 14,2005 by FMR Corp.
(3)
Includes shares issuable pursuant to outstanding stock options
that may be exercised within 60 days from the date hereof
as follows: 491,600 shares for Mr. Caputo;
250,452 shares for Mr. Straub; 86,667 shares for
Mr. Thaw; 163,334 shares for Dr. Harrison;
112,749 shares for Ms. Argo; 81,667 shares for
Mr. Hunt; 72,500 shares for Mr. Fedde;
46,667 shares for Mr. Brooks; 30,000 shares for
Mr. Clark; 40,000 shares for Mr. Potts;
31,220 shares for Mr. Money; and 1,419,356 shares
for all executive officers and directors as a group.
(4)
Represents less than 1% of the outstanding shares of common
stock.
The Company has adopted a policy limiting each director and each
executive officer to selling no more than 50% of such
director’s or officer’s total holdings of Company
stock and vested options during any year. Certain exceptions are
available, including exceptions related to hardship and expiring
options. Holdings are calculated as of the most recent annual
meeting of stockholders.
14
EQUITY COMPENSATION PLAN INFORMATION
The table below sets forth certain information as of
April 18, 2005 with respect to common stock of the Company
authorized for issuance under the Company’s equity
compensation plans. (1)
(a)
(b)
(c)
Number of securities
remaining available for
future issuance under
Number of securities to
Weighted-average
equity compensation
be issued upon exercise
exercise price of
plans (excluding
of outstanding options,
outstanding options,
securities reflected in
Plan category
warrants and rights
warrants and rights
column (a))
Equity compensation plans approved by stockholders
2,441,127
$
19.40
327,706
Equity compensation plans not approved by stockholders
284,008
$
20.02
44,305
Total
2,725,135
$
19.46
372,011
(1)
Also, there are outstanding options for 1,411,406 shares of
common stock of the Company issued in connection with the
acquisition of Rainbow Technologies, Inc. in March 2004. The
weighted average exercise price of these options is $21.45.
There are outstanding options for 29,452 shares of common
stock of the Company issued in connection with the acquisition
of Datakey, Inc. in December 2004. The weighted average exercise
price of these options is $38.01.
The securities to be issued upon exercise of options under
equity compensation plans not approved by stockholders reflect
shares of common stock that were reserved for issuance under the
former 2000 Non-Qualified Stock Option Plan (the “2000
Plan”). The 2000 Plan previously reserved
800,000 shares of common stock for issuance upon the
exercise of non-qualified stock option awards. The 2000 Plan was
amended and restated by the 2001 Omnibus Stock Plan, and in
connection with such amendment and restatement, the number of
shares that had been reserved for issuance under the 2000 Plan
was reduced from 800,000 to 400,000.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Effective May 1, 2003, the Company hired Shelley A.
Harrison, a member of its Board of Directors, as a part-time
employee to provide services relating to the Company’s
Embedded Security Division, corporate development and business
combination strategy. In consideration for such services,
Dr. Harrison is currently compensated at a rate of
$189,000 per year and was granted options for
50,000 shares of common stock at an exercise price equal to
the price of the common stock on the date of grant, which
options were fully vested on the date of grant.
Dr. Harrison subsequently served as joint holder of the
Office of President and Chief Operating Officer from December
2003 to June 2004. As further compensation for
Dr. Harrison’s employment in those roles,
Dr. Harrison was granted options for 50,000 shares of
common stock at an exercise price equal to the price of the
Common Stock on the date of grant, which options were fully
vested on the date of grant.
ITEM 14.
PRINCIPAL ACCOUNTANT FEES AND SERVICES
Independent Auditor Fee Information
Audit Fees
Fees for audit services totaled $2,041,000 in 2004 and $689,000
in 2003, including fees associated with the annual audit of the
Company’s consolidated financial statements and it’s
internal control over financial reporting, the reviews of the
Company’s quarterly reports on Form 10-Q, statutory
audits required internationally, and review of SEC registration
statements and related consents.
15
Audit-Related Fees
Fees for audit-related services totaled $33,000 in 2004 and
$120,000 in 2003. Audit-related services principally include due
diligence in connection with acquisitions, audits in connection
with proposed or consummated acquisitions and other
consultations.
Tax Fees
Fees for tax services totaled $373,000 in 2004 and $342,000 in
2003. Major components of these fees included the following:
2004
2003
Major Components of tax fees:
U.S. federal, state and local tax compliance
$
57,000
$
30,000
Domestic and foreign tax planning, compliance, and advice
124,000
85,000
Tax and human resource due diligence services pertaining to
potential business acquisitions, including advice on tax
structuring
192,000
219,000
Expatriate tax assistance and compliance
—
8,000
$
373,000
$
342,000
All Other Fees
Fees for all other services not included above totaled $424,000
in 2004 and $446,000 in 2003, principally including services
rendered in connection with post-merger integration services.
POLICY ON AUDIT COMMITTEE PRE-APPROVAL OF AUDIT SERVICES AND
PERMISSIBLE NON-AUDIT SERVICES OF INDEPENDENT AUDITORS
The Audit Committee’s policy is to pre-approve all audit
and permissible non-audit services performed by the independent
auditors. Prior to engagement of the independent auditors for
the next year’s audit, the independent auditor provides the
scope of the proposed audit and related fees for services
expected to be rendered during that year within each of four
categories of services to the Audit Committee for approval. The
fees are budgeted and the Audit Committee requires the
independent auditor and management to report actual fees versus
the budget periodically throughout the year by category of
service. The Audit Committee is also informed routinely as to
the services actually provided by the independent auditor
pursuant to this pre-approval process. The Audit
Committee’s prior approval must be obtained before the
scope or cost of pre-approved services is increased and if the
need for other permissible non-audit services arises during the
course of the year.
In determining whether to pre-approve any given services, the
Committee considers whether such services are consistent with
the continued independence of the independent auditor under the
SEC’s rules, whether the independent auditor is best
positioned to provide the most effective and efficient service,
whether the service might enhance the Company’s ability to
manage or control risk or improve audit quality.
The Audit Committee approved all audit and non-audit services
provided by Ernst & Young LLP in 2004.
The Audit Committee has delegated pre-approval authority to its
Chairman to pre-approve services to be provided by the
independent auditors between meetings. The Chairman must report
any decisions to the Audit Committee at the next scheduled
meeting.
16
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K
23
.1
Consent of Ernst & Young LLP, independent registered
public accounting firm
31
.1
Certification pursuant to Rule 13a — 14(a) under
the Securities Exchange Act of 1934, as amended
31
.2
Certification pursuant to Rule 13a — 14(a) under
the Securities Exchange Act of 1934, as amended
17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on behalf of the undersigned, thereunto
duly authorized.
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the
dates indicated.