<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 8, 1997
REGISTRATION NO. 333-29073
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SCM MICROSYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3577 77-0444317
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
SCM MICROSYSTEMS, INC.
131 ALBRIGHT WAY
LOS GATOS, CA 95032
(408) 370-4888
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
STEVEN HUMPHREYS
PRESIDENT AND CHIEF EXECUTIVE OFFICER
SCM MICROSYSTEMS, INC.
131 ALBRIGHT WAY
LOS GATOS, CA 95032
(408) 370-4888
(NAME, ADDRESS, INCLUDING ZIP CODE AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
JEFFREY D. SAPER, ESQ. MICHAEL S. IMMORDINO, ESQ.
KENNETH M. SIEGEL, ESQ. KARL A. ROESSNER, ESQ.
N. ANTHONY JEFFRIES, ESQ. DAVID M. DETWEILER, ESQ.
JAN-MARC VAN DER SCHEE, ESQ. JOHN CAFIERO, ESQ.
WILSON SONSINI GOODRICH & ROSATI ROGERS & WELLS
PROFESSIONAL CORPORATION CITY TOWER
650 PAGE MILL ROAD 40 BASINGHALL STREET
PALO ALTO, CA 94304 LONDON, EC2V 5DE
(415) 493-9300 ENGLAND
44-171-628-0101
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
- ---------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ---------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: (i) one to be
used in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and (ii) the other to be used in connection with a concurrent
offering outside of the United States and Canada (the "International
Prospectus"). The U.S. Prospectus and the International Prospectus are identical
in all respects except for the front cover page and back cover page of the
International Prospectus, both of which are included herein after the final page
of the U.S. Prospectus and are labeled "Alternate Page for International
Prospectus." Final forms of each of the Prospectuses will be filed with the
Securities and Exchange Commission under Rule 424(b).
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES
MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE
REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY
NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH
OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO THE REGISTRATION OR
QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS (Subject to Completion)
Dated September 5, 1997
3,370,000 Shares
LOGO
Common Stock
-----------------------------
Of the 3,370,000 shares of Common Stock offered, 2,620,000 shares are being
offered hereby in the United States and Canada (the "U.S. Offering") and 750,000
shares are being offered in a concurrent international offering outside the
United States and Canada (the "International Offering"), subject to transfers of
shares between the U.S. Underwriters and International Underwriters
(collectively, the "Underwriters"). The initial public offering price and the
aggregate underwriting discount per share will be identical for both offerings.
The closing of the U.S. Offering and International Offering are conditioned upon
each other. See "Underwriting."
Of the 3,370,000 shares of Common Stock offered, 3,250,000 shares are being
sold by SCM Microsystems, Inc. (the "Company") and 120,000 shares are being sold
by certain selling stockholders (the "Selling Stockholders"). See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from the
sale of the shares being sold by the Selling Stockholders.
Prior to this offering, there has been no public market for the Common
Stock of the Company. The Company has applied to have the Common Stock approved
for quotation on the Nasdaq National Market under the symbol "SCMM" and intends
to submit an application to have the Common Stock listed on the Neuer Markt of
the Frankfurt Stock Exchange. It is currently estimated that the initial public
offering price will be between $11.00 and $13.00 per share. See "Underwriting"
for information relating to the determination of the initial public offering
price.
-----------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 HEREOF.
-----------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<S> <C> <C> <C> <C>
==========================================================================================================
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount (1) Company (2) Stockholders
- ----------------------------------------------------------------------------------------------------------
Per Share..................... $ $ $ $
Total (3)..................... $ $ $ $
==========================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses, estimated at $1,170,000, payable by the Company.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of 505,500
additional shares of Common Stock at the Price to Public less the
Underwriting Discount to cover over-allotments, if any. If all such
additional shares are purchased, the total Price to Public, Underwriting
Discount, Proceeds to Company, and Proceeds to Selling Stockholders will be
$ , $ , $ , and $ respectively. See
"Underwriting."
-----------------------------
The Common Stock is offered by the several Underwriters named herein when,
as and if received and accepted by them, subject to their right to reject orders
in whole or in part and subject to certain other conditions. It is expected that
delivery of certificates for such shares will be made at the offices of Cowen &
Company, New York, New York, on or about , 1997.
COWEN & COMPANY HAMBRECHT & QUIST
, 1997
<PAGE> 4
[See Appendix - Description of Graphics]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMPANY'S COMMON
STOCK, INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE
IMPOSITION OF PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
2
<PAGE> 5
PROSPECTUS SUMMARY
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus.
Except as set forth in the Consolidated Financial Statements or as
otherwise indicated, all information in this Prospectus assumes: (i) the
conversion of all of the Company's outstanding shares of Preferred Stock into
shares of Common Stock effective upon the closing of this offering (the
"Automatic Conversion"); (ii) the sale to Gemplus of 200,000 shares of Common
Stock at $9.00 per share in a private placement that will close concurrently
with this offering (the "Directed Placement") and (iii) that the Underwriters'
over-allotment option is not exercised.
THE COMPANY
SCM Microsystems designs, develops and sells standards-compliant hardware,
firmware and software products and technologies used in smart card and other
token-based network security and conditional access systems. The Company's
objective is to leverage its expertise in Personal Computer Memory Card Industry
Association ("PCMCIA") peripheral products and smart card technologies, and its
extensible, upgradeable smart card token-based security architecture, to
capitalize on the growing demand for data and network security and the need to
control access to digital information. The Company sells security and access
products which include SwapBox PC Card adapters, SwapSmart smart card readers,
SwapAccess DVB-CAM modules and its SmartOS universal smart card interface
architecture. The Company sells security and access products to original
equipment manufacturers ("OEMs") such as computer, telecommunication and digital
video broadcasting ("DVB") component and system manufacturers. The Company
markets, sells and licenses its products through a direct sales and marketing
organization primarily to OEMs and also through distributors, value-added
resellers ("VARs"), system integrators and resellers worldwide. OEM customers
include Compaq, Dell, France Telecom, IBM, Kirch Group (BetaDigital),
Schlumberger, Security Dynamics, Siemens/Nixdorf, Sun Microsystems and Telenor.
The Company addresses the needs of the enterprise data security and
electronic commerce market by: (i) securing data before it is transmitted across
LANs, public switched networks or the Internet; (ii) providing a range of
products that enable smart cards to be read through standard PCMCIA slots thus
bridging the gap between smart cards and PCs, network computers and other
devices; and (iii) employing an open-systems, remotely upgradeable architecture
that provides compatibility across a range of hardware platforms and software
environments. The Company addresses the needs of the conditional access market
by providing smart card-based Digital Video Broadcast -- Conditional Access
Module ("DVB-CAM") products that: (i) adhere to the European DVB-Common
Interface ("DVB-CI") standard and the United States "NRSS-B" standard
promulgated by the National Renewable Security Standards Committee of the
Society of Cable and Telecommunication Engineers; (ii) include real time,
high-bandwidth video decryption capabilities within the reader which can be
unlocked by smart card tokens, which by themselves are not capable of decrypting
digital video data at the rate required for DVB; and (iii) incorporate
read/write capabilities that permit DVB content and service providers to perform
a virtually no-cost upgrade of users' access rights as new products and services
are developed and introduced and as users' subscription desires change.
With the increasing proliferation and reliance upon digital data, data
security has become a paramount concern of businesses, government, educational
institutions and consumers. Whether the issue is controlling access to
proprietary or confidential information such as business data or health records,
or attempting to limit access to digital video broadcasts to paying subscribers,
content providers, network and data managers and users of digital data are
concerned with controlling access to data and maintaining data security.
3
<PAGE> 6
From the Company's inception through 1994, the Company focused on PCMCIA
peripheral products, including flash memory and fax/modem devices. In 1994, the
Company began emphasizing security and access products. The Company made the
final shipment of PCMCIA peripheral products in the quarter ended March 31,
1997, completing its exit from this business. As a result of the Company's shift
in product focus, net sales of security and access products increased from 22.1%
of total net sales in 1994 to 77.3% of total net sales in 1996. The Company has
formed strategic relationships, including technology sharing agreements, with a
number of key industry players such as France Telecom, Gemplus, Intel and
Telenor. In addition, Intel and Telenor made equity investments in the Company
of $2.0 million and $5.5 million, respectively, in early 1997.
The Company was originally formed in 1990 as a German corporation, and in
1993 the Company merged with two affiliated companies. The Company
reincorporated in Delaware in December 1996. The Company maintains headquarters
in Los Gatos, California and Pfaffenhofen, Germany. The address of the Company's
principal United States office is located at 131 Albright Way, Los Gatos,
California 95032 and its telephone number is (408) 370-4888.
THE OFFERING
<TABLE>
<S> <C> <C>
Common Stock offered by the Company............ 3,250,000 shares
Common Stock offered by Selling Stockholders... 120,000 shares
------------------
Total................................ 3,370,000 shares
Common Stock offered in U.S. Offering.......... 2,620,000 shares
Common Stock offered in International 750,000 shares
Offering.....................................
------------------
Total................................ 3,370,000 shares
Common Stock to be outstanding after the 10,115,243 shares (1)
offerings....................................
Use of proceeds................................ For repayment of indebtedness and general
corporate purposes, including working capital
and capital expenditures. See "Use of
Proceeds."
Proposed Nasdaq National Market symbol......... SCMM
</TABLE>
The Company intends to submit an application to have the Common Stock
listed on the Neuer Markt of the Frankfurt Stock Exchange.
- ---------------
(1) Excludes: (i) 665,926 shares of Common Stock issuable upon exercise of stock
options outstanding as of June 30, 1997 at a weighted average exercise price
of $3.87 per share; (ii) 189,191 shares of Common Stock and Preferred Stock
subject to warrants outstanding as of June 30, 1997 at an exercise price of
$5.72 per share and (iii) 751,500 shares of Common Stock issuable upon
exercise of stock options and warrants issued subsequent to June 30, 1997 at
a weighted average exercise price of $11.63 per share. See
"Management -- Employee Stock Plans" and Notes 4 and 11 of Notes to
Consolidated Financial Statements.
"SwapBox," "SwapSmart," "SwapAccess" and "SmartOS" are trademarks of the
Company. This Prospectus also contains trademarks of other companies.
4
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------- -----------------
1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales(1):
Security and access products........ $ -- $ 1,426 $12,520 $16,628 $ 5,789 $ 9,820
PCMCIA peripheral products.......... 2,379 5,020 5,546 4,892 2,724 163
------- ------- ------- ------- ------- -------
Total net sales................ 2,379 6,446 18,066 21,520 8,513 9,983
------- ------- ------- ------- ------- -------
Gross profit........................... 600 1,359 2,295 6,640 2,342 3,857
Operating expenses..................... 1,601 2,966 4,895 7,620 3,496 4,564
------- ------- ------- ------- ------- -------
Loss from operations................... (1,001) (1,607) (2,600) (980) (1,154) (707)
Net loss............................... (1,096) (1,868) (2,926) (1,110) (1,246) (410)
Accretion on redeemable convertible
preferred stock..................... -- -- (139) (287) (143) (478)
------- ------- ------- ------- ------- -------
Net loss applicable to common
stockholders........................ $(1,096) $(1,868) $(3,065) $(1,397) $(1,389) $ (888)
======= ======= ======= ======= ======= =======
Pro forma net loss per common
share(2)............................ $ (0.25) $ (0.13)
======= =======
Shares used to determine pro forma net
loss per common share(2)............ 5,272 7,018
======= =======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------
CONSOLIDATED BALANCE SHEET DATA: ACTUAL AS ADJUSTED(3)
------- --------------
<S> <C> <C>
Cash and cash equivalents......................................... $10,942 $ 45,505
Working capital................................................... 13,694 50,594
Total assets...................................................... 20,665 55,228
Redeemable convertible preferred stock............................ 21,781 --
Total stockholders' equity (deficit).............................. (7,223) 51,458
</TABLE>
- ---------------
(1) Through 1994, the Company focused on PCMCIA peripheral products, including
flash memory and fax/modem devices. In 1994, the Company began to shift its
focus away from these products toward security and controlled access
products. The Company made the final shipment of PCMCIA peripheral products
in the quarter ended March 31, 1997, completing its exit from this business.
(2) Share and per share information gives pro forma effect to the Automatic
Conversion. See Notes 1, 4 and 10 of Notes to Consolidated Financial
Statements.
(3) Adjusted to reflect the sale of 3,250,000 shares of Common Stock offered by
the Company at an assumed initial public offering price of $12.00 per share,
after deducting the underwriting discounts and estimated offering expenses
payable by the Company and the application of the estimated net proceeds
therefrom, the Automatic Conversion and the Directed Placement. See "Use of
Proceeds" and "Capitalization."
5
<PAGE> 8
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the shares of Common Stock offered hereby. This
Prospectus contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended (the "Securities Act"), and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All
forward-looking statements in this Prospectus are based on information available
to the Company on the date hereof and assumptions which the Company believes are
reasonable, and the Company assumes no obligation to update any such
forward-looking statements. These forward-looking statements involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus. The Private Securities Litigation Reform Act of 1995 (the "Reform
Act") provides safe harbors for certain forward-looking statements. The Reform
Act, by its terms, does not apply to initial public offerings. Nonetheless, in
evaluating the Company's business, prospective investors should consider
carefully the following factors in addition to the other information set forth
in this Prospectus.
HISTORY OF OPERATING LOSSES; POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS;
SEASONALITY
Although the Company was profitable for the fiscal quarters ended September
30, 1996 and December 31, 1996, the Company incurred a net loss of $410,000 for
the six months ended June 30, 1997 and net operating losses on an annual basis
since its inception in 1993. As of June 30, 1997, the Company had an accumulated
deficit of $8.9 million. In view of the Company's loss history, there can be no
assurance that the Company will be able to achieve or sustain profitability on
an annual or quarterly basis in the future.
The Company's quarterly operating results have in the past varied and may
in the future vary significantly. Factors affecting operating results include:
the level of competition; the size, timing, cancellation or rescheduling of
significant orders; market acceptance of new products and product enhancements;
new product announcements or introductions by the Company or its competitors;
adoption of new technologies and standards; changes in pricing by the Company or
its competitors; the ability of the Company to develop, introduce and market new
products and product enhancements on a timely basis, if at all; hardware
component costs and availability, particularly with respect to hardware
components obtained from sole or limited source suppliers; the Company's success
in expanding its sales and marketing organization and programs; technological
changes in the market for digital information security products; levels of
expenditures on research and development; foreign currency exchange rates; and
general economic trends. In addition, because a high percentage of the Company's
operating expenses are fixed, a small variation in revenue can cause significant
variations in operating results from quarter to quarter. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company has experienced significant seasonality in its business, and
the Company's business and operating results are likely to be affected by
seasonality in the future. The Company has typically experienced higher net
sales in the third quarter and fourth quarter of each calendar year followed by
lower net sales and operating income in the first quarter and second quarter of
the following year. The Company believes that this trend has been principally
due to budgeting requirements of the U.S. government which influence the
purchasing patterns of OEMs which supply PCs and workstations incorporating the
Company's data security products to the U.S. government. The Company expects
that as sales of its DVB products, which are currently sold to OEMs mainly in
Europe for the consumer market, begin to represent a larger percentage of net
sales, the seasonality that the Company experiences may be further exacerbated
as these sales are likely to be strongest in the fourth quarter of the year.
Initial sales of the Company's products to a new customer typically involve
a sales cycle which can range from six to nine months during which the Company
may expend substantial financial resources and management time and effort with
no assurance that a sale will ultimately result. The length of the sales cycle
may vary depending on a number of factors over which the Company may have little
or no control, including product and technical requirements, and the level of
competition which the Company encounters in its selling activities. Any delays
in the sales cycle for new customers could have a material adverse effect on the
Company's business and operating results.
6
<PAGE> 9
Based upon the factors enumerated above, the Company believes that its
operating results may vary significantly in future periods and that historical
results are not reliable indicators of future performance. It is likely that, in
some future quarter or quarters, the Company's operating results will be below
the expectations of stock market analysts and investors. In such event, the
market price of the Company's Common Stock could decline significantly. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results of Operations."
DEPENDENCE ON EMERGING PRODUCT MARKETS; UNCERTAINTY OF MARKET ACCEPTANCE OF THE
COMPANY'S PRODUCTS
From the Company's inception through 1994, the Company focused on PCMCIA
peripheral products, including flash memory and fax/modem devices. In 1994, the
Company began emphasizing security and access products. The Company made the
final shipment of PCMCIA peripheral products in the quarter ended March 31,
1997, completing its exit from this business. As a result of the Company's
strategic shift in product focus, the proportion of security and access product
sales increased from 22.1% of total net sales in 1994 to 77.3% of total net
sales in 1996. The Company's net sales are now and will continue to be dependent
upon the success of its security and access products.
The Company's future growth and operating results will depend to a large
extent on the successful marketing and commercial viability of the Company's
security and access product families. Each of these product families addresses
needs in different emerging markets. Smart card token-based security
applications are able to provide protection from unauthorized access to digital
information. The Company believes that smart cards are ideally suited to serve
as tokens for network and electronic commerce security. Accordingly, the
Company's SwapBox and SwapSmart product families are designed to provide smart
card token-based security for PCs. However, there can be no assurance that the
smart card will become the industry standard for network and electronic commerce
security applications. The Company's DVB product family provides a means of
controlling access to digital television broadcasts. The Company's SwapAccess
DVB-CAM product implements the DVB-CI and NRSS-B standards. To date, the
Company's DVB-CAM product has been implemented in a relatively limited number of
DVB set-top boxes in Europe. Although the Company believes that the DVB-CI
standard will eventually become the European standard for DVB conditional access
applications, there can be no assurance that the standard will be adopted, that
the European DVB market will further develop or that even if such standard is
adopted and the market further develops, the Company's DVB-CAM products will be
widely adopted. Furthermore, the market for DVB products in the United States
has only recently begun to develop. While the NRSS Committee has proposed the
NRSS-B standard for use in the United States, there can be no assurance that
this standard will be adopted as currently proposed or at all. Moreover, even if
this or another standard is adopted, there can be no assurance whether, or to
what extent, the United States DVB market will grow. In addition, the
substantial installed base of analog set-top boxes in the United States may
cause the market for DVB products in general, and the Company's SwapAccess
products in particular, to grow slower than expected, if at all.
If the market for the products described above or any of the Company's
other products fails to develop or develops more slowly than expected or if any
of the standards supported by the Company do not achieve or sustain market
acceptance, the Company's business and operating results would be materially and
adversely affected. See "-- Competition."
DEPENDENCE ON SALES TO OEMS
A substantial majority of the Company's products are intended for use as
components or subsystems in systems manufactured and sold by third party OEMs.
In 1996, almost all of the Company's sales were to OEMs and the Company expects
this dependence on OEM sales to continue. In 1996, sales to IBM accounted for
12% of total net sales, sales to BetaDigital (a division of the Kirch Group)
accounted for 11% of total net sales and sales to the Company's top 10 customers
(all of which are OEMs) accounted for 55.0% of total net sales. In order for an
OEM to incorporate the Company's products into its systems, the Company must
demonstrate that its products provide significant commercial advantages to OEMs
over competing products. There can be no assurance that the Company can
successfully demonstrate such advantages or that the Company's products will
continue to provide any advantages. Moreover, even if the Company is able to
7
<PAGE> 10
demonstrate such advantages, there can be no assurance that OEMs will elect to
incorporate the Company's products into their current or future systems.
Further, the business strategies and manufacturing practices of the Company's
OEM customers are subject to change and any such change may result in decisions
by the customers to decrease their purchases of the Company's products, seek
other sources for products currently manufactured by the Company or manufacture
these products internally. The Company's OEM customers may also seek price
concessions from the Company. Failure of OEMs to incorporate the Company's
products into their systems, the failure of such OEMs' systems to achieve market
acceptance or any other event causing a decline in the Company's sales to OEMs
would have a material adverse effect on the Company's business and operating
results. See "Business -- Customers and Applications."
DEPENDENCE ON SALES TO GOVERNMENT CONTRACTORS
Approximately 50.6% and 39.2% of the Company's net sales during 1995 and
1996, respectively, were derived from sales of the Company's SwapBox product for
use by the U.S. government, all of which were made under contracts between the
Company and major OEMs that sell PCs to the United States Department of Defense
(the "DoD"). The Company believes that indirect sales to the DoD are subject to
a number of significant uncertainties, including timing and availability of
funding, unforeseen changes in the timing and quantity of government orders and
the competitive nature of government contracting generally. Furthermore, the DoD
has been reducing total expenditures over the past few years in a number of
areas and there can be no assurance that such funding will not be reduced in the
future. In addition, there is no assurance that the Company will be able to
modify existing products or develop new products that will continue to meet the
specifications of OEM suppliers to the DoD. A significant loss of indirect sales
to the U.S. government would have a material adverse effect on the Company's
business and operating results. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
DEPENDENCE ON DEVELOPMENT OF INDUSTRY RELATIONSHIPS
The Company is party to collaborative arrangements with a number of
corporations and is a member of key industry consortia. The Company has formed
strategic relationships, including technology sharing agreements, with a number
of key industry players such as Intel, France Telecom and Telenor. In addition,
Intel and Telenor made equity investments in the Company of $2.0 million and
$5.5 million, respectively, in early 1997. The Company evaluates, on an ongoing
basis, potential strategic alliances and intends to continue to pursue such
relationships. The Company's future success will depend significantly on the
success of its current arrangements and its ability to establish additional
arrangements. There can be no assurance that these arrangements will result in
commercially successful products. See "Business -- Collaborative Industry
Relationships."
COMPETITION
The market for digital data security and access control products is
intensely competitive and characterized by rapidly changing technology. The
Company believes that competition in this market is likely to intensify as a
result of increasing demand for security products. The Company currently
experiences competition from a number of sources, including: (i) ActionTec,
Carry Computer Engineering, Greystone and Litronics in PC Card adapters; (ii)
Gemplus, Hitachi and Toshiba in smart card readers and universal smart card
reader interfaces; and (iii) Gemplus in DVB-CAM modules. The Company also
experiences indirect competition from certain of its customers which currently
offer alternative products or are expected to introduce competitive products in
the future. The Company may in the future face competition from these and other
parties including new entrants, such as Motorola, that develop digital
information security products based upon approaches similar to or different from
those employed by the Company. In addition, there can be no assurance that the
market for digital data security and access control products will not ultimately
be dominated by approaches other than the approach marketed by the Company.
Many of the Company's current and potential competitors have significantly
greater financial, technical, marketing, purchasing and other resources than the
Company, and as a result, may be able to respond more quickly to new or emerging
technologies or standards and to changes in customer requirements, or may be
able
8
<PAGE> 11
to devote greater resources to the development, promotion and sale of products,
or to deliver competitive products at a lower end user price. Current and
potential competitors have established or may establish cooperative
relationships among themselves or with third parties to increase the ability of
their products to address the needs of the Company's prospective customers.
Accordingly, it is possible that new competitors or alliances among competitors
may emerge and rapidly acquire significant market share. Increased competition
is likely to result in price reductions, reduced operating margins and loss of
market share, any of which could have a material adverse effect on the Company's
business and operating results.
The Company believes that the principal competitive factors affecting the
market for digital data security products include: the extent to which products
support industry standards and provide interoperability; technical features;
ease of use; quality/reliability; level of security; strength of distribution
channels; and price. There can be no assurance that the Company will be able to
compete as to these or other factors or that competitive pressures faced by the
Company will not materially and adversely affect its business and operating
results.
MANAGEMENT OF GROWTH
The Company's business has grown substantially in recent periods, with net
sales increasing from $6.4 million in 1994 to $21.5 million in 1996. The growth
of the Company's business has placed a significant strain on the Company's
management and operations. In addition, a number of key members of the Company's
management, including its President and Chief Executive Officer, Chief Financial
Officer, Vice President-Operations, and Vice President-Marketing have joined the
Company within the past 13 months. Furthermore, in 1993 the Company commenced
operations in North America which included the establishment of a U.S.
management team. As a result, the Company has a limited operating history under
its current U.S. management. In addition, the number of employees has grown from
50 at December 31, 1995 to 72 as of June 30, 1997. If the Company is successful
in achieving its growth plans, such growth is likely to place a significant
burden on the Company's operating and financial systems, resulting in increased
responsibility for senior management and other personnel within the Company.
There can be no assurance that the Company's existing management or any new
members of management will be able to augment or improve existing systems and
controls or implement new systems and controls in response to anticipated future
growth. The Company's failure to do so could have a material adverse effect on
the Company's business and operating results. See "-- Dependence on Key
Personnel; Ability to Recruit Personnel," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
INTEGRATION OF GLOBAL LOCATIONS
The Company's U.S. headquarters are located in Los Gatos, California, its
European headquarters are located in Pfaffenhofen, Germany, and its research and
development facilities are located in Erfurt, Germany and La Ciotat, France. In
addition, a significant portion of the Company's contract manufacturing occurs
in Singapore. Operating in diverse geographic locations imposes a number of
risks and burdens on the Company, including the need to manage employees and
contractors from diverse cultural backgrounds and who speak different languages,
and difficulties associated with operating in a number of time zones. Although
the Company seeks to mitigate the difficulties associated with operating in
diverse geographic locations through the extensive use of electronic mail and
teleconferencing, there can be no assurance that it will not encounter
unforeseen difficulties or logistical barriers in operating in diverse
locations. Furthermore, operations in widespread geographic locations require
the Company to implement and operate complex information systems that are
capable of providing timely information which can readily be consolidated.
Although the Company believes that its information systems are adequate, the
Company may in the future have to implement new information systems.
Implementation of such new information systems may be costly and may require
training of personnel. Any failure or delay in implementing these systems,
procedures and controls on a timely basis, if necessary, or in expanding these
areas in an efficient manner at a pace consistent with the Company's business
could have a material adverse effect on the Company's business and operating
results.
9
<PAGE> 12
PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY
The Company's success depends significantly upon its proprietary
technology. The Company currently relies on a combination of patent, copyright
and trademark laws, trade secrets, confidentiality agreements and contractual
provisions to protect its proprietary rights. The Company seeks to protect its
software, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection. The Company generally
enters into confidentiality and non-disclosure agreements with its employees and
with key vendors and suppliers. The Company's SwapBox trademark is registered in
the United States, and the SwapSmart trademark is the subject of an allowed,
pending application. The Company will continue to evaluate the registration of
additional trademarks as appropriate. The Company currently has one U.S. patent
issued, six U.S., one French and one Japanese patent applications pending, and
exclusive licenses under four other U.S. patents associated with its products.
Furthermore, the Company intends to obtain an exclusive license from one of its
employees to five other patents relating to its products. There can be no
assurance that any new patents will be issued, that the Company will develop
proprietary products or technologies that are patentable, that any issued patent
will provide the Company with any competitive advantages or will not be
challenged by third parties, or that the patents of others will not have a
material adverse effect on the Company's business.
There has also been substantial litigation in the technology industry
regarding intellectual property rights, and litigation may be necessary to
protect the Company's proprietary technology. The Company has from time to time
received claims that it is infringing upon third parties' intellectual property
rights, and there can be no assurance that third parties will not in the future
claim infringement by the Company with respect to current or future products,
patents, trademarks or other proprietary rights. In April 1997, Gemplus served
the Company with a complaint alleging that the Company's SwapSmart product
infringes certain claims of a French patent held by Gemplus. Although such
dispute was settled on terms acceptable to the Company, there can be no
assurance that future disputes with third parties will not arise nor that any
such disputes can be resolved on terms acceptable to the Company. In addition, a
third party has alleged that the Company has infringed the third party's
trademarks and engaged in unfair competition. See "Business -- Legal
Proceedings." The Company expects that companies in the computer and digital
information security market will increasingly be subject to infringement claims
as the number of products and competitors in the Company's target markets grows.
Any such claims or litigation may be time-consuming and costly, cause product
shipment delays, require the Company to redesign its products or require the
Company to enter into royalty or licensing agreements, any of which could have a
material adverse effect on the Company's business and operating results. Despite
the Company's efforts to protect its proprietary rights, unauthorized parties
may attempt to copy aspects of the Company's products or to obtain and use
information and software that the Company regards as proprietary. In addition,
the laws of some foreign countries do not protect proprietary and intellectual
property rights to as great an extent as do the laws of the United States. There
can be no assurance that the Company's means of protecting its proprietary and
intellectual property rights will be adequate or that the Company's competitors
will not independently develop similar technology, duplicate the Company's
products or design around patents issued to the Company or other intellectual
property rights of the Company.
DEPENDENCE ON CONTRACT AND OFFSHORE MANUFACTURING; LIMITED NUMBER OF SUPPLIERS
OF KEY COMPONENTS
The Company has implemented a global sourcing strategy that it believes
will enable it to achieve greater economies of scale, improve gross margins and
maintain uniform quality standards for its products. The Company currently
sources its products through three contract manufacturers in Europe and Asia. In
the event any of the Company's contract manufacturers are unable or unwilling to
continue to manufacture the Company's products, the Company may have to rely on
other current manufacturing sources or identify and qualify new contract
manufacturers. In this regard, one of the Company's contract manufacturers has
recently been involved in bankruptcy proceedings and may be unable to continue
manufacturing the Company's products. In the event that such manufacturer (or
any other key supplier) were unable to meet the Company's requirements, there
can be no assurance that the Company would be able to identify or qualify new
contract manufacturers in a timely manner or that such manufacturers would
allocate sufficient capacity to the Company in order to meet its requirements.
Any significant delay in the Company's ability to obtain adequate
10
<PAGE> 13
supplies of its products from its current or alternative sources would
materially and adversely affect the Company's business and operating results.
In an effort to reduce manufacturing costs, the Company has shifted volume
production of many components of its products to Singapore. The Company is
currently considering shifting the production of other components of its
products to other suppliers in Europe or Asia. Difficulties encountered in
transferring production may have a disruptive effect on the Company's
manufacturing process and increase overall production costs. Due to the
substantial concentration of the Company's manufacturing operations in
Singapore, a disruption of operations at its contractor's facilities in
Singapore could have a material adverse effect on the Company's business and
operating results. Foreign manufacturing is subject to a number of risks,
including transportation delays and interruptions, difficulties in staffing,
currency fluctuations, potentially adverse tax consequences and unexpected
changes in regulatory requirements, tariffs and other trade barriers, and
political and economic instability.
The Company relies upon a limited number of suppliers of several key
components utilized in the assembly of the Company's products. For example, the
Company purchases many of the components for use in its SwapSmart and SwapBox
products from Intellicard Systems, a Singapore-based supplier, and mechanical
components for use in its smart card reader product exclusively from Stocko, a
German-based supplier. The Company's reliance on sole source suppliers involves
several risks, including a potential inability to obtain an adequate supply of
required components, price increases, late deliveries and poor component
quality. Although to date the Company has been able to purchase its requirements
of such components, there can be no assurance that the Company will be able to
obtain its full requirements of such components in the future or that prices of
such components will not increase. In addition, there can be no assurance that
problems with respect to yield and quality of such components and timeliness of
deliveries will not occur. Disruption or termination of the supply of these
components could delay shipments of the Company's products and could have a
material adverse effect on the Company's business and operating results. Such
delays could also damage relationships with current and prospective customers.
See "Business -- Manufacturing."
DEPENDENCE ON NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE
The markets for the Company's products are characterized by rapid
technological change, changing customer needs, frequent new product introduction
and evolving industry standards and short product lifecycles. The introduction
by the Company or its competitors of products embodying new technologies and the
emergence of new industry standards could render the Company's existing products
obsolete and unmarketable. Therefore, the Company's future success will depend
upon its ability to successfully develop and to introduce on a timely and
continuous basis new and enhanced products that keep pace with technological
developments and emerging industry standards and address the increasingly
sophisticated needs of its customers. The timing and success of product
development is unpredictable due to the inherent uncertainty in anticipating
technological developments, the need for coordinated efforts of numerous
technical personnel and the difficulties in identifying and eliminating design
flaws prior to product release. Any significant delay in releasing new products
could have a material adverse effect on the ultimate success of a product and
other related products and could impede continued sales of predecessor products,
any of which could have a material adverse effect on the Company's business and
operating results. There can be no assurance that the Company will be able to
introduce new products on a timely basis, that new products introduced by the
Company will achieve any significant degree of market acceptance or that any
such acceptance will be sustained for any significant period. Failure of new
products to achieve or sustain market acceptance could have a material adverse
effect on the Company's business and operating results. See
"Business -- Research and Development."
RISKS OF INTERNATIONAL SALES; CURRENCY FLUCTUATIONS
The Company was originally a German corporation and continues to conduct a
substantial portion of its business in Europe. Approximately 82.5%, 49.0%, 52.5%
and 69.0% of the Company's revenues in 1994, 1995, 1996 and the six months ended
June 30, 1997, respectively, were derived from customers located outside the
United States. Because a significant number of the Company's principal customers
are located in other
11
<PAGE> 14
countries, the Company anticipates that international sales will continue to
account for a significant portion of its revenues. As a result, a significant
portion of the Company's sales and operations may continue to be subject to
certain risks, including tariffs and other trade barriers, difficulties in
staffing and managing disparate branch operations, currency exchange risks and
exchange controls and potential adverse tax consequences. These factors may have
a material adverse effect on the Company's business and operating results.
As a result of the Company's multinational operations and sales, the
Company's operating results are subject to significant fluctuations based upon
changes in the exchange rates of certain currencies, particularly the German
mark, in relation to the U.S. dollar. The Company does not currently engage in
hedging activities with respect to its foreign currency exposure. Although
management will continue to monitor the Company's exposure to currency
fluctuations, and, when appropriate, may use financial hedging techniques in the
future to minimize the effect of these fluctuations, there can be no assurance
that exchange rate fluctuations will not have a material adverse effect on the
Company's business and operating results. In the future, the Company could be
required to denominate its product sales in other currencies, which would make
the management of currency fluctuations more difficult and expose the Company to
greater risks in this regard. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
PRODUCT LIABILITY RISKS
Customers rely on the Company's token-based security products to prevent
unauthorized access to their digital content. A malfunction of or design defect
in the Company's products could result in tort or warranty claims. Although the
Company attempts to reduce the risk of exposure from such claims through
warranty disclaimers and liability limitation clauses in its sales agreements
and by maintaining product liability insurance, there can be no assurance that
such measures will be effective in limiting the Company's liability for any such
damages. Any liability for damages resulting from security breaches could be
substantial and could have a material adverse effect on the Company's business
and operating results. In addition, a well-publicized actual or perceived
security breach involving token-based security systems could adversely affect
the market's perception of token-based security products in general, or the
Company's products in particular, regardless of whether such breach is
attributable to the Company's products. This could result in a decline in demand
for the Company's products, which would have a material adverse effect on the
Company's business and operating results.
DEPENDENCE ON KEY PERSONNEL; ABILITY TO RECRUIT PERSONNEL
The Company's future performance depends in significant part upon the
continued service of Robert Schneider, the Company's Chairman of the Board,
Steven Humphreys, the Company's President and Chief Executive Officer, and Bernd
Meier, the Company's Chief Operations Officer, as well as its other key
technical and senior management personnel. The Company provides compensation
incentives such as bonuses, benefits and option grants (which are typically
subject to vesting over four years) to attract and retain qualified employees.
In addition, the Company's German subsidiary has entered into substantially
similar employment agreements with each of Messrs. Schneider and Meier pursuant
to which each serves as a Managing Director of the subsidiary. Each of the
respective agreements has no set termination date, may be terminated by the
subsidiary or the officer with six months notice, and provides that the officer
is bound by a non-compete provision during the one-year period following his
termination. Non-compete agreements are, however, generally difficult to enforce
and therefore these provisions may not provide significant protection to the
Company. The Company also has an employment agreement with Jean-Yves Le Roux,
its Vice President, Engineering, that is terminable by either party at will. The
Company does not have employment agreements with any of its other key employees
and does not maintain key man life insurance on any of its employees. The loss
of the services of one or more of the Company's officers or other key employees
could have a material adverse effect on the Company's business and operating
results. The Company believes that its future success will depend in large part
on its continuing ability to attract and retain highly qualified technical and
management personnel. Competition for such personnel is intense, and there can
be no assurance that the Company can retain its key technical and management
employees or that it can attract, assimilate or retain
12
<PAGE> 15
other highly qualified technical and management personnel in the future. See
"Business -- Employees" and "Management."
BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS; RISKS ASSOCIATED WITH POTENTIAL
ACQUISITIONS
The Company currently has no specific use planned for a substantial portion
of the net proceeds from this offering. As a consequence, the Company's
management will have broad discretion to allocate a large percentage of these
proceeds to uses which the stockholders may not deem desirable, and there can be
no assurance that the proceeds can or will yield a return. Although it currently
has no present plans, agreements or commitments with respect to any material
transaction, the Company could use a portion of these funds for the acquisition
of complementary businesses, products and technologies.
Future acquisitions by the Company may result in potentially dilutive
issuances of equity securities, the incurrence of additional debt and
amortization of goodwill and other intangible assets, which could materially
adversely affect the Company's operating results. In addition, acquisitions
involve numerous risks, including: difficulties in the assimilation of the
operations, products and personnel of the acquired company; the diversion of
management's attention from other business concerns; risks of entering markets
in which the Company has no direct prior experience; and the potential loss of
key employees of both the acquired company and the Company. There can be no
assurance that the Company will ever successfully complete an acquisition. See
"Use of Proceeds."
CONCENTRATION OF STOCK OWNERSHIP; ANTI-TAKEOVER PROVISIONS
Upon completion of this offering, the Company's executive officers and
directors, together with their affiliates, will beneficially own approximately
23.3% of the Company's outstanding shares of Common Stock. Accordingly, these
stockholders, acting together, will continue to be able to exert significant
influence over matters requiring stockholder approval, including the election of
the Company's directors and the approval of mergers and other change in control
transactions involving the Company. See "Management," "Principal and Selling
Stockholders" and "Description of Capital Stock."
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation, amended Bylaws, Delaware law and the Company's indemnification
agreements with its officers and directors may be deemed to have an
anti-takeover effect. Such provisions may delay, deter or prevent a tender offer
or takeover attempt that a stockholder might consider to be in that
stockholder's best interests, including attempts that might result in a premium
over the market price for the shares held by stockholders.
The Company's Board of Directors may issue additional shares of Common
Stock or establish one or more classes or series of Preferred Stock, having the
number of shares (up to 10,000,000), designations, relative voting rights,
dividend rates, liquidation and other rights, preferences and limitations as
determined by the Board of Directors without stockholder approval. The foregoing
provisions give the Board of Directors, acting without stockholder approval, the
ability to prevent, or render more difficult or costly, the completion of a
takeover transaction that stockholders might view as being in their best
interests. The Company's Amended and Restated Certificate of Incorporation and
Bylaws, as amended, also contain a number of provisions that could impede a
takeover or change in control of the Company, including but not limited to the
elimination of stockholders' ability to take action by written consent without a
meeting and the elimination of cumulative voting in the election of directors.
The Company is subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law. In general, the statute prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner.
In addition, in connection with its listing on the Neuer Markt of the
Frankfurt Stock Exchange, the Company will be required to comply with the German
Takeover Code (the "German Code"). The German Code regulates mergers,
consolidations and tender offers ("Public Offers"), and requires companies
seeking to
13
<PAGE> 16
make a Public Offer to inform the German regulatory authorities and the public
of the offer, to provide certain disclosure to the target company's
stockholders, to generally treat stockholders equally in an offer, and to comply
with certain other procedural requirements. In addition, the German Code gives
broad authority to the German regulatory authorities to interpret the German
Code and to review and regulate specific Public Offers. Compliance with the
German Code could have the effect of delaying, deterring or preventing a tender
offer or takeover attempt that a stockholder might consider to be in that
stockholder's best interests, including attempts that might result in a premium
over the market price for the shares held by stockholders.
The Company licenses certain technology from a third party pursuant to a
license that is not transferable by the Company without the prior written
consent of the third party. This provision may prohibit the transfer of such
technology in a merger or consolidation of the Company with another company. As
a result, this provision may have the effect of discouraging or preventing an
acquisition of the Company.
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to this offering there has been no public market for the Company's
Common Stock, and there can be no assurance that an active public market for the
Common Stock will develop or be sustained after the offering. The initial
offering price will be determined by negotiation between the Company and the
Underwriters based upon several factors, and may not be indicative of future
market prices. See "Underwriting." The trading price of the Company's Common
Stock could be subject to wide fluctuations in response to a number of factors,
including quarterly variations in operating results, announcements of
technological innovations or new products, applications or product enhancements
by the Company or its competitors, changes in financial estimates by securities
analysts and other events. In addition, the stock market has experienced
volatility that has particularly affected the market prices of equity securities
of many high technology companies and that often has been unrelated or
disproportionate to the operating performance of such companies. These broad
market fluctuations may adversely affect the market price of the Company's
Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public
market after this offering could adversely affect the market price of the
Company's Common Stock and could impair the Company's ability to raise capital
through the sale of equity or equity-related securities. Upon completion of this
offering, the Company will have outstanding 10,115,243 shares of Common Stock,
assuming no further exercise of options or warrants outstanding as of June 30,
1997. Of these shares, the 3,370,000 shares offered hereby (3,875,500 shares if
the Underwriters' overallotment options are exercised in full) will be freely
tradeable without restriction or further registration under the Securities Act
of 1933, as amended (the "Securities Act"), unless purchased by "affiliates" of
the Company as that term is defined in Rule 144 under the Securities Act ("Rule
144") described below. The remaining 6,745,243 shares of Common Stock
outstanding upon completion of this offering are "restricted securities" as that
term is defined in Rule 144. Of the restricted securities, 57,618 shares will be
eligible for immediate sale upon commencement of this offering and an additional
31,126 shares will become eligible for sale beginning 90 days after commencement
of this offering. Upon expiration of certain lock-up agreements (which occurs on
the date 180 days after commencement of this offering), an aggregate of
4,377,560 shares will become eligible for sale pursuant to Rule 144 or Rule 701
under the Securities Act, and 2,278,939 additional shares will become eligible
for sale thereafter under Rule 144. See "Shares Eligible for Future Sale."
Holders of an aggregate of 6,278,947 shares will have the right to require the
Company to register such shares for sale under the Securities Act. See
"Description of Capital Stock -- Registration Rights."
IMMEDIATE AND SUBSTANTIAL DILUTION
The initial public offering price is substantially higher than the net
tangible book value per share of Common Stock. At an estimated offering price of
$12.00 per share, investors purchasing shares in this offering will incur
immediate dilution of $6.91 per share. To the extent outstanding options and
warrants to purchase the Company's Common Stock are exercised, there will be
further dilution to new stockholders. See "Dilution."
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<PAGE> 17
BENEFITS OF OFFERING TO CURRENT STOCKHOLDERS
This offering will provide substantial benefits to the current stockholders
of the Company. Consummation of this offering is expected to create a public
market for the Common Stock held by the Company's current stockholders,
including the Company's directors and executive officers. The Selling
Stockholders, each of whom serves as an officer and director of the Company,
paid approximately $18,000 for the 120,000 shares of Common Stock offered by
them pursuant to this Prospectus. They will recognize a gain of approximately
$1.4 million upon the sale of such Common Stock, assuming an initial public
offering price of $12.00 per share. In addition, the current stockholders paid
$25.1 million for the 6,745,243 other shares of Common Stock held by them and
not offered by this Prospectus. This offering will result in an unrealized gain
to such stockholders of approximately $55.8 million based on the assumed initial
public offering price. See "Dilution" and "Principal and Selling Stockholders."
15
<PAGE> 18
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 3,250,000 shares of
Common Stock being offered by the Company, based on an assumed initial public
offering price of $12.00 per share and after deducting the underwriting discount
and estimated offering expenses payable by the Company, are estimated to be
approximately $35,100,000 ($40,741,380 if the Underwriters' over-allotment
option is exercised in full). The Company intends to use $2.3 million of the
proceeds of the offering to repay amounts owed under a term loan from a German
bank. This loan is due in part on December 31, 2003 and in part on December 31,
2005 and bears interest at rates ranging from 5.0% to 6.0%. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." The Company intends to use the
remaining net proceeds for general corporate purposes, including working capital
and capital expenditures. A portion of the net proceeds may also be used to
acquire or invest in complementary businesses or products or to obtain the right
to use complementary technologies. The Company has no present plans, agreements
or commitments and is not currently engaged in any negotiations with respect to
any such transactions. Pending use of the net proceeds for the above purposes,
the Company intends to invest such funds in short-term, interest-bearing,
investment grade obligations. The Company will not receive any of the proceeds
from the sale of Common Stock by the Selling Stockholders.
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock
or other securities. The Company is currently negotiating a new U.S. line of
credit to replace its previous U.S. line of credit which expired in August 1997.
The Company expects the new U.S. line of credit to require that the Company
obtain the bank's prior written consent in order to declare or pay any cash
dividends. The Company currently anticipates that it will retain all of its
future earnings for use in the expansion and operation of its business and does
not anticipate paying any cash dividends in the foreseeable future.
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<PAGE> 19
CAPITALIZATION
The following table sets forth the total capitalization of the Company at
June 30, 1997 and such capitalization adjusted give effect to the Automatic
Conversion, the Directed Placement and the sale of the 3,250,000 shares of
Common Stock offered by the Company at an assumed initial public offering price
of $12.00 per share (after deducting the underwriting discount and estimated
offering expenses) and the application of net proceeds therefrom. See "Principal
and Selling Stockholders." This table should be read in conjunction with the
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Short-term debt, including current portion of long-term debt(1)........ $ 2,337 $ --
------- -------
Redeemable Convertible Preferred Stock, $0.001 par value; 10,000,000
shares authorized, 3,944,495 shares issued and outstanding actual; no
shares issued and outstanding as adjusted............................ 21,781 $ --
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value; 854,038 shares issued and
outstanding actual; no shares as adjusted......................... 1 --
Common Stock, $0.001 par value; authorized -- 40,000,000 shares
actual, and as adjusted; issued and outstanding -- 1,866,710
shares actual and 10,115,243 shares as adjusted(2)................ 2 10
Additional paid-in capital........................................... 2,446 61,120
Deferred compensation................................................ (188) (188)
Accumulated deficit.................................................. (8,903) (8,903)
Currency translation adjustment...................................... (581) (581)
------- -------
Total stockholders' equity (deficit).............................. (7,223) 51,458
------- -------
Total capitalization......................................... $16,895 $51,458
======= =======
</TABLE>
- ---------------
(1) See Note 3 of Notes to Consolidated Financial Statements.
(2) Excludes: (i) 665,926 shares of Common Stock issuable upon exercise of stock
options outstanding as of June 30, 1997 at a weighted average exercise price
of $3.87 per share; (ii) 189,191 shares of Common Stock and Preferred Stock
subject to warrants outstanding as of June 30, 1997 at an exercise price of
$5.72 per share and (iii) 751,500 shares of Common Stock issuable upon
exercise of stock options and warrants issued subsequent to June 30, 1997 at
a weighted average exercise price of $11.63 per share. See
"Management -- Employee Stock Plans" and Notes 4 and 11 of Notes to
Consolidated Financial Statements.
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<PAGE> 20
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1997
was $16,358,000 or $2.38 per common share. Pro forma net tangible book value per
share is determined by dividing the net tangible book value of the Company
(total tangible assets less total liabilities) by the number of shares of Common
Stock outstanding at that date after giving pro forma effect to the Automatic
Conversion and Directed Placement. After giving effect to the sale of the
3,250,000 shares of Common Stock offered by the Company (at an assumed initial
public offering price of $12.00 per share and after deduction of the
underwriting discount and estimated offering expenses payable by the Company),
the Company's pro forma net tangible book value at June 30, 1997 would have been
$51,458,000 or $5.09 per share. This represents an immediate increase in net
tangible book value to existing stockholders of $2.71 per share and an immediate
dilution to new investors of $6.91 per share. The following table illustrates
the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $12.00
Net tangible book value per share as of June 30, 1997....... $2.38
Increase per share attributable to new investors............ 2.71
-----
Pro forma net tangible book value per share after this
offering.................................................... 5.09
------
Dilution per share to new investors........................... $ 6.91
======
</TABLE>
The following table sets forth, on the pro forma basis described above, as
of June 30, 1997, the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by:
(i) existing stockholders and (ii) new investors at an assumed offering price of
$12.00 per share (before deducting the underwriting discount and estimated
offering expenses):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- --------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
----------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)................. 6,865,243 67.9% $25,144,000 39.2% $ 3.66
New investors(1)......................... 3,250,000 32.1% 39,000,000 60.8% 12.00
--------- ----- ----------- -----
Total.......................... 10,115,243 100.0% $64,144,000 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) Shares held and total consideration paid by existing stockholders includes
200,000 shares of Common Stock sold in the Directed Placement. Sales by
Selling Stockholders in this offering will reduce the number of shares of
Common Stock held by existing stockholders to 6,745,243 shares or
approximately 67% of the total shares of Common Stock outstanding after this
offering and will increase the number of shares held by new investors to
3,370,000 shares or approximately 33% of the total shares of Common Stock
outstanding after the offering.
The foregoing computations assume no exercise of the Underwriters'
over-allotment option and no exercise of stock options outstanding at June 30,
1997. As of June 30, 1997, there were outstanding options to purchase an
aggregate of 665,926 shares of Common Stock at a weighted average exercise price
of $3.87 per share. Also as of June 30, 1997, there were outstanding warrants to
purchase an aggregate of 189,191 shares of Common Stock and Preferred Stock at
an exercise price of $5.72 per share. In addition, subsequent to June 30, 1997,
the Company issued options and warrants to purchase an aggregate of 751,500
shares of Common Stock at a weighted average exercise price of $11.63 per share.
To the extent that any of these options or warrants are exercised, there will be
further dilution to new investors. See "Capitalization," "Management -- Employee
Stock Plans" and Notes 4 and 11 of Notes to Consolidated Financial Statements.
18
<PAGE> 21
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data at December 31, 1995 and
1996 and for each of the years in the three-year period ended December 31, 1996
are derived from consolidated financial statements of the Company that have been
audited by KPMG Peat Marwick LLP, independent certified public accountants, and
are included elsewhere in this Prospectus. The consolidated balance sheet data
at December 31, 1994 is derived from the audited Consolidated Financial
Statements of the Company that are not included herein. The consolidated
statement of operations data for the year ended December 31, 1993 and the
consolidated balance sheet data at December 31, 1993 are derived from unaudited
Consolidated Financial Statements of the Company that are not included herein.
The following selected consolidated financial data at June 30, 1997 and for the
six-month periods ended June 30, 1996 and 1997 are unaudited but have been
prepared on the same basis as the audited Consolidated Financial Statements and,
in the opinion of management, contain all adjustments, consisting only of normal
recurring adjustments, that management believes necessary for a fair
presentation of the financial position and results of operations for these
periods. The historical results are not necessarily indicative of the operating
results to be expected in the future. The following selected consolidated
financial data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------- -------------------
1993 1994 1995 1996 1996 1997
------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales(1):
Security and access products.................... $ -- $ 1,426 $12,520 $16,628 $ 5,789 $ 9,820
PCMCIA peripheral products...................... 2,379 5,020 5,546 4,892 2,724 163
------- ------- ------- ------- ------ ------
Total net sales............................... 2,379 6,446 18,066 21,520 8,513 9,983
Cost of sales..................................... 1,779 5,087 15,771 14,880 6,171 6,126
------- ------- ------- ------- ------ ------
Gross profit...................................... 600 1,359 2,295 6,640 2,342 3,857
Operating expenses:
Research and development........................ 691 1,162 1,399 2,386 1,180 1,418
Sales and marketing............................. 564 1,224 2,057 3,230 1,408 2,013
General and administrative...................... 346 580 1,439 2,004 908 1,133
------- ------- ------- ------- ------ ------
Total operating expenses...................... 1,601 2,966 4,895 7,620 3,496 4,564
------- ------- ------- ------- ------ ------
Loss from operations.............................. (1,001) (1,607) (2,600) (980) (1,154) (707)
Interest income (expense), net.................... (95) (261) (337) (304) (148) 58
Foreign currency transaction gain................. -- -- 11 174 56 239
------- ------- ------- ------- ------ ------
Net loss.......................................... (1,096) (1,868) (2,926) (1,110) (1,246) (410)
Accretion on redeemable convertible preferred
stock........................................... -- -- (139) (287) (143) (478)
------- ------- ------- ------- ------ ------
Net loss applicable to common stockholders........ $(1,090) $(1,868) $(3,065) $(1,397) $(1,389) $ (888)
======= ======= ======= ======= ====== ======
Pro forma net loss per share(2)................... $ (0.25) $ (0.13)
======= ======
Shares used to determine pro forma net loss per
share(2)........................................ 5,272 7,018
======= ======
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------
1993 1994 1995 1996 JUNE 30, 1997
------- ------- ------- ------- -------------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash and cash equivalents....................... $ 115 $ 70 $ 739 $ 2,593 $10,942
Working capital (deficit)....................... 454 823 1,620 (1,787) 13,694
Total assets.................................... 1,829 3,452 8,143 11,459 20,665
Long-term debt, less current portion............ 503 3,027 2,147 -- --
Redeemable convertible preferred stock.......... -- -- 4,781 5,068 21,781
Total stockholders' equity (deficit)............ 19 (2,027) (4,760) (6,024) (7,223)
</TABLE>
- ---------------
(1) Through 1994, the Company focused on PCMCIA peripheral products, including
flash memory and fax/modem devices. In 1994, the Company began emphasizing
security and access products. The Company made the final shipment of PCMCIA
peripheral products in the quarter ended March 31, 1997, completing its exit
from this business.
(2) Share and per share information gives pro forma effect to the Automatic
Conversion. See Notes 1, 4 and 10 of Notes to Consolidated Financial
Statements.
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth in this section as well as those discussed
under the caption "Risk Factors" and elsewhere in this Prospectus.
OVERVIEW
SCM Microsystems designs, develops and sells standards-compliant hardware,
firmware and software products and technologies used in smart card and other
token-based network security and conditional access systems. The Company's
objective is to leverage its expertise in PCMCIA peripheral products and smart
card technologies, and its extensible, upgradeable smart card token-based
security architecture, to capitalize on the growing demand for data and network
security and the need to control access to digital information. The Company
sells security and access products which include SwapBox PC Card adapters,
SwapSmart smart card readers, SwapAccess DVB-CAM modules and its SmartOS
universal smart card interface architecture. The Company sells security and
access products to OEMs such as computer, telecommunication and DVB component
and system manufacturers. The Company markets, sells and licenses its products
through a direct sales and marketing organization primarily to OEMs and also
through distributors, VARs, system integrators and resellers worldwide. OEM
customers include Compaq, Dell, France Telecom, IBM, Kirch Group (BetaDigital),
Schlumberger, Security Dynamics, Siemens/Nixdorf, Sun Microsystems and Telenor.
The Company focuses on security and access products that provide secure
access to digital data. The Company's security and access products are targeted
at OEM computer, telecommunication and DVB component and system manufacturers.
From the Company's inception through 1994, the Company focused primarily on
PCMCIA peripheral products, including flash memory and fax/modem devices, which
carried a significantly lower gross margin than the Company's current products.
In 1994, the Company began emphasizing security and access products. The Company
made the final shipment of PCMCIA peripheral products in the quarter ended March
31, 1997, completing its exit from this business. As a result of the Company's
strategic shift in product focus, the proportion of security and access product
sales increased from 22.1% of total net sales in 1994 to 77.3% of total net
sales in 1996. The Company's net sales are now, and will continue to be,
dependent upon the sales of the Company's security and access products.
A substantial majority of the Company's security and access products are
intended for use as components or subsystems in systems manufactured and sold by
third party OEMs. In 1996, sales to IBM accounted for 12% of total net sales,
sales to BetaDigital, a division of the Kirch Group, accounted for 11% of total
net sales and sales to the Company's top 10 customers accounted for 55.0% of
total net sales. In addition, sales of the Company's SwapBox product accounted
for 62.2% and 54.4% of total net sales in 1995 and 1996, respectively. A
substantial majority of the SwapBox products sold by the Company are sold to a
number of major OEMs, including IBM, Dell and Packard Bell, each of which in
turn supplies products, such as desktop PCs, to the DoD. The Company expects its
business to continue to be substantially dependent upon sales of SwapBox
products to OEMs that are supplying the DoD, although such dependence may
decline as the Company expands its product lines and customer base. The Company
frequently enters into contracts with OEMs which provide for shipment of certain
quantities of products at specified future dates. Revenue from these contracts,
as well as from other sales, is recognized upon shipment of products. The
Company's dependence upon a limited number of significant customers imposes
certain risks on the Company. See "Risk Factors -- Dependence on Sales to OEMs,"
"-- Dependence on Sales to Government Contractors" and "-- Dependence on
Development of Industry Relationships."
As a result of the Company's multinational operations and sales, the
Company's operating results are subject to significant fluctuations based upon
changes in the exchange rates of certain currencies, particularly the German
mark, in relation to the U.S. dollar. For example, the Company's United States
headquarters are located in Los Gatos, California, its international
headquarters are located near Munich, Germany and its
20
<PAGE> 23
research and development facilities are located in Erfurt, Germany and La
Ciotat, France. In addition, the Company sources its products from contract
manufacturers located in Europe and Asia. As a result, a substantial portion of
the Company's costs and expenses are denominated in currencies other than the
U.S. dollar. For the year ended December 31, 1996 and the six months ended June
30, 1997, the Company's sales denominated in U.S. dollars represented
approximately 54.8% and 38.5% of the Company's total net sales, respectively.
The Company does not currently engage in risk management activities with respect
to its foreign currency exposure. Although management will continue to monitor
the Company's exposure to currency fluctuations, there can be no assurance that
exchange rate fluctuations will not have a material adverse effect on the
Company's business and operating results.
The Company experiences substantial seasonality in its business, with
approximately one-third of annual net sales being realized in the first half of
the year and the remaining two-thirds being realized in the second half of the
year. In recent periods, this seasonality has been primarily the result of the
Company's reliance on sales of its SwapBox products to OEMs that in turn are
selling to U.S. government agencies. The buying pattern of U.S. government
agencies tend to be substantially weighted to the third quarter and, to a
somewhat lesser extent, the fourth quarter of the calendar year. The strength in
net sales in the third quarter which results from the U.S. government buying
patterns is somewhat offset by relatively weaker sales in Europe in the same
quarter as a result of the traditional European summer vacation patterns. The
Company expects that as sales of its DVB products, which are sold to OEMs mainly
in Europe for the consumer market, begin to represent a larger percentage of net
sales, the seasonality that the Company experiences may be further exacerbated
as such sales are likely to be strongest in the fourth quarter of the year. In
contrast to net sales, operating expenses tend to be spread relatively evenly
across the year. As a result, the Company's operating results have tended to be
weakest in first and second quarter of the year. See "-- Quarterly Results of
Operations."
In April 1997, Gemplus served the Company with a complaint alleging that
the Company's SwapSmart product infringes certain claims of a French patent held
by Gemplus. In September 1997, the Company entered into a license agreement and
memorandum of understanding, and settled this dispute, with Gemplus. In
connection with these transactions, the Company issued warrants to Gemplus to
purchase up to 200,000 shares of Common Stock at an exercise price of $13.00 per
share and up to 200,000 shares of Common Stock at an exercise price of $14.00
per share. The Company also agreed to sell 200,000 shares of Common Stock to
Gemplus at a purchase price of $9.00 per share in the Directed Placement. The
Company's general and administrative expenses for the quarter ending September
30, 1997 will include a one-time expense of approximately $500,000 in connection
with the foregoing agreements, approximately $450,000 of which is non-cash
consideration. See "Business -- Collaborative Industry Relationships" and
"-- Legal Proceedings."
21
<PAGE> 24
RESULTS OF OPERATIONS
The following table sets forth certain items from the Company's
consolidated statement of operations as a percentage of total revenues for the
periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------- ---------------
1994 1995 1996 1996 1997
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Net sales:
Security and access products..................... 22.1% 69.3% 77.3% 68.0% 98.4%
PCMCIA peripheral products....................... 77.9 30.7 22.7 32.0 1.6
----- ----- ----- ----- -----
Total net sales............................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Cost of sales...................................... 78.9 87.3 69.1 72.5 61.4
Gross profit....................................... 21.1 12.7 30.9 27.5 38.6
----- ----- ----- ----- -----
Operating expenses:
Research and development......................... 18.0 7.7 11.1 13.9 14.2
Sales and marketing.............................. 19.0 11.4 15.0 16.5 20.2
General and administrative....................... 9.0 8.0 9.3 10.7 11.3
----- ----- ----- ----- -----
Total operating expenses...................... 46.0 27.1 35.4 41.1 45.7
----- ----- ----- ----- -----
Loss from operations............................... (24.9) (14.4) (4.6) 13.6 (7.1)
Interest income (expense), net..................... (4.1) (1.9) (1.4) (1.7) 0.6
Foreign currency transaction gain.................. 0.0 0.1 0.8 0.7 2.4
----- ----- ----- ----- -----
Net loss........................................... (29.0) (16.2) (5.2) (14.6) (4.1)
----- ----- ----- ----- -----
Accretion on redeemable convertible preferred
stock............................................ -- (0.8) (1.3) (1.7) (4.8)
----- ----- ----- ----- -----
Net loss applicable to common stockholders......... (29.0)% (17.0)% (6.5)% (16.3)% (8.9)%
===== ===== ===== ===== =====
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997 COMPARED TO SIX MONTHS ENDED JUNE 30, 1996
Net Sales. Net sales reflect the invoiced amount for goods shipped less
estimated returns. Revenue is recognized upon product shipment. Net sales were
$10.0 million for the first six months of 1997, compared to $8.5 million in the
first six months of 1996. This increase was due primarily to increased unit
sales of the Company's new DVB-CAM products. Sales of security and access
products were $9.8 million in the first six months of 1997, compared to $5.8
million in the first six months of 1996, an increase of 70%, reflecting the
Company's shift in product strategy toward security and access products. This
increase was primarily due to the introduction of the Company's DVB-CAM
products, which products were first shipped in the fourth quarter of 1996. The
Company made the final shipment of PCMCIA peripheral products in the quarter
ended March 31, 1997, completing its exit from that business.
Gross Profit. Gross profit was $3.9 million, or 38.6% of net sales, for the
first six months of 1997, compared to $2.3 million, or 27.5% of net sales, in
the first six months of 1996. The increase in gross profit, both in absolute
amount and as a percentage of net sales, was primarily due to the introduction
of DVB-CAM products and the concurrent shift away from lower margin PCMCIA
peripheral products. In addition, the Company's transition from the PCMCIA
peripheral products business resulted in reduced labor requirements. The
Company's gross profit has been and will continue to be affected by a variety of
factors, including competition, product configuration and mix, the availability
of new products and product enhancements which tend to carry higher gross profit
than older products and the cost and availability of components. Accordingly,
gross profits are expected to fluctuate from period to period.
Research and Development. Research and development expenses consist
primarily of employee compensation and prototype expenses. To date, the period
between achieving technological feasibility and completion of software has been
short, and software development costs qualifying for capitalization have been
insignificant. Accordingly, to date the Company has not capitalized any software
development costs. Research and development expenses were $1.4 million, or 14.2%
of net sales, for the first six months of 1997, compared
22
<PAGE> 25
to $1.2 million, or 13.9% of net sales, in the prior year period. The 20.2%
increase in research and development spending was due primarily to higher
headcount in the Company's French facility and a rise in prototype and related
expenses for the Company's DVB-CAM product. The Company believes that research
and development expenses during 1997 will continue to be higher than in 1996 in
absolute amount due to a higher number of personnel to support the Company's new
product development and customer projects.
Sales and Marketing. Sales and marketing expenses consist primarily of
employee compensation and trade show and other marketing costs. Sales and
marketing expenses were $2.0 million, or 20.2% of net sales, for the first six
months of 1997, compared to $1.4 million, or 16.5% of net sales, for the first
six months of 1996, an increase of 43.0%. This increase in absolute amount and
as a percentage of net sales was due primarily to growth of the Company's sales
and marketing headcount in the U.S. and initial promotional efforts in the
Asia-Pacific region. Sales and marketing expenses in 1997 are expected to
increase in absolute amount as the Company continues to expand its headcount to
support a larger customer base and expanded product line.
General and Administrative. General and administrative expenses consist
primarily of compensation expenses for administrative employees. General and
administrative expenses were $1.1 million, or 11.3% of net sales, for the first
six months of 1997, compared to $908,000, or 10.7% of net sales in the first six
months of 1996, an increase of 24.8%. General and administrative expenses
increased both in absolute amount and as a percentage of net sales in the first
six months of 1997 primarily as a result of an increase of administrative
headcount in the Company's U.S. and German offices in support of higher levels
of business activities. The Company believes general and administrative expenses
in 1997 will continue to increase in absolute amount as a result of operating as
a public company.
Interest Income (Expense), Net. Interest income (expense), net consists of
interest earned on invested cash, offset by interest paid or accrued on
outstanding debt. Net interest income was $58,000 for the first six months of
1997, compared to a net expense of $148,000 for the first six months of 1996.
During the first six months of 1997, the Company raised $12.1 million through
the sale of preferred stock, and converted $4.2 million of convertible debt into
preferred stock, resulting in both a reduction of outstanding debt and
corresponding interest expense and an increase in investable cash balances. The
Company expects to realize increased interest income in the near term as a
result of investing the net proceeds of this offering.
Income Taxes. The Company incurred operating losses in 1995 and 1996 and
for the six months ended June 30, 1997, and therefore did not incur income tax
obligations in such periods. As of December 31, 1996, the Company had German net
operating loss carry forwards of approximately $4.6 million available to offset
income from the Company's German operations for an indefinite period. In
addition, the Company had net operating loss carry forwards of approximately
$1.9 million and $800,000 for U.S. federal and California income tax purposes,
respectively. The Company's utilization of U.S. federal net operating loss carry
forwards is limited to approximately $340,000 per year. At June 30, 1997, the
Company recorded a full valuation allowance to offset these deferred tax assets
as management has concluded that it is more likely than not that the deferred
tax assets would not be realized in the future. A future change in the Company's
assessment of the likelihood of future realization of deferred tax assets could
result in a reduction of the valuation allowance, a corresponding reduction in
the Company's income tax expense recorded for financial statement purposes and a
corresponding increase in net income. This would not, however, result in a
change in actual income taxes payable by the Company in any future period. See
Note 6 to the Consolidated Financial Statements.
1996 COMPARED TO 1995
Net Sales. Net sales were $21.5 million in 1996, compared to $18.1 million
in 1995, an increase of 19.1%. This increase was due primarily to increased unit
sales of certain previously existing products as well as sales of products first
introduced in 1996. Sales of security and access products represented 77.3% of
total net sales in 1996 compared to 69.3% in 1995, reflecting the continued
shift in the Company's product strategy toward security and access products.
Security and access product sales were $16.6 million in 1996 compared to $12.5
million in 1995, an increase of 32.8%. This increase resulted primarily from
increased sales of SwapBox products which began shipping in 1995, as well as
sales of security and access products introduced during
23
<PAGE> 26
1996, including SwapSmart and the Company's DVB products. One customer accounted
for 11% of the Company's net sales in 1996, resulting from the initial shipments
of the Company's DVB-CAM products which were introduced in the fourth quarter.
Accounts receivable from this customer represented 25% of the Company's total
receivables as of December 31, 1996 due to the timing of shipments in the fourth
quarter. All such receivables were collected during the first quarter of 1997.
Consistent with the Company's shift away from PCMCIA peripheral products, sales
of such products were $4.9 million in 1996, compared to $5.5 million in 1995, a
decrease of 11.8%.
Gross Profit. Gross profit was $6.6 million, or 30.9% of net sales, in
1996, compared to $2.3 million, or 12.7% of net sales, in 1995. The substantial
increase in gross profit as a percentage of net sales in 1996 was primarily
attributable to three factors: (i) during 1996, the Company benefited from
manufacturing cost efficiencies associated with the increased sales of security
and access products; (ii) as part of the continued shift in 1996 from PCMCIA
peripheral products to security and access products, the Company introduced
certain new security and access products during 1996 that carried higher gross
margins than other products in the security and access product family; and (iii)
during 1996, the Company received approximately $1.6 million in nonrecurring
engineering revenues with relatively minimal cost of sales.
Research and Development. Research and development expenses totaled $2.4
million, or 11.1% of net sales, in 1996, compared to $1.4 million, or 7.7% of
net sales, in 1995. The increase in research and development spending during
1996 was primarily a result of increased headcount and development activity
associated with new product introductions and the opening of the Company's
research and development facility in France.
Sales and Marketing. Sales and marketing expenses totaled $3.2 million, or
15.0% of net sales, in 1996, compared to $2.1 million, or 11.4% of net sales, in
1995. Sales and marketing expenses in 1996 in absolute amount increased
primarily as a result of the costs associated with introducing several
significant new products during 1996 and the higher headcount costs associated
with supporting a broader base of customers and expanded line of products.
General and Administrative. General and administrative expenses totaled
$2.0 million, or 9.3% of net sales, in 1996, compared to $1.4 million, or 8.0%
of net sales, in 1995. General and administrative expenses increased in absolute
amount in 1996 and as a percentage of net sales primarily as a result of
increasing headcount and expanded facilities associated with the overall growth
in the business.
Interest Income (Expense), Net. Interest expense was immaterial as a
percentage of sales in both 1996 and 1995.
Income Taxes. The Company incurred losses in 1995 and 1996 and therefore
did not incur income tax obligations in these periods. As of December 31, 1996,
the Company had deferred tax assets of approximately $2.2 million, resulting
primarily from the net operating loss carryforwards.
1995 COMPARED TO 1994
Net Sales. Net sales increased to $18.1 million in 1995, compared to $6.4
million during 1994. This increase reflected increased unit sales across the
Company's product lines. Sales of security and access products and sales of
PCMCIA peripheral products represented 69.3% and 30.7%, respectively, of total
net sales in 1995 compared to 22.1% and 77.9%, respectively, in 1994, reflecting
the shift in the Company's product strategy toward security and access products.
Security and access product sales increased to $12.5 million in 1995, compared
to $1.4 million in 1994. This substantial increase resulted primarily from sales
of SwapBox products which began shipping in 1995. PCMCIA peripheral product
sales increased to $5.5 million in 1995, compared to $5.0 million in 1994. This
increase resulted primarily from the expansion in 1995 of the Company's PCMCIA
peripheral product line to include fax/modem PC Cards.
Gross Profit. Gross profit was $2.3 million, or 12.7% of net sales, in
1995, compared to $1.4 million, or 21.1% of net sales, in 1994. The substantial
decrease in gross profit as a percentage of net sales in 1995 was primarily
attributable to continuing price erosion for the Company's older PCMCIA
peripheral products, partially offset by the somewhat better margins associated
with the fax/modem product, and to relatively high
24
<PAGE> 27
manufacturing and procurement costs associated with the security access
products, particularly SwapBox which was first shipped in 1995.
Research and Development. Research and development expenses totaled $1.4
million, or 7.7% of net sales, in 1995, compared to $1.2 million, or 18.0% of
net sales, in 1994. The 20.4% increase in research and development spending in
1995 was primarily due to increased headcount related to the Company's
establishment of its research facility in La Ciotat, France. The decrease in
research and development expenses as a percentage of net sales was due to the
large increase in net sales.
Sales and Marketing. Sales and marketing expenses totaled $2.1 million, or
11.4% of net sales, in 1995, compared to $1.2 million, or 19.0% of net sales, in
1994. Sales and marketing expenses increased in absolute amount in 1995 as the
Company's headcount expanded, particularly in the United States, and as the
Company expanded marketing activities in the U.S.
General and Administrative. General and administrative expenses totaled
$1.4 million, or 8.0% of net sales, in 1995, compared to $580,000, or 9.0% of
net sales, in 1994. General and administrative expenses increased in absolute
amount in 1995 primarily as a result of an increase in administrative personnel
during 1995 to support the growth in the Company's business.
Interest Income (Expense), Net. Interest expense was immaterial as a
percentage of net sales in 1994 and 1995.
Income Taxes. Due to the Company's operating losses, the Company did not
incur income tax expense in 1994 or 1995.
25
<PAGE> 28
QUARTERLY RESULTS OF OPERATIONS
The following tables present certain unaudited consolidated statement of
operations data for each of the four quarters in the year ended December 31,
1996 and the first two quarters of 1997, as well as such data expressed as a
percentage of the Company's total net sales for the periods indicated. This data
has been derived from unaudited consolidated financial statements and has been
prepared on the same basis as the Company's audited Consolidated Financial
Statements which appear elsewhere in this Prospectus. In the opinion of the
Company's management, this data includes all adjustments (consisting only of
normal recurring adjustments) necessary for a fair presentation of such data.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
1996 1996 1996 1996 1997 1997
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA (IN THOUSANDS):
Net sales:
Security and access products.................... $ 2,811 $2,978 $ 4,927 $5,912 $ 4,202 $5,618
PCMCIA peripheral products...................... 1,446 1,278 1,073 1,095 163 --
------- -------- ------- ------- - ------- ------- -
Total net sales............................... 4,257 4,256 6,000 7,007 4,365 5,618
------- -------- ------- ------- - ------- ------- -
Cost of sales..................................... 3,068 3,103 3,903 4,806 2,804 3,322
Gross profit...................................... 1,189 1,153 2,097 2,201 1,561 2,296
------- -------- ------- ------- - ------- ------- -
Operating expenses:
Research and development........................ 624 556 598 608 628 790
Sales and marketing............................. 631 777 889 933 975 1,038
General and administrative...................... 441 467 605 491 548 585
------- -------- ------- ------- - ------- ------- -
Total operating expenses...................... 1,696 1,800 2,092 2,032 2,151 2,413
------- -------- ------- ------- - ------- ------- -
Income (loss) from operations..................... (507) (647) 5 169 (590) (117)
------- -------- ------- ------- - ------- ------- -
Interest income (expense), net.................... (25) (123) (70) (86) (28) 86
Foreign currency transaction gain................. 35 21 92 26 64 175
------- -------- ------- ------- - ------- ------- -
Net income (loss)................................. (497) (749) 27 109 (554) 144
Accretion on redeemable convertible preferred
stock........................................... (71) (72) (72) (72) (160) (318)
------- -------- ------- ------- - ------- ------- -
Net loss applicable to common stockholders........ $ (568) $ (821) $ (45) $ 37 $ (714) $ (174)
======= ======== ======= ======== ======= ========
AS A PERCENTAGE OF TOTAL NET SALES:
Net sales:
Security and access products.................... 66.0% 70.0% 82.1% 84.4% 96.3% 100.0%
PCMCIA peripheral products...................... 34.0 30.0 17.9 15.6 3.7 --
----- ----- ----- ----- ----- -----
Total net sales............................... 100.0 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- ----- -----
Cost of sales..................................... 72.1 72.9 65.1 68.6 64.2 59.1
Gross profit...................................... 27.9 27.1 35.0 31.4 35.8 40.9
----- ----- ----- ----- ----- -----
Operating expenses:
Research and development........................ 14.7 13.1 10.0 8.7 14.4 14.1
Sales and marketing............................. 14.8 18.2 14.8 13.3 22.3 18.5
General and administrative...................... 10.3 11.0 10.1 7.0 12.6 10.4
----- ----- ----- ----- ----- -----
Total operating expenses...................... 39.8 42.3 34.9 29.0 49.3 43.0
----- ----- ----- ----- ----- -----
Income (loss) from operations..................... (11.9) (15.2) 0.1 2.4 (13.5) (2.1)
----- ----- ----- ----- ----- -----
Interest income (expense), net.................... (0.6) (2.9) (1.2) (1.2) (0.6) 1.5
Foreign currency transaction gain................. 0.8 0.5 1.5 0.4 1.5 3.1
----- ----- ----- ----- ----- -----
Net income (loss)................................. (11.7) (17.6) 0.5 1.6 (12.6) 2.5
Accretion on redeemable convertible preferred
stock........................................... (1.7) (1.7) (1.2) (1.0) (3.7) (5.6)
----- ----- ----- ----- ----- -----
Net loss applicable to common stockholders........ (13.4)% (19.3)% (0.7)% 0.6% (16.3)% (3.1)%
===== ===== ===== ===== ===== =====
</TABLE>
26
<PAGE> 29
The Company experiences substantial seasonality in its business, with
approximately one-third of annual net sales being realized in the first half of
the year and the remaining two-thirds being realized in the second half of the
year. In recent periods, this seasonality has been primarily the result of the
Company's reliance on sales of its SwapBox products to OEMs that in turn sell to
U.S. government agencies. The buying pattern of U.S. government agencies tend to
be substantially weighted to the third quarter and, to a somewhat lesser extent,
the fourth quarter of the calendar year. The strength in net sales in the third
quarter which results from the U.S. government buying patterns is somewhat
offset by relatively weaker sales in Europe in the same quarter as a result of
the traditional European summer vacation patterns. The Company expects that as
sales of its DVB products, which are sold to OEMs mainly in Europe for the
consumer market, begin to represent a larger percentage of net sales, the
seasonality that the Company experiences may be further exacerbated as these
sales are likely to be strongest in the fourth quarter of the year. In contrast
to net sales, operating expenses tend to be spread relatively evenly across the
year. As a result, the Company's operating results have tended to be weakest in
first and second quarter of the year. This revenue seasonality is evident in the
table above, in which the Company's net sales in 1996 increased each quarter,
then declined in the first quarter of 1997.
Gross margin generally improved in the second half of 1996 due primarily to
the shift in focus away from lower margin PCMCIA peripheral products. Gross
margin in the third quarter of 1996 was higher than other quarters in the year
due primarily to favorable product mix shift driven by higher sales to OEMs
supplying the DoD, combined with volume purchasing which lowered certain
component costs.
Research and development expenses have generally increased each quarter,
due primarily to increased headcount and related expenses in the Company's
development centers in France and Germany. Unusually high research and
development expenses were incurred in the first quarter of 1996 due primarily to
substantial prototype manufacturing and test expenses related to accelerated
project timetables on key development projects. Sales and marketing expenses
have generally increased each quarter. In addition, certain sales compensation
costs typically fluctuate based on the levels of revenue bookings and shipments.
General and administrative expenses have generally increased each quarter to
support the increase in business activity. In the third quarter of 1996, general
and administrative expenses were impacted by costs associated with the
recruitment of the Company's President and CEO.
The Company's quarterly operating results have in the past varied and may
in the future vary significantly. In addition to seasonality, factors affecting
operating results include: level of competition; size, timing, cancellation or
rescheduling of significant orders; product configuration and mix; market
acceptance of new products and product enhancements; new product announcements
or introductions by the Company or its competitors; adoption of new technologies
and standards; deferrals of customer orders in anticipation of new products or
product enhancements; changes in pricing by the Company or its competitors; the
ability of the Company to develop, introduce and market new products and product
enhancements on a timely basis; hardware component costs and availability,
particularly with respect to hardware components obtained from sole sources; the
Company's success in expanding its sales and marketing programs; technological
changes in the market for digital information security products; levels of
expenditures on research and development; foreign currency exchange rates;
general economic trends and other factors. Because a high percentage of the
Company's operating expenses are fixed, a small variation in revenue can cause
significant variations in operating results from quarter to quarter. See
"-- Overview."
LIQUIDITY AND CAPITAL RESOURCES
The Company has financed its operations to date principally through private
placements of debt and equity securities and, to a lesser extent, borrowings
under bank lines of credit. As of June 30, 1997, the Company's working capital
was $13.7 million. Working capital increased during the first two quarters of
1997 due primarily to the Company's receipt of $12.1 million in net proceeds
from the private placement of redeemable convertible preferred stock and the
conversion of approximately $4.2 million of notes payable into redeemable
convertible preferred stock. These notes payable were classified as current
liabilities as of December 31, 1996 due to certain demand features in the notes,
resulting in a working capital deficit as of that date.
27
<PAGE> 30
During the first six months of 1997, cash and cash equivalents increased by
$8.3 million due primarily to financing activities which included preferred
stock sales totaling $12.1 million, partially offset by repayments of short term
debt of $1.3 million. Investing activities in the first half of 1997 consisted
of $265,000 in capital equipment expenditures. Operating activities in the
period used $1.7 million of cash, including an increase in receivables of
$956,000 due primarily to higher revenue levels, an increase in prepaid expenses
of $350,000 related to costs associated with the Company's planned initial
public stock offering, and an increase in inventory of $162,000 relating to an
increase in backlog for third quarter shipments.
In 1996, cash and cash equivalents increased by $1.9 million due primarily
to financing activities which included issuance of convertible notes payable
totaling $5.0 million and line of credit borrowings of $1.0 million, partially
offset by repayments of short term debt of $1.5 million. Investing activities
consisted of $643,000 in capital equipment expenditures. Operating activities
used $1.7 million of cash, including an increase in receivables of $1.0 million
due primarily to higher revenue levels, and an increase in prepaid expenses of
$582,000, consisting primarily of financing costs relating to the convertible
debt and preferred stock placements which closed in the first quarter of 1997.
In 1995, cash and cash equivalents increased $669,000 due primarily to
financing activities which included issuance of $2.4 million of redeemable
convertible preferred stock, issuance of convertible notes payable totaling $1.5
million, and issuance of non-convertible notes payable of $1.2 million.
Investing activities consisted of $524,000 in capital equipment expenditures.
Operating activities used $3.9 million of cash, including an increase in
receivables of $2.8 million due to the large revenue increase over 1994, an
increase in inventories of $800,000 due to the increase in business levels, and
an increase in accounts payable and accrued expenses of $2.3 million related to
higher purchasing and employment levels in support of the Company's sales
growth.
The Company has revolving lines of credit with three banks in Germany
providing total borrowings of up to 4.5 million DM (approximately $2.6 million
at June 30, 1997). These lines expire at dates ranging from September 30, 1997
to March 31, 1998. The German lines of credit bear interest at rates ranging
from 8.0% to 8.75%. Borrowings under the German lines of credit are unsecured.
At June 30, 1997, no amounts were outstanding under the German lines of credit.
The Company is in the process of negotiating a new U.S. line of credit to
replace its previous $2.5 million U.S. line of credit which expired in August
1997. At June 30, 1997, no amounts were outstanding under the previous U.S. line
of credit.
In addition to the lines of credit, the Company had outstanding debt at
June 30, 1997 totaling approximately $2.3 million, consisting of a term loan
from a German bank. This debt bears interest at rates ranging from 5.0% to 6.0%.
The term loan also contains certain profit sharing and prepayment provisions. In
May 1997, the Company and the German bank agreed to amend the loan agreement to
eliminate the prepayment provisions in exchange for a warrant to purchase
138,000 shares of Common Stock at an exercise price of $5.72 per share. The
Company expects to use a portion of the proceeds of this offering to repay the
term loan. See "Use of Proceeds." As of June 30, 1997, the Company had no
material commitments for capital expenditures.
The Company presently expects that the proceeds of this offering, together
with its current capital resources and available borrowings should be sufficient
to meet its operating and capital requirements through at least the end of 1998.
The Company may, however, seek additional debt or equity financing prior to that
time. There can be no assurance that additional capital will be available to the
Company on favorable terms or at all. The sale of additional debt or equity
securities may cause dilution to existing stockholders.
28
<PAGE> 31
BUSINESS
SCM Microsystems designs, develops and sells standards-compliant hardware,
firmware and software products and technologies used in smart card and other
token-based network security and conditional access systems. The Company's
objective is to leverage its expertise in PCMCIA peripheral products and smart
card technologies, and its extensible, upgradeable smart card token-based
security architecture, to capitalize on the growing demand for data and network
security and the need to control access to digital information. The Company
sells security and access products which include SwapBox PC Card adapters,
SwapSmart smart card readers, SwapAccess DVB-CAM modules and its SmartOS
universal smart card interface architecture. The Company sells security and
access products to OEMs such as computer, telecommunication and DVB component
and system manufacturers. The Company markets, sells and licenses its products
through a direct sales and marketing organization primarily to OEMs and also
through distributors, VARs, system integrators and resellers worldwide. OEM
customers include Compaq, Dell, France Telecom, IBM, Kirch Group (BetaDigital),
Schlumberger, Security Dynamics, Siemens/Nixdorf, Sun Microsystems and Telenor.
INDUSTRY BACKGROUND
Individuals and corporations increasingly rely upon computer networks, the
Internet, intranets and direct broadcast systems to access information,
entertainment and data in a digital form from their homes and workplaces. This
increasing proliferation and reliance upon digital data has caused data security
to become a paramount concern of businesses, government, educational
institutions and consumers. Regardless of whether the issue is controlling
access to proprietary or confidential information such as business data or
health records, or whether it is attempting to limit access to digital video
broadcasts to paying subscribers, content providers, network and data managers
and users of digital data are concerned with controlling access to data and
maintaining data security. The enterprise data security market, including
electronic commerce applications, and the market for DVB conditional access
require a range of products to address their needs.
ENTERPRISE DATA SECURITY AND ELECTRONIC COMMERCE
Enterprise Data Security
Enterprise computing has evolved from highly centralized mainframe
computers to widely distributed client/server network-based solutions. Modern
enterprises frequently employ one or more local area networks to connect
computer users located in a single facility, wide area networks and intranets to
connect users in disparate facilities, and the Internet or direct electronic
links to provide internal users access to third party information and to provide
customers, vendors and other interested third parties with access to an
enterprise's computing resources or information. Internet usage is expected to
increase from approximately 35 million Web users worldwide in 1996 to
approximately 160 million users worldwide by 2000 according to International
Data Corporation ("IDC"). This shift towards distributed computing is being
fueled in part by the growing number of mobile computer users and telecommuters
that perform some or all of their work from home or other remote locations.
As enterprises move toward distributed computing and make data more
accessible to internal and external users, this data has become increasingly
vulnerable to unauthorized access. According to the Computer Security Institute
("CSI"), 42% of respondents to its 1996 CSI/FBI Computer Crime and Security
Survey acknowledged that they had experienced unauthorized use of their computer
systems within the last 12 months. Unauthorized access can range from users who
are authorized to access portions of an enterprise's computing resources
accessing unauthorized portions, to hackers who have no legitimate access
breaking into a network and stealing or corrupting data. The consequences of
unauthorized access, which can often go undetected, can range from theft of
proprietary information or other assets to the alteration or destruction of
stored data. Approximately 78% of respondents to the Fourth Annual Information
Week/Ernst & Young Information Security Survey reported that their company
suffered a loss related to information security and disaster recovery in the
past two years. Some companies reported losses of up to $1 million due to
security breaches. As a result of the consequences of unauthorized access, many
enterprises have been reluctant to make their computing resources as open as may
be otherwise desirable, and those that allow access are adopting various
security measures to guard against unauthorized access. The Company believes
29
<PAGE> 32
that enterprises seek solutions which will allow them to expand access to data
while maintaining adequate security.
Electronic Commerce
The proliferation of PCs in both the home and office combined with
widespread access to the Internet have created significant opportunities for
online shopping and other electronic commerce. IDC estimates that the total
value of goods and services purchased over the Web will grow from $3 billion in
1996 to $100 billion in 2000. The Company believes that a key factor
constraining the growth in online purchasing has been the lack of adequate data
security. As a result of the anonymity of the Internet, merchants and consumers
need assurances that customers are correctly identified and that the
confidentiality of information such as credit card numbers is maintained.
Accordingly, the Company believes that successful expansion of electronic
commerce will require the implementation of improved security measures which
accurately identify and authenticate users and reliably encrypt data
transmissions over the Internet.
Common Solutions to Secure Enterprise Data and Electronic Commerce
Data security and secure electronic commerce generally involve implementing
a patchwork of hardware and software solutions operating at a variety of points
in a data environment, including router, gateway and server-based hardware
solutions, and operating system and applications-level software solutions.
[See Appendix - Description of Graphics]
Currently, the most common security solution is the installation of one or
more firewalls that control the flow of data between segments of an internal
network or between an internal network and the Internet or other remote access
paths. A firewall essentially acts as a funnel, analyzing whether a particular
communication passing through the funnel is authorized. With the increasing
volumes of network traffic, firewalls may no longer be capable of providing
adequate levels of protection without impairing the speed of communications.
Moreover, new Internet technologies such as Sun Microsystems' Java and
Microsoft's ActiveX, which involve the transfer of active programs (applets),
and broadcast applications such as PointCast and Marimba, present security risks
that are not readily addressed by firewalls.
30
<PAGE> 33
The key to any security system is the ability to reliably identify users in
order to prevent unauthorized access to information and resources.
Authentication of a user's identification is generally accomplished by one of
two approaches: passwords, which are a code known only by a specific user; and
tokens, which are user-specific physical devices that only authorized users
possess. Passwords, while easier to use, are also the least secure because they
tend to be short and static, and are often transmitted without encryption. As a
result, passwords are vulnerable to decoding or observation and subsequent use
by unauthorized persons. Tokens are small devices ranging from simple credit
card-like devices to more complex devices capable of generating
time-synchronized or challenge-response access codes. Certain token-based
systems require both possession of the token itself and a personal
identification number ("PIN") to indicate that the token is being used by an
authorized user. Such an approach, referred to as two-factor authentication,
provides much greater security than single factor systems such as passwords or
the simple possession of a token.
Early implementation of tokens include automatic teller machine ("ATM")
cards, which are plastic cards with data encoded on a magnetic strip on the
card. ATM cards require the user to possess the ATM card and to know the PIN
before engaging in any transaction. While suitable for certain applications, the
ATM type card is subject to counterfeiting, tampering and inadvertent data
deletion, and can hold only a very limited amount of information.
PC Cards represent a more advanced form of token, although their use in
security applications has been limited to date. PC Cards are computer
peripherals similar in width and length to, but substantially thicker than, a
credit card. The standards for PC Cards and the corresponding slots were
developed by the PCMCIA. With an installed base of approximately 10 million
PCMCIA slots in 1995 according to IDC, PC Card products have been developed for
a variety of functions including modems and memory devices. While virtually all
portable PCs being sold today contain at least one, and in many cases two,
PCMCIA slots as a standard feature, the PCMCIA standard has generally not been
widely adopted for desktop computers. The use of PC Cards as security tokens has
been endorsed by the DoD as part of its Defense Messaging System ("DMS"). The
DMS uses a PC Card known as "Fortezza" as its standard security token. In
connection with the DMS, the DoD has mandated that desktop computers supplied to
the DoD and its affiliated agencies must incorporate PCMCIA slots in order to
accept the Fortezza PC Card identification/authentication token.
A further advancement in token implementation is the smart card. Smart
cards are credit card-sized plastic cards that contain an embedded
microprocessor, memory and a secure operating system. Smart cards have
significant advantages over PC Cards, including lower cost, portability and
greater durability. Smart cards have been used in applications such as stored
value cards, either for making general purchases or for specific applications
such as prepaid telephone calling cards, and as health care cards, which are
used to store patient and provider information and records. Smart cards are
useful as health care cards because they identify the holder for insurance or
government payment purposes and store health records that can be accessed and
updated by health care providers.
Smart card use for these applications has become widespread in Europe,
where the existence of multiple languages and currencies has created a demand
for common solutions that enable businesses and consumers to conduct their
affairs effectively and efficiently while moving from country to country.
According to Dataquest, the European market for smart cards has far outpaced
that of the United States. Dataquest estimates that in 1995 the U.S. accounted
for approximately 10 million units (2%) of the 544 million unit worldwide
microprocessor-based smart card market, and projects that the worldwide market
will grow to 3.4 billion units by 2001. By the year 2001, Dataquest estimates
that Europe, Asia/Pacific and the Americas will account for 40%, 25% and 20%,
respectively, of this market.
In addition to providing a common record-keeping and stored value solution
across multiple languages and currencies, the Company believes that smart cards
are ideally suited to serve as tokens for network and electronic commerce
security. Microsoft, with its PC/SC Workgroup, and Netscape, with its Security
Infrastructure group, have both endorsed smart cards as key components of their
respective data security architectures, have released application program
interfaces ("APIs") for smart cards and have stated their intentions to support
smart cards in future generations of their software products. The Company
believes that these companies, together with other enterprises with a financial
stake in securing access to digital data and
31
<PAGE> 34
enabling secure electronic commerce such as Verisign and Security Dynamics, will
drive the adoption of smart card technology for security applications in the
United States. The Company also believes that as smart card-based security
systems become accepted in the United States, users outside the United States
will adopt similar systems.
There are several reasons for these endorsements of smart card-based data
security solutions. Key end-user benefits include ease-of-use, low cost,
convenience and durability. Even more compelling is the architectural simplicity
of these systems. E-mail messages, purchase orders, credit card numbers, video
clips, data inquiries and other confidential transmissions are secured as they
are sent. Therefore, these secure transmissions can be opened only by the
intended recipient, thus eliminating many of the security weakpoints of the
communications infrastructure between the parties. Other solutions such as
firewalls, secure modems and SSL software may continue to be used or added
without interfering with the smart-card based security. The Company believes
that smart cards provide the easiest, most flexible, most cost-effective way to
achieve the key benefits of a secure, authenticated transaction between two or
more parties regardless of the specific infrastructure between them. The
smart-card initiatives launched by the companies discussed in the preceding
paragraph indicate that this view is shared by some other significant companies
in the PC, LAN, WAN, Internet and digital content industries.
To date, a number of factors have limited broad adoption of smart cards as
security tokens. These factors include the requirement for special purpose
readers which have been expensive and therefore not widely deployed and the lack
of standards governing the operating systems, communication protocols, APIs and
similar features of the tokens. These factors have resulted in the deployment of
proprietary, closed systems that are not compatible with other systems. In
addition, smart cards are relatively low speed serial interface devices which,
although capable of providing encryption of passwords or other limited data, are
not capable of providing the real-time bulk encryption/decryption required for
many secured access applications.
DIGITAL VIDEO BROADCASTING
DVB involves the transmission of video signals in a digital format. In
contrast to the traditional analog approach, digital signals allow content
providers ranging from broadcast television stations and cable carriers to
specialty programming producers to deliver very high resolution, high quality
video images. DVB may take the form of currently available direct satellite
broadcast services, or alternative services that are expected to be introduced
in the near future such as digital cable services and direct broadcast digital
television. DVB makes it possible to provide a broader range of private content
and nontraditional services than previously available. Businesses, educational
institutions and other enterprises could broadcast private content such as
product information updates and training or educational content to users in
disparate locations, or could provide various interactive products and services
via the DVB medium. The Company believes that a primary challenge for
broadcasters will be to limit access to their content to the intended users such
as those who have purchased appropriate subscriptions or event-by-event
pay-per-view privileges.
The traditional approach to controlling access has been to sell or lease
proprietary set-top boxes (and, in the case of satellite direct broadcast, a
receiving antenna) to subscribers. These set-top boxes descramble digital
signals and then convert them into analog signals in order to be compatible with
the viewer's analog television. While this approach provides the controlled
access desired by broadcasters, it limits the range of content available to the
consumer. Consumers wishing to obtain content or services from more than one
provider would be required to purchase multiple proprietary set-top boxes.
Similarly, the use of proprietary set-top boxes may limit broadcasters' ability
to upgrade systems that have already been installed in their customers' homes
without a costly replacement process.
To address the limitations of the closed-system set-top box, the DVB
Project, an international consortium of over 170 enterprises involved in varying
aspects of DVB including France Telecom, Deutsche Telekom, Nokia, Sony and
Philips, has developed the DVB-CI standard. Such standard makes it possible to
deliver a universal set-top box capable of receiving content from a variety of
providers. The universal set-top box requires use of a smart card token that
"unlocks" the specific services to which a consumer has subscribed. With this
approach, multiple service providers can deliver digital content to the same
"open" set-top box and
32
<PAGE> 35
consumers, using the appropriate conditional access module, can access the
content to which they have subscribed. When consumers subscribe to different or
additional content services or parents seek to limit the viewing privileges of
their children, the service providers need only provide the appropriate smart
card to allow access to the new or additional services. The DVB-CI standard
addresses the limitations of the closed-system set-top box by making it
possible: (i) for broadcasters to upgrade systems installed in their customers'
homes by downloading new operating system software onto the universal set-top
box; (ii) for customers to use one universal set-top box to access digital
content from various service providers by inserting the appropriate conditional
access module for each particular service provider; and (iii) for service
providers to secure access to new or additional services by issuing new tokens
coded for access to such services.
[See Appendix - Description of Graphics]
The Company believes that the members of the DVB Project and other
interested enterprises will continue to drive the adoption of DVB-CI as the
European standard for conditional access to digital content. Moreover,
legislation has been enacted in Spain (and may be enacted elsewhere in the
future) mandating that set-top boxes comply with the DVB-CI standard in order to
assure broad access to digital content without requiring consumers to purchase
multiple set-top boxes. In the United States, the NRSS Committee has proposed
the NRSS-B standard for a conditional access system. The NRSS-B standard is
substantially similar to the DVB-CI standard. Adoption of the NRSS-B standard is
expected to take from six to 12 months. The Company believes that similar
standards may be adopted in certain Asian countries in the future.
The Company believes that successful implementation of the DVB-CI, NRSS-B
and similar standards will require the development of hardware that is capable
of real time, high bandwidth decryption of the video signal and is remotely
updatable to permit providers to offer new content and services without the need
to replace equipment. While the current implementations of DVB-CI and NRSS-B use
set-top boxes, the Company believes that as the standards evolve and as flexible
hardware solutions become available, the DVB-CI and NRSS-B capability will be
built directly into televisions, PCs and network computers. These devices would
then contain the appropriate DVB token slot and reader capabilities, thereby
eliminating the need for the separate set-top box while providing the same smart
card-based conditional access of current systems.
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<PAGE> 36
THE SCM MICROSYSTEMS SOLUTION
SCM Microsystems provides OEMs with key standards-compliant enabling
hardware, firmware and software products and technologies used in smart card and
other token-based network security systems and conditional access to DVB content
and services. Through the use of its extensible core technologies, the Company
is able to offer products that address the specific needs of diverse market
applications such as enterprise data security, electronic commerce and DVB
conditional access.
Enterprise Data Security and Electronic Commerce. The Company's products
address the needs of the enterprise data security and electronic commerce
markets as described below.
PCMCIA BRIDGES FOR SMART CARDS. The Company offers a range of products
which enable smart cards to be read and written through standard PCMCIA ports.
This eliminates the requirement for special purpose smart card readers and
provides interoperability between smart cards and PCs, network computers and
other devices equipped with standard PCMCIA ports.
STANDARDS-BASED, INTEROPERABLE PRODUCTS. The Company's products employ
an open-systems architecture that provides compatibility across a range of
hardware platforms and software environments. The Company's products are
remotely upgradeable so that compatibility can be maintained as the security
infrastructure evolves.
SPEED AND PERFORMANCE. Certain of the Company's smart card reader
products transparently extend the speed and performance capabilities of smart
cards used as security tokens by including encryption/decryption capabilities.
By this approach, smart cards are used as keys to activate the
encryption/decryption capabilities of the reader thus eliminating the speed and
performance limitations inherent in smart cards.
Digital Video Broadcasting. The Company's products address the needs of the
DVB market as described below.
INEXPENSIVE, EASY TO DELIVER CONDITIONAL ACCESS MODULES. The Company
provides smart card-based conditional access readers and modules that adhere to
the DVB-CI and NRSS-B standards. These products enable digital content and
service providers to control and meter access to content and services through
the use of inexpensive smart cards.
REAL TIME, HIGH-BANDWIDTH DESCRAMBLING CAPABILITIES. The Company's
products are structured to use smart cards as keys to activate the
high-bandwidth capabilities of PC Cards. By this approach, smart card-based
tokens, which by themselves are not capable of descrambling digital video data
at the rate required for digital video broadcast, can still be used to control
and meter access to DVB content and services.
REMOTE UPGRADE CAPABILITIES. The Company's DVB products incorporate
read/write capabilities that permit content and service providers to perform a
virtually no-cost upgrade of users' access rights as new products and services
are developed and introduced and as users' subscriptions change.
STRATEGY
The Company's objective is to utilize its expertise in PCMCIA and smart
card technologies and its extensible, updatable smart card token-based security
architecture in order to capitalize on opportunities presented by the growing
demand for secure and controlled access to digital information. The Company
believes it is well positioned to capitalize on the significant growth projected
for smart card-based security and controlled access systems. Key elements of the
Company's strategy include the following:
Leverage Technology Base; Support Open Systems and Interoperability. The
Company has developed extensive expertise and intellectual property in both
PCMCIA and smart card technologies. The Company intends to continue to leverage
this technology base to provide smart card products that can operate across a
variety of hardware platforms and software environments. This technology
incorporates upgradeable, firmware-based features which enable smart card
readers to be upgraded as new smart card operating systems and communication
protocols are adopted. In addition to enabling the Company to respond quickly to
industry
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developments with properly tailored products, this upgradeable architecture
protects the investments in smart card hardware.
Expand Range of Product Applications. The Company's current products are
designed to provide flexible interoperability between smart cards and PCs or
set-top boxes. The Company intends to expand the range of its product offerings
to address specialized applications such as health care records and
identification, televisions and television set-top boxes, customer loyalty
programs, personal identification and Internet and intranet access. In addition,
the Company intends to develop chip set-based versions of certain of its
products in order to reduce their cost and facilitate their easy integration
into future generations of televisions, PCs and network computers.
Increase Penetration of Major OEM Customers; Expand Customer Base. The
Company currently sells its products to a number of OEM customers including
Bull, Dell, France Telecom, Gateway 2000, IBM, Kirch Group, Packard Bell,
Schlumberger, Siemens/Nixdorf and Sun Microsystems. The Company intends to
pursue additional opportunities with its existing customers by leveraging its
relationships to increase sales. For example, the Company's relationships with
its existing customers provide the Company with insight into the current and
future needs of these customers, enabling the Company to design specific
products to meet the additional product needs of each customer. Moreover, the
Company believes that as the needs for data security increase and smart cards
gain wider market acceptance, a significant number of additional participants
will enter the market. The Company intends to expand its customer base by
pursuing opportunities with these new market entrants.
Expand Strategic Industry Relationships. The Company has formed strategic
relationships with a number of key industry players such as Intel, France
Telecom and Telenor. These relationships provide the Company with access to
leading edge technology, marketing and sales leverage and access to key
customers and accounts. In addition, in certain cases, the Company's strategic
partners have provided funding to the Company in the form of funded research,
product purchase prepayment and equity investment. The Company intends to
continue to leverage these relationships and to identify additional key industry
players with which to form strategic relationships. See "-- Collaborative
Industry Relationships."
Support Standards Setting Organizations. The Company intends to continue to
participate in the standards setting activities for the industries it serves.
The Company is a founding member of the PCMCIA and the DVB Project and supports
the Common Data Security Access standard developed by Intel and adopted by
Netscape. The Company's products are compliant with the RSA public key
cryptographic system number 11 ("PKCS #11") standard. Through its participation
in standards setting organizations, the Company contributed to the adoption of
the DVB-CI specification as the standard by the PCMCIA. The Company intends to
maintain an active role in these and other standards setting groups in order to
continue to have its technologies adopted as standards where appropriate and to
keep apprised of technological advancements as they are developed.
TECHNOLOGY
The Company believes that smart cards are ideally suited to serve as tokens
for digital information security. A smart card is a credit card-sized plastic
card which contains a microprocessor, memory and a secure operating system. The
card is inserted into a device that reads the information contained on the card
and performs an appropriate function. The Company has used its extensible smart
card interface architecture to develop open and standard products that support
many different smart cards regardless of the manufacturer, are accessible
through a variety of operating systems and platforms and enable a wide range of
secure applications. The Company's extensible smart card interface architecture
consists of certain core technologies which provide this interoperability as
described below.
Silicon and Firmware for Smart Card Readers. SCM Microsystems has developed
physical interface technology which provides interoperability between PCs and
smart cards from many different smart card manufacturers. The Company's
interoperable architecture includes an ISO compliant layer as well as an
additional layer for supporting non-ISO compliant smart cards. Through its
proprietary integrated circuits and firmware, the Company's smart card readers
can be updated electronically to accommodate new types of
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<PAGE> 38
smart cards without the need to change the reader's hardware. Intel Corporation
has become the first company to license the Company's smart card interface.
Proprietary PC Card Case. The Company's proprietary PC Card case is an open
sided case which has guides to ensure the smart card is positioned correctly
into the PC Card reader. This hardware technology solves the problem presented
by the fact that smart cards and PC Cards have the same width and length.
Proprietary Software. The Company has developed a flexible proprietary
software architecture for real-time downloading of firmware for new smart card
protocol handling requirements into a flash memory chip which resides on the
smart card reader. This software, combined with the Company's proprietary
integrated circuits and firmware described above, allows the reader to
accommodate new types of smart cards without the need to change the reader's
hardware. Additionally, the Company has developed "flash filing" software, which
enables PCMCIA flash memory to function as a flash disk. The Company has filed
patent applications with respect to both software applications.
Hardware for PC Card Adapters. The Company has developed the interface
technology to accommodate multiple PCMCIA slots for ISA, SBus (Sun Microsystems)
and PCI bus structures, thus enabling desktop PCs and workstations to be
equipped with PCMCIA slots. In particular, the Company has developed a patented
dual cable solution with special grounding and termination methods which
prevents signal interference between the PCI/ISA bus slots and a large variety
of PC Cards.
PRODUCTS
By bridging smart cards and other secure devices with PCs, workstations and
set-top boxes, the Company's products provide cost-effective solutions for
conditional access to mobile and desktop computers, workstations, DVB, virtual
private networks, electronic files, e-mail, the Internet and secure electronic
commerce. The Company's products have been developed utilizing the Company's
core competencies in smart card and PC interoperability, PC Card expertise and
flash memory chip experience, and all are compliant with the PKCS #11 standard.
SCM Microsystems provides high quality, easy-to-use solutions in the following
product categories:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PRODUCT CATEGORY FEATURES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SWAPBOX PC CARD ADAPTERS - A peripheral with a PC Card slot that enables desktop PCs
(introduced in 1993) and workstations to accept all sizes of PC Cards (Types I,
II and III)
- Supports a wide variety of PC Card peripherals, including
Ethernet, fax/data modems, SCSI, ATA hard drives, flash
memory, GPS and Fortezza cards
- Available in wide variety of configurations (single and
dual slots, front and rear access, floppy/PC combination)
- Supports a wide variety of platforms (Win 3.X, 95, NT,
OS/2, DOS, Solaris, Unix) and architectures (ISA, PCI, SBus,
USB, EPP, SCSI)
- Compliant with the PCMCIA standard
</TABLE>
- - -------------------------- -
- --------------------------------------------------------------------------------
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<PAGE> 39
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PRODUCT CATEGORY FEATURES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SWAPSMART SMART - A smart card reader that fits in a PC Card slot
CARD READERS - Supports all ISO 7816 smart card protocols as well as
(introduced in 1995) asynchronous and synchronous smart cards, and supports dual
or single card applications
- Incorporates an upgradeable firmware-based chip set so
that the reader can be automatically updated with additional
smart card operating systems, protocols and emerging
industry standards
- Supports a wide variety of platforms (Win 3.X, 95, NT,
OS/2, DOS, Solaris, Unix) and architectures (ISA, PCI)
- Compliant with the PCMCIA standard
- --------------------------------------------------------------------------------------------
SWAPACCESS DVB-CAM MODULES - A multi-function PC Card that can include smart card
(introduced in 1996) read/write capabilities, MPEG2 descrambling, DVB
descrambling and pay- per-view functions
- Utilizes a smart card to control access to digital content
- Enables "open" set-top boxes
- Compliant with the DVB-CI and NRSS-B standards
- --------------------------------------------------------------------------------------------
SMARTOS UNIVERSAL SMART - A chip and accompanying software which provides a
CARD INTERFACE ARCHITECTURE cost-effective universal smart card reader interface easily
(introduced in 1997) integrated into a wide range of devices
- Supports all ISO 7816 smart card protocols, as well as
synchronous and asynchronous smart cards
- Software upgradeable to support new smart card protocols,
functions and industry standards
- Includes dual smart card support, serial and parallel
interfaces, LCD and keypad controls
</TABLE>
- - -------------------------- -
- --------------------------------------------------------------------------------
SWAPBOX PC CARD ADAPTERS
Desktop PCs and workstations, in contrast to laptop and notebook PCs,
generally do not come equipped with PC Card slots. The Company's SwapBox
products are devices with PC Card slots designed to be installed by OEMs into
desktop computers, workstations and servers. Coupled with PC Card security
tokens, cards or smart card readers such as SCM Microsystems' SwapSmart reader,
SwapBoxes allow enterprises to effectively provide authentication, integrity and
confidentiality services. Flash memory cards are widely used with SwapBoxes and
SCM Microsystems' proprietary SwapFTL software for data collection applications.
SwapBoxes accept any PC Card compliant cards including readers for small form
factor memory devices such as Compact Flash, SSFDC, Multimedia and Miniature
Cards, allowing flash memory cards to be connected to PCs for quick and easy
exchange of electronic images, digital audio recordings and text files.
SWAPSMART SMART CARD READERS
The SwapSmart reader is a device in a PC Card form factor that provides a
portable, universal, secure and cost effective bridge between smart cards and
the mobile PC or other products which have PC Card slots. The SwapSmart reader
supports all ISO 7816 smart card protocols as well as asynchronous and
synchronous smart cards. Furthermore, because the SwapSmart reader incorporates
an upgradeable firmware-based chip set, the functionality of SwapSmart products
can be remotely updated as additional smart card operating systems and protocols
come into use. In addition to broad smart card support, the SwapSmart reader is
easily accessible from a wide variety of operating systems and platforms. The
SwapSmart reader enables easy access to the growing number of smart card
applications such as network, VPN and firewall security as well as local and
remote computer access control. Additionally, the SwapSmart reader makes it
possible to use smart cards for user authorization and authentication, for
e-mail and for secure transactions required for electronic
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<PAGE> 40
commerce. Because of its encryption capabilities, the reader is well suited for
security applications, particularly mobile computing security.
Currently, the Company is working with Microsoft's PC/SC Workgroup and with
Netscape's Security Infrastructure group to ensure that the SwapSmart reader
supports the new open specifications for integrating smart cards with PCs. By
supporting a wide range of smart cards and complying with the open standards set
by the PC/SC Workgroup, SwapSmart provides maximum interoperability among smart
cards and easy access to smart card applications for mobile or desktop PCs. For
example, the SwapSmart reader is compliant with the B1 specification for smart
card readers developed by Deutsche Telekom, as well as the Common Data Security
Access specification developed by Intel and adopted by Netscape for use in
Netscape Communicator.
SWAPACCESS DVB-CAM MODULES
By combining SCM Microsystems' SwapSmart reader technology with the
proprietary descrambling code of a digital content provider, the Company's
SwapAccess DVB-CAM provides a cost-effective means of controlling access to
digital broadcasts through the use of a PC Card. SwapAccess is an all-in-one PC
Card that utilizes a smart card to determine if a viewer has access to a given
content provider's service. If the viewer is authorized, SwapAccess descrambles
the signal for viewing.
SwapAccess is the world's first implementation of the DVB-CI standard. The
Company's DVB-CAM technology enables a variety of critical functions including
video-on-demand, pay-per-view, interactive video, home shopping, home banking
and games. Since SwapAccess can be used in any DVB-CI or NRSS-B compliant "open"
set-top box, it allows acceptance of a single solution for different set-top box
systems. The Company believes that the use of smart card technology combined
with the DVB-CI or NRSS-B standard will eliminate the need for multiple set-top
boxes in order for users to access a broad range of desired broadcast data.
SwapAccess has already been selected by certain of the major content providers
in Europe, including France Telecom, Telenor (Norway Telecom) and The Kirch
Group (BetaDigital), who plan to implement the DVB-CI standard through 1997 and
1998. In the United States, the NRSS Committee has proposed the NRSS-B standard
for a conditional access system. The NRSS-B standard is substantially similar to
the DVB-CI standard. Adoption of the NRSS-B standard is expected to take from
six to 12 months. SwapAccess is fully compliant with the NRSS-B standard as
currently proposed. The Company has been and remains active in the definition
and adoption of the NRSS-B standard, and intends to keep SwapAccess compliant
with such standard as it progresses through the formal adoption process. The
Company believes that similar standards may be adopted in certain Asian
countries in the future.
SMARTOS SMART CARD INTERFACE ARCHITECTURE
Based on a unique chip and firmware technology that makes it possible to
easily integrate smart cards with a wide variety of PC and stand-alone devices,
the SmartOS allows companies to integrate smart card support cost-effectively
within desktop, notebook or network computers, USB or serial devices and
keyboards as well as point of sale (POS) terminals and vending machines. The
SmartOS solution allows integrators to utilize only essential components to
control cost and maximize design flexibility. Many hardware designs, such as a
keyboard or network computer, may already incorporate a controller chip but lack
an interface unit and firmware for the completion of a smart card reader
solution. Instead of being forced to purchase all components, the SmartOS
solution offers just those components an integrator needs and those tools
necessary for the quick implementation of smart card readers at a minimum cost.
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CUSTOMERS AND APPLICATIONS
The Company's security and access products are targeted at OEM computer,
telecommunication and DVB component and system manufacturers. The following list
sets forth the customers that purchased in excess of $300,000 of the Company's
security and access products during the year ended December 31, 1996.
<TABLE>
<S> <C>
=================================================================================
OEM PRODUCTS PURCHASED
---------------------------------------------------------------------------------
Dell PC Card Adapters
Digital Equipment Corporation PC Card Adapters
Gateway PC Card Adapters
IBM PC Card Adapters; Smart Card Readers
Kirch Group (BetaDigital) DVB Modules
Micron PC Card Adapters
Packard Bell PC Card Adapters
Siemens/Nixdorf PC Card Adapters; Smart Card Readers
Sun Microsystems PC Card Adapters
Sysorex PC Card Adapters
---------------------------------------------------------------------------------
-
-
-
</TABLE>
Sales to a relatively small number of customers historically have accounted
for a significant percentage of the Company's total sales. In 1996, sales to IBM
accounted for 12% of total net sales, sales to BetaDigital, a division of the
Kirch Group, accounted for 11% of total net sales and sales to the Company's top
10 customers accounted for 55% of total net sales. The Company expects that
sales of its products to a limited number of customers will continue to account
for a high percentage of the Company's total sales for the foreseeable future.
The loss or reduction of orders from a significant customer, including losses or
reductions due to manufacturing, reliability or other difficulties associated
with the Company's products, changes in customer buying patterns, or market,
economic or competitive conditions in the digital information security business,
could adversely affect the Company's business and operating results. See "Risk
Factors -- Dependence on Sales to OEMs."
Examples of applications of the Company's products include the following:
Siemens-Nixdorf/Deutsche Telekom. Siemens-Nixdorf markets SCM Microsystems
smart card readers under its own label and integrates them into its systems
solutions for sale to major corporate users. For example, Deutsche Telekom is
providing its employees with Siemens-Nixdorf laptop computers equipped with
smart cards and the Company's smart card readers. This enables Deutsche
Telekom's remote sales force to gain secure access to Deutsche Telekom's
corporate intranet. In addition to controlling initial access to the intranet,
the smart card also holds information as to the defined areas and information
within the intranet to which the user is permitted access. When the information
systems group wants to change a user's access or authorization, they simply
download new instructions to the smart card during the session. The next time
the user accesses the intranet, his or her updated access is already present on
the smart card. This allows Deutsche Telekom to provide extensive information
over its intranet, since it knows that the user's identity is verified before
access is granted. The principal reasons for Siemens-Nixdorf's selection of the
Company's products were their compliance with the B1 specification for smart
card readers developed by Deutsche Telekom, their ability to offer a broad range
of smart card support and their ability to offer a broad range of operating
system support.
The Kirch Group. SCM Microsystems has developed and provides DVB-CI
compliant and proprietary DVB-CAM modules under contract to BetaDigital, the
technology arm of the Kirch Group. These modules are installed in DVB compliant
set-top boxes which Kirch distributes to consumers to allow them to access the
Kirch digital entertainment services. These set-top boxes include a smart card,
the Company's smart card readers and a generic receiver/tuner unit to provide
secure access to its entertainment content and services. Customers can easily
add and change the services they receive, and Kirch can easily enable and
disable services. Also, individual customers can have different smart cards
which permit different services. Although used in the same set-top box, a
child's smart card could permit different programming from a parent's smart
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<PAGE> 42
card. Kirch also can download completely new services to the modules, permitting
new capabilities, such as pay-per-view and other electronic transaction-based
services, to be added with no additional hardware cost. SwapAccess is the
world's first implementation of the DVB-CI standard established by the DVB
Project. The principal reason for Kirch's selection of the Company's products
was their ability to provide Kirch's customers with an open system that could be
upgraded for new functions.
SALES AND MARKETING
The Company markets, sells and licenses its products primarily to OEMs, and
also through distributors, VARs, system integrators and resellers, worldwide
through a direct sales and marketing organization. As of June 30, 1997, the
Company had 20 full-time employees and consultants engaged in sales and
marketing activities. The Company's direct sales staff solicits prospective
customers, provides technical advice and support with respect to the Company's
products and works closely with customers, distributors and OEMs.
In support of its sales efforts, the Company conducts sales training
courses, comprehensive targeted marketing programs, including public relations,
advertising, seminars, trade shows and ongoing customer and third-party
communications programs. The Company also seeks to stimulate interest in digital
information security through its public relations program, speaking engagements,
white papers, technical notes and other publications.
At June 30, 1997, the Company's backlog was approximately $6.9 million, as
compared to approximately $6.1 million at December 31, 1996. The Company's
backlog consists of all written purchase orders for products which have a
scheduled shipment date within the next twelve months. Orders for the Company's
products are usually placed by customers on an as-needed basis and the Company
has typically been able to ship products within 30 days after the customer
submits a firm purchase order. The Company's contracts with its customers
generally do not require fixed long-term purchase commitments. In view of the
Company's order and shipment patterns and because of the possibility of customer
changes in delivery schedules or cancellation of orders, the Company's backlog
as of any particular date may not be indicative of sales in any future period.
COLLABORATIVE INDUSTRY RELATIONSHIPS
SCM Microsystems is party to collaborative arrangements with a number of
corporations and is a member of key industry consortia. The Company evaluates,
on an ongoing basis, potential strategic alliances and intends to continue to
pursue such relationships. The Company's future success will depend
significantly on the success of its current arrangements and its ability to
establish additional arrangements. There can be no assurance that these
arrangements will result in commercially successful products.
Gemplus. In September 1997, the Company and Gemplus, a leading smart card
manufacturer, reached an agreement to explore cooperative opportunities in
several areas. The agreement includes the development of a single smart card
reader chip and software core to form the basis of a family of smart card
readers to be sold by both companies as well as the development of
next-generation smart card readers. SCM Microsystems and Gemplus have also
agreed to examine joint marketing and market development activities and joint
manufacturing opportunities. The two companies also believe that standard
setting will accelerate market acceptance of both companies' products and so
have agreed to explore joint use of a single DVB-CAM based on the DVB-CI
standard and joint use of a single PCMCIA smart card reader. The companies are
not required, however, to reach a binding cooperative agreement covering any of
the foregoing items and there can be no assurance that they will reach such an
agreement. Nonetheless, as an initial step in this cooperation, the Company and
Gemplus have entered into a cross-license agreement for PCMCIA-based smart card
reader technology, DVB-CI technology, and related patents and intellectual
property. In addition, Gemplus has agreed to make a $1.8 million investment in
the Company through the Directed Placement, which will close concurrently with
this offering.
Intel Corporation. In March 1997, the Company and Intel entered into a
development and license agreement for cryptographic PC Card-based secure access
modules for the PC platform. The Company has granted Intel a non-exclusive
license to certain Company designs and other intellectual property. Intel has
agreed to support the Company's programs to design a PC Card token. In addition,
Intel also made an equity investment of approximately $2.0 million in the
Company. Intel and the Company have agreed to jointly promote various industry
standards applicable to security products.
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Telenor. In May 1997, the Company and Telenor entered into a development
and supply agreement pursuant to which the Company will design, manufacture,
test and supply DVB-CAM modules to Telenor. Pursuant to this agreement, Telenor
may pay up to an aggregate of $1.2 million to the Company for development costs
as the Company achieves certain development milestones. Once the prototype has
been approved by Telenor, the Company will supply these modules pursuant to the
terms of the agreement. As part of this arrangement, Telenor also made an equity
investment of approximately $5.5 million in the Company. Furthermore, the
Company has issued 34,965 shares of Preferred Stock to a Telenor affiliate,
fifty percent (50%) of which will remain unvested until the Company achieves the
mid-point milestone of the project and has been paid by Telenor for such
milestone completion. Each party will retain rights to its preexisting
intellectual property, and it is expected that any intellectual property that is
jointly developed under the agreement will be jointly owned.
PCMCIA. SCM Microsystems is an executive and founding member of PCMCIA, an
international standards body and trade association with over 500 member
companies that was founded in 1989 to establish standards for integrated circuit
cards and to promote interchangeability among mobile PCs. Other executive
members include Advanced Micro Devices, Apple Computer, Compaq, IBM, Intel,
Motorola, Texas Instruments and U.S. Robotics. Since 1990, the Company has been
a member of PCMCIA in Europe and currently holds the European Chair position. In
1996, the Company introduced to PCMCIA the DVB-CI standard which was adopted as
an extension to its PC Card standard Release 2.0.
DVB Project. The Company is a member of the DVB Project, an international
standards body with over 200 members that was founded in 1993 to define
platforms for the digital television industry. Other key members include France
Telecom, Deutsche Telekom, Telenor, Nokia, Sony and Philips. In 1994, the
Company was instrumental in the DVB Project's adoption of the PC Card standard
as the common interface for digital set-top boxes. As the DVB Project's
Compatibility Chair, the Company advances and oversees proposals to provide
optimum interoperability between PC Cards and digital set-top boxes.
Teletrust. The Company is a member of Teletrust, a German organization
whose goal is to provide a legally accepted means to adopt digital signatures.
Digital signatures are encrypted personal identifiers, typically stored on a
secure smart card, which allow for a high level of security through
internationally accepted authentication methods. The Company is actively working
on the smart card terminal committee which defines the standards for connecting
smart cards to computers for applications such as secure electronic commerce
over the Internet.
RESEARCH AND DEVELOPMENT
To date, the Company has made substantial investments in research and
development, particularly in the areas of physical, token-based access devices.
The Company's engineering design teams work cross-functionally with marketing
managers, applications engineers and customers to develop products and product
enhancements. The Company also strives to develop and maintain close
relationships with key suppliers of components and technologies in order to
enable the Company to quickly introduce new products that incorporate the latest
technological advances. The Company's future success will depend upon its
ability to develop and to introduce new products on a timely basis that keep
pace with technological developments and emerging industry standards and address
the increasingly sophisticated needs of its customers. See "Risk
Factors -- Dependence on New Products; Rapid Technological Change."
The Company's expenses for research and development were approximately $1.2
million, $1.4 million and $2.4 million for the years ended December 31, 1994,
1995 and 1996, respectively, and $1.4 million for the six months ended June 30,
1997. As of June 30, 1997, the Company had 27 full-time employees engaged in
research and development activities, including software and hardware
engineering, testing and quality assurance and technical documentation. All of
the Company's research and development activities occur in France and Germany.
The Company has in the past funded a portion of its research and development
activities with technology development revenues received from OEM customers in
connection with design and development of specific products. The Company
recognized $562,000, $543,000 and $1.6 million in technology development
revenues in 1994, 1995 and 1996, respectively, and $1.0 million in the six
months ended June 30, 1997.
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MANUFACTURING AND SOURCES OF SUPPLY
The Company sources its products through three contract manufacturers in
Europe and Asia. The Company has implemented a global sourcing strategy that it
believes will enable it to achieve greater economies of scale, improve gross
margins and maintain uniform quality standards for its products. In the event
any of the Company's contract manufacturers were unable or unwilling to continue
to manufacture the Company's products, the Company may have to rely on other
current manufacturing sources or identify and qualify new contract
manufacturers. For example, one of the Company's contract manufacturers has
recently been involved in bankruptcy proceedings and may be unable to continue
manufacturing the Company's products. In the event that such manufacturer (or
any other key supplier) were unable to meet the Company's requirements, there
can be no assurance that the Company would be able to identify or qualify new
contract manufacturers in a timely manner or that such manufacturers would
allocate sufficient capacity to the Company in order to meet its requirements.
Any significant delay in the Company's ability to obtain adequate supplies of
its products from its current or alternative sources would materially and
adversely affect the Company's business and operating results.
The Company believes that its success will depend in large part on its
ability to provide quality products and services. As of June 30, 1997, the
Company had 10 full-time employees engaged in manufacturing activities. The
Company has a formal quality control program to satisfy its customers'
requirements for high quality and reliable products. To ensure that products
manufactured by others are consistent with its standards, the Company manages
all key aspects of the production process, including establishing product
specifications, selecting the components to be used to produce its products and
the suppliers of such components and negotiating the prices for such components.
In addition, the Company works with its suppliers to improve process control and
product design. The Company's quality control specialists conduct on-site
inspections of its suppliers, and the Company's products are tested by the
Company's contract manufacturers prior to shipment.
The Company relies upon a limited number of suppliers of several key
components of the Company's products. For example, the Company purchases ASICs
for its DVB modules exclusively from TEMIC, PCBs for SwapBoxes exclusively from
Vertek in Taiwan and Degussa in Singapore, smart card connectors exclusively
from ITT Canon, SwapBox boards and completed products exclusively from
Intellicard Systems and SwapSmart mechanical components exclusively from Stocko.
The Company's reliance on sole source suppliers involves several risks,
including a potential inability to obtain an adequate supply of required
components, price increases, timely delivery and component quality. Although to
date the Company has been able to purchase its requirements of such components,
there can be no assurance that the Company will be able to obtain its full
requirements of such components in the future or that prices of such components
will not increase. In addition, there can be no assurance that problems with
respect to yield and quality of such components and timeliness of deliveries
will not occur. Disruption or termination of the supply of these components
could delay shipments of the Company's products and could have a material
adverse effect on the Company's business and operating results. Such delays
could also damage relationships with current and prospective customers. In the
past, due to the Company's quality requirements, the Company has experienced
delays in the shipments of its new products principally due to an inability to
qualify component parts from third-party manufacturers and other suppliers,
resulting in delay or loss of product sales. These delays have not had a
material adverse effect upon the Company's business and operating results.
However, there can be no assurance that in the future any such delays would not
have a material adverse effect upon the Company's business and operating
results.
COMPETITION
The market for digital data security and access control products is
intensely competitive and characterized by rapidly changing technology. The
Company believes that competition in this market is likely to intensify as a
result of increasing demand for security products. The Company currently
experiences competition from a number of sources, including: (i) ActionTec,
Carry Computer Engineering, Greystone and Litronics in PC Card adapters; (ii)
Gemplus, Hitachi and Toshiba in smart card readers and universal smart card
reader interfaces; and (iii) Gemplus in DVB-CAM modules. The Company also
experiences indirect
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competition from certain of its customers which currently offer alternative
products or are expected to introduce competitive products in the future. The
Company may in the future face competition from these and other parties that
develop digital data security products based upon approaches similar to or
different from those employed by the Company. In addition, there can be no
assurance that the market for digital information security and access control
products will not ultimately be dominated by approaches other than the approach
marketed by the Company.
Many of the Company's current and potential competitors have significantly
greater financial, technical, marketing, purchasing and other resources than the
Company, and as a result, may be able to respond more quickly to new or emerging
technologies or standards and to changes in customer requirements, or to devote
greater resources to the development, promotion and sale of products, or to
deliver competitive products at a lower end user price. Current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to increase the ability of their products to
address the needs of the Company's prospective customers. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. Increased competition is likely to
result in price reductions, reduced operating margins and loss of market share,
any of which could have a material adverse effect on the Company's business,
operating results or financial condition.
The Company believes that the principal competitive factors affecting the
market for digital data security products include: the extent to which products
support industry standards and provide interoperability; technical features;
ease of use; quality/reliability; level of security; strength of distribution
channels, and price. While the Company believes that it competes favorably with
respect to these factors, there can be no assurance that the Company will be
able to successfully compete as to these or other factors or that competitive
pressures faced by the Company will not materially and adversely affect its
business, operating results or financial condition.
PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY
The Company's success depends significantly upon its proprietary
technology. The Company currently relies on a combination of patent, copyright
and trademark laws, trade secrets, confidentiality agreements and contractual
provisions to protect its proprietary rights. The Company seeks to protect its
software, documentation and other written materials under trade secret and
copyright laws, which afford only limited protection. The Company generally
enters into confidentiality and non-disclosure agreements with its employees and
with key vendors and suppliers. The Company's SwapBox trademark is registered in
the United States, and the SwapSmart trademark is the subject of an allowed,
pending application. The Company will continue to evaluate the registration of
additional trademarks as appropriate. The Company currently has one U.S. patent
issued, six U.S., one French and one Japanese patent applications pending, and
exclusive licenses under four other U.S. patents associated with its products.
Furthermore, the Company intends to obtain an exclusive license from one of its
employees to five other patents relating to its products. There can be no
assurance that any new patents will be issued, that the Company will develop
proprietary products or technologies that are patentable, that any issued patent
will provide the Company with any competitive advantages or will not be
challenged by third parties, or that the patents of others will not have a
material adverse effect on the Company's business.
There has also been substantial litigation in the technology industry
regarding intellectual property rights, and litigation may be necessary to
protect the Company's proprietary technology. The Company has from time to time
received claims that it is infringing upon third parties' intellectual property
rights, and there can be no assurance that third parties will not in the future
claim infringement by the Company with respect to current or future products,
patents, trademarks or other proprietary rights. On April 28, 1997, Gemplus
served the Company with a complaint alleging that the Company's SwapSmart
product infringes certain claims of a French patent held by Gemplus. Although
such dispute was settled on terms acceptable to the Company, there can be no
assurance that future disputes with third parties will not arise nor that any
such disputes can be resolved on terms acceptable to the Company. In addition, a
third party has alleged that the Company has infringed the third party's
trademarks and engaged in unfair competition. See "Business -- Legal
Proceedings." The Company expects that companies in the computer and digital
information security market will
43
<PAGE> 46
increasingly be subject to infringement claims as the number of products and
competitors in the Company's target markets grows. Any such claims or litigation
may be time-consuming and costly, cause product shipment delays, require the
Company to redesign its products or require the Company to enter into royalty or
licensing agreements, any of which could have a material adverse effect on the
Company's business, operating results or financial condition. Despite the
Company's efforts to protect its proprietary rights, unauthorized parties may
attempt to copy aspects of the Company's products or to obtain and use
information and software that the Company regards as proprietary. In addition,
the laws of some foreign countries do not protect proprietary and intellectual
property rights to as great an extent as do the laws of the United States. There
can be no assurance that the Company's means of protecting its proprietary and
intellectual property rights will be adequate or that the Company's competitors
will not independently develop similar technology, duplicate the Company's
products or design around patents issued to the Company or other intellectual
property rights of the Company.
EMPLOYEES
As of June 30, 1997, SCM Microsystems had a total of 72 full-time
employees, of which 27 were engaged in engineering, research and development; 20
in sales and marketing; 10 in manufacturing; and 15 in general management and
administration. In addition, the Company had a total of 3 part-time employees as
of June 30, 1997. None of the Company's employees is represented by a labor
union. The Company has experienced no work stoppages and believes that its
employee relations are good.
FACILITIES
The Company leases approximately 5,300 square feet in Los Gatos, California
pursuant to a lease agreement dated September 29, 1994 (the "Los Gatos Lease")
and approximately 2,900 additional square feet pursuant to a sublease agreement,
dated July 6, 1996 (the "Los Gatos Sublease"). In 1996, the Company paid
approximately $63,000 and $25,000 for rent pursuant to the Los Gatos Lease and
Los Gatos Sublease, respectively. The Los Gatos Lease and the Los Gatos Sublease
end on October 31, 1998 and July 31, 1998, respectively. In addition, the
Company has the option to extend the Los Gatos Lease for two one-year periods.
The Company leases approximately 6,000 square feet in Pfaffenhofen pursuant to a
lease agreement dated September 30, 1994 (the "Pfaffenhofen Lease"). In 1996,
the Company paid approximately $120,000 for rent pursuant to the Pfaffenhofen
Lease. The Pfaffenhofen Lease ends on June 30, 2000. The Company also leases its
research and development facilities in La Ciotat, France and Erfurt, Germany.
The Company believes that its existing facilities are adequate for its current
needs.
LEGAL PROCEEDINGS
In April 1997, Gemplus served the Company with a complaint alleging that
the Company's SwapSmart product infringes certain claims of a French patent held
by Gemplus. In September 1997, the Company and Gemplus settled this dispute. In
connection with the settlement, Gemplus and the Company agreed to cross-license
to each other certain patented technology held by each company and entered into
a memorandum of understanding providing for the negotiation of a joint product
development and supply agreement. The Company also agreed to issue to Gemplus
warrants to purchase up to 200,000 shares of Common Stock at $13.00 per share
and up to 200,000 shares of Common Stock at $14.00 per share. These warrants are
immediately exercisable and expire in September 1998.
The Company has been notified by Smith Corona Corporation ("Smith Corona")
that Smith Corona believes that the "SCM" in the Company's name, logo and a
certain product name infringe a trademark held by Smith Corona and that the
Company has engaged in unfair competition. The Company believes that it has
defenses to Smith Corona's claim and has so notified Smith Corona. In the event
that Smith Corona were to initiate legal proceedings against the Company with
respect to this matter, the Company would vigorously defend the action.
Defending any action can be costly and time consuming regardless of the outcome
and, as with any litigation matter, there can be no assurance that the outcome
of any such dispute would be favorable to the Company. An unfavorable outcome in
the matter could subject the Company to monetary damages and may result in the
Company having to change its name and logo, which would require the Company to
incur costs related thereto and may result in a loss of the goodwill associated
with its name and logo.
44
<PAGE> 47
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
June 30, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------- ---- ----------------------------------------------------
<S> <C> <C>
Robert Schneider................... 48 Chairman of the Board
Steven Humphreys................... 36 President, Chief Executive Officer and Director
Bernd Meier........................ 47 Chief Operations Officer and Director
Nicholas Efthymiou................. 34 Vice President, U.S. Sales and Business Development
David Hale......................... 32 Vice President, Operations
Jean-Yves Le Roux.................. 38 Vice President, Engineering
Edward MacBeth..................... 38 Vice President, Marketing
John Niedermaier................... 40 Vice President, Finance and Chief Financial Officer
Friedrich Bornikoel(1)............. 47 Director
Bruce Graham....................... 37 Director
Randall Lunn(2).................... 46 Director
Poh Chuan Ng(2).................... 35 Director
Andrew Vought(1)(2)................ 42 Director
</TABLE>
- ---------------
(1) Member of Compensation Committee.
(2) Member of Audit Committee
Robert Schneider founded the Company in May 1990 as President, Chief
Executive Officer, General Manager and Chairman of the Board. Mr. Schneider is
currently Chairman of the Board. Mr. Schneider is a Managing Director of the
Company's German subsidiary. Mr. Schneider holds a degree in engineering from
HTBL Salzburg and a B.A. degree from the Akademie for Business Administration in
Uberlinger.
Steven Humphreys joined the Company in August 1996 as President and
Chairman of the Board. Mr. Humphreys currently is President, Chief Executive
Officer and a Director of the Company. From April 1994 until February 1996, Mr.
Humphreys was President of Caere Corporation, an optical character recognition
software and systems company. From November 1990 until March 1994, he was Vice
President of General Electric Information Services, an electronic commerce
services provider. Mr. Humphreys holds a B.S. degree from Yale University and a
M.S. degree and a M.B.A. degree from Stanford University.
Bernd Meier joined the Company in January 1992 as General Manager and as a
Director of the Company. Mr. Meier is currently the Chief Operations Officer, a
Director of the Company and a Managing Director of the Company's German
subsidiary. Mr. Meier holds a degree in engineering from Fachhochschule Dieburg.
Nicholas Efthymiou has held various sales and marketing positions since
joining the Company as Vice President, Marketing in February 1992. Mr. Efthymiou
is currently Vice President, U.S. Sales and Business Development. Mr. Efthymiou
holds a B.S.E.E. degree from S.U.N.Y. at Buffalo and a M.B.A. degree from the
University of Texas.
David Hale has served as Vice President, Operations since October 1996.
From October 1991 until September 1996, Mr. Hale held various management
positions at a subsidiary of Solectron, an electronics manufacturing company,
where he most recently served as operations manager. Mr. Hale holds a B.S.I.E.
degree and a M.A. degree and a M.B.A. degree from Stanford University.
Jean-Yves Le Roux joined the Company in May 1995 as Manager, Research and
Development. Mr. Le Roux is currently Vice President, Engineering. From
September 1991 until March 1995, Mr. Le Roux was Manager, PCMCIA Research and
Development of Gemplus, a smart card products supplier. Mr. Le Roux holds an
engineering degree from E.O.E.S. Angers France.
45
<PAGE> 48
Edward MacBeth joined the Company in August 1996 as Vice President,
Marketing. From September 1994 until August 1996, Mr. MacBeth was Director,
Marketing and Business Development of Caere Corporation, and from September 1992
until September 1994, he was President of Fit Software, a software development
company. Mr. MacBeth holds a B.S. degree from California Polytechnic State
University, San Luis Obispo and a M.B.A. degree from San Jose State University.
John Niedermaier joined the Company in April 1997 as Vice President,
Finance and Chief Financial Officer. From November 1995 until March 1997, Mr.
Niedermaier was Vice President, Finance and Chief Financial Officer of Voysys
Corporation, a provider of telecommunications systems for small businesses, and
from April 1994 until November 1995, he was Director, Business Planning at Octel
Communications Corporation, a voice messaging company. From November 1989 until
March 1994, Mr. Niedermaier was Vice President, Corporate Controller of VMX,
Inc., a voice processing company, which merged with Octel in March 1994. Mr.
Niedermaier is a Certified Public Accountant and holds a B.S. degree from Wayne
State University.
Friedrich Bornikoel has served as a Director of the Company since September
1993. Mr. Bornikoel joined TVM Techno Venture Management GmbH, a venture capital
firm, in July 1987 and has been a Partner since 1990. Mr. Bornikoel is a
director of several privately held companies. Mr. Bornikoel holds a Masters
degree in Physics from the Technical University of Munich.
Bruce Graham has served as a Director of the Company since July 1995. Mr.
Graham has been a Partner of Bessemer Venture Partners, a venture capital firm,
since December 1996. From 1991 until December 1996, Mr. Graham was an Associate
and Vice President at Vertex Management, a venture capital firm. Mr. Graham is a
director of several privately held companies. Mr. Graham holds a B.S. degree in
Chemical Engineering from Princeton University and a M.B.A. degree from Stanford
University.
Randall Lunn has served as a Director of the Company since November 1993.
Mr. Lunn has been a Partner of TVM Techno Venture Management, L.P., a venture
capital firm, since May 1990. Mr. Lunn is a director of several privately held
companies. Mr. Lunn holds a B.A. degree, a B.S. degree in Engineering and a
M.B.A. degree from Dartmouth College.
Poh Chuan Ng has served as a Director of the Company since June 1995. Mr.
Ng is currently a Managing Director and Chairman of the Board of Global Team
Technology Pte. Ltd., a manufacturer's representative for computer products.
From September 1994 through May 1997, Mr. Ng served as Director, Business
Development at Intellicard Systems Pte. Ltd. ("Intellicard"), a contract
manufacturing company and developer of communications products. Prior to joining
Intellicard, Mr. Ng was a product engineering manager for Compaq Computer Corp.
Mr. Ng is a director of several privately held companies. Mr. Ng holds a B.S.E.
degree from the National University of Singapore.
Andrew Vought has served as a Director of the Company since March 1996. Mr.
Vought has been a Partner of Cheyenne Capital Corporation since January 1995 and
has been Vice President, Chief Financial Officer and Secretary of Advanced
Telecommunications Modules Ltd., an ATM networking equipment company, since May
1996. From May 1990 until April 1994, Mr. Vought was Vice President, Chief
Financial Officer and Secretary of MicroPower Systems, Inc., an analog and mixed
signal semiconductor company. Mr. Vought is a director of several privately held
companies. Mr. Vought holds a B.S. degree and a B.A. degree from the University
of Pennsylvania and a M.B.A. degree from Harvard University.
TERM OF OFFICE OF DIRECTORS AND OFFICERS
The Company's Bylaws and Certificate of Incorporation provide that
effective as of the date of the first regularly scheduled meeting of the
stockholders following the date on which the Company becomes subject to the
periodic requirements of the Securities Exchange Act of 1934, as amended, the
directors of the Company will be divided into three classes equal in size with
each class elected to a staggered three-year term. Each director will hold
office until the expiration of the term of his or her respective class and until
his or her respective successor has been duly elected and qualified.
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<PAGE> 49
BOARD COMMITTEES
In March 1997, the Board established an Audit Committee and a Compensation
Committee. The Audit Committee, currently comprised of directors Randall Lunn,
Poh Chuan Ng and Andrew Vought, recommends to the Board of Directors the
engagement of the Company's independent accountants and reviews with the
accountants the plan, scope and results of their examination of the consolidated
financial statements. The Compensation Committee, currently comprised of
directors Friedrich Bornikoel and Andrew Vought, reviews and makes
recommendations to the Board of Directors regarding all forms of compensation to
be provided to the executive officers, directors and consultants to the Company.
DIRECTOR COMPENSATION
Beginning April 1, 1997, nonemployee members of the Company's Board of
Directors ("Outside Directors") receive an annual fee of $10,000 plus $1,000 for
each board meeting attended in person for their services as directors. Prior to
that time, directors did not receive compensation for services as directors.
The Company's 1997 Director Option Plan (the "Director Plan") was adopted
by the Board of Directors in March 1997. A total of 50,000 shares of Common
Stock has been reserved for issuance under the Director Plan. However, an annual
increase will be made to the Director Plan on each anniversary date of adoption
of the Director Plan, in an amount equal to the number of shares underlying
options granted in the immediately preceding year or a lesser amount determined
by the Board. Each Outside Director of the Company was granted an initial option
to purchase 5,000 shares of Common Stock upon the effective date of the Director
Plan and each person who becomes an Outside Director after that date will
automatically be granted an initial option to purchase 10,000 shares of Common
Stock. Each Outside Director will automatically be granted subsequent annual
options to purchase 5,000 additional shares of Common Stock under the Director
Plan on the date of each annual meeting of stockholders. All such options have
an exercise price equal to the fair market value of the Common Stock at the date
of grant, have a term of ten years and vest monthly over one year from the date
of grant. Options granted under the Director Plan are not transferable unless
approved by the Board. The Company's Director Plan will terminate in 2007.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
No interlocking relationship exists between the Company's Board of
Directors or Compensation Committee and the board of directors or compensation
committee of any other company, nor has any such interlocking relationship
existed in the past.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
The Company's Certificate of Incorporation, as amended and restated, limits
the liability of directors to the maximum extent permitted by Delaware law.
Delaware law provides that directors of a corporation will not be personally
liable for monetary damages for breach of their fiduciary duties as directors
except for liability arising out of: (i) a breach of their duty of loyalty to
the corporation or its stockholders; (ii) acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law; (iii)
unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided in Section 174 of the Delaware General Corporation Law; or (iv) any
transaction from which the director derived an improper personal benefit.
The Company's charter documents provide that the Company shall indemnify
its officers, directors and agents to the fullest extent permitted by law,
including those circumstances where indemnification would otherwise be
discretionary. The Company believes that indemnification under its charter
documents covers at least negligence and gross negligence on the part of
indemnified parties. The Company has entered into indemnification agreements
with each of its directors and officers which may, in some cases, be broader
than the specific indemnification provisions contained in the Delaware General
Corporation Law. The indemnification agreements may require the Company, among
other things, to indemnify each director and officer against certain liabilities
that may arise by reason of their status or service as directors or officers
(other than liabilities
47
<PAGE> 50
arising from willful misconduct of a culpable nature) and to advance such
persons' expenses incurred as a result of any proceeding against him or her as
to which such person could be indemnified.
At the present time, there is no pending litigation or proceeding involving
a director, officer, employee or other agent of the Company in which
indemnification would be required or permitted. The Company is not aware of any
threatened litigation or proceeding that could result in a claim for such
indemnification.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth all compensation
awarded to, earned by, or paid for services rendered to the Company in all
capacities during the year ended December 31, 1996 for the Company's Chief
Executive Officer and the Company's most highly compensated other executive
officers whose salary and bonus for such year exceeded $100,000 (collectively,
the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES
---------------------- UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) OPTIONS(#) COMPENSATION($)
- ---------------------------------------- --------- -------- ------------ ------------------
<S> <C> <C> <C> <C>
Robert Schneider........................ 154,800 84,415 50,577 1,935(2)
Managing Director of German subsidiary
Steven Humphreys(1)..................... 76,064 17,258 276,570 30(2)
President and Chief Executive Officer
Bernd Meier............................. 154,800 125,807 201,026 1,935(2)
Chief Operations Officer and Managing
Director of German subsidiary
Nicholas Efthymiou...................... 100,000 30,458 75,544 11,357(3)
Vice President, U.S. Sales and
Business Development
</TABLE>
- ---------------
(1) Mr. Humphreys began working at the Company in August 1996.
(2) Represents payments of life insurance premiums.
(3) Represents payments of a housing and auto allowance of $11,327 and life
insurance premiums of $30.
Option Grants During 1996. The following table sets forth for each of the
Named Executive Officers certain information concerning stock options granted
during 1996.
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL RATES OF
INDIVIDUAL GRANTS STOCK
----------------------------------------------------- PRICE
NUMBER OF PERCENT OF TOTAL APPRECIATION
SECURITIES OPTIONS FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -----------------
NAME GRANTED 1996 PER SHARE DATE(1) 5%($) 10%($)
- -------------------------------- ---------- ---------------- --------- --------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Robert Schneider................ 50,577 7% $0.10 --(3) 3,181 8,061
Steven Humphreys................ 276,570 38% 0.10 4/30/2006 17,393 44,078
Bernd Meier..................... 201,026 28% 0.10 --(3) 12,642 32,038
Nicholas Efthymiou.............. 75,544 10% 0.10 --(3) 4,751 12,040
</TABLE>
- ---------------
(1) Options generally vest as to 25% of the shares one year from the date of
grant and monthly thereafter for the succeeding 36 months. Options may
generally be exercised ahead of vesting, subject to a right of the Company
to repurchase the unvested portion of the shares if the optionee's status as
an employee or consultant is terminated or upon the optionee's death or
disability prior to the shares vesting.
(2) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the Company's future
Common Stock prices. The actual value realized may be greater or less than
the potential realizable values set forth in the table.
(3) These options have no expiration date.
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<PAGE> 51
Year-End Option Values. The following table sets forth, for each of the
Named Executive Officers, the year-end value of unexercised options as of
December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE(1) OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY
AT YEAR-END(#): OPTIONS AT YEAR-END($):
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(2)
- ----------------------------------------------- ------------------------- ----------------------------
<S> <C> <C>
Robert Schneider............................... 88,989/ -- 185,097/ --
Steven Humphreys............................... -- /276,570 -- /575,266
Bernd Meier.................................... 239,438/ -- 498,031/ --
Nicholas Efthymiou............................. 88,348/ -- 183,764/ --
</TABLE>
- ---------------
(1) Market value of underlying securities at year-end minus the exercise price.
Year-end market value of the Common Stock ($2.18 per share) was determined
by the Board of Directors by reference to an independent appraisal.
(2) Options are generally exercisable by the optionee ahead of vesting. Unvested
shares purchased on exercise of an option are subject to a repurchase right
of the Company, and may not be sold by an optionee until the shares vest.
Options indicated as "Exercisable" are those options which were both vested
and exercisable as of December 31, 1996. All other options are indicated as
"Unexercisable."
EMPLOYMENT CONTRACTS
The Company's German subsidiary has entered into substantially similar
employment agreements with each of Messrs. Schneider and Meier pursuant to which
each serves as a Managing Director of the subsidiary. Each agreement continues
for an indefinite term and each party may terminate the agreement at any time
with six months notice. Each executive receives an annual base salary of
$190,000 and an annual bonus of up to $75,000. Furthermore, each executive is
subject to a non-compete provision for a period of one year after the
termination of employment.
In addition, the Company has entered into an employment agreement, dated
June 2, 1995, with Mr. LeRoux. The initial salary under the agreement is FF
475,000 (approximately $82,000) per year, including a bonus of FF 70,000
(approximately $12,000). Either party may terminate the agreement at any time.
EMPLOYEE STOCK PLANS
1997 Stock Plan
The Company's 1997 Stock Plan (the "1997 Plan") provides for the granting
to employees of incentive stock options within the meaning of Section 422 of the
Internal Revenue Code of 1986, as amended (the "Internal Revenue Code"), and for
the granting to employees and consultants of nonstatutory stock options and
stock purchase rights ("SPRs"). The 1997 Plan was approved by the Board of
Directors in March 1997, and by the stockholders in April 1997. Unless
terminated sooner, the 1997 Plan will terminate automatically in March 2007. A
total of 1,000,000 shares of Common Stock are currently reserved for issuance
and options to purchase 671,900 shares have been issued pursuant to the 1997
Plan. An annual increase will be made to the 1997 Plan on each anniversary date
of the adoption of the 1997 Plan, in an amount equal to the lesser of 500,000
shares, three percent of the outstanding shares on such date, or a lesser amount
determined by the Board.
The 1997 Plan may be administered by the Board of Directors or a committee
of the Board (the "Committee"), which Committee shall, in the case of options
intended to qualify as "performance-based compensation" within the meaning of
Section 162(m) of the Internal Revenue Code, consist of two or more "outside
directors" within the meaning of Section 162(m) of the Internal Revenue Code.
The Committee has the power to amend, suspend or terminate the 1997 Plan
(provided that no such action may affect any share of Common Stock previously
issued and sold or any option or SPR previously granted under the 1997 Plan), to
determine the terms of the options and SPRs granted, including the exercise
price, the number of shares
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<PAGE> 52
subject to each or SPR option, the exercisability thereof, and the form of
consideration payable upon such exercise. In addition, the Committee has the
authority to prescribe, amend and rescind rules and regulations relating to the
1997 Plan. Pursuant to this authority, the Committee has approved the 1997 Stock
Option Plan for French Employees (the "French Plan") in April 1997, pursuant to
which stock options that qualify for preferential tax treatment under French tax
law may be granted. The French Plan will be submitted to the Company's
stockholders for their approval.
Options and SPRs granted under the 1997 Plan are not generally transferable
by the optionee, and each option and SPR is exercisable during the lifetime of
the optionee only by such optionee. Options granted under the 1997 Plan must
generally be exercised within three months of the end of optionee's status as an
employee or consultant of the Company, or within twelve months after such
optionee's termination by death or disability, but in no event later than the
expiration of the option's term. In case of SPRs, unless the Committee
determines otherwise, the Restricted Stock Purchase Agreement shall grant the
Company a repurchase option exercisable upon the voluntary or involuntary
termination of the purchaser's employment with the Company for any reason
(including death or disability). The purchase price for Shares repurchased
pursuant to the Restricted Stock Purchase Agreement shall be the original price
paid by the purchaser and may be paid by cancellation of any indebtedness of the
purchaser to the Company. The repurchase option shall lapse at a rate determined
by the Committee. The exercise price of options granted under the 1997 Plan is
determined by the Committee, but with respect to incentive stock options, and
nonstatutory stock options intended to qualify as "performance-based
compensation" within the meaning of Section 162(m) of the Internal Revenue Code,
the exercise price must at least be equal to the fair market value of the Common
Stock on the date of grant. The term of options granted under the 1997 Plan
generally may not exceed ten years.
The 1997 Plan provides that in the event of a merger of the Company with or
into another corporation, a sale of substantially all of the Company's assets or
a like transaction involving the Company, each option shall be assumed or an
equivalent option substituted by the successor corporation. If the outstanding
options are not assumed or substituted for as described in the preceding
sentence, the Optionee shall fully vest in and have the right to exercise the
option or SPR as to all of the optioned stock, including shares as to which it
would not otherwise be vested or exercisable. If the Administrator makes an
option or SPR fully vested and exercisable in the event of a merger or sale of
assets, the Administrator shall notify the optionee that the option or SPR shall
be fully vested and exercisable for a specified period from the date of such
notice, and the option or SPR will terminate upon the expiration of such period.
1997 Employee Stock Purchase Plan
The Company's 1997 Employee Stock Purchase Plan (the "Purchase Plan") was
adopted by the Board of Directors in March 1997 and by the stockholders in April
1997. A total of 175,000 shares of Common Stock has been reserved for issuance
under the Purchase Plan. However, an annual increase will be made to the
Purchase Plan on each anniversary date of the adoption of the Purchase Plan, in
an amount equal to the lesser of 150,000 shares, one percent of the outstanding
shares on such date, or a lesser amount determined by the Board. The Purchase
Plan, which is intended to qualify under Section 423 of the Internal Revenue
Code, is implemented by consecutive overlapping twenty-four month offering
periods beginning on the first trading day on or after May 1 and November 1 each
year, except for the first such offering period which commences on the first
trading day on or after the effective date of this offering and ends on the last
trading day on or after April 30, 1999. Each offering period contains four
purchase periods of approximately six months duration during which a participant
may accumulate payroll deductions and purchase Common Stock. The Purchase Plan
is administered by the Board of Directors or by a committee appointed by the
Board. Employees are eligible to participate if they are customarily employed by
the Company or any participating subsidiary for at least 20 hours per week and
more than five months in any calendar year. The Purchase Plan permits eligible
employees to purchase Common Stock through payroll deductions of up to 10% of an
employee's compensation (including commissions, overtime and other bonuses and
incentive compensation), up to a maximum of $5,000 for each purchase period. The
price of stock purchased under the Purchase Plan is 85% of the lower of the fair
market value of the Common Stock at the beginning of the offering period or the
end of the applicable purchase period. Employees may end their participation at
any time during an offering period, and they will be
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<PAGE> 53
paid their payroll deductions to date. Participation ends automatically upon
termination of employment with the Company.
Rights granted under the Purchase Plan are not transferable by a
participant other than by will, the laws of descent and distribution, or as
otherwise provided under the Purchase Plan. The Purchase Plan provides that, in
the event of a merger of the Company with or into another corporation or a sale
of all or substantially all of the Company's assets, each participant's right to
purchase Common Stock will assumed or an equivalent right substituted by the
successor corporation. If the successor corporation refuses to undertake such an
assumption or substitution, the Board of Directors shall shorten the offering
period then in progress (so that employees' rights to purchase stock under the
Purchase Plan are exercised prior to the merger or sale of assets). The Purchase
Plan will terminate in 2007. The Board of Directors has the authority to amend
or terminate the Purchase Plan, except that no such action may adversely affect
any outstanding rights to purchase stock under the Purchase Plan.
1997 Employee Stock Purchase Plan for Non-U.S. Employees
The 1997 Employee Stock Purchase Plan for Non-U.S. Employees (the
"International Purchase Plan") was adopted by the Board of Directors in April
1997. The number of shares reserved for issuance under the International
Purchase Plan equals the number of shares reserved for issuance under the
Purchase Plan, but not yet issued. The terms of the International Purchase Plan
are substantially similar to those of the Purchase Plan, except that employees
need not be customarily employed by the Company or a participating subsidiary
for at least 20 hours per week and more than five months per calendar year to
participate. The International Purchase Plan is not intended to qualify under
Section 423 of the Code.
51
<PAGE> 54
CERTAIN TRANSACTIONS
From time to time, Robert Schneider loaned to the Company various amounts
up to approximately DM 240,000 (approximately $145,000). These loans accrued
interest at 8.5% per annum and were due on demand. As of December 31, 1996, the
amount outstanding under these loans was approximately DM 100,000 (approximately
$69,000) and, as of June 30, 1997, all such loans had been repaid.
In March 1997, the Company and Intel entered into a three-year development
and license agreement. As part of this arrangement, Intel has made an equity
investment of $2.0 million in the Company and beneficially owns approximately
5.2% of the Company's Common Stock, assuming the conversion of all of the
Company's outstanding shares of Preferred Stock into shares of Common Stock.
In May 1997, the Company and Telenor entered into a development and supply
agreement. As part of this agreement, Telenor has purchased 640,000 shares of
Preferred Stock for approximately $5.5 million, received 34,965 additional
shares of Preferred Stock in exchange for certain technology rights and received
a warrant to purchase an additional 194,930 shares of Preferred Stock for $8.58
per share. See "Business -- Collaborative Industry Relationships" and "Principal
and Selling Stockholders."
During 1995, 1996 and the first six months of 1997, the Company purchased
contract manufacturing services totaling $3.5 million, $3.3 million and $1.1
million, respectively, from Intellicard. Poh Chuan Ng, a director of the
Company, served as Director, Business Development for Intellicard from September
1994 through May 1997.
52
<PAGE> 55
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's Common Stock as of June 30, 1997 and as
adjusted to reflect the sale of the Common Stock offered hereby for: (i) each
person or entity who is known by the Company to beneficially own five percent or
more of the outstanding Common Stock of the Company prior to this offering; (ii)
each of the Company's directors; (iii) each of the Named Executive Officers;
(iv) all directors and executive officers of the Company as a group; and (v)
each Selling Stockholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR TO OWNED AFTER
OFFERING(1) OFFERING(1)
--------------------- SHARES ---------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- --------------------------------------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
(APM) AlpinvestInternational B.V.(2)... 784,128 11.8 -- 784,128 7.7
Gooimeer 3
P.O. Box 5073
1410 AB Naarden, The Netherlands
Robert Schneider(3).................... 686,944 10.3 80,000 606,944 6.0
c/o SCM Microsystems GmbH
Luitpoldstrasse 6
D-85276 Pfaffenhofen
Germany
Telenor Venture AS..................... 674,965 10.1% -- 674,965 6.7%
P.O. Box 6701, St. Olavs plass
N-0130 Oslo, Norway
TVM Techno Venture Management 667,857 10.0 -- 667,857 6.6
GmbH(4)..............................
c/o Friedrich Bornikoel
Tolzerstrasse 12A
82031 Grunwald
Germany
Bernd Meier(5)......................... 621,002 9.3 40,000 581,002 5.7
c/o SCM Microsystems GmbH
Luitpoldstrasse 6
D-85276 Pfaffenhofen
Germany
Vertex Investment (II) Ltd.(6)......... 580,187 8.7 -- 580,187 5.7
83, Science Park Drive
#01-01/02
Singapore 0511
Gemplus(7)............................. 400,000 5.7 -- 600,000 5.7
Z.I. Athelia III-Voie Antiope
13705 La Ciotat Cedex 8, France
Intel Corporation...................... 349,650 5.2 -- 349,650 3.5
c/o Laila Partridge
2200 Mission College Boulevard
Santa Clara, CA 95052
Steven Humphreys(8).................... 276,570 4.0 -- 276,570 2.7
Nicholas Efthymiou(9).................. 219,591 3.3 -- 219,591 2.2
Friedrich Bornikoel(10)................ 677,023 10.1 -- 677,023 6.7
Bruce Graham(11)....................... 2,917 -- -- 2,917 --
Randall Lunn(12)....................... 670,774 10.1 -- 670,774 6.6
Poh Chuan Ng(13)....................... 2,917 -- -- 2,917 --
Andrew Vought(14)...................... 101,544 1.5 -- 101,544 1.0
All directors and executive officers as
a group (13 persons)(15)............. 2,550,449 36.5% 120,000 2,430,449 23.3%
</TABLE>
- ---------------
53
<PAGE> 56
(1) Assumes conversion of all of the Company's outstanding shares of Preferred
Stock into shares of Common Stock. Beneficial ownership is determined in
accordance with the rules of the Securities and Exchange Commission. In
computing the number of shares beneficially owned by a person and the
percentage ownership of that person, shares of Common Stock subject to
options held by that person that are currently exercisable or exercisable
but not necessarily vested within 60 days of September 30, 1997 are deemed
outstanding. Such shares, however, are not deemed outstanding for the
purpose of computing the percentage ownership of each other person. Except
as indicated in the footnotes to this table and pursuant to applicable
community property laws, each stockholder named in the table has sole
voting and investment power with respect to the shares set forth opposite
such stockholder's name.
(2) Includes warrants to purchase 5,537 shares of Series D Preferred Stock
exercisable before April 15, 2003.
(3) Includes 32,010 shares held by Robert Schneider's wife, Ursula Schneider.
(4) Includes: (i) warrants to purchase 2,872 shares of Series D Preferred Stock
exercisable before April 15, 2003; (ii) 259,315 shares held by TVM Eurotech
Ltd. and (iii) warrants to purchase 1,845 shares of Series D Preferred
Stock exercisable before April 15, 2003 held by TVM Eurotech Ltd. TVM
Techno Venture Management provides certain advisory services to (APM)
Alpinvest International B.V. but disclaims beneficial ownership of shares
held by such entity.
(5) Includes: (i) 16,005 shares held by Bernd Meier's wife, Sonja Meier, (ii)
48,015 shares held in trust for Reiner Pohl and (iii) 131,243 shares held
in trust for Nicholas Efthymiou.
(6) Includes warrants to purchase 8,017 shares of Series D Preferred Stock
exercisable before April 15, 2003.
(7) Shares beneficially owned prior to offering includes warrants to purchase
400,000 shares of Common Stock exercisable before September 1998. Shares
beneficially owned after the offering also include 200,000 shares of Common
Stock purchased in the Direct Placement.
(8) Includes options to purchase 276,570 shares of Common Stock exercisable
within 60 days of September 30, 1997, 92,190 of which will be vested as of
such date and the remainder of which will be subject to repurchase by the
Company until vested.
(9) Includes 131,243 shares held by Bernd Meier in trust for the benefit of Mr.
Efthymiou.
(10) Includes: (i) 667,857 shares held by TVM Techno Venture Management GmbH.
Mr. Bornikoel is a partner of TVM Techno Venture Management GmbH. Mr.
Bornikoel disclaims beneficial ownership of shares beneficially owned by
such entity except to the extent of his pecuniary interest therein and (ii)
options to purchase 9,166 shares of Common Stock exercisable within 60 days
of September 30, 1997. TVM Techno Venture Management provides certain
advisory services to (APM) AlpinvestInternational B.V. but disclaims
beneficial ownership of shares held by such entity.
(11) Includes options to purchase 2,917 shares of Common Stock exercisable
within 60 days of September 30, 1997.
(12) Includes: (i) 667,857 shares held by TVM Techno Venture Management GmbH.
Mr. Lunn is a partner of TVM Techno Venture Management L.P. Mr. Lunn
disclaims beneficial ownership of shares beneficially owned by such entity
except to the extent of his pecuniary interest therein and (ii) options to
purchase 2,917 shares of Common Stock exercisable within 60 days of
September 30, 1997. TVM Techno Venture Management provides certain advisory
services to (APM) AlpinvestInternational B.V. but disclaims beneficial
ownership of shares held by such entity.
(13) Includes options to purchase 2,917 shares of Common Stock exercisable
within 60 days of September 30, 1997.
(14) Includes: (i) 24,327 shares held by Genevest Consulting Group and 74,300
shares held by Index Special Fund, venture capital funds with which Mr.
Vought is affiliated and (ii) options to purchase 2,917 shares of Common
Stock exercisable within 60 days of September 30, 1997.
(15) Includes shares and exercisable options and warrants which may be deemed to
be beneficially owned by certain directors and executive officers. See
Notes 3, 5, 8, 9, 10, 11, 12, 13 and 14 above.
54
<PAGE> 57
DESCRIPTION OF CAPITAL STOCK
At the consummation of this offering, the authorized capital stock of the
Company will consist of 40,000,000 shares of Common Stock, $0.001 par value, and
10,000,000 shares of Preferred Stock, $0.001 par value.
COMMON STOCK
As of July 31, 1997, there were 6,865,243 shares of Common Stock
outstanding (after giving effect to the conversion of all Preferred Stock into
Common Stock and the Directed Placement) held of record by approximately 90
stockholders. Holders of Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to preferences that may be
applicable to any outstanding Preferred Stock, the holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the Board of Directors out of funds legally available therefor. See
"Dividend Policy." In the event of a liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities, subject to prior liquidation
rights of Preferred Stock, if any, then outstanding. The Common Stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to the Common Stock. All
outstanding shares of Common Stock are fully paid and non-assessable, and the
shares of Common Stock to be outstanding upon consummation of the offering will
be fully paid and non-assessable.
PREFERRED STOCK
Upon the closing of this offering, 10,000,000 shares of undesignated
Preferred Stock will be authorized, and no shares will be outstanding. The Board
of Directors has the authority to issue the shares of Preferred Stock in one or
more series and to fix the rights, preferences, privileges and restrictions
granted to or imposed upon any unissued shares of Preferred Stock and to fix the
number of shares constituting any series and the designations of such series,
without any further vote or action by the stockholders. Although it presently
has no intention to do so, the Board of Directors, without stockholder approval,
can issue Preferred Stock with voting and conversion rights which could
adversely affect the voting power of the holders of Common Stock. The issuance
of Preferred Stock may have the effect of delaying, deterring or preventing a
change in control of the Company.
WARRANTS
Upon the closing of this offering, the Company will have outstanding
warrants to purchase an aggregate of 589,191 shares of Common Stock at a
weighted average exercise price of $11.00 per share.
ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation, amended Bylaws, Delaware law and the Company's indemnification
agreements with certain officers and directors of the Company may be deemed to
have an anti-takeover effect. Such provisions may delay, deter or prevent a
tender offer or takeover attempt that a stockholder might consider to be in that
stockholder's best interests, including attempts that might result in a premium
over the market price for the shares held by stockholders.
The Company's Board of Directors may issue additional shares of Common
Stock or establish one or more classes or series of Preferred Stock, having the
number of shares (up to 10,000,000), designations, relative voting rights,
dividend rates, liquidation and other rights, preferences and limitations as
determined by the Board of Directors without stockholder approval. The Company's
Amended and Restated Certificate of Incorporation and Bylaws, as amended, also
contain a number of provisions that could impede a takeover or change in control
of the Company, including but not limited to the elimination of stockholders'
ability to take action by written consent without a meeting and the elimination
of cumulative voting in the election of directors.
55
<PAGE> 58
In addition, the Company is subject to the anti-takeover provisions of
Section 203 of the Delaware General Corporation Law. In general, the statute
prohibits a publicly-held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
In addition, in connection with its listing on the Neuer Markt of the
Frankfurt Stock Exchange, the Company will be required to comply with the German
Code. The German Code regulates Public Offers, and requires companies seeking to
make a Public Offer to inform the German regulatory authorities and the public
of the offer, to provide certain disclosure to the target Company's
stockholders, to generally treat stockholders equally in an offer, and to comply
with certain other regulatory requirements. In addition, the German Code gives
broad authority to the German regulatory authorities to interpret the German
Code and to review and regulate specific Public Offers. Compliance with the
German Code could have the effect of delaying, deferring or preventing a tender
offer or takeover attempt that a stockholder might consider to be in that
stockholder's best interests, including attempts that might result in a premium
over the market price for the shares held by stockholders.
The Company licenses certain technology from a third party pursuant to a
license that is not transferable by the Company without the prior written
consent of the third party. This provision may prohibit the transfer of such
technology in a merger or consolidation of the Company with another company. As
a result, this provision may have the effect of discouraging or preventing an
acquisition of the Company.
Each of the foregoing may have the effect of preventing or rendering more
difficult or costly, the completion of a takeover transaction that stockholders
might view as being in their best interests.
REGISTRATION RIGHTS
Upon the closing of this offering, the holders or their permitted
transferees ("Holders") of approximately 6,278,947 shares of Common Stock are
entitled to certain rights with respect to the registration of such shares under
the Securities Act. If the Company proposes to register any of its securities
under the Securities Act, either for its own account or for the account of other
security holders, the holders are entitled to notice of the registration and are
entitled to include, at the Company's expense, shares therein. In addition,
certain of the Holders may require the Company at its own expense, on not more
than two occasions, to file a registration statement under the Securities Act,
with respect to their shares of Common Stock, and the Company is required to use
its best efforts to effect such registration, subject to certain conditions and
limitations. Further, the Holders may require the Company, at its expense, to
register shares of Common Stock on a Registration Statement on Form S-3, when
such form becomes available to the Company, subject to certain conditions and
limitations. See "Shares Eligible For Future Sale."
LISTING
The Company has applied to have the Common Stock approved for quotation on
the Nasdaq National Market under the symbol "SCMM" and also intends to apply to
have the Common Stock listed on the Neuer Markt of the Frankfurt Stock Exchange.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is American
Stock Transfer & Trust Company.
56
<PAGE> 59
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
10,115,243 shares of Common Stock, assuming no exercise of options or warrants
outstanding as of June 30, 1997. Of these shares, the 3,370,000 shares offered
hereby (3,875,500 shares if the Underwriters' over-allotment option is exercised
in full) will be freely tradeable without restriction or further registration
under the Securities Act of 1933, as amended (the "Securities Act"), unless
purchased by "affiliates" of the Company as that term is defined in Rule 144
under the Securities Act ("Rule 144") described below. The remaining 6,745,243
shares of Common Stock outstanding upon completion of this offering are
"restricted securities" as that term is defined in Rule 144. Of these shares,
57,618 will be eligible for immediate sale upon commencement of the offering, an
additional 31,126 shares will become eligible for sale beginning 90 days after
commencement of this offering. Upon expiration of certain lock-up agreements
described below (which occurs 180 days after the commencement of this offering),
an aggregate of 4,377,560 shares will become eligible for sale pursuant to Rule
144 or Rule 701 under the Securities Act ("Rule 701") and 2,278,939 additional
shares will become eligible for sale thereafter under Rule 144.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least one
year (including the holding period of any prior owner except an affiliate from
whom such shares were purchased) is entitled to sell in "broker's transactions"
or to market makers, within any three-month period commencing 90 days after the
date of this Prospectus, a number of shares that does not exceed the greater of:
(i) one percent of the number of shares of Common Stock then outstanding
(approximately 99,000 shares immediately after this offering) or (ii) generally,
the average weekly trading volume in the Common Stock during the four calendar
weeks preceding the required filing of a Form 144 with respect to such sale.
Sales under Rule 144 are generally subject to the availability of current public
information about the Company. Under Rule 144(k), a person who is not deemed to
have been an affiliate of the Company at any time during the 90 days preceding a
sale, and who has beneficially owned the shares proposed to be sold for at least
two years (including the holding period of any prior owner other than an
affiliate from whom such shares were purchased), is entitled to sell such shares
without having to comply with the manner of sale, public information, volume
limitation or notice provisions of Rule 144. Under Rule 701, persons who
purchase shares upon exercise of options granted prior to the effective date of
this offering are entitled to sell such shares 90 days after the effective date
of this offering in reliance on Rule 144, without having to comply with the
holding period requirements of Rule 144 and, in the case of non-affiliates,
without having to comply with the public information, volume limitation or
notice provisions of Rule 144.
Pursuant to certain lock-up agreements, the Company and certain
stockholders owning upon completion of this offering, in the aggregate,
6,598,224 shares of Common Stock and certain holders of stock options have
agreed not to, directly or indirectly, offer, sell, offer to sell, contract to
sell, grant any option to purchase or otherwise sell or dispose (or announce any
offer, sale, offer of sale, contract of sale, grant of any option to purchase or
other sale or disposition) of any shares of Common Stock (including shares
issuable under options exercisable during the lock-up period described below) or
any securities convertible into or exercisable or exchangeable therefor (except
for shares of Common Stock they may acquire in the public market), until 180
days after the date of this Prospectus without the prior written consent of
Cowen & Company, on behalf of the Underwriters.
As soon as practicable after the date of this Prospectus, the Company
intends to file registration statements on Form S-8 covering an aggregate of
approximately 1.1 million shares of Common Stock that have been reserved for
issuance under its employee stock option plans and purchase plans thus
permitting the resale of such shares in the public market without restriction
under the Securities Act.
Prior to this offering, there has not been any public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect the prevailing market prices and impair the Company's
ability to raise capital through the sale of equity securities.
57
<PAGE> 60
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement (the "U.S.
Underwriting Agreement"), the Company and the Selling Stockholders have agreed
to sell to each of the underwriters named below (the "U.S. Underwriters"), and
each of the U.S. Underwriters, for whom Cowen & Company and Hambrecht & Quist
LLC are acting as representatives (the "U.S. Representatives"), has severally
agreed to purchase from the Company and the Selling Stockholders, the respective
number of shares of Common Stock set forth opposite the name of such U.S.
Underwriter below:
<TABLE>
<CAPTION>
NUMBER
U.S. UNDERWRITERS OF SHARES
------------------------------------------------------------------ ---------
<S> <C>
Cowen & Company...................................................
Hambrecht & Quist LLC.............................................
---------
Total................................................... 2,620,000
=========
</TABLE>
Subject to the terms and conditions of an underwriting agreement (the
"International Underwriting Agreement"), the Company and the Selling
Stockholders have agreed to sell to the international managers named below (the
"International Managers"), and each of the International Managers, for whom
Cowen International L.P., Hambrecht & Quist LLC and Westdeutche Landesbank
Girozentrale are acting as lead managers (the "Lead Managers"), has severally
agreed to purchase from the Company and the Selling Stockholders, the respective
number of shares of Common Stock set forth opposite the name of such
International Manager below:
<TABLE>
<CAPTION>
NUMBER
INTERNATIONAL MANAGERS OF SHARES
----------------------------------------------------------------- ---------
<S> <C>
Cowen International L.P..........................................
Hambrecht & Quist LLC............................................
Westdeutsche Landesbank Girozentrale.............................
---------
Total.................................................. 750,000
=======
</TABLE>
The U.S. Underwriters and the International Managers, and the U.S.
Representatives and Lead Managers, are collectively referred to as the
"Underwriters" and "Representatives," respectively. The U.S. Underwriting
Agreement and the International Underwriting Agreement are collectively referred
to as the "Underwriting Agreements." The offering price and aggregate
underwriting discounts and commissions per share for the U.S. Offering and the
International Offering are identical. The completion of each offering is
contingent upon the completion of the other.
The Underwriting Agreements provide that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the Underwriters' over-allotment option described below) if any such
shares are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the initial public offering price set forth on the
cover page of this Prospectus and in part to certain securities dealers at such
price less a concession not in excess of $ per share. The Underwriters
may allow, and such dealers may reallow, a concession not in excess of
$ per share to certain brokers and dealers. After the shares of Common
Stock are released for sale to the public, the offering price and other selling
terms may from time to time be varied by the Representatives.
58
<PAGE> 61
Pursuant to the Agreement among U.S. Underwriters and International
Managers (the "Agreement Among"), each U.S. Underwriter has represented and
agreed that, with certain exceptions: (i) it is not purchasing any Shares (as
defined herein) for the account of anyone other than a United States or Canadian
Person (as defined herein) and (ii) it has not offered or sold, and will not
offer or sell, directly or indirectly, any Shares or distribute any prospectus
relating to the Shares outside the United States or Canada or to anyone other
than a United States or Canadian Person. Pursuant to the Agreement Among, each
International Manager has represented and agreed that, with certain exceptions:
(i) it is not purchasing any Shares for the account of any United States or
Canadian Person and (ii) it has not offered or sold, and will not offer or sell,
directly or indirectly, any Shares or distribute any prospectus relating to the
Shares in the United States or Canada or to any United States or Canadian
Person. With respect to any Underwriter that is both a U.S. Underwriter and an
International Manager, the foregoing representations and agreements (i) made by
it in its capacity as a U.S. Underwriter apply only to it in its capacity as a
U.S. Underwriter and (ii) made by it in its capacity as an International Manager
apply only to it in its capacity as an International Manager. The foregoing
limitations do not apply to stabilization transactions or to certain other
transactions specified in the Agreement Among. As used herein, "United States or
Canadian Person" means any national or resident of the United States or Canada,
or any corporation, pension, profit-sharing or other trust or other entity
organized under the laws of the United States or Canada or of any political
subdivision thereof (other than a branch located outside the United States and
Canada of any United States or Canadian Person), and includes any United States
or Canadian branch of a person who is otherwise not a United States or Canadian
Person. All shares of Common Stock to be purchased by the Underwriters under the
Underwriting Agreements are referred to herein as the "Shares."
Pursuant to the Agreement Among, sales may be made between the U.S.
Underwriters and the International Managers of such number of shares of Common
Stock as may be mutually agreed. The price of any shares so sold shall be the
initial public offering price, less an amount not greater than the selling
concession.
The Company has granted to the Underwriters an option exercisable for 30
days after the date of this Prospectus to purchase up to an aggregate of 505,500
additional shares of Common Stock to cover over-allotments, if any. If the
Underwriters exercise their over-allotment option, the Underwriters have
severally agreed, subject to certain conditions, to purchase approximately the
same percentage thereof that the number of shares to be purchased by each of
them, as shown in the foregoing tables, bears to the 3,370,000 shares of Common
Stock offered hereby. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the shares of Common Stock
offered hereby.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act, and to
contribute to payments the Underwriters may be required to make in respect
thereof.
The Company, the Company's officers and directors, the Selling Stockholders
and certain of the Company's other stockholders have agreed subject to certain
limited exceptions, not, directly or indirectly, to offer, sell, contract to
sell, or otherwise dispose of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or any right to
acquire Common Stock for a period of 180 days after the date of this Prospectus
without the prior written consent (which consent may be given without notice to
the Company's stockholders or other public announcement) of Cowen & Company.
Cowen & Company has advised the Company that it has no present intention of
releasing any of the Company's stockholders from such lock-up agreements until
the expiration of such 180-day period.
The Representatives have advised the Company that, pursuant to rules
promulgated by the Commission, certain persons participating in this offering
may engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred
59
<PAGE> 62
by the Underwriters in connection with the offering. A "penalty bid" is an
arrangement permitting the Underwriters to reclaim the selling concession
otherwise accruing to an Underwriter or syndicate member in connection with the
offering if the Common Stock originally sold by such Underwriter or syndicate
member is purchased by the Underwriters in syndicate covering transactions, in
stabilization transactions or otherwise. The Underwriters have advised the
Company that such transactions may be effected on the Nasdaq National Market or
otherwise and, if commenced, may be discontinued at any time.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales in excess of 5% of the shares offered hereby to any
account over which they exercise discretionary authority.
The Underwriters have reserved for sale, at the initial public offering
price, up to 360,000 shares of the Common Stock offered hereby for certain
individuals and entities that have expressed an interest in purchasing such
shares of Common Stock in the offering. The number of shares available for sale
to the general public will be reduced to the extent such persons purchase such
reserved shares. Any reserved shares not so purchased will be offered by the
Underwriters to the general public on the same basis as other shares offered
hereby.
Hambrecht & Quist California ("H&Q California"), an affiliate of Hambrecht
& Quist LLC ("H&Q LLC"), Daniel H. Case III, the President and Chief Executive
Officer of H&Q LLC, and Joshua M. Rafner, a managing director of H&Q LLC
purchased 69,930, 8,741 and 8,741 shares of the Company's Series E Preferred
Stock, respectively, in a March 1997 financing. Each of H&Q California and
Messrs. Case and Rafner has agreed not to sell, transfer, assign, pledge or
hypothecate such shares for a period of one year from the date of this
Prospectus. The National Association of Securities Dealers has deemed the
difference between the purchase price of those 87,412 shares ($5.72 per share)
and the initial public offering price of the shares of the Company's Common
Stock offered hereby to be additional underwriting compensation.
Prior to this offering, there has been no public market for the Common
Stock of the Company. Consequently, the initial public offering price was
determined by negotiations between the Company and the Representatives. Among
the factors considered in such negotiations were prevailing market conditions,
the results of operations of the Company in recent periods, the market
capitalizations and stages of development of other companies that the Company
and the Representatives believe to be comparable to the Company, estimates of
the business potential of the Company, the present state of the Company's
development and other factors deemed relevant.
This Prospectus may be used by underwriters and dealers in connection with
offers and sales of the Common Stock, including shares initially sold in the
International Offering, to persons located in the United States.
LEGAL MATTERS
Certain legal matters with respect to the legality of the issuance of the
shares of Common Stock offered hereby will be passed upon for the Company by
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California. Certain legal matters in connection with this offering will be
passed upon for the Underwriters by Rogers & Wells, London, England. Members of
the firm of Wilson Sonsini Goodrich & Rosati, Professional Corporation, own an
aggregate of 26,223 shares of Common Stock.
EXPERTS
The consolidated financial statements and schedule of the Company at
December 31, 1995 and 1996 and for each of the years in the three-year period
ended December 31, 1996 have been included herein and in the Registration
Statement in reliance upon the reports of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, and upon the authority
of said firm as experts in accounting and auditing.
60
<PAGE> 63
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission"),
Washington, D.C. 20549, a Registration Statement on Form S-1 under the
Securities Act with respect to the shares of Common Stock offered hereby. This
Prospectus does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto. Certain items are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
filed therewith. Statements contained in this Prospectus as to the contents of
any contract or any other document referred to are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such statement
being qualified in all respects by such reference. A copy of the Registration
Statement, and the exhibits and schedules thereto, may be inspected without
charge at the public reference facilities maintained by the Commission in Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's
regional offices located at the Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade Center, 13th
Floor, New York, New York 10048, and copies of all or any part of the
Registration Statement may be obtained from such offices upon the payment of the
fees prescribed by the Commission. The Commission maintains a World Wide Web
site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission.
61
<PAGE> 64
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996 and June 30, 1997
(unaudited)......................................................................... F-3
Consolidated Statements of Operations for the years ended December 31, 1994, 1995 and
1996 and for the six-month periods ended June 30, 1996 and 1997 (unaudited)......... F-4
Consolidated Statements of Stockholders' Equity (Deficit) for the years ended December
31, 1994, 1995 and 1996 and for the six-month period ended June 30, 1997
(unaudited)......................................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996 and for the six-month periods ended June 30, 1996 and 1997 (unaudited)......... F-6
Notes to Consolidated Financial Statements............................................ F-7
</TABLE>
F-1
<PAGE> 65
INDEPENDENT AUDITORS' REPORT
The Board of Directors
SCM Microsystems, Inc.:
We have audited the accompanying consolidated balance sheets of SCM
Microsystems, Inc. and subsidiaries (the Company) as of December 31, 1995 and
1996, and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for each of the years in the three-year period
ended December 31, 1996. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of SCM
Microsystems, Inc. and subsidiaries as of December 31, 1995 and 1996, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
/s/ KPMG Peat Marwick LLP
Palo Alto, California
March 31, 1997, except
as to Note 10, which is
as of September 5, 1997
F-2
<PAGE> 66
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1995 1996
------- ------- JUNE 30,
1997
-----------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 739 $ 2,593 $10,942
Accounts receivable, less allowance of $93, $210 and $160
in 1995, 1996 and 1997, respectively................... 4,430 5,237 5,822
Inventories............................................... 2,313 2,279 2,396
Prepaid expenses.......................................... 113 519 641
------- -------- --------
Total current assets................................... 7,595 10,628 19,801
Property and equipment, net................................. 476 818 850
Other assets, net........................................... 72 13 14
------- -------- --------
$ 8,143 $11,459 $20,665
======= ======== ========
LIABILITIES, REDEEMABLE CONVERTIBLE
PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable and current portion of long-term debt....... $ 1,973 $ 5,896 $ 2,337
Current portion of related party debt..................... 84 2,350 --
Accounts payable.......................................... 3,184 3,351 2,877
Accrued payroll and related expenses...................... 161 458 356
Other accrued expenses.................................... 573 360 537
------- -------- --------
Total current liabilities.............................. 5,975 12,415 6,107
Notes payable and long-term debt, less current portion...... 2,147 -- --
------- -------- --------
Total liabilities...................................... 8,122 12,415 6,107
Redeemable convertible preferred stock; $0.001 par value;
6,000,000 shares authorized in 1995 and 1996, 10,000,000
shares authorized in 1997; 1,211,914 shares issued and
outstanding in 1995 and 1996, and 3,944,495 shares issued
and outstanding in 1997 (liquidation preference of $4,642
and $21,768 in 1996 and 1997)............................. 4,781 5,068 21,781
Stockholders' deficit:
Convertible preferred stock, $0.001 par value; 854,038
shares issued and outstanding.......................... 1 1 1
Common stock, $0.001 par value; 19,000,000 shares
authorized in 1995 and 1996 and 40,000,000 shares
authorized in 1997; 1,280,414 shares issued and
outstanding in 1995 and 1996, and 1,866,710 shares
issued and outstanding in 1997......................... 1 1 2
Additional paid-in capital................................ 2,010 2,387 2,446
Deferred stock compensation............................... -- (224) (188)
Accumulated deficit....................................... (6,618) (8,015) (8,903)
Cumulative translation adjustment......................... (154) (174) (581)
------- -------- --------
Total stockholders' deficit............................ (4,760) (6,024) (7,223)
------- -------- --------
Commitments and contingencies
$ 8,143 $11,459 $20,665
======= ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 67
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
--------------------------------- --------------------
1994 1995 1996 1996 1997
------- ------- --------- ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales.............................. $ 6,446 $18,066 $ 21,520 $ 8,513 $9,983
Cost of sales.......................... 5,087 15,771 14,880 6,171 6,126
------- -------- ------- ------- -------
Gross profit...................... 1,359 2,295 6,640 2,342 3,857
Operating expenses:
Research and development............. 1,162 1,399 2,386 1,180 1,418
Sales and marketing.................. 1,224 2,057 3,230 1,408 2,013
General and administrative........... 580 1,439 2,004 908 1,133
------- -------- ------- ------- -------
Loss from operations.............. (1,607) (2,600) (980) (1,154) (707)
Interest income (expense).............. (261) (337) (304) (148) 58
Other.................................. -- 11 174 56 239
------- -------- ------- ------- -------
Net loss.......................... (1,868) (2,926) (1,110) (1,246) (410)
Accretion on redeemable convertible
preferred stock...................... -- (139) (287) (143) (478)
------- -------- ------- ------- -------
Net loss applicable to common
stockholders......................... $(1,868) $(3,065) $ (1,397) $(1,389) $ (888)
======= ======== ======= ======= =======
Pro forma net loss per share........... $ (0.25) $(0.13)
======= =======
Shares used to compute pro forma net
loss per common share................ 5,272 7,018
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 68
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED STOCK- TOTAL
SERIES A COMMON STOCK ADDITIONAL DEFERRED CUMULATIVE STOCKHOLDERS'
---------------- ------------------ PAID-IN STOCK ACCUMULATED TRANSLATION EQUITY
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT ADJUSTMENT (DEFICIT)
------- ------ --------- ------ ---------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of
December 31,
1993............. 854,038 $1 1,280,414 $1 $1,761 $ -- $(1,685) $ (58) $ 20
Foreign currency
translation
adjustment....... -- -- -- -- -- -- -- (180) (180)
Net loss........... -- -- -- -- -- -- (1,868) -- (1,868)
-- --
------- --------- ------ ----- ------- ----- -------
Balances as of
December 31,
1994............. 854,038 1 1,280,414 1 1,761 -- (3,553) (238) (2,028)
Redeemable
convertible
preferred stock,
Series B
additional
paid-in
capital.......... -- -- -- -- 249 -- -- -- 249
Foreign currency
translation
adjustment....... -- -- -- -- -- -- -- 84 84
Net loss........... -- -- -- -- -- -- (2,926) -- (2,926)
Accretion on
redeemable
convertible
preferred stock,
Series B......... -- -- -- -- -- -- (139) -- (139)
-- --
------- --------- ------ ----- ------- ----- -------
Balance as of
December 31,
1995............. 854,038 1 1,280,414 1 2,010 -- (6,618) (154) (4,760)
Deferred
compensation
related to grants
of stock
options.......... -- -- -- -- 377 (377) -- -- --
Amortization of
deferred employee
compensation..... -- -- -- -- -- 153 -- -- 153
Foreign currency
translation
adjustment....... -- -- -- -- -- -- -- (20) (20)
Net loss........... -- -- -- -- -- -- (1,110) -- (1,110)
Accretion on
redeemable
convertible
preferred stock,
Series B......... -- -- -- -- -- -- (287) -- (287)
-- --
------- --------- ------ ----- ------- ----- -------
Balances as of
December 31,
1996............. 854,038 1 1,280,414 1 2,387 (224) (8,015) (174) (6,024)
Exercise of common
stock options
(unaudited)...... -- -- 586,296 1 59 -- -- -- 60
Amortization of
deferred employee
compensation
(unaudited)...... -- -- -- -- -- 36 -- -- 36
Foreign currency
translation
adjustment
(unaudited)...... -- -- -- -- -- -- -- (407) (407)
Net loss
(unaudited)...... -- -- -- -- -- -- (410) -- (410)
Accretion on
redeemable
convertible
preferred stock
(unaudited)...... -- -- -- -- -- -- (478) -- (478)
-- --
------- --------- ------ ----- ------- ----- -------
Balances as of June
30, 1997
(unaudited)...... 854,038 $1 1,866,710 $2 $2,446 $ (188) $(8,903) $(581) $ (7,223)
======= == ========= == ====== ===== ======= ===== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 69
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------- -------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................... $(1,868) $(2,926) $(1,110) $(1,246) $ (410)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization............ 87 135 445 118 172
Interest on subordinated stockholder
loans converted to equity.............. -- 242 -- -- --
Amortization of deferred employee
compensation........................... -- -- 153 -- 36
Changes in operating assets and
liabilities:
Accounts receivable.................... (472) (2,816) (991) 450 (956)
Inventories............................ (1,020) (800) (75) 644 (162)
Prepaid expenses....................... (10) (99) (582) (187) (350)
Accounts payable....................... 882 1,983 370 (812) (79)
Accrued expenses....................... 332 390 116 104 70
------- ------- ------- ------ ------
Net cash used in operating
activities........................ (2,069) (3,891) (1,674) (929) (1,679)
------- ------- ------- ------ ------
Cash flows used in investing activities --
capital expenditures........................ (194) (524) (643) (318) (265)
------- ------- ------- ------ ------
Cash flows from financing activities:
Proceeds from notes payable................. -- 1,253 5,011 3,289 --
Payments on notes payable................... (17) -- (1,531) (1,702) (1,290)
Proceeds from long-term debt................ 2,470 1,509 -- -- --
Principal payments on long-term debt........ (58) (59) -- -- (63)
Proceeds from issuance of equity............ -- 2,441 -- -- 12,148
Proceeds from line of credit................ -- -- 1,000 -- --
------- ------- ------- ------ ------
Net cash provided by financing
activities........................ 2,395 5,144 4,480 1,587 10,795
------- ------- ------- ------ ------
Effect of exchange rates on cash.............. (180) (60) (309) (173) (502)
------- ------- ------- ------ ------
Net (decrease) increase in cash and cash
equivalents................................. (48) 669 1,854 167 8,349
Cash and cash equivalents at beginning of
period...................................... 118 70 739 739 2,593
------- ------- ------- ------ ------
Cash and cash equivalents at end of period.... $ 70 $ 739 $ 2,593 $ 906 $10,942
======= ======= ======= ====== ======
Supplemental disclosures of cash flow
information:
Cash paid during the period -- interest..... $ 79 $ 191 $ 313 $ 147 $ 65
======= ======= ======= ====== ======
Noncash financing activity -- conversion of
notes payable and accrued interest to
redeemable preferred stock............... $ -- $ 2,301 $ -- $ -- $ 4,240
======= ======= ======= ====== ======
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 70
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994, 1995 AND 1996
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED.)
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
SCM Microsystems designs, develops and sells standards-compliant hardware,
firmware and software products and technologies used in smart card and other
token-based network security and conditional access systems. The Company
currently sells its products to a number of OEM customers. The Company maintains
its U.S. headquarters in California and maintains its international headquarters
in Germany.
During 1994, the Company began emphasizing security and access products.
The Company made the final shipment of PCMCIA peripheral products in the quarter
ended March 31, 1997, completing its exit from this business.
Reincorporation
From inception in 1990 until December 1996, the Company was incorporated in
Germany. During 1993, the Company formed a U.S. subsidiary which is incorporated
in Delaware.
In December 1996, the Company incorporated a holding company in the state
of Delaware and entered into a stock exchange agreement with the stockholders of
the German corporation. The Board of Directors approved an exchange of one share
in the German corporation for 6.4021 shares in the new Delaware corporation
which effected a 6.4021 for 1 stock split of common and preferred stock. The
Certificate of Incorporation of the Delaware corporation authorizes 19,000,000
shares of common stock at $0.001 par value per share and 6,000,000 shares of
preferred stock at $0.001 par value per share. The accompanying consolidated
financial statements have been retroactively restated to give effect to the
reincorporation and stock split.
Registration Statement
In December 1996, the Board of Directors authorized the filing of a
registration statement with the Securities and Exchange Commission permitting
the Company to sell shares of the Company's common stock in connection with a
proposed initial public offering (IPO). If the offering is consummated under the
terms presently anticipated, all the currently outstanding shares of preferred
stock will automatically convert into 4,798,533 shares of common stock upon the
effectiveness of the proposed IPO. The conversion of the preferred stock has
been reflected in the unaudited pro forma stockholders' deficit as of June 30,
1997 (see Note 11).
Principles of Consolidation
The accompanying consolidated financial statements include those of the
Company and its wholly owned subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the consolidated
financial statements and reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
F-7
<PAGE> 71
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED.)
Cash Equivalents
The Company considers all highly liquid investments with a remaining
maturity of three months or less at the date of acquisition to be cash
equivalents.
Concentration of Credit Risk
The Company sells its products to a diversified group of customers which
are typically large OEM computer manufacturers located mainly in the United
States and Europe. The Company extends credit based on an evaluation of each
customer's financial condition and generally requires no collateral from its
customers. Credit losses, if any, have been provided for in the consolidated
financial statements and have been within management's expectation.
Inventories
Inventories are stated at the lower of cost or market, using the first-in,
first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using
the straight-line method based upon the useful lives of the respective assets or
the lease term, generally three to seven years. During 1996, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the
Impairment of Long Lived Assets and Long Lived Assets to Be Disposed Of. The
adoption of SFAS No. 121 did not have a material effect on the Company's
consolidated financial position or operating results.
Fair Value of Financial Instruments
The carrying amounts reflected in the consolidated balance sheets for cash,
accounts receivable, and accounts payable approximate their respective fair
values due to the short maturities of these instruments. The fair value of the
Company's notes payable, notes payable to related parties, and long-term related
party debt is not determinable as it is uncertain at what value the Company
could settle such financing or obtain replacement financings.
Revenue Recognition
Revenue from product sales is recognized upon product shipment. Provisions
for estimated warranty repairs and returns and allowances are provided for at
the time products are shipped. Nonrecurring engineering contract revenue is
recognized using the percentage of completion method.
Stock-Based Compensation
The Company accounts for its stock-based compensation arrangements in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense would be recorded on the date of grant only if the
fair value of the underlying stock exceeded the exercise price. On January 1,
1996, the Company adopted the disclosure provisions of SFAS No. 123, Accounting
for Stock-Based Compensation, which requires entities to provide pro forma net
income and pro forma earnings per share disclosures for employee stock option
grants made in 1995 and future years as if the fair value-based method defined
in SFAS No. 123 had been applied.
F-8
<PAGE> 72
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED.)
Income Taxes
Income taxes are accounted for using the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amount of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rates is recognized in income in the period that includes the
enactment date.
Foreign Currency Translation
The functional currency of the Company's foreign subsidiary is the local
foreign currency. The Company translates the assets and liabilities of its
foreign subsidiary to U.S. dollars at the rates of exchange in effect at the end
of the year. Net sales and expenses are translated at the average rates of
exchange for the year. Translation gains and losses are included in
stockholders' deficit in the consolidated balance sheets. Gains and losses
resulting from foreign currency transactions denominated in a currency other
than the functional currency are included in income and have not been
significant to the Company's consolidated operating results in any period.
Pro Forma Net Loss Per Share
Pro forma net loss per share data is based on the weighted-average number
of shares of common stock and, when dilutive, common equivalent shares from
stock options and warrants outstanding, using the treasury stock method, and
convertible preferred stock and notes payable on an "as if converted" basis.
Pursuant to certain SEC Staff Accounting Bulletins, common stock,
convertible preferred stock and convertible notes payable issued for
consideration below the assumed IPO price and stock options granted and warrants
issued with exercise prices below the assumed IPO price during the 12-month
period prior to the date of the initial filing of the registration statement,
even when antidilutive, have been included in the calculation of pro forma net
loss per share, using the treasury stock method based on the assumed IPO price,
as if they were outstanding for all periods presented.
The Financial Accounting Standards Board recently issued SFAS No. 128,
Earnings Per Share. SFAS No. 128 requires the presentation of basic earnings per
share (EPS) and, for companies with complex capital structures, diluted EPS.
SFAS No. 128 is effective for annual and interim periods ending after December
15, 1997. The Company expects that for profitable periods basic EPS will be
higher than earnings per share as presented in the accompanying financial
statements and diluted EPS will not differ materially from earnings per share as
presented in the accompanying consolidated financial statements. Computations
for loss periods should not change significantly.
Unaudited Interim Consolidated Financial Statements
The unaudited interim consolidated financial statements as of June 30,
1997, and for the six months ended June 30, 1996 and 1997, have been prepared on
substantially the same basis as the audited consolidated financial statements,
and in the opinion of management include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the financial
information set forth therein.
F-9
<PAGE> 73
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED.)
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." This Statement establishes standards for reporting and displaying
comprehensive income and its components in the consolidated financial
statements. It does not, however, require a specific format for the statement,
but requires the Company to display an amount representing total comprehensive
income for the period in that financial statement. The Company is in the process
of determining its preferred format. This statement is effective for fiscal
years beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information." The Statement establishes standards for
the way public business enterprises are to report information about operating
segments in annual financial statements and requires those enterprises to report
selected information about operating segments in interim financial reports
issued to shareholders. This Statement is effective for financial statements for
periods beginning after December 31, 1997. The Company has not yet determined
whether it has any separately reportable business segments.
2. BALANCE SHEET COMPONENTS
A summary of balance sheet components is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1995 1996 1997
------ ------ ---------
<S> <C> <C> <C>
Inventories:
Raw materials............................... $ 945 $1,615 $ 1,131
Work in process............................. 241 -- --
Finished goods.............................. 1,127 664 1,265
------ ------ ------
$2,313 $2,279 $ 2,396
====== ====== ======
Property and equipment:
Furniture, fixtures, and office equipment... $ 570 $1,070 $ 1,143
Purchased software.......................... 109 204 289
------ ------ ------
679 1,274 1,432
Less accumulated depreciation............... 203 456 582
------ ------ ------
$ 476 $ 818 $ 850
====== ====== ======
</TABLE>
3. NOTES PAYABLE, LONG-TERM DEBT, AND RELATED PARTY DEBT
Notes payable and long-term debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- JUNE 30,
1995 1996 1997
------ ------ ---------
<S> <C> <C> <C>
Nonconvertible loans.......................... $2,070 $2,580 $ 2,294
Notes payable to banks........................ 2,050 357 43
Convertible notes payable, Series C........... -- 1,959 --
Line of credit................................ -- 1,000 --
------ ------ ---
4,120 5,896 2,337
Less current portion.......................... 1,973 5,896 2,337
------ ------ ---
Notes payable and long-term debt, less
current portion........................ $2,147 $ -- $ --
====== ====== ===
</TABLE>
F-10
<PAGE> 74
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED.)
Related party debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE
----------------- 30,
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Convertible notes payable Series C -- related
party.......................................... $ -- $ 627 $ --
Convertible notes payable Series D -- related
party.......................................... -- 1,654 --
Stockholder loans................................ 84 69 --
------ ------ ------
84 2,350
Less current portion............................. 84 2,350
------ ------ ------
Long-term related party debt, less current
portion................................... $ -- $ -- $ --
====== ====== ======
</TABLE>
Nonconvertible Loans
In October 1993, the Company's German subsidiary entered into a Deutsche
Mark (DM) 1,000,000 loan agreement, bearing interest at 5% per annum, expiring
on December 31, 2003. In June 1995, the Company entered into an additional DM
3,000,000 loan agreement with the same party, bearing interest at 6% per annum,
expiring on December 31, 2005. DM 2,000,000 was drawn under this second
agreement in June 1995, and the remaining DM 1,000,000 was drawn on April 2,
1996. The terms of these agreements also provide the lender with the option to
request an additional compensation of 25% of the then outstanding loan amount
after the fifth year of each of the respective agreements or upon early
termination of the loans by the Company. The Company may terminate this
agreement at the end of each half year with three months notice. The outstanding
balance on these loans was $2,070,000, $2,580,000, and $2,294,000 as of December
31, 1995 and 1996, and June 30, 1997, respectively.
In May 1997, the Company and the lender resolved the additional
compensation arrangement in exchange for a warrant to purchase 138,000 shares of
the Company's Common Stock at a price of $5.72 per share. The fair value of
these warrants was not significant.
Notes Payable to Banks
Notes payable to banks bear interest at 10% and are guaranteed by certain
stockholders of the Company.
Stockholder Loans
Loans from stockholders accrue interest at 8.5% per annum. These loans from
stockholders are due on demand.
Line of Credit
In April 1996, the Company entered into a $2,500,000 revolving line of
credit agreement expiring in August 1997. The facility bears interest at the
bank's prime rate plus 1.5%, reduced to 1.0% under certain profitability
conditions contained in the agreement (9.25% as of December 31, 1996). The
agreement contains certain financial covenants and is secured by all assets of
the Company. As of December 31, 1996, the Company had outstanding borrowings of
$1,000,000 under this agreement.
The Company also has DM 4,500,000 in foreign lines of credit and other bank
facilities. These facilities bear interest at 8.0% to 8.75% and expire on
various dates through March 1998. As of December 31, 1996, there were no
borrowings under these lines.
F-11
<PAGE> 75
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED.)
Convertible Notes Payable, Series B
In August 1994, certain stockholders advanced the Company loans totaling
$2,059,000. In June 1995, these loans and accrued interest of approximately
$242,000 were converted into Series B preferred stock.
Convertible Notes Payable, Series C
In February 1996, the Company's German subsidiary entered into a loan
agreement for DM 4,009,000. The loan bears interest at 4% per annum and is
convertible into 653,642 shares of Series C preferred stock. The outstanding
balance of this loan as of December 31, 1996, was $1,959,000 payable to third
parties and $627,000 payable to stockholders. In accordance with the provisions
of the loan agreement, the loan was converted into 653,642 shares of Series C
preferred stock in March 1997.
Convertible Notes Payable, Series D
In December 1996, the Company's German subsidiary entered into a loan
agreement for a total of DM 3,179,000 with stockholders of which DM 2,564,000
was tendered at year-end. The loan agreement includes a conversion option which
may be exercised after June 30, 1997, and expires on December 31, 1997. Under
the terms of the agreement, the loan, if not converted, becomes payable on
demand. Under the agreement, the debt automatically converts to common stock in
the event of certain events including an IPO of equity securities. The loan
bears no interest and is convertible into 377,580 shares of Series D preferred
stock. Under the terms of this agreement, if the conversion option is not
exercised by December 31, 1997, the loan will bear interest at 12% per annum
from the date of issue. The outstanding balance of this loan as of December 31,
1996, was $1,654,000. In March 1997, the loan was converted into 377,580 shares
of Series D preferred stock.
In connection with this loan agreement, the Company issued 22,652 warrants
to purchase Series D preferred stock at $5.72 per share. The fair value of these
warrants was not significant.
4. STOCKHOLDERS' DEFICIT
Convertible Preferred Stock
As of December 31, 1996, the Company was authorized to issue 6,000,000
shares of convertible preferred stock, with a par value of $0.001. The Company
has designated 854,038 shares as convertible Series A and 1,211,914 shares as
convertible Series B.
In March 1997, the Company issued 388,284 shares of Series D redeemable
convertible preferred stock for proceeds of $2,221,000 and 463,285 shares of
Series E redeemable convertible preferred stock for proceeds of $2,650,000. In
April 1997, the Company issued 849,790 shares of Series F redeemable convertible
preferred stock (see Note 10).
The rights and preferences of the holders of preferred stock are as
follows:
- Holders of preferred stock are entitled to noncumulative dividends when
and as declared by the Company's Board of Directors. Dividends are
distributable among all holders of preferred stock and common stock in
proportion to the number of shares of common stock which would be held by
each such holder if all shares of preferred stock were converted into
common stock.
- Holders of Series B, C, D, E and F preferred stock have a liquidation
preference of $3.83, $4.29, $5.72, $5.72 and $8.58 per share,
respectively, plus any declared but unpaid dividends.
F-12
<PAGE> 76
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED.)
- Holders of Series A, B, C, D, E and F preferred stock may convert all or
part of their shares at any time after the date of issuance into such
number of shares of common stock as is determined by dividing $1.75,
$3.83, $4.29, $5.72, $5.72 and $8.58, respectively, by the conversion
price in effect at the time.
- Holders of Series B, C, D, E and F preferred stock have the right to
require the Company to redeem the then outstanding shares if the Company
has not made a public offering of its common stock pursuant to an
effective registration statement under the Securities Act of 1933 on or
before June 30, 1999, February 28, 2000, December 31, 2001, February 28,
2002 and March 28, 2002, respectively. An amount equal to the respective
shares' liquidation preference plus 6% compounded interest per annum on
such amount from the date of issuance shall be paid to the holders of
such preferred stock subject to certain provisions of the stock purchase
agreement.
In connection with the issuance of Series D redeemable convertible
preferred stock, the Company issued 28,539 warrants to purchase Series D
preferred stock at $5.72 per share to a stockholder. The fair value of these
warrants was not significant.
Stock Options
In October 1995, the Company authorized issuance of 376,443 options. The
options generally vest over a 4-year period, 25% vesting on the first
anniversary date of the employees' date of employment and 1/48th vesting each
additional full month thereafter, and are exercisable for a term of 10 years
after issuance. During July 1996, the number of shares authorized to be issued
was increased to 1,030,097 shares.
In April 1997, the Company's stockholders approved the 1997 Stock Plan and
the 1997 Director Option Plan (see Note 10).
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER OF PRICE
OPTION HISTORY FOR GRANT SHARES PER SHARE
----------------------------------------- --------- --------- ---------
<S> <C> <C> <C>
Balance as of January 1, 1995............ -- -- $ --
Shares reserved........................ 376,443 --
Options granted........................ (281,686) 281,686 0.10
-------- --------
Balance as of December 31, 1995.......... 94,757 281,686 0.10
Shares reserved........................ 653,654 --
Options granted........................ (733,657) 733,657 0.10
Options canceled....................... 81,626 (81,626) 0.10
-------- --------
Balance as of December 31, 1996.......... 96,380 933,717 0.10
Shares assumed under 1997 stock
plans............................... (96,380) --
Shares reserved under 1997 stock plans 1,050,000
Options granted........................ (345,400) 345,400 7.38
Options canceled....................... 26,895 (26,895) 0.10
Options exercised...................... -- (586,296) 0.10
-------- --------
Balance as of June 30, 1997.............. 731,495 665,926 $3.87
======== ========
</TABLE>
As of December 31, 1996, 480,414 options were fully vested and exercisable.
F-13
<PAGE> 77
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED.)
The Company accounts for stock-based compensation in accordance with APB
Opinion No. 25 and, accordingly, no compensation cost has been recognized for
its stock options in the accompanying consolidated financial statements because
the fair value of the underlying common stock equals or exceeds the exercise
price of the stock options at the date of grant, except with respect to the
options and restricted stock granted in July and October 1996. The Company has
recorded deferred stock compensation of $377,000 for the difference at the grant
date between the exercise price and the fair value, as determined by an
independent valuation, of the restricted stock and the common stock underlying
the options. This amount is being amortized on the straight-line basis over the
vesting period of the individual options and restricted stock, generally four
years. For the year ended December 31, 1996, the Company expensed approximately
$153,000 of the deferred stock compensation reflecting the commencement of
vesting from the date of employment. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under SFAS
No. 123, the Company's compensation charge would have been $145,000, and the
Company's net loss would have been changed to the pro forma amounts indicated
below (in thousands):
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Net loss:
As reported.................................... $(2,926) $(1,110)
Pro forma...................................... (2,926) (1,110)
</TABLE>
The per share weighted-average fair value of stock options granted during
1995 and 1996 was $0.02 and $0.54, respectively, on the date of grant using the
minimum value method with the following weighted-average assumptions:
1995 -- expected dividend yield 0.0%, risk-free interest rate of 5.79%, and
expected life of 4 years; 1996 -- expected dividend yield 0.0%, risk-free
interest rate of 6.32%, and expected life of 4 years.
F-14
<PAGE> 78
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED.)
5. GEOGRAPHIC INFORMATION
Information regarding operations in different geographic regions is as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31, JUNE 30,
--------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net sales to unaffiliated
customers:
Europe......................... $ 5,319 $ 8,848 $11,289 $ 4,581 $ 6,890
United States.................. 1,127 9,218 10,231 3,932 3,093
------- ------- ------- ------ -------
$ 6,446 $18,066 $21,520 $ 8,513 $ 9,983
======= ======= ======= ====== =======
Transfers between geographic
areas
(eliminated in consolidation):
Europe......................... $ 1,207 $ 8,608 $ 6,241 $ 1,968 $ 1,805
United States.................. -- -- -- -- 149
------- ------- ------- ------ -------
$ 1,207 $ 8,608 $ 6,241 $ 1,968 $ 1,954
======= ======= ======= ====== =======
Income (loss) from operations:
Europe......................... $ (683) $ (907) $(1,144) $(1,053) $ 211
United States.................. (924) (1,693) 164 (101) (918)
------- ------- ------- ------ -------
$(1,607) $(2,600) $ (980) $(1,154) $ (707)
======= ======= ======= ====== =======
Identifiable assets:
Europe......................... $ 2,532 $ 4,168 $ 6,912 $ 7,270
United States.................. 920 3,975 4,547 13,395
------- ------- ------- -------
$ 3,452 $ 8,143 $11,459 $20,665
======= ======= ======= =======
</TABLE>
The Company's European operations are in Germany and France. Intercompany
transfers between geographic areas are accounted for using the transfer prices
in effect for subsidiaries.
6. INCOME TAXES
As of December 31, 1996, SCM Microsystems GmbH had German net operating
loss carryforwards of approximately $4,600,000, which can be used to offset
GmbH's income. The German net operating loss carryforwards can be carried
forward indefinitely.
SCM Microsystems, Inc. had net operating loss carryforwards of
approximately $1,900,000 and $800,000 for federal and California income tax
purposes, respectively. The federal net operating loss carryforwards will expire
in the years 2008 through 2010. The California net operating loss carryforwards
will expire in the years 1998 through 2000.
Federal and California tax laws impose significant restrictions on the
utilization of net operating loss carryforwards in the event of a shift in the
ownership of the Company, which constitutes an "ownership change" as defined by
the Internal Revenue Code, Section 382. An ownership change occurred in 1996,
resulting in the U.S. subsidiary's federal and California net operating loss
carryforwards being subject to an annual limitation of approximately $340,000.
Any unused annual limitations may be carried forward to increase the limitations
in subsequent years.
F-15
<PAGE> 79
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED.)
The domestic and foreign components of net income (loss) before income
taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
------- ------- -------
<S> <C> <C> <C>
Domestic.................................... $ (924) $(1,693) $ 133
Foreign..................................... (944) (1,233) (1,243)
------- ------- -------
Net loss.......................... $(1,868) $(2,926) $(1,110)
======= ======= =======
</TABLE>
The Company has a deferred tax asset as of December 31, 1995 and 1996, of
approximately $1,100,000 and $2,200,000, which is fully offset by a valuation
allowance. The deferred tax asset principally results from the net operating
loss carryforwards. The Company has provided a valuation allowance due to the
uncertainty of generating future profits that would allow for the realization of
such deferred tax assets.
7. COMMITMENTS
The Company leases its facilities, certain equipment, and automobiles under
noncancelable operating lease agreements. These lease agreements expire at
various dates during the next four years. Rent expense was $251,000, $343,000,
and $467,000 in 1994, 1995, 1996, respectively.
Future minimum lease payments under noncancelable operating leases are as
follows as of December 31, 1996 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
--------------------------------------------------
<S> <C>
1997........................................... $ 440
1998........................................... 399
1999........................................... 303
2000........................................... 54
------
Total minimum lease payments............ $1,196
======
</TABLE>
8. RELATED PARTY TRANSACTIONS
The Company purchased inventory under transactions negotiated on a basis
comparable to an arm's length basis totaling $3,478,000 and $3,294,000 in 1995
and 1996, respectively, from a stockholder. Included in accounts payable are
amounts owed this stockholder of $925,000 and $396,000 as of December 31, 1995
and 1996, respectively.
F-16
<PAGE> 80
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED.)
9. MAJOR CUSTOMERS AND SALES INFORMATION
A summary of the net sales to major customers that exceeded 10% of total
net sales during each of the years in the three-year period ended December 31,
1996, and the amount due from these customers as of December 31, 1996, follows
(accounts receivable in thousands):
<TABLE>
<CAPTION>
ACCOUNTS
1994 1995 1996 RECEIVABLE
---- ---- ---- -----------
<S> <C> <C> <C> <C>
Customer 1................................ -- -- 12% $ 346
Customer 2................................ -- -- 11% 1,326
Customer 3................................ -- 17% -- --
Customer 4................................ -- 16% -- --
Customer 5................................ 12% -- -- --
Customer 6................................ 11% -- -- 109
</TABLE>
During 1994, 1995, and 1996, net sales of PCMCIA peripheral products
amounted to 78%, 31%, and 23%, respectively, of sales. As discussed in Note 1,
during 1996, the Company phased out of these products.
10. SUBSEQUENT EVENTS
Series F Preferred Stock Financing
In April 1997, the Company issued 849,790 shares of Series F redeemable
convertible preferred stock for proceeds of $6,991,199, of which 34,965 shares
are subject to repurchase rights. The rights and preferences of Series F
preferred stock are substantially the same as the rights and preferences
underlying the holders of Series B, C, D, and E preferred stock with the
following exceptions:
- The liquidation preference of Series F shall be $8.58.
- Holders of Series F preferred stock may convert all or part of their
shares at any time after the date of issuance into such number of shares
of common stock as is determined by dividing $8.58 by the conversion
price in effect at the time.
- Holders of Series F preferred stock have the right to require the Company
to redeem the then outstanding shares if the Company has not made a
public offering of its common stock pursuant to an effective registration
statement under the Securities Act of 1933 on or before March 28, 2002.
Pursuant to the terms of the Series F Preferred Stock Purchase Agreement,
the Company issued a warrant for the purchase of an additional 194,930 shares of
Series F preferred stock at a price of $8.58 per share to one of the purchasers
of Series F preferred stock (the warrant holder). This warrant was issued as
partial consideration for the warrant holder entering into a Development and
Supply Agreement with the Company, which was executed effective April 30, 1997.
The fair value of these warrants was not significant. The warrants expired
unexercised on June 30, 1997.
In conjunction with the designation of Series F preferred stock, the
Company approved an increase to the authorized number of shares of common stock
and preferred stock to 40,000,000 shares and 10,000,000 shares, respectively.
Legal Proceedings
The Company has been notified by Smith Corona Corporation ("Smith Corona")
that Smith Corona believes that the "SCM" in the Company's name, logo and a
certain product name infringe a trademark held by Smith Corona and that the
Company has engaged in unfair competition. The Company believes that it has
F-17
<PAGE> 81
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED.)
defenses to Smith Corona's claim and has so notified Smith Corona. In the event
that Smith Corona were to initiate legal proceedings against the Company with
respect to this matter, the Company would vigorously defend the action.
Defending any action can be costly and time consuming regardless of the outcome
and, as with any litigation matter, there can be no assurance that the outcome
of any such dispute would be favorable to the Company. An unfavorable outcome in
the matter could subject the Company to monetary damages and may result in the
Company having to change its name and logo, which would require the Company to
incur costs related thereto and may result in a loss of the goodwill associated
with its name and logo.
In April 1997, Gemplus served the Company with a complaint alleging that
certain of the Company's products infringe certain claims of a French patent
held by Gemplus. In September 1997, the Company entered into a license agreement
and memorandum of understanding, and settled this dispute, with Gemplus. In
connection with these transactions, the Company issued warrants to Gemplus to
purchase up to 200,000 shares of Common Stock at an exercise price of $13.00 per
share and up to 200,000 shares of Common Stock at an exercise price of $14.00
per share. The Company also agreed to sell 200,000 shares of Common Stock to
Gemplus at a purchase price of $9.00 per share
Employee Stock Plans
1997 Stock Plan
In April 1997, the Company's stockholders approved the 1997 Stock Plan (the
1997 Plan) under which employees and consultants may be granted incentive or
nonqualified stock options for the purchase of the Company's common stock and
stock purchase rights. Unless terminated sooner, the 1997 Plan will terminate
automatically in 2007. A total of 1,000,000 shares of common stock are currently
reserved for issuance pursuant to the 1997 Plan.
1997 Employee Stock Purchase Plan
In April 1997, the Company's stockholders approved the 1997 Employee Stock
Purchase Plan which authorizes the issuance of up to 175,000 shares of the
Company's common stock. The plan permits eligible employees to purchase common
stock through payroll deductions at a purchase price of 85% of the lower of fair
market value of the common stock at the beginning or end of each offering
period.
1997 Director Option Plan
In April 1997, the Company's stockholders approved the 1997 Director Option
Plan (the Director Plan). A total of 50,000 shares of common stock has been
reserved for issuance under the Director Plan. Each outside director of the
Company will automatically be granted an option to purchase up to 10,000 shares
of common stock upon the effective date of the Director Plan and will
automatically be granted annual subsequent options to purchase additional shares
of common stock under the Director Plan. The price of stock purchased under the
Director Plan is 100% of the fair market value of the common stock as of the
grant date.
August 1997 Stock Option Grants
On August 11, 1997, the Company granted to certain employees options to
purchase 351,500 shares of common stock with an exercise price of $9.50.
F-18
<PAGE> 82
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(INFORMATION AS OF JUNE 30, 1997 AND FOR THE SIX MONTHS ENDED
JUNE 30, 1996 AND 1997 IS UNAUDITED.)
11. PRO FORMA INFORMATION (UNAUDITED)
The following table reflects the pro forma adjustments in the accompanying
consolidated balance sheet (in thousands):
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------------------------------
HISTORICAL ADJUSTMENTS PRO FORMA
---------- ---------
--------------------------------------------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash................................................. $ 10,942 $ -- $10,942
Other current assets................................. 8,859 -- 8,859
------- -------- -------
Total current assets.............................. 19,801 19,801
Other noncurrent assets................................ 864 -- 864
------- -------- -------
Total assets...................................... $ 20,665 $ -- $20,665
======= ======== =======
Total liabilities...................................... $ 6,107 $ -- $ 6,107
Redeemable convertible preferred stock................. 21,781 (21,781)(a) --
Stockholders' equity (deficit):
Convertible preferred stock.......................... 1 (1)(b) --
Common stock......................................... 2 5(a)(b) 7
Additional paid-in capital........................... 2,446 21,777(a)(b) 24,223
Deferred stock compensation.......................... (188) -- (188)
Accumulated deficit.................................. (8,903) -- (8,903)
Cumulative translation adjustment.................... (581) -- (581)
------- -------- -------
Total stockholders' equity (deficit).............. (7,223) 21,781 14,558
------- -------- -------
Total liabilities and stockholders' equity
(deficit).................................. $ 20,665 $ -- $20,665
======= ======== =======
</TABLE>
- ---------------
(a) Gives effect to the conversion of the Company's Series B, C, D, E, and F
redeemable convertible preferred stock into 1,211,914, 653,642, 765,864,
463,285, and 849,790 shares, respectively, of common stock.
(b) Gives effect to the conversion of the Company's convertible preferred Series
A stock into 854,038 shares of common stock.
F-19
<PAGE> 83
============================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS OR BY ANY OTHER
PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO BUY, OF ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER DELIVERY OF THIS PROSPECTUS NOR ANY SALES MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 6
Use of Proceeds............................ 16
Dividend Policy............................ 16
Capitalization............................. 17
Dilution................................... 18
Selected Consolidated Financial Data....... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 20
Business................................... 29
Management................................. 45
Certain Transactions....................... 52
Principal and Selling Stockholders......... 53
Description of Capital Stock............... 55
Shares Eligible for Future Sale............ 57
Underwriting............................... 58
Legal Matters.............................. 60
Experts.................................... 60
Additional Available Information........... 61
Index to Consolidated Financial
Statements............................... F-1
</TABLE>
------------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THE PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
============================================================
============================================================
3,370,000 Shares
LOGO
Common Stock
------------------------------
PROSPECTUS
------------------------------
COWEN & COMPANY
HAMBRECHT & QUIST
, 1997
============================================================
<PAGE> 84
[Alternate Page for International Prospectus]
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT.
PROSPECTUS (Subject to Completion)
Dated September 5, 1997
3,370,000 Shares
LOGO
Common Stock
-----------------------------
Of the 3,370,000 shares of Common Stock offered, 750,000 shares are being
offered hereby in an international offering outside the United States and Canada
(the "International Offering") and 2,620,000 shares are being offered in a
concurrent offering in the United States and Canada (the "U.S. Offering"),
subject to transfers of shares between the International Underwriters and U.S.
Underwriters (collectively, the "Underwriters"). The initial public offering
price and the aggregate underwriting discount per share will be identical for
both offerings. The closing of the International Offering and U.S. Offering are
conditioned upon each other. See "Underwriting."
Of the 3,370,000 shares of Common Stock offered, 3,250,000 shares are being
sold by SCM Microsystems, Inc. (the "Company") and 120,000 shares are being sold
by certain selling stockholders (the "Selling Stockholders"). See "Principal and
Selling Stockholders." The Company will not receive any of the proceeds from the
sale of the shares being sold by the Selling Stockholders.
Prior to this offering, there has been no public market for the Common
Stock of the Company. The Company has applied to have the Common Stock approved
for quotation on the Nasdaq National Market under the symbol "SCMM" and intends
to submit an application to have the Common Stock listed on the Neuer Markt of
the Frankfurt Stock Exchange. It is currently estimated that the initial public
offering price will be between $11.00 and $13.00 per share. See "Underwriting"
for information relating to the determination of the initial public offering
price.
-----------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 HEREOF.
-----------------------------
THIS INTERNATIONAL PROSPECTUS IS INTENDED FOR USE ONLY IN CONNECTION WITH OFFERS
AND SALES OF THE COMMON STOCK OUTSIDE THE UNITED STATES AND CANADA AND IS NOT TO
BE SENT OR GIVEN TO ANY PERSON WITHIN THE UNITED STATES OR CANADA. THE COMMON
STOCK OFFERED HEREBY IS NOT BEING REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933 FOR THE PURPOSE OF SALES OUTSIDE THE UNITED STATES.
<TABLE>
<S> <C> <C> <C> <C>
==========================================================================================================
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount (1) Company (2) Stockholders
- ----------------------------------------------------------------------------------------------------------
Per Share..................... $ $ $ $
Total (3)..................... $ $ $ $
==========================================================================================================
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses, estimated at $1,170,000, payable by the Company.
(3) The Company has granted the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to an aggregate of 505,500
additional shares of Common Stock at the Price to Public less the
Underwriting Discount to cover over-allotments, if any. If all such
additional shares are purchased, the total Price to Public, Underwriting
Discount, Proceeds to Company, and Proceeds to Selling Stockholders will be
$ , $ , $ , and $ respectively. See
"Underwriting."
-----------------------------
The Common Stock is offered by the several Underwriters named herein when,
as and if received and accepted by them, subject to their right to reject orders
in whole or in part and subject to certain other conditions. It is expected that
delivery of certificates for such shares will be made at the offices of Cowen &
Company, New York, New York, on or about , 1997.
COWEN INTERNATIONAL L.P.
HAMBRECHT & QUIST
WESTDEUTSCHE LANDESBANK
GIROZENTRALE
, 1997
<PAGE> 85
[Alternate Page for International Prospectus]
- ------------------------------------------------------------
- ------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS OR BY ANY OTHER
PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION
OF AN OFFER TO BUY, OF ANY SECURITIES OTHER THAN THE SHARES OF COMMON STOCK
OFFERED HEREBY, NOR DOES IT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN
OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY
JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION TO
SUCH PERSON. NEITHER DELIVERY OF THIS PROSPECTUS NOR ANY SALES MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY DATE SUBSEQUENT TO THE DATE HEREOF.
------------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary......................... 3
Risk Factors............................... 6
Use of Proceeds............................ 16
Dividend Policy............................ 16
Capitalization............................. 17
Dilution................................... 18
Selected Consolidated Financial Data....... 19
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 20
Business................................... 29
Management................................. 45
Certain Transactions....................... 52
Principal and Selling Stockholders......... 53
Description of Capital Stock............... 55
Shares Eligible for Future Sale............ 57
Underwriting............................... 58
Legal Matters.............................. 60
Experts.................................... 60
Additional Available Information........... 61
Index to Consolidated Financial
Statements............................... F-1
</TABLE>
------------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS INTERNATIONAL
PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK IN THE
UNITED STATES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE
REQUIRED TO DELIVER THE U.S. PROSPECTUS. THIS DELIVERY REQUIREMENT IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER THE U.S. PROSPECTUS WHEN ACTING
AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS IN
THE UNITED STATES.
============================================================
============================================================
3,370,000 Shares
LOGO
Common Stock
------------------------------
PROSPECTUS
------------------------------
COWEN INTERNATIONAL L.P.
HAMBRECHT & QUIST
WESTDEUTSCHE LANDESBANK
GIROZENTRALE
, 1997
============================================================
<PAGE> 86
APPENDIX - DESCRIPTION OF GRAPHICS
INSIDE FRONT COVER
DESCRIPTION:
Photo of SwapBox product with caption "SwapBox PC Card Adaptors"
Photo of SwapAccess product and smart card with caption "SwapAccess
Digital Video Broadcast--Conditional Access Modules
Photo of SwapSmart product and smart card with caption "SwapSmart Smart
Card Readers"
Image of SmartOS logo with caption: "SmartOS Universal Smart Card
Interface Architecture"
TEXT
SCM Microsystems Logo;
Securing Access to Digital Information
Today's world increasingly relies upon computer networks, the Internet
and intranets and direct broadcast systems to access information,
entertainment and data in a digital form and to conduct electronic
commerce. This increasing proliferation and reliance upon digital data
has caused data security to become a paramount concern.
SCM Microsystems provides OEMs with key standards-compliant enabling
hardware, firmware and software products and technologies for smart
card and other token-based network security systems and conditional
access to DVB content and services.
GATEFOLD - FIRST PAGE
DESCRIPTION:
Photo of SwapAccess product with smart card. Caption: "Video Digital
Video Broadcast"
Graphic of video screen showing scrambled video image, television
set-top box with SmartAccess and smart card leading to clear video
image on screen. Caption: "Scrambled incoming digital video broadcasts
are received by the set-top box. The SCM Microsystems DVB-CAM verifies
authorization via the subscriber's smart card, descrambles the video
signal and provides output for viewing. "
Graphic of set-top box with SwapAccess and analog television; and
digital television with SmartAccess and smart card fitting into
television. Caption: "Integrated digital TV set."
TEXT
SCM Microsystems smart card technology secures a wide range of
applications today . . .
SCM Microsystems' SwapAccess Digital Video Broadcast-Conditional
Access Module (DVB-CAM) provides a cost-effective means of controlling
access to digital broadcasts through the use of a PC Card which
utilizes a smart card to authorize, access, and initiate real-time,
high-bandwidth video decryption. SwapAccess can be used in any DVB-CI
or NRSSB compliant "open" set-top box.
GATEFOLD -- SECOND PAGE
DESCRIPTION:
Photo of SwapSmart and smart card.
Photo of SwapBox.
Image of personal computers linked through Internet (or other network
structure), with SCM Microsystems' products securing and unsecuring
data.
TEXT
PC Data Security and Access Control
SCM Microsystems offers a range of smart card and PC Card-based
solutions that enable enterprises to protect vital digital data, yet
still provide authorized individuals with easy and secure access.
SCM Microsystems' solutions secure data before it is sent across LANs,
public switched networks and the Internet to its destination, where it
is unlocked for use. Only the sender and the intended recipient can
access the data.
. . . and provides solution for emerging data platforms of tomorrow.
PAGE 30
The Data Security "Patchwork"
DESCRIPTION:
These graphics depict numerous icons representing laptop computers,
servers, firewalls and clouds (representing the internet and other
networks), each with a caption identifying the particular icon, and
all of which are tied to each other by solid, connecting lines.
TEXT
Information Sources and Types of Users Seeking Access
Websites and other information sources which include applets
and push technologies.
Enterprise websites and limited network access sought by
external users such as customers and vendors.
Full network access sought by mobile and remote employees.
PAGE 33
Securing Digital Video Broadcasts
DESCRIPTION:
These graphics depict a satellite receiving a television signal, the
forwarding of the signal to a set-top box containing a smart card
and the continuation of the signal to a television.
TEXT
The text describes the process depicted by the graphics.
1. Set-top box receives DVB signal
2. Set-top box transfers MPEG2 data to
Conditional Access Model ("CAM")
3. CAM checks Smart Card for authorization to view broadcast
4. If card is accepted, CAM descrambles MPEG2 data
5. Set-top box decodes MPEG2 data and provides output for
standard TVs and VCRs.
Enables services such as:
-- Video-on-Demand
-- Home Banking
-- Pay-Per-View
-- Interactive Video and Games
-- Home Shopping
INSIDE BACK COVER
DESCRIPTION:
Lap top personal computer, palm-top computer, computer key board, desk
top personal computer, SmartOS logo and four smart cards labeled:
"memory," "cryptographic," "microprocessor" and "any other."
TEXT
SCM Microsystems' open systems-based smart card interface architecture
(Smart OS(TM)) allows OEMs to integrate smart card support
cost-effectively within desktop, notebook or network computers and
peripheral devices. The SmartOS solution allows integrators to utilize
only essential components to control cost and maximize design
flexibility. Many hardware designs, such as a keyboard or network
computer, may already incorporate a controller chip, but lack an
interface unit and firmware for the completion of a smart card reader
solution. Instead of being forced to purchase all components, the
SmartOS solution offers just those components an integrator needs and
those tools necessary for the quick implementation of smart card
readers at a minimum cost.
SmartOS(TM) provides support for most smart cards. SmartOS-based
products can be upgraded through software to support additional smart
cards, operating systems, applications and evolving industry standards.
<PAGE> 87
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Registrant in connection
with the sale of Common Stock being registered. All amounts are estimates except
the SEC registration fee, the NASD filing fee and the Nasdaq National Market
listing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee............................................. $ 15,268
NASD filing fee.................................................. 5,539
Nasdaq National Market listing fee............................... 25,000
Printing and engraving expenses.................................. 100,000
Legal fees and expenses.......................................... 350,000
Accounting fees and expenses..................................... 225,000
Directors' and officers' liability insurance..................... 200,000
Blue Sky qualification fees and expenses......................... 3,000
Transfer agent and registrar fees................................ 5,000
Miscellaneous.................................................... 241,193
----------
Total.................................................. $1,170,000
==========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
As permitted by Section 145 of the Delaware General Corporation Law, the
Registrant's Amended and Restated Certificate of Incorporation includes a
provision that eliminates the personal liability of its directors for monetary
damages for breach or alleged breach of their duty of care. In addition, as
permitted by Section 145 of the Delaware General Corporation Law, the Bylaws, as
amended, of the Registrant provide that: (i) the Registrant is required to
indemnify its directors and officers and persons serving in such capacities in
other business enterprises (including, for example, subsidiaries of the
Registrant) at the Registrant's request, to the fullest extent permitted by
Delaware law, including in those circumstances in which indemnification would
otherwise be discretionary; (ii) the Registrant may, in its discretion,
indemnify employees and agents in those circumstances where indemnification is
not required by law; (iii) the Registrant is required to advance expenses, as
incurred, to its directors and officers in connection with defending a
proceeding (except that it is not required to advance expenses to a person
against whom the Registrant brings a claim for breach of the duty of loyalty,
failure to act in good faith, intentional misconduct, knowing violation of law
or deriving an improper personal benefit); (iv) the rights conferred in the
Bylaws, as amended, are not exclusive, and the Registrant is authorized to enter
into indemnification agreements with its directors, officers and employees; and
(v) the Registrant may not retroactively amend the Bylaw provisions in a way
that is adverse to such directors, officers and employees.
The Registrant's policy is to enter into indemnification agreements with
each of its directors and officers that provide the maximum indemnity allowed to
directors and officers by Section 145 of the Delaware General Corporation Law
and the Bylaws, as amended, as well as certain additional procedural
protections.
The indemnification provisions in the Bylaws, as amended, and the
indemnification agreements entered into between the Registrant and its directors
and officers may be sufficiently broad to permit indemnification of the
Registrant's directors and officers for liabilities arising under the Securities
Act.
II-1
<PAGE> 88
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
EXHIBIT
DOCUMENT NUMBER
-------------------------------------------------------------------- ------
<S> <C>
Form of U.S. Underwriting Agreement................................. 1.1
Form of International Underwriting Agreement........................ 1.2
Form of Third Amended and Restated Certificate of Incorporation..... 3.1
Form of Fourth Amended and Restated Certificate of Incorporation to
be effective upon completion of this offering..................... 3.2
Bylaws, as amended.................................................. 3.3
Form of Indemnification Agreement entered into by the Registrant
with each of its directors and executive officers................. 10.1
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant has recently issued and sold the following securities:
(i) From January 1, 1994 through September 4, 1997 the Registrant issued
and sold 3,944,495 shares of Preferred Stock at purchase prices ranging from
$3.83 to $8.58 for aggregate consideration of approximately $21,290,570;
(ii) From January 1, 1994 through September 4, 1997 the Registrant issued
and sold 586,296 shares of Common Stock to employees and consultants at an
exercise price of $0.10 for aggregate consideration of approximately $59,000;
(iii) From January 1, 1994 through September 4, 1997, the Registrant issued
warrants to purchase up to 784,121 shares of Common Stock at exercise prices
ranging from $5.72 to $14.00 per share in connection with the issuance of a
portion of the Preferred Stock described in (i) above, certain loan arrangements
and the settlement with Gemplus; and
(iv) Concurrently with these offerings, the Registrant will issue and sell
200,000 shares of Common Stock at $9.00 per share.
The issuances referred to in paragraphs (i), (iii) and (iv) were deemed
exempt from registration under the Securities Act in reliance upon Section 4(2)
thereof. The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates issued in such transactions. All
recipients had adequate access, through their relationships with the Registrant,
to information about the Registrant. The issuances of Common Stock described in
paragraph (ii) above were deemed exempt from registration under the Securities
Act in reliance upon Rule 701 promulgated under the Securities Act.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ----------------------------------------------------------------------------
<S> <C>
1.1 Form of U.S. Underwriting Agreement.
1.2 Form of International Underwriting Agreement.
3.1* Third Amended and Restated Certificate of Incorporation of Registrant.
3.2* Form of Fourth Amended and Restated Certificate of Incorporation to be
effective upon completion of this offering.
3.3* Bylaws, as amended, of Registrant.
4.1* Form of Registrant's Common Stock Certificate.
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation,
regarding legality of the securities being issued.
9.1* Voting Trust Agreement with Nicholas Efthymiou.
9.2* Voting Trust Agreement with Reiner Pohl.
10.1* Form of Director and Officer Indemnification Agreement.
10.2* 1997 Stock Plan.
10.3* 1997 Employee Stock Purchase Plan.
</TABLE>
II-2
<PAGE> 89
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ----------------------------------------------------------------------------
<S> <C>
10.4* 1997 Director Option Plan.
10.5* 1997 Stock Option Plan for French Employees.
10.6* 1997 Employee Stock Purchase Plan for Non-U.S. Employees.
10.7* Partnership Agreement, dated June 8, 1995, between Registrant and
Technologie-Beteiligungs-GmbH of Deutsche Ausgleichsbank.
10.8* Continuing Guarantee, dated January 15, 1997, between Registrant and
Imperial Bank.
10.9* Line of Credit, dated October 23, 1996, between Registrant and Deutsche
Bank.
10.10* Line of Credit, dated December 3, 1996, between Registrant and BHF Bank.
10.11* Line of Credit, dated November 11, 1996, between Registrant and
Stadtsparkasse Munchen.
10.12* Lease, dated September 29, 1994, between Registrant and Los Gatos Business
Park.
10.13* Sublease Agreement, dated December 17, 1996, between Intermart Systems, Inc.
and Registrant.
10.14* Lease, dated September 30, 1994, between Registrant and Olbrich Franz.
10.15* Amended and Restated Stockholders' Agreement, dated April 11, 1997, between
Registrant and certain investors.
10.16* Form of Employment Agreement between SCM GmbH and Messrs. Schneider and
Meier.
10.17* Employment Agreement, dated May 15, 1995, between Registrant and Jean-Yves
Le Roux.
10.18*+ Commitment Instrument, dated August 7, 1996, among France Telecom, Matra
Communication, Registrant and Matra MHS.
10.19*+ Teaming Agreement, dated October 6, 1995, between Temic/Matra MHS, Matra
Communication and Registrant.
10.20 Form of amendment to the Partnership Agreement, dated June 8, 1995, between
Registrant and Technologie-Beteiligungs-GmbH of Deutsche Ausgleichsbank and
form of warrant.
10.21*+ Development Agreement, dated March 6, 1997, between Intel Corporation and
Registrant.
10.22*+ Technology Development and License Agreement, dated September 27, 1996,
between Registrant and Sun Microsystems, Inc.
10.23* Cooperation Contract, dated March 25, 1996, between Registrant and Stocko
Metallwarenfabriken Henkels and Sohn GmbH & Co.
10.24+ Development and Supply Agreement, dated October 9, 1996, between BetaDigital
Gesellschaft fur digitale Fernsehdienste mbH and Registrant.
10.25* Framework Contract, dated December 23, 1996, between Siemens Nixdorf
Informationssysteme AG and Registrant.
10.26* Intentionally omitted.
10.27*+ B-1 License and Know-How Contract, dated September 4, 1996, between Deutsche
Telekom AG and Registrant, as amended.
10.28 Technology Option Agreement, dated January 31, 1997, between Wolfgang Neifer
and Registrant.
10.29*+ Patent License Agreement, dated November 15, 1995, between MIPS Dataline
America, Inc. and Registrant.
10.30*+ Development and Supply Agreement, dated May 15, 1997, between Telenor Conax
and Registrant.
10.31*+ Manufacturer's Sales Representative Agreement, dated December 8, 1994,
between Registrant and AGM.
10.32+ License Agreement, dated September 5, 1997, between the Registrant and
Gemplus.
10.33 Warrant Issuance and Common Stock Agreement, dated September 5, 1997,
between the Registrant and Gemplus.
10.34 Common Stock Purchase Warrant dated September 5, 1997, issued to Gemplus.
10.35 Common Stock Purchase Warrant dated September 5, 1997, issued to Gemplus.
10.36 Waiver and Amendment to Amended and Restated Stockholders' Agreement dated
September 5, 1997.
11.1* Statement of computation of earnings per share.
21.1* Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP, Independent Certified Public Accountants
</TABLE>
II-3
<PAGE> 90
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ----------------------------------------------------------------------------
<S> <C>
23.2* Consent of Wilson Sonsini Goodrich & Rosati, Professional Corporation
(included in Exhibit 5.1)
24.1* Power of Attorney
27.1* Financial Data Schedule
</TABLE>
- ---------------
* Filed previously.
** To be filed by amendment.
+ Certain information in these exhibits has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a confidential
treatment request under 17 C.F.R. sec.sec. 200.80(b)(4), 200.83 and 230.46.
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
Schedules not listed above have been omitted because the information
required to be set forth therein is not applicable or is shown in the financial
statements or notes thereto.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act, may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the California Corporation Law, the Registrant's
Certificate of Incorporation, as amended, the Registrant's Bylaws, as amended,
the Registrant's indemnification agreements or otherwise, the Registrant has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act, and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered hereunder, the Registrant will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the
information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a
form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act,
each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new Registration Statement relating to the securities
offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 91
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Company's Registration Statement on
Form S-1 to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Los Gatos, State of California, on this 4th day of
September 1997.
SCM MICROSYSTEMS, INC.
By: /s/ STEVEN HUMPHREYS
------------------------------------
Steven Humphreys
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Company's Registration Statement has been signed by the following
persons in the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ----------------------------------------------- ----------------------- ------------------
<C> <S> <C>
/s/ STEVEN HUMPHREYS President and Chief September 4, 1997
- ----------------------------------------------- Executive Officer
Steven Humphreys (Principal Executive
Officer) and Director
/s/ JOHN NIEDERMAIER Vice President, Finance September 4, 1997
- ----------------------------------------------- and Chief Financial
John Niedermaier Officer (Principal
Financial and
Accounting Officer)
/s/ ROBERT SCHNEIDER* Chairman of the Board September 4, 1997
- -----------------------------------------------
Robert Schneider
/s/ BERND MEIER* Chief Operations September 4, 1997
- ----------------------------------------------- Officer and Director
Bernd Meier
/s/ FRIEDRICH BORNIKOEL* Director September 4, 1997
- -----------------------------------------------
Friedrich Bornikoel
/s/ BRUCE GRAHAM* Director September 4, 1997
- -----------------------------------------------
Bruce Graham
/s/ RANDALL LUNN* Director September 4, 1997
- -----------------------------------------------
Randall Lunn
/s/ POH CHUAN NG* Director September 4, 1997
- -----------------------------------------------
Poh Chuan Ng
/s/ ANDREW VOUGHT* Director September 4, 1997
- -----------------------------------------------
Andrew Vought
*By: /s/ JOHN NIEDERMAIER
- -----------------------------------------------
John Niedermaier
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 92
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT DEDUCTIONS:
BEGINNING OF WRITE OFFS BALANCE AT
CLASSIFICATION PERIOD ADDITIONS OF ACCOUNTS END OF PERIOD
- --------------------------------------------------- ------------ --------- ----------- -------------
<S> <C> <C> <C> <C>
Allowance for returns and doubtful accounts
Year ended December 31, 1994..................... -- 28 -- 28
Year ended December 31, 1995..................... 28 65 -- 93
Year ended December 31, 1996..................... 93 159 42 210
Six months ended June 30, 1997................... 210 -- 50 160
Warranty accrual
Year ended December 31, 1994..................... -- -- -- --
Year ended December 31, 1995..................... -- 84 -- 84
Year ended December 31, 1996..................... 84 19 -- 103
Six months ended June 30, 1997................... 103 30 2 131
</TABLE>
II-6
<PAGE> 93
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------------------------------------------------------------
<S> <C> <C>
1.1 Form of U.S. Underwriting Agreement
1.2 Form of International Underwriting Agreement
3.1* Third Amended and Restated Certificate of Incorporation of
Registrant
3.2* Form of Fourth Amended and Restated Certificate of Incorporation
to be effective upon completion of this offering
3.3* Bylaws, as amended, of Registrant
4.1* Form of Registrant's Common Stock Certificate
5.1* Opinion of Wilson Sonsini Goodrich & Rosati, Professional
Corporation, regarding legality of the securities being issued
9.1* Voting Trust Agreement with Nicholas Efthymiou
9.2* Voting Trust Agreement with Reiner Pohl
10.1* Form of Director and Officer Indemnification Agreement
10.2* 1997 Stock Plan
10.3* 1997 Employee Stock Purchase Plan
10.4* 1997 Director Option Plan
10.5* 1997 Stock Option Plan for French Employees
10.6* 1997 Employee Stock Purchase Plan for Non-U.S. Employees
10.7* Partnership Agreement, dated June 8, 1995, between Registrant and
Technologie-Beteiligungs-GmbH of Deutsche Ausgleichsbank
10.8* Continuing Guarantee, dated January 15, 1997, between Registrant
and Imperial Bank
10.9* Line of Credit, dated October 23, 1996, between Registrant and
Deutsche Bank
10.10* Line of Credit, dated December 3, 1996, between Registrant and
BHF Bank
10.11* Line of Credit, dated November 11, 1996, between Registrant and
Stadtsparkasse Munchen
10.12* Lease, dated September 29, 1994, between Registrant and Los Gatos
Business Park
10.13* Sublease Agreement, dated December 17, 1996, between Intermart
Systems, Inc. and Registrant
10.14* Lease, dated September 30, 1994, between Registrant and Olbrich
Franz
10.15* Amended and Restated Stockholders' Agreement, dated April 11,
1997, between Registrant and certain investors
10.16* Form of Employment Agreement between SCM GmbH and Messrs.
Schneider and Meier
10.17* Employment Agreement, dated May 15, 1995, between Registrant and
Jean-Yves Le Roux
10.18*+ Commitment Instrument, dated August 7, 1996, among France
Telecom, Matra Communication, Registrant and Matra MHS
10.19*+ Teaming Agreement, dated October 6, 1995, between Temic/Matra
MHS, Matra Communication and Registrant
10.20 Form of Amendment to the Partnership Agreement, dated June 8,
1995, between Registrant and Technologie-Beteiligungs-GmbH of
Deutsche Ausgleichsbank and form of Warrant
10.21*+ Development Agreement, dated March 6, 1997, between Intel
Corporation and Registrant
10.22*+ Technology Development and License Agreement, dated September 27,
1996, between Registrant and Sun Microsystems, Inc.
10.23* Cooperation Contract, dated March 25, 1996, between Registrant
and Stocko Metallwarenfabriken Henkels and Sohn GmbH & Co.
</TABLE>
<PAGE> 94
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------------------------------------------------------------
<S> <C> <C>
10.24+ Development and Supply Agreement, dated October 9, 1996, between
BetaDigital Gesellschaft fur digitale Fernsehdienste mbH and
Registrant
10.25* Framework Contract, dated December 23, 1996, between Siemens
Nixdorf Informationssysteme AG and Registrant
10.26* Intentionally omitted
10.27*+ B-1 License and Know-How Contract, dated September 4, 1996,
between Deutsche Telekom AG and Registrant, as amended
10.28 Technology Option Agreement, dated January 31, 1997, between
Wolfgang Neifer and Registrant
10.29*+ Patent License Agreement, dated November 15, 1995, between MIPS
Dataline America, Inc. and Registrant
10.30*+ Development and Supply Agreement, dated May 15, 1997, between
Telenor Conax and Registrant
10.31*+ Manufacturer's Sales Representative Agreement, dated December 8,
1994, between Registrant and AGM
10.32+ License Agreement, dated September 5, 1997, between the
Registrant and Gemplus
10.33 Warrant Issuance and Common Stock Agreement, dated September 5,
1997, between the Registrant and Gemplus
10.34 Common Stock Purchase Warrant dated September 5, 1997, issued to
Gemplus
10.35 Common Stock Purchase Warrant dated September 5, 1997, issued to
Gemplus
10.36 Waiver and Amendment to Amended and Restated Stockholders'
Agreement dated September 5, 1997
11.1* Statement of computation of earnings per share
21.1* Subsidiaries of the Registrant
23.1 Consent of KPMG Peat Marwick LLP, Independent Certified Public
Accountants
23.2* Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1)
24.1* Power of Attorney
27.1* Financial Data Schedule
</TABLE>
- ---------------
* Filed previously.
** To be filed by amendment.
+ Certain information in these exhibits has been omitted and filed separately
with the Securities and Exchange Commission pursuant to a confidential
treatment request under 17 C.F.R. sec.sec. 200.80(b)(4), 200.83 and 230.46.
<PAGE> 1
EXHIBIT 1.1
R&W Draft
9/3/97
2,620,000 Shares
SCM MICROSYSTEMS, INC.
Common Stock
U.S. UNDERWRITING AGREEMENT
_____________, 1997
COWEN & COMPANY
HAMBRECHT & QUIST LLC
As Representatives of the several U.S. Underwriters
c/o Cowen & Company
Financial Square
New York,
New York 10005
Dear Sirs:
1 Introductory. SCM Microsystems, Inc., a Delaware corporation (the
"Company"), and the selling stockholders named in Schedule B hereto
(the "Selling Stockholders") propose to sell, pursuant to the terms
of this Agreement, to the several U.S. Underwriters named in
Schedule A hereto (the "U.S. Underwriters," or, each, a "U.S.
Underwriter"), an aggregate of 2,620,000 shares of Common Stock,
$0.001 par value per share (the "Common Stock"), of the Company.
The aggregate of 2,620,000 shares so proposed to be sold is
hereinafter referred to as the "Firm Stock." The Company also
proposes to sell to the U.S. Underwriters, upon the terms and
conditions set forth in Section 3 hereof, up to an additional
393,000 shares of Common Stock (the "Optional Stock"). The Firm
Stock and the Optional Stock are hereinafter collectively referred
to as the "Stock." Cowen & Company ("Cowen") and Hambrecht & Quist
LLC are acting as representatives of the several U.S. Underwriters
and in such capacity are hereinafter referred to as the
"Representatives."
It is understood by all parties that the Company and the Selling
Stockholders are concurrently entering into an agreement dated the
date hereof (the "International Underwriting Agreement") providing
for the sale by the Company and the Selling Stockholders of an
aggregate of 750,000 shares of Common Stock (the "International
Stock") through arrangements with certain international managers
outside the United States (the "International Managers"), for whom
Cowen International L.P., Hambrecht & Quist LLC and Westdeutsche
Landesbank Girozentrale are acting as lead manager (the "Lead
Managers"). The U.S. Underwriters and the International Managers
simultaneously are entering into an agreement among the U.S. and
International underwriting syndicates (the "Agreement Among U.S.
Underwriters and International Managers") which provides for, among
other things, the transfer of shares of Common Stock between the
two syndicates. Two forms of prospectus are to be used in
connection with the offer and sale of shares
1
<PAGE> 2
of Common Stock contemplated by the foregoing, one relating to the
Stock and the other relating to the International Stock. In
addition, the International version of the prospectus will be
translated into German for purposes of the application to list the
International Stock on the Neuer Markt of the Frankfurt Stock
Exchange. Except as used in the first paragraph hereof and in
Section 3 and 8 herein, and except as the context may otherwise
require, references herein to the Stock shall include all the
shares of Common Stock which may be sold pursuant to both this
Agreement and the International Underwriting Agreement, and
references herein to any prospectus whether in preliminary or final
form, and whether as amended or supplemented, shall include the
U.S. and the International versions thereof and the German
translation version of the International version.
2a. Representations and Warranties of the Company and its Subsidiaries.
The Company hereby represents and warrants to, and agrees with, the
several U.S. Underwriters that:
(a) A registration statement on Form S-1 (File No.
333-29073) in the form in which it became or becomes
effective and also in such form as it may be when any
post-effective amendment thereto shall become
effective with respect to the Stock, including any
pre-effective prospectuses included as part of the
registration statement as originally filed or as part
of any amendment or supplement thereto, or filed
pursuant to Rule 424 under the Securities Act of 1933,
as amended (the "Securities Act"), and the rules and
regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission")
promulgated thereunder, copies of which have
heretofore been delivered to you, has been prepared by
the Company in conformity with the requirements of the
Securities Act and has been filed with the Commission
under the Securities Act; one or more amendments to
such registration statement, including in each case an
amended pre- effective prospectus, copies of which
amendments have heretofore been delivered to you, have
been so prepared and filed. If it is contemplated, at
the time this Agreement is executed, that a
post-effective amendment to the registration statement
will be filed and must be declared effective before
the offering of the Stock may commence, the term
"Registration Statement" as used in this Agreement
means the registration statement as amended by said
post-effective amendment. The term "Registration
Statement" as used in this Agreement shall also
include any registration statement relating to the
Stock that is filed and declared effective pursuant to
Rule 462(b) under the Securities Act. The term
"Prospectus" as used in this Agreement means the
prospectus in the form included in the Registration
Statement, or, (A) if the prospectus included in the
Registration Statement omits information in reliance
on Rule 430A under the Securities Act and such
information is included in a prospectus filed with the
Commission pursuant to Rule 424(b) under the
Securities Act, the term "Prospectus" as used in this
Agreement means the prospectus in the form included in
the Registration Statement as supplemented by the
addition of the Rule 430A information contained in the
prospectus filed with the Commission pursuant to Rule
424(b) and (B) if prospectuses that meet the
requirements of Section 10(a) of the Securities Act
are delivered pursuant to Rule 434 under the
Securities Act, then (i) the term "Prospectus" as used
in this Agreement means the "prospectus subject to
completion" (as such term is defined in Rule 434(g)
under the Securities Act) as supplemented by (a) the
addition of Rule 430A information or other information
contained in the form of prospectus delivered pursuant
to Rule 434(b)(2) under the Securities Act or (b) the
information contained in the term sheets described in
Rule 434(b)(3) under the Securities Act, and (ii) the
date of such prospectuses shall be deemed to be the
date of the term sheets. The term "Pre-effective
Prospectus" as used in this Agreement means the
prospectus
2
<PAGE> 3
subject to completion dated September __, 1997, and as
such prospectus shall have been amended from time to
time prior to the date of the Prospectus.
(b) The Commission has not issued or, to the Company's
knowledge, threatened to issue any order preventing or
suspending the use of any Pre-effective Prospectus,
and, at its date of issue, each Pre-effective
Prospectus complied in all material respects with the
applicable provisions of the Securities Act and did
not contain any untrue statement of a material fact or
omit to state any material fact required to be stated
therein or necessary in order to make the statements
therein, in light of the circumstances under which
they were made, not misleading, other than any
nonconformance or untrue statement or omission in a
Pre-effective Prospectus that has been corrected in
the Prospectus; and, when the Registration Statement
becomes effective and at all times subsequent thereto
up to and including each of the Closing Dates (as
hereinafter defined), the Registration Statement and
the Prospectus and any amendments or supplements
thereto contained and will contain all material
statements and information required to be included
therein by the Securities Act and complied and will
comply in all material respects with the applicable
provisions of the Securities Act and neither the
Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, contained or will
contain any untrue statement of a material fact or
omit to state any material fact required to be stated
therein or necessary in order to make the statements
therein, in light of the circumstances under which
they were made, not misleading; provided, however,
that the foregoing representations and warranties
shall not apply to information contained in or omitted
from any Pre-effective Prospectus or the Registration
Statement or the Prospectus or any such amendment or
supplement thereto in reliance upon, and in conformity
with, written information furnished to the Company by
the Representatives on behalf of the several U.S.
Underwriters, directly or through you, specifically
for use in the preparation thereof. With respect to
the preceding sentence, the Company acknowledges that
the only information furnished in writing by the
Representatives on behalf of the several U.S.
Underwriters for use in the Pre-effective Prospectus,
the Registration Statement and the Prospectus is the
paragraph with respect to stabilization on the inside
front cover page of the Prospectus and the statements
contained under the caption "Underwriting" in the
Prospectus.
(c) The Registration Statement is effective under the
Securities Act and no stop order suspending
effectiveness of the Registration Statement or
suspending or preventing the use of the Prospectus has
been issued and no proceedings for that purpose have
been instituted or, to the Company's knowledge, are
threatened under the Securities Act; any required
filing of the Prospectus and any amendment or
supplement thereto pursuant to Rule 424(b) of the
Rules and Regulations has been or will be made in the
manner and within the time period required by Rule
424(b).
(d) There is no document, contract or other agreement of a
character required to be described in the Registration
Statement or Prospectus or to be filed as an exhibit
to the Registration Statement which is not described
or filed as required by the Securities Act or the
Rules and Regulations. Each agreement described in the
Registration Statement and the Prospectus or listed in
the Exhibits to the Registration Statement is in full
force and effect and is valid and enforceable by and
against the Company or its subsidiaries in accordance
with its terms, except to the extent that rights to
indemnity and contribution hereunder may be limited by
applicable bankruptcy, insolvency and other similar
laws affecting conditions,
3
<PAGE> 4
rights and rules of law governing specific
performance, injunctive relief and other equitable
remedies. Neither the Company nor any subsidiary is in
default in the observance or performance of any
material term or obligation to be performed by it
under any such agreement, and no event has occurred
which, with notice or lapse of time or both, would
constitute such a default, in any such case which
default or event would have a material adverse effect
on the Company and its subsidiaries taken as a whole.
No default exists, and, to the knowledge of the
Company, no event has occurred which, with notice or
lapse of time or both would constitute a default, in
the due performance and observance of any term,
covenant or condition, by the Company or any of its
subsidiaries of any other agreement or instrument to
which the Company or any of its subsidiaries is a
party or by which any of them or their respective
properties or businesses may be bound or affected, in
any case which default or event could reasonably be
expected to have a material adverse effect on the
operations of the Company and its subsidiaries
considered as a whole.
(e) None of the Company or its subsidiaries is in
violation of any franchise, license, permit, judgment,
decree, order, statute or rule or regulation, which
could reasonably be expected to have a material
adverse effect on the operations of the Company and
its subsidiaries considered as a whole, or any term or
provision of its certificate of incorporation or
by-laws.
(f) Subsequent to the respective dates as of which
information is given in the Registration Statement and
Prospectus, and except as set forth or contemplated in
the Prospectus, neither the Company nor any of its
subsidiaries has incurred any material liabilities or
obligations, direct or contingent, nor entered into
any transactions not in the ordinary course of
business, and there has not been any material adverse
change in the condition (financial or otherwise),
properties, business, management, net worth or results
of operations of the Company and its subsidiaries
considered as a whole, or any change in the capital
stock, short-term or long-term debt of the Company and
its subsidiaries considered as a whole, except for
issuances of Common Stock pursuant to the Company's
1997 Stock Plan, 1997 Employee Stock Purchase Plan,
1997 Director Option Plan, 1997 Stock Option Plan for
French Employees and the 1997 Employee Stock Purchase
Plan for Non-U.S. Employees (collectively, the "1997
Plans").
(g) The financial statements, together with the related
notes and schedules, set forth in the Prospectus and
elsewhere in the Registration Statement fairly
present, the financial position and the results of
operations and changes in financial position of the
Company and its consolidated subsidiaries at the
respective dates or for the respective periods therein
specified. Such statements and related notes and
schedules have been prepared in accordance with
generally accepted accounting principles applied on a
consistent basis except as may be set forth in the
Prospectus. The summary and selected financial and
statistical data set forth in the Prospectus under the
captions "Summary Consolidated Financial Data,"
"Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and
Results of Operations-- Results of Operations" and "--
Quarterly Results of Operations" fairly present, on
the basis stated in the Registration Statement, the
information set forth therein as at the respective
dates and for the respective periods specified, and
such data have been presented on a basis consistent
with the financial statements so set forth in the
Prospectus and other financial information.
4
<PAGE> 5
(h) To the Company's knowledge, KPMG Peat Marwick LLP, who
have expressed their opinions on the audited financial
statements and related schedules included in the
Registration Statement and the Prospectus are
independent public accountants as required by the
Securities Act and the Rules and Regulations.
(i) The Company and each of its subsidiaries have been
duly organized and are validly existing and in good
standing as corporations under the laws of their
respective jurisdictions of organization, with power
and authority (corporate and other) to own or lease
their properties and to conduct their businesses as
described in the Registration Statement and the
Prospectus; each of the Company and its subsidiaries
is in possession of and operating in compliance with
all material franchises, grants, authorizations,
licenses, permits, easements, consents, certificates
and orders required for the conduct of its business,
all of which are valid and in full force and effect;
and each of the Company and its subsidiaries is duly
qualified to do business and in good standing as a
foreign corporation in all other jurisdictions where
its ownership or leasing of properties or the conduct
of its businesses requires such qualification, except
where failure to so qualify would not have a material
adverse effect on the Company and its subsidiaries
considered as a whole. The Company has and each of its
subsidiaries have all requisite power and authority,
and all necessary consents, approvals, authorizations,
orders, registrations, qualifications, licenses and
permits of and from all public regulatory or
governmental agencies and bodies to own, lease and
operate its properties and conduct its business as now
being conducted and as described in the Registration
Statement and the Prospectus, and no such consent,
approval, authorization, order, registration,
qualification, license or permit contains a materially
burdensome restriction not adequately disclosed in the
Registration Statement and the Prospectus. The Company
owns or controls, directly or indirectly, only the
corporations, associations or other entities named in
Schedule C hereto.
(j) The Company's authorized and outstanding capital stock
is on the date hereof, and will be on the Closing
Dates, as set forth under the heading "Capitalization"
in the Prospectus; the outstanding shares of Common
Stock of the Company conform to the description
thereof in the Prospectus and have been duly
authorized and validly issued and are fully paid and
nonassessable; and have been issued in compliance with
all federal and state securities laws and were not
issued in violation of or subject to any pre-emptive
rights or similar rights to subscribe for or purchase
securities. Except as disclosed in and or contemplated
by the Prospectus and the consolidated financial
statements of the Company and related notes thereto
included in the Prospectus, the Company does not have
outstanding any options or warrants to purchase, or
any pre-emptive rights or other rights to subscribe
for or to purchase any securities or obligations
convertible into, or any contracts or commitments to
issue or sell, shares of its capital stock or any such
options, rights, convertible securities or
obligations, except for options granted subsequent to
the date of information provided in the Prospectus
pursuant to the Company's employee and stock option
plans as disclosed in the Prospectus. The description
of the Company's stock option and other stock plans or
arrangements, and the options or other rights granted
or exercised thereunder, as set forth in the
Prospectus, accurately and fairly presents the
information required to be shown with respect to such
plans, arrangements, options and rights. All
outstanding shares of capital stock of each subsidiary
have been duly authorized and validly issued, and are
fully paid and nonassessable and are owned directly by
the Company or by another wholly owned subsidiary of
the Company free and clear of any liens, encumbrances,
equities or claims.
5
<PAGE> 6
(k) The Stock to be issued and sold by the Company to the
U.S. Underwriters hereunder and the International
Stock to be issued and sold by the Company to the
International Managers under the International
Underwriting Agreement has been duly and validly
authorized and, when issued and delivered against
payment therefor as provided herein and therein, will
be duly and validly issued, fully paid and
nonassessable and free of any pre-emptive or similar
rights and will conform to the description thereof in
the Prospectus and the U.S. Underwriters and the
International Managers will receive good title to the
Stock and the International Stock, respectively, free
and clear of all liens, security interests, pledges,
charges, claims and encumbrances.
(l) Except as set forth in the Prospectus, there are no
legal or governmental proceedings pending to which the
Company or any of its subsidiaries is a party or of
which any property of the Company or any subsidiary is
subject, which, if determined adversely to the Company
or any such subsidiary, could individually or in the
aggregate be reasonably expected to (i) prevent or
adversely affect the transactions contemplated by this
Agreement, (ii) suspend the effectiveness of the
Registration Statement, (iii) prevent or suspend the
use of the Pre-effective Prospectus in any
jurisdiction or (iv) result in a material adverse
change in the condition (financial or otherwise),
properties, business, management, net worth or results
of operations of the Company and its subsidiaries
considered as a whole and the Company is not aware of
any valid basis for any such legal or governmental
proceeding; and, to the Company's knowledge, no such
proceedings are threatened or contemplated against the
Company or any subsidiary by governmental authorities
or others. Neither the Company nor any subsidiary is a
party nor subject to the provisions of any material
injunction, judgment, decree or order of any court,
regulatory body or other governmental agency or body.
The description of the Company's litigation under the
heading "Legal Proceedings" in the Prospectus is true
and correct and complies with the Rules and
Regulations and no other suit or proceeding before any
court or governmental authority known to the Company
is required to be disclosed in the Prospectus that is
not so disclosed.
(m) The execution, delivery and performance of this
Agreement and the International Underwriting Agreement
and the consummation of the transactions herein and
therein contemplated (A) will not result in any
violation of the provisions of the certificate of
incorporation, by-laws or other organizational
documents of the Company or its subsidiary, or any
law, order, rule or regulation of any court or
governmental agency or body having jurisdiction over
the Company or its subsidiaries or any of their
respective properties or assets, and (B) will not
conflict with or result in a breach or violation of
any of the terms or provision of or constitute a
default under any indenture, mortgage, deed of trust,
loan agreement or other agreement or instrument to
which the Company or any of its subsidiaries is a
party or by which it or any of their respective
properties is or may be bound nor will such delivery
and performance result in the creation of a security
interest, lien, encumbrance, charge or claim.
(n) No consent, approval, authorization or order of any
court or governmental agency or body is required for
the execution, delivery and performance of this
Agreement and the International Underwriting Agreement
by the Company or its subsidiaries and the
consummation of the transactions contemplated hereby
and thereby (including the
6
<PAGE> 7
issuance, sale and delivery of the Stock), except such
as may be required by the National Association of
Securities Dealers, Inc. (the "NASD"), the Neuer Markt
of the Frankfurt Stock Exchange or under the
Securities Act or the Securities Exchange Act of 1934,
as amended (the "Exchange Act") or the securities or
"Blue Sky" laws of any jurisdiction in connection with
the purchase and distribution of the Stock by the U.S.
Underwriters and the International Stock by the
International Managers.
(o) The Company has the full corporate power and authority
to enter into this Agreement and the International
Underwriting Agreement and to perform its obligations
hereunder and thereunder (including to issue, sell and
deliver the Stock and the International Stock), and
this Agreement and the International Underwriting
Agreement have each been duly and validly authorized,
executed and delivered by the Company and each
constitutes a valid and binding obligation of the
Company, enforceable against the Company in accordance
with their respective terms, except to the extent that
rights to indemnity and contribution hereunder may be
limited by federal or state securities laws or the
public policy underlying such laws and except as may
be limited by applicable bankruptcy, insolvency and
other similar laws affecting conditions, rights and
rules of law governing specific performance,
injunctive relief and other equitable remedies.
(p) The Company and its subsidiaries are in all material
respects in compliance with, and conduct their
respective businesses in conformity with, all
applicable federal, state, local and foreign laws,
rules and regulations or any court or governmental
agency or body; to the knowledge of the Company,
otherwise than as set forth in the Registration
Statement and the Prospectus, no prospective change in
any of such federal or state laws, rules or
regulations has been adopted which, when made
effective, could reasonably be expected to have a
material adverse effect on the operations of the
Company and its subsidiaries considered as a whole.
(q) The Company and its subsidiaries have filed all
necessary federal, state, local and foreign income,
payroll, franchise and other tax returns and have paid
all taxes shown as due thereon or with respect to any
of their properties, and there is no tax deficiency
that has been or to the knowledge of the Company is
reasonably likely to be, asserted against the Company
or any of its subsidiaries or any of their respective
properties or assets that would materially and
adversely affect the financial position, business or
operations of the Company and its subsidiaries
considered as a whole.
(r) No person or entity has the right to require
registration of shares of Common Stock or other
securities of the Company because of the filing or
effectiveness of the Registration Statement or
otherwise, except for persons and entities who have
expressly waived such right or who have been given
proper notice and have failed to exercise such right
within the time or times required under the terms and
conditions of such right.
(s) Neither the Company nor any of its officers, directors
or affiliates has taken or will take, directly or
indirectly, any action designed or intended to
stabilize or manipulate the price of the Common Stock
in violation of Regulation M of the Exchange Act, or
which caused or resulted in, or which might in the
future reasonably be expected to cause or result in,
stabilization or manipulation of the price of the
Common Stock in violation of Regulation M of the
Exchange Act.
7
<PAGE> 8
(t) Each of the Company and each of its subsidiaries owns,
or possesses adequate and enforceable rights, either
as owner or licensee, to use all patents, trademarks
(including "SwapBox(TM)," "SwapSmart(TM),"
"SwapAcces(TM)" and "SmartOS(TM)"), trademark
registrations, service marks, service mark
registrations, trade names, copyrights, licenses,
inventions, trade secrets, know-how and other similar
rights described in the Prospectus as being owned or
licensed by them and except as described in the
Prospectus the Company is not aware of any claim to
the contrary or any challenge by any other person to
the rights of the Company and its subsidiaries with
respect to the foregoing. The Company's business as
now conducted and as proposed to be conducted does not
and will not infringe or conflict with in any material
respect any patents, trademarks, service marks, trade
name, copyright, trade secrets, know-how, licenses or
other intellectual property or franchise right of any
person. Except as described in the Prospectus, no
claim has been made against the Company alleging the
infringement by the Company of any patent, trademark,
service mark, trade name, copyright, trade secret,
know-how, license in or other intellectual property
right or franchise right of any person.
(u) The Company is not involved in any labor dispute nor,
to the knowledge of the Company, is any such dispute
threatened. Except as described in the Prospectus, the
Company is not aware that (A) any executive, key
employee or significant group of employees of the
Company or any subsidiary plans to terminate
employment with the Company or any such subsidiary or
(B) any such executive or key employee is subject to
any noncompete, nondisclosure, confidentiality,
employment, consulting or similar agreement that would
be violated by the present or proposed business
activities of the Company and its subsidiaries.
Neither the Company nor any subsidiary has or expects
to have any liability for any prohibited transaction
or funding deficiency or any complete or partial
withdrawal liability with respect to any pension,
profit sharing or other plan which is subject to the
Employee Retirement Income Security Act of 1974, as
amended ("ERISA"), to which the Company or any
subsidiary makes or ever has made a contribution and
in which any employee of the Company or any subsidiary
is or has ever been a participant. With respect to
such plans, the Company and each subsidiary is in
compliance in all material respects with all
applicable provisions of ERISA.
(v) No transaction has occurred, and no relationship,
direct or indirect, exists, between or among the
Company or its subsidiaries, on the one hand, and any
of its stockholders, officers, directors, customers or
suppliers of the Company or its subsidiaries or any
affiliate or affiliates of any such stockholder,
officer, director, customer or supplier, on the other
hand, that is required to be described and is not so
described in the Prospectus.
(w) The Company and its subsidiaries have, and the Company
and its subsidiaries as of the Closing Dates will
have, good and marketable title to all personal
property owned by them which is material to the
business of the Company or of its subsidiaries, in
each case free and clear of all liens, encumbrances
and defects except such as are described in the
Prospectus or such as would not have
8
<PAGE> 9
a material adverse effect on the Company and its
subsidiaries considered as a whole; and any real
property and buildings held under lease by the Company
and its subsidiaries are, or will be as of each of the
Closing Dates, held by them under valid, subsisting
and enforceable leases with such exceptions as would
not have a material adverse effect on the Company and
its subsidiaries considered as a whole, in each case
except as described in or contemplated by the
Prospectus.
(x) The Company and its subsidiaries are insured by
insurers of recognized financial responsibility
against such losses and risks and in such amounts as
are customary in the businesses in which they are
engaged or propose to engage after giving effect to
the transactions described in the Prospectus; and
neither the Company nor any subsidiary of the Company
has any reason to believe that it will not be able to
renew its existing insurance coverage as and when such
coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue their
business at a cost that would not have a material
adverse effect on the Company and its subsidiaries
considered as a whole, except as described in or
contemplated by the Prospectus.
(y) Other than as contemplated by this Agreement and the
International Underwriting Agreement, there is no
broker, finder or other party that is entitled to
receive from the Company any brokerage or finder's fee
or other fee or commission as a result of any of the
transactions contemplated by this Agreement or the
International Underwriting Agreement.
(z) The Stock has been duly authorized for (i) quotation
on the National Association of Securities Dealers
Automated Quotation ("NASDAQ") National Market System,
subject to official Notice of Issuance, and (ii)
listing on the Neuer Markt of the Frankfurt Stock
Exchange, and a registration statement has been filed
on Form 8-A pursuant to Section 12 of the Exchange
Act, which registration statement complies in all
material respects with the Exchange Act.
(aa) The books, records and accounts of the Company and its
subsidiaries accurately and fairly reflect, in all
material respects, the transactions in, and
dispositions of, the assets of, and the results of
operation of, the Company and its subsidiaries. The
Company and each of its subsidiaries maintains a
system of internal accounting controls sufficient to
provide reasonable assurances that (i) transactions
are executed in accordance with management's general
or specific authorization; (ii) transactions are
recorded as necessary to permit preparation of
financial statements in conformity with generally
accepted accounting principles and to maintain
accountability for assets; (iii) access to assets is
permitted only in accordance with management's general
or specific authorization; and (iv) the recorded
accountability for assets is compared with existing
assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(bb) To the Company's knowledge, neither the Company nor
any of its subsidiaries nor any employee or agent of
the Company or any of its subsidiaries has made any
payment of funds of the Company or any of its
subsidiaries or received or retained any funds in
violation of any law, rule or regulation, which
payment, receipt or retention of funds is of a
character required to be disclosed in the Prospectus.
(cc) Neither the Company nor any of its subsidiaries is or,
after application of the net proceeds of this offering
as described under the caption "Use of Proceeds" in
the Prospectus, will become an "investment company" or
an entity "controlled" by an "investment company" as
such terms are defined in the Investment Company Act
of 1940, as amended.
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<PAGE> 10
(dd) Each certificate signed by any officer of the Company
and delivered to the U.S. Underwriters or counsel for
the U.S. Underwriters shall be deemed to be a
representation and warranty by the Company as to the
matters covered thereby.
(ee) Neither the Company nor any of its subsidiaries, nor
any director, officer, agent, employee or other person
associated with or acting on behalf of the Company or
any of its subsidiaries, has used any corporate funds
for any unlawful contribution, gift, entertainment or
other unlawful expense relating to political activity;
made any direct or indirect unlawful payment to any
foreign or domestic government official or employee
from corporate funds; or has violated or is in
violation of any provision of the Foreign Corrupt
Practices Act of 1977.
2b. Representations and Warranties and Agreements of the Selling
Stockholders. Each Selling Stockholder represents and warrants to,
and agrees with, the several U.S. Underwriters that such Selling
Stockholder:
(a) Now has, and on the Closing Date will have, valid and
marketable title to the Stock and the International
Stock to be sold by such Selling Stockholder, free and
clear of any lien, claim, security interest or other
encumbrance, including, without limitation, any
restriction on transfer, and has full right, power and
authority to enter into this Agreement, the Power of
Attorney and the Custody Agreement (each as
hereinafter defined).
(b) Now has, and on the Closing Date will have, upon
delivery of and payment for each share of Stock
hereunder and the International Stock under the
International Underwriting Agreement, full right,
power and authority, and approval required by law to
sell, transfer, assign and deliver the Stock being
sold by such Selling Stockholder hereunder and the
International Stock being sold by such Selling
Stockholder under the International Underwriting
Agreement, and each of the several U.S. Underwriters
will acquire valid and marketable title to all of the
Stock being sold to the U.S. Underwriters by such
Selling Stockholder, free and clear of any liens,
encumbrances, equities claims, restrictions on
transfer or other defects whatsoever.
(c) For a period of 180 days after the date of this
Agreement, without the consent of Cowen, such Selling
Stockholder will not offer, sell, assign, transfer,
encumber, contract to sell, grant an option to
purchase or otherwise dispose of any Stock or
securities convertible into or exchangeable for Stock,
including, without limitation Stock which may be
deemed to be beneficially owned by such Selling
Shareholder in accordance with the Rules and
Regulations, except for the Stock being sold hereunder
and the International Stock being sold under the
International Underwriting Agreement.
(d) Has duly executed and delivered a power of attorney,
in substantially the form heretofore delivered by the
Representatives (the "Power of Attorney"), appointing
and and each of them, as attorney-in-fact (the
"Attorneys-in-fact") with authority to execute and
deliver this Agreement and the International
Underwriting Agreement on behalf of such Selling
Stockholder, to authorize the delivery of the shares
of Stock to be sold by such Selling Stockholder
hereunder and the shares of International Stock to be
sold by such Selling Stockholder under the
International Underwriting Agreement and otherwise to
act
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<PAGE> 11
on behalf of such Selling Stockholder in connection
with the transactions contemplated by this Agreement
and the International Underwriting Agreement.
(e) Has duly executed and delivered a custody agreement,
in substantially the form heretofore delivered by the
Representatives ( the "Custody Agreement"), with
_______________________ as custodian (the
"Custodian"), pursuant to which certificates in
negotiable form for the shares of Stock and
International Stock to be sold by such Selling
Stockholder hereunder have been placed in custody for
delivery under this Agreement and the International
Underwriting Agreement.
(f) Has, by execution and delivery of each of this
Agreement, the International Underwriting Agreement,
the Power of Attorney and the Custody Agreement,
created valid and binding obligations of such Selling
Stockholder, enforceable against such Selling
Stockholder in accordance with its terms, except to
the extent that rights to indemnity hereunder may be
limited by federal or state securities laws or the
public policy underlying such laws.
(g) The performance of this Agreement, the International
Underwriting Agreement, the Custody Agreement and the
Power of Attorney, and the consummation of the
transactions contemplated hereby and thereby will not
result in a breach or violation by such Selling
Stockholder of any of the terms or provisions of, or
constitute a default by such Selling Stockholder
under, any material indenture, mortgage, deed of
trust, trust (constructive or other), loan agreement,
lease, franchise, license or other agreement or
instrument to which such Selling Stockholder is a
party or by which such Selling Stockholder or any of
its properties is bound, or any judgement of any court
or governmental agency or body applicable to such
Selling Stockholder or any of its properties, or to
such Selling Stockholder's knowledge, any statute,
decree, order, rule or regulation of any court or
governmental agency or body applicable to such Selling
Stockholder or any of its properties.
Each Selling Stockholder agrees that the shares of
Stock and International Stock represented by the
certificates held in custody under the Custody
Agreement are for the benefit of and coupled with and
subject to the interests of the U.S. Underwriters, the
International Managers, the Selling Stockholders, and
the Company hereunder, and that the arrangement for
such custody and the appointment of the
Attorneys-in-fact are irrevocable; that the
obligations of such Selling Stockholder hereunder
shall not be terminated by operation of law, whether
by the death or incapacity, liquidation or
distribution of such Selling Stockholder, or any other
event, that if such Selling Stockholder should die or
become incapacitated or any other event occurs, before
the delivery of the Stock hereunder and the
International Stock under the International
Underwriting Agreement, certificates for the Stock and
International Stock to be sold by such Selling
Stockholder shall be delivered on behalf of such
Selling Stockholder in accordance with the terms and
conditions of this Agreement, the International
Underwriting Agreement and the Custody Agreement, and
action taken by the Attorneys- in-fact or any of them
under the Power of Attorney shall be as valid as if
such death, incapacity, or other event had not
occurred, whether or not the Custodian, the Attorneys-
in-fact or any of them shall have notice of such
death, incapacity or other event.
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<PAGE> 12
3 Purchase by, and Sale and Delivery to, U.S. Underwriters
--Closing Dates. The Company and the Selling Stockholders
agree, severally and not jointly, to sell to the U.S. Underwriters
the Firm Stock with the number of shares to be sold by the
Company and each Selling Stockholder being the number of shares set
forth opposite his, her or its name in Schedule B, and on the basis
of the representations, warranties, covenants and agreements herein
contained, but subject to the terms and conditions herein set
forth, the U.S. Underwriters agree, severally and not jointly,
to purchase the Firm Stock from the Company and the Selling
Stockholders, the number of shares of Firm Stock to be purchased by
each U.S. Underwriter being set opposite its name in Schedule
A, subject to adjustment in accordance with Section 12 hereof. The
number of shares of Stock to be purchased by each U.S. Underwriter
from each Selling Stockholder hereunder shall bear the same
proportion to the total number of shares of Stock to be purchased
by such U.S. Underwriter hereunder as the number of shares of
stock being sold by each Selling Stockholder bears to the total
number of shares of Stock being sold by all Selling Stockholders,
subject to adjustment by the Representatives to eliminate
fractions.
The purchase price per share to be paid by the U.S. Underwriters
to the Company and the Selling Stockholders will be the
price per share set forth in the "Per Share" row of the table on
the cover page of the Prospectus under the heading "Proceeds to
Company" and "Proceeds to Selling Stockholders," respectively (the
"Purchase Price").
The Company and the Selling Stockholders will deliver the Firm
Stock to the Representatives for the respective accounts of the
several U.S. Underwriters (in the form of definitive
certificates, issued in such names and in such denominations as the
Representatives may direct by notice in writing to the Company and
the Selling Stockholders given at or prior to 12:00 Noon, New York
Time, on the second full business day preceding the First Closing
Date (as defined below) or, if no such direction is received, in
the names of the respective U.S. Underwriters or in such other
names as Cowen may designate (solely for the purpose of
administrative convenience) and in such denominations as Cowen
may determine), against payment of the aggregate Purchase
Price therefore by wire transfer in immediately available funds
(same day funds), to the Company and ______________________ as
Custodian for the Selling Stockholders, all at the offices of
Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo Alto,
California 94304. The time and date of the delivery and closing
shall be at 10:00 A.M., New York Time, on _________, 1997. The time
and date of such payment and delivery are herein referred to as the
"First Closing Date". The First Closing Date and the location of
delivery of, and the form of payment for, the Firm Stock may be
varied by agreement among the Company, Cowen and the Selling
Stockholders. The First Closing Date may be postponed pursuant to
the provisions of Section 12.
The Company and the Selling Stockholders shall make the
certificates for the Stock available to the Representatives for
examination on behalf of the U.S. Underwriters not later than 10:00
A.M., New York time, on the business day preceding the First
Closing Date at the offices of Cowen & Company, Financial Square,
New York, New York 10005.
It is understood that Cowen or the other Representative,
individually and not as Representatives of the several U.S.
Underwriters, may (but shall not be obligated to) make payment to
the Company or to the Selling Stockholders on behalf of any U.S.
Underwriter or U.S. Underwriters, for the Stock to be purchased by
such U.S. Underwriter or U.S. Underwriters. Any such payment by
Cowen or other Representatives shall not relieve such U.S.
Underwriter or U.S. Underwriters from any of its or their other
obligations hereunder.
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<PAGE> 13
The several U.S. Underwriters agree to make an initial public
offering of the Firm Stock at the initial public offering price set
forth on the cover page of the Prospectus as soon after the
effectiveness of the Registration Statement as in their judgment is
advisable. The Representatives shall promptly advise the Company
and the Selling Stockholders of the making of the initial public
offering.
For the purpose of covering any over-allotments in connection with
the distribution and sale of the Firm Stock as contemplated by the
Prospectus, the Company hereby grants to the U.S. Underwriters an
option to purchase, severally and not jointly, up to an aggregate
of 393,000 shares of Optional Stock. The price per share to be paid
for the Optional Stock shall be the Purchase Price. The option
granted hereby may be exercised as to all or any party of the
Optional Stock at any time, and from time to time, not more than
thirty (30) days subsequent to the effective date of this
Agreement. No Optional Stock shall be sold and delivered unless the
Firm Stock previously has been, or simultaneously is, sold and
delivered. The right to purchase the Optional Stock or any portion
thereof may be surrendered and terminated at any time upon notice
by the U.S. Underwriters to the Company.
The option granted hereby may be exercised by the U.S. Underwriters
by giving written notice from Cowen to the Company setting forth
the number of shares of the Optional Stock to be purchased by them
and the date and time for delivery of and payment for the Optional
Stock. Each date and time for delivery of and payment for the
Optional Stock (which may be the First Closing Date, but not
earlier) is herein called an "Option Closing Date" and shall in no
event be earlier than two (2) business days nor later than ten (10)
business days after written notice is given. (The Option Closing
Date and the First Closing Date are herein called the "Closing
Dates".) Optional Stock shall be purchased for the account of each
U.S. Underwriter in the same proportion as the number of shares of
Firm Stock set forth opposite such U.S. Underwriter's name in
Schedule A hereto bears to the total number of shares of Firm Stock
(subject to adjustment by the U.S. Underwriters to eliminate odd
lots). Upon exercise of the option of the U.S. Underwriters, the
Company agrees to sell to the U.S. Underwriters the number of
shares of Optional Stock set forth in the written notice of
exercise and the U.S. Underwriters agree, severally and not jointly
and subject to the terms and conditions herein set forth, to
purchase the number of such shares determined as aforesaid.
The Company will deliver the Optional Stock to the U.S.
Underwriters (in the form of definitive certificates, issued in
such names and in such denominations as the Representatives may
direct by notice in writing to the Company given at or prior to
12:00 Noon, New York Time, on the second full business day
preceding the Option Closing Date or, if no such direction is
received, in the names of the respective U.S. Underwriters or in
such other names as Cowen may designate (solely for the purpose of
administrative convenience) and in such denominations as Cowen may
determine), against payment of the aggregate Purchase Price
therefor by wire transfer in immediately available funds (same day
funds), to the Company, all at the offices of Wilson Sonsini
Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304.
The Company shall make the certificates for the Optional Stock
available to the U.S. Underwriters for examination not later than
10:00 A.M., New York Time, on the business day preceding the Option
Closing Date at the offices of Cowen & Company, Financial Square,
New York, New York 10005. The Option Closing Date and the location
of delivery of, and the form of payment for, the Option Stock may
be
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<PAGE> 14
varied by agreement between the Company and Cowen. The Option
Closing Date may be postponed pursuant to the provisions of Section
12.
4 Covenants and Agreements of the Company. The Company covenants and
agrees with the several U.S. Underwriters that:
(a) The Company will (i) if the Company and the
Representatives have determined not to proceed
pursuant to Rule 430A of the Rules and Regulations,
use its best efforts to cause the Registration
Statement to become effective, (ii) if the Company and
the Representatives have determined to proceed
pursuant to Rule 430A of the Rules and Regulations,
use its best efforts to comply with the provisions of
and make all requisite filings with the Commission
pursuant to Rule 430A and Rule 424 of the Rules and
Regulations and (iii) if the Company and the
Representatives have determined to deliver
Prospectuses pursuant to Rule 434 of the Rules and
Regulations, to use its best efforts to comply with
all the applicable provisions thereof. The Company
will advise the Representatives promptly as to the
time at which the Registration Statement becomes
effective, will advise the Representatives promptly of
the issuance by the Commission of any stop order
suspending the effectiveness of the Registration
Statement or of the institution of any proceedings for
that purpose, and will use its best efforts to prevent
the issuance of any such stop order and to obtain as
soon as possible the lifting thereof, if issued. The
Company will advise the Representatives promptly of
the receipt of any comments of the Commission or any
request by the Commission for any amendment of or
supplement to the Registration Statement or the
Prospectus or for additional information and will not
at any time file any amendment to the Registration
Statement or supplement to the Prospectus which shall
not previously have been submitted to the
Representatives a reasonable time prior to the
proposed filing thereof or to which the
Representatives shall reasonably object in writing or
which is not in compliance with the Securities Act and
the Rules and Regulations.
(b) The Company will prepare and file with the Commission,
promptly upon the request of the Representatives, any
amendments or supplements to the Registration
Statement or the Prospectus which in the opinion of
the Representatives may be necessary to enable the
several U.S. Underwriters to continue the distribution
of the Stock and the several International Managers to
continue the distribution of the International Stock
and will use its best efforts to cause the same to
become effective as promptly as possible.
(c) If, at any time after the effective date of the
Registration Statement when a prospectus relating to
the Stock is required to be delivered under the
Securities Act, any event relating to or affecting the
Company or any of its subsidiaries occurs as a result
of which the Prospectus or any other prospectus as
then in effect would contain any untrue statement of a
material fact, or omit to state any material fact
necessary to make the statements therein, in light of
the circumstances under which they were made, not
misleading, or if it is necessary at any time to amend
the Prospectus to comply with the Securities Act, the
Company will promptly notify the Representatives
thereof and will prepare an amended or supplemented
prospectus which will correct such statement or
omission; and in case any U.S. Underwriter is required
to deliver a prospectus relating to the Stock nine (9)
months or more after the effective date of the
Registration Statement, the Company upon the request
of the Representatives and at the expense of such U.S.
Underwriter will prepare promptly
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<PAGE> 15
such prospectus or prospectuses as may be necessary to
permit compliance with the requirements of Section
10(a)(3) of the Securities Act.
(d) The Company will deliver to each of the
Representatives, at or before the Closing Dates, one
signed copy of the Registration Statement, as
originally filed with the Commission, and one signed
copy of all amendments thereto including all financial
statements and exhibits thereto and will deliver to
the Representatives such number of unsigned copies of
the Registration Statement, including such financial
statements but without exhibits, and all amendments
thereto, as the Representatives may reasonably
request. The Company will deliver or mail to or upon
the order the Representatives, from time to time until
the effective date of the Registration Statement, as
many copies of the Pre-effective Prospectus as the
Representatives may reasonably request. The Company
will deliver or mail to or upon the order of the
Representatives on the date of the initial public
offering, and thereafter from time to time during the
period when delivery of a prospectus relating to the
Stock is required under the Securities Act, as many
copies of the Prospectus, in final form or as
thereafter amended or supplemented as the
Representatives may reasonably request; provided,
however, that the expense of the preparation and
delivery of any prospectus required for use nine (9)
months or more after the effective date of the
Registration Statement shall be borne by the U.S.
Underwriters required to deliver such prospectus.
(e) The Company will make generally available to its
stockholders as soon as practicable, but not later
than fifteen (15) months after the effective date of
the Registration Statement, an earnings statement
which will be in reasonable detail (but which need not
be audited) and which will comply with Section 11(a)
of the Securities Act, covering a period of at least
twelve (12) months beginning after the "effective
date" (as defined in Rule 158 under the Securities
Act) of the Registration Statement.
(f) The Company will cooperate with the Representatives to
enable the Stock to be registered or qualified for
offering and sale by the U.S. Underwriters and by
dealers under the securities laws of such
jurisdictions as the Representatives may designate and
at the request of the Representatives will make such
applications and furnish such consents to service of
process or other documents as may be required of it as
the issuer of the Stock for that purpose; provided,
however, that the Company shall not be required to
qualify to do business or to file a general consent
(other than that arising out of the offering or sale
of the Stock) to service of process in any such
jurisdiction where it is not now so subject. The
Company will, from time to time, prepare and file such
statements and reports as are or may be required of it
as the issuer of the Stock to continue such
qualifications in effect for so long a period as the
Representatives may reasonably request for the
distribution of the Stock. The Company will advise the
Representatives promptly after the Company becomes
aware of the suspension of the qualifications or
registration of (or any such exception relating to)
the Common Stock of the Company for offering, sale or
trading in any jurisdiction or of any initiation or
threat of any proceeding for any such purpose, and in
the event of the issuance of any orders suspending
such qualifications, registration or exception, the
Company will, with the cooperation of the
Representatives use its best efforts to obtain the
withdrawal thereof.
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<PAGE> 16
(g) The Company will furnish to its stockholders annual
reports containing financial statements certified by
independent public accountants.
(h) The Company will maintain a transfer agent and
registrar for its Common Stock.
(i) For a period of one year after the date hereof, prior
to filing its quarterly statements on Form 10-Q, the
Company will have its independent auditors perform a
limited quarterly review of its quarterly numbers.
(j) The Company will not offer, sell, assign, transfer,
encumber, contract to sell, register for sale, grant
an option to purchase or otherwise dispose of, other
than by operation of law, gifts, pledges or
dispositions by estate representatives, any shares of
Common Stock or securities convertible into or
exercisable or exchangeable for Common Stock
(including, without limitation, Common Stock of the
Company which may be deemed to be beneficially owned
by the Company in accordance with the Rules and
Regulations) during the 180 days following the date on
which the price of the Common Stock to be purchased by
the U.S. Underwriters is set, other than (i) the
Company's sale of Common Stock hereunder, (ii)
issuances of Common Stock, stock options, stock
purchase rights or other similar rights issued
pursuant to the 1997 Plans as described in the
Prospectus, and (iii) any Common Stock or preferred
stock issued by the Company in any transaction of the
type described in Rule 145 under the Securities Act or
otherwise issued by the Company in exchange for
technology or other non-cash assets of any third
party.
(k) The Company will file with the Commission any reports
on Form SR required pursuant to Rule 463 of Rules and
Regulations, and will deliver promptly to the
Representatives a signed copy of each report on Form
SR filed by it with the Commission.
(l) The Company will apply the net proceeds from the sale
of the Stock as set forth in the description under
"Use of Proceeds" in the Prospectus.
(m) The Company will supply you with copies of all
correspondence to and from, and all documents issued
to and by, the Commission in connection with the
registration of the Stock under the Securities Act and
the Neuer Markt of the Frankfurt Stock Exchange in
connection with the sale of the International Stock
pursuant to the International Underwriting Agreement.
(n) Prior to each of the Closing Dates the Company will
furnish to you, as soon as they have been prepared,
copies of any unaudited interim consolidated financial
statements of the Company and its subsidiaries for any
periods subsequent to the periods covered by the
financial statements appearing in the Registration
Statement and the Prospectus.
(o) Prior to the Closing Dates the Company will issue no
press release or other public communications directly
or indirectly and hold no press conference with
respect to the Company (other than customary product
related sales and marketing communications) or any of
its subsidiaries, the financial condition, results of
operations, business, prospects, assets or liabilities
of the Company any of them, or the offering of the
Stock, without your prior written consent, which shall
not be unreasonably withheld.
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<PAGE> 17
(p) During the period of five (5) years hereafter, the
Company will furnish to the Representatives, and upon
request of the Representatives, to each of the
Underwriters: (i) as soon as practicable after the end
of each fiscal year, copies of the Annual Report of
the Company containing the balance sheet of the
Company as of the close of such fiscal year and
statements of income, stockholders' equity and cash
flows for the year then ended and the opinion thereon
of the Company's independent public accountants; (ii)
as soon as practicable after the filing thereof,
copies of each proxy statement, Annual Report on Form
10-K, Quarterly Report on Form 10-Q, Report on Form
8-K or other report filed by the Company with the
Commission, or the NASD or any securities exchange;
(iii) as soon as available, copies of any report or
communication of the Company mailed generally to
holders of its Common Stock; and (iv) from time to
time such other information concerning the Company as
you may reasonably request.
5 Payment of Expenses.
(a) The Company will pay (directly or by reimbursement)
all costs, fees and expenses incurred in connection
with the performance of the obligations of the Company
and of the Selling Stockholders under this Agreement
and the International Underwriting Agreement and in
connection with the transactions contemplated hereby,
including but not limited to (i) all expenses and
taxes incident to the issuance and delivery of the
Stock to the Representatives; (ii) all expenses
incident to the registration of the Stock and the
International Stock under the Securities Act; (iii)
the costs of preparing stock certificates (including
printing and engraving costs); (iv) all fees and
expenses of the registrar and transfer agent of the
Stock and the International Stock; (v) all necessary
issue, transfer and other taxes in connection with the
issuance and sale of the Stock to the U.S.
Underwriters; (vi) fees and expenses of the Company's
counsel and the Company's independent accountants;
(vii) all costs and expenses incurred by the Company
in connection with the preparation, printing, filing,
shipping and distribution of the Registration
Statement, each Pre-effective Prospectus and the
Prospectus (including all exhibits and financial
statements) and all amendments and supplements
provided for herein, the Selling Stockholders' Power
of Attorney, the Custody Agreement, the "Agreement
Among U.S. Underwriters and International Managers"
between the Representatives and Lead Managers, the
"Agreement Among U.S. Underwriters" between the
Representatives and the U.S. Underwriters, the Master
Selected Dealers' Agreement, the U.S. Underwriters'
Questionnaire and the Blue Sky memoranda (including
related fees and expenses of counsel to the
Underwriters) and this Agreement; (viii) all filing
fees, attorneys' fees and expenses incurred by the
Company or the U.S. Underwriters in connection with
exemptions from the qualifying or registering (or
obtaining qualification or registration of) all or any
part of the Stock for offer and sale and determination
of its eligibility for investment under the Blue Sky
or other securities laws of such jurisdictions as the
Representatives may designate; (ix) all fees and
expenses paid or incurred in connection with filings
made with the NASD and the Neuer Markt of the
Frankfurt Stock Exchange; and (x) all other costs and
expenses incurred by the Company and the Selling
Stockholders incident to the performance of their
obligations hereunder which are not otherwise
specifically provided for in this Section.
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<PAGE> 18
(b) In addition to their other obligations under Section
6(a) hereof, the Company and the Selling Stockholders
agree that, as an interim measure during the pendency
of any claim, action, investigation, inquiry or other
proceeding arising out of or based upon (i) any
statement or omission or any alleged statement or
omission by the Company or the Selling Stockholders or
(ii) any breach or inaccuracy in their representations
and warranties contained in this Agreement, they will
reimburse each U.S. Underwriter on a quarterly basis
for all reasonable legal or other expenses incurred in
connection with investigating or defending any such
claim, action, investigation, inquiry or other
proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability
of the Company's and each Selling Stockholder's
obligation to reimburse each U.S. Underwriter for such
expenses and the possibility that such payments might
later be held to have been improper by a court of
competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been
improper, each U.S. Underwriter shall promptly return
it to the Company or such Selling Stockholder, as the
case may be, together with interest, compounded daily,
determined on the basis of the prime rate (or other
commercial lending rate for borrowers of the highest
credit standing) announced from time to time by
Citibank, N.A., New York, New York (the "Prime Rate").
Any such interim reimbursement payments which are not
made to a U.S. Underwriter in a timely manner as
provided below shall bear interest at the Prime Rate
from the due date for such reimbursement. This expense
reimbursement agreement will be in addition to any
other liability which the Company or any Selling
Stockholder may otherwise have. The request for
reimbursement will be sent to the Company with a copy
to each Selling Stockholder.
(c) In addition to its other obligations under Section
6(b) hereof, each U.S. Underwriter severally agrees
that, as an interim measure during the pendency of any
claim, action, investigation, inquiry or other
proceeding arising out of or based upon any statement
or omission, or any alleged statement or omission,
described in Section 6(b) hereof which relates to
information furnished to the Company pursuant to
Section 6(c) hereof, it will reimburse the Company
(and, to the extent applicable, each officer,
director, controlling person or Selling Stockholder)
on a quarterly basis for all reasonable legal or other
expenses incurred in connection with investigating or
defending any such claim, action, investigation,
inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the
propriety and enforceability of the U.S. Underwriters'
obligation to reimburse the Company (and, to the
extent applicable, each officer, director, controlling
person or Selling Stockholder) for such expenses and
the possibility that such payments might later be held
to have been improper by a court of competent
jurisdiction. To the extent that any such interim
reimbursement payment is so held to have been
improper, the Company (and, to the extent applicable,
each officer, director, controlling person or Selling
Stockholder) shall promptly return it to the U.S.
Underwriters together with interest, compounded daily,
determined on the basis of the Prime Rate. Any such
interim reimbursement payments which are not made to
the Company within thirty (30) days of a request for
reimbursement shall bear interest at the Prime Rate
from the date of such request. This indemnity
agreement will be in addition to any liability which
such U.S. Underwriter may otherwise have.
(d) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements
set forth in paragraph (b) and/or (c) of this Section
5, including the amounts
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<PAGE> 19
of any requested reimbursement payments and the method
of determining such amounts, shall be settled by
arbitration conducted under the provisions of the
Constitution and Rules of the Board of Governors of
the New York Stock Exchange, Inc. or pursuant to the
Code of Arbitration Procedure of the NASD. Any such
arbitration must be commenced by service of a written
demand for arbitration or written notice of intention
to arbitrate, therein electing the arbitration
tribunal. In the event the party demanding arbitration
does not make such designation of an arbitration
tribunal in such demand or notice, then the party
responding to said demand or notice is authorized to
do so. Such an arbitration would be limited to the
operation of the interim reimbursement provisions
contained in paragraph (b) and/or (c) of this Section
5 and would not resolve the ultimate propriety or
enforceability of the obligation to reimburse expenses
which is created by the provisions of Section 6.
19
<PAGE> 20
6 Indemnification and Contribution.
20
<PAGE> 21
(a) The Company and SCM Microsystems GmbH jointly
and severally agree to indemnify and hold harmless
each U.S. Underwriter and each person, if any, who
controls such U.S. Underwriter within the meaning of
the Securities Act and the respective officers,
directors, partners, employees, representatives and
agents of each of such U.S. Underwriter (collectively,
the "Underwriter Indemnified Parties" and, each, an
"Underwriter Indemnified Party"), against any losses,
claims, damages, liabilities or expenses (including
the reasonable cost of investigating and defending
against any claims therefor and counsel fees incurred
in connection therewith), joint or several, which may
be based upon the Securities Act, or any other statute
or at common law, (i) on the ground or alleged ground
that any Pre-effective Prospectus, the Registration
Statement or the Prospectus (or any Pre-effective
Prospectus, the Registration Statement or the
Prospectus as from time to time amended or
supplemented) includes or allegedly includes an untrue
statement of a material fact or omits to state a
material fact required to be stated therein or
necessary in order to make the statements therein, in
light of the circumstances under which they were made,
not misleading, unless such statement or omission was
made in reliance upon, and in conformity with, written
information furnished to the Company by any U.S.
Underwriter, directly or through the Representatives,
specifically for use in the preparation thereof and
provided that the foregoing indemnity agreement with
respect to any Pre-effective Prospectus shall not
inure to the benefit of any U.S. Underwriter from whom
the person asserting any such losses, claims, damages
or liabilities purchased Stock, or any person
controlling such U.S. Underwriter, if a copy of the
Prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on
behalf of such U.S. Underwriter to such person, if
required by law so to have been delivered, at or prior
to the written confirmation of the sale of the Stock
to such person, and the Prospectus (as so amended or
supplemented) would have cured the defect giving rise
to such losses, claims, damages or liabilities, unless
such failure to deliver the Prospectus (as so amended
or supplemented) resulted from the Company's failure
to perform its obligations pursuant to Section 4(c)
above or (ii) for any act or failure to act or any
alleged act or failure to act by any U.S. Underwriter
in connection with, or relating in any manner to, the
Stock or the offering contemplated hereby, and which
is included as part of or referred to in any loss,
claim, damage, liability or expense arising out of or
based upon matters covered by clause (i) above
(provided that the Company shall not be liable under
this clause (ii) to the extent that it is determined
in a final judgment by a court of competent
jurisdiction that such loss, claim, damage, or
liability or expense resulted directly from any such
acts or failures to act undertaken or omitted to be
taken by such U.S. Underwriter through its gross
negligence or willful misconduct). The Company will be
entitled to participate at its own expense in the
defense or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but if
the Company elects to assume the defense, such defense
shall be conducted by counsel chosen by it and
reasonably acceptable to the U.S. Underwriters. In the
event the Company elects to assume the defense of any
such suit and retain such counsel, any Underwriter
Indemnified Parties, defendant or defendants in the
suit, may retain additional counsel but shall bear the
fees and expenses of such counsel unless (i) the
Company shall have specifically authorized the
retaining of such counsel or (ii) the parties to such
suit include both any such Underwriter Indemnified
Party and the Company, and such Underwriter
Indemnified Parties have been advised by counsel to
the U.S. Underwriters that one or more legal defenses
may be available to it or them which may not be
available to the Company, in which case the Company
shall not be entitled to assume the defense of such
21
<PAGE> 22
suit without the written consent of the Underwriter
Indemnified Parties party to such suit notwithstanding
its obligation to bear the fees and expenses of such
counsel. In circumstances where the Company does not
assume the defense of a suit for which indemnification
is sought by one or more Underwriter Indemnified
Parties, the Company will be obligated to bear the
fees and expenses of only one firm on behalf of all
Underwriter Indemnified Parties (plus local counsel,
if, in the judgment of the primary counsel to the
Underwriter Indemnified Parties use of such local
counsel is necessary). This indemnity agreement is not
exclusive and will be in addition to any liability
which the Company might otherwise have and shall not
limit any rights or remedies which may otherwise be
available at law or in equity to each Underwriter
Indemnified Party.
(b) Each Selling Stockholder severally and not jointly
agrees to indemnify and hold harmless each Underwriter
Indemnified Party against any losses, claims, damages,
liabilities or expenses (including, unless such
Selling Stockholder elects to assume the defense, the
reasonable cost of investigating and defending against
any claims therefor and counsel fees incurred in
connection therewith), joint or several, which may be
based upon the Securities Act, or any other statute or
at common law, on the ground or alleged ground that
any Pre-Effective Prospectus, the Registration
Statement or the Prospectus (or any Pre-Effective
Prospectus, the Registration Statement or the
Prospectus, as from time to time amended and
supplemented) includes an untrue statement of a
material fact or omits to state a material fact
required to be stated therein or necessary in order to
make the statements therein, in light of the
circumstances under which they were made, not
misleading, unless such statement or omission was made
in reliance upon, and in conformity with, written
information furnished to the Company by any U.S.
Underwriter, directly or through the Representatives
specifically for use in the preparation thereof;
provided however that with respect to any untrue
statement or omission or alleged untrue statement or
omission made in any Pre-Effective Prospectus, the
indemnity agreement contained in this subsection (b)
shall not inure to the benefit of any Underwriter
Indemnified Party from whom the person asserting any
such losses, claims, damages or liabilities purchased
the shares of Stock concerned to the extent that any
such loss, claim, damage or liability of such
Underwriter Indemnified Party results from the fact
that a copy of the Prospectus was not sent or given to
such person at or prior to the written confirmation of
the sale of such shares of Stock, as required by the
Securities Act, and if the untrue statement or
omission concerned has been corrected in the
Prospectus. Such Selling Stockholder shall be entitled
to participate at his own expense in the defense, or,
if he so elects, to assume the defense of any suit
brought to enforce any such liability, but, if such
Selling Stockholder elects to assume the defense, such
defense shall be conducted by counsel chosen by him.
In the event that any Selling Stockholder elects to
assume the defense of any such suit and retain such
counsel, the Underwriter Indemnified Parties,
defendant or defendants in the suit, may retain
additional counsel but shall bear the fees and
expenses of such counsel unless (i) such Selling
Stockholder shall have specifically authorized the
retaining of such counsel or (ii) the parties to such
suit include both such Underwriter Indemnified Parties
and such Selling Stockholder and such Underwriter
Indemnified Parties have been advised by counsel that
one or more legal defenses may be available to it or
them which may not be available to such Selling
Stockholder, in which case such Selling Stockholder
shall not be entitled to assume the defense of such
suit notwithstanding its obligation to bear the fees
and expenses of such counsel. This indemnity agreement
is not exclusive and will be in addition to any
liability which such Selling Stockholder might
otherwise have and shall not limit any rights
22
<PAGE> 23
or remedies which may otherwise be available at law or
in equity to each Underwriter Indemnified Party. The
Company and the Selling Stockholders may agree, as
among themselves and without limiting the rights of
the U.S. Underwriters under this Agreement, as to
their respective amounts of such liability for which
they each shall be responsible.
Notwithstanding any other provision of this Agreement
or the International Underwriting Agreement, the
liability of each Selling Stockholder to the U.S.
Underwriters and International Managers under this
Agreement, the International Underwriting Agreement or
otherwise shall be limited to an amount equal to the
aggregate initial public offering price of the shares
of Common Stock sold by such Selling Stockholder in
the initial public offering.
(c) Each U.S. Underwriter severally and not jointly agrees
to indemnify and hold harmless the Company, each of
its directors, each of its officers who have signed
the Registration Statement and each person, if any,
who controls the Company within the meaning of the
Securities Act (collectively, the "Company Indemnified
Parties") and each Selling Stockholder (the "Selling
Stockholder Indemnified Parties") against any losses,
claims, damages, liabilities or expenses (including,
unless the U.S. Underwriter or U.S. Underwriters elect
to assume the defense, the reasonable cost of
investigating and defending against any claims
therefor and counsel fees incurred in connection
therewith), joint or several, which arise out of or
are based in whole or in part upon the Securities Act,
the Exchange Act or any other federal, state, local or
foreign statute or regulation, or at common law, on
the ground or alleged ground that any Pre-effective
Prospectus, the Registration Statement or the
Prospectus (or any Pre-effective Prospectus, the
Registration Statement or the Prospectus, as from time
to time amended and supplemented) includes an untrue
statement of a material fact or omits to state a
material fact required to be stated therein or
necessary in order to make the statements therein, in
light of the circumstances in which they were made,
not misleading, but only insofar as any such statement
or omission was made in reliance upon, and in
conformity with, written information furnished to the
Company by such U.S. Underwriter, directly or through
the Representatives, specifically for use in the
preparation thereof. Such U.S. Underwriter shall be
entitled to participate at its own expense in the
defense, or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but,
if such U.S. Underwriter elects to assume the defense,
such defense shall be conducted by counsel chosen by
it. In the event that any U.S. Underwriter elects to
assume the defense of any such suit and retain such
counsel, the Company Indemnified Parties or Selling
Stockholders Indemnified Parties and any other U.S.
Underwriter or U.S. Underwriters or controlling person
or persons, defendant or defendants in the suit, shall
bear the fees and expenses of any additional counsel
retained by them, respectively. The U.S. Underwriter
against whom indemnity may be sought shall not be
liable to indemnify any person for any settlement of
any such claim effected without such U.S.
Underwriter's consent. This indemnity agreement is not
exclusive and will be in addition to any liability
which such U.S. Underwriter might otherwise have and
shall not limit any rights or remedies which may
otherwise be available at law or in equity to any
Company Indemnified Party or Selling Stockholder
Indemnified Party.
(d) If the indemnification provided for in this Section 6
is unavailable or insufficient to hold harmless an
indemnified party under subsection (a), (b) or (c)
above in respect of any losses, claims, damages,
liabilities or expenses (or actions in respect
thereof) referred to
23
<PAGE> 24
herein, then each indemnifying party shall contribute
to the amount paid or payable by such indemnified
party as a result of such losses, claims, damages,
liabilities or expenses (or actions in respect
thereof) in such proportion as is appropriate to
reflect the relative benefits received by the Company
and the Selling Stockholders on the one hand and the
U.S. Underwriters on the other from the offering of
the Stock. If, however, the allocation provided by the
immediately preceding sentence is not permitted by
applicable law, then each indemnifying party shall
contribute to such amount paid or payable by such
indemnified party in such proportion as is appropriate
to reflect not only such relative benefits but also
the relative fault of the Company and the Selling
Stockholders on the one hand and the U.S. Underwriters
on the other in connection with the statements or
omissions which resulted in such losses, claims,
damages, liabilities or expenses (or actions in
respect thereof), as well as any other relevant
equitable considerations. The relative benefits
received by the Company and the Selling Stockholders
on the one hand and the U.S. Underwriters on the other
shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling
Stockholders bear to the total underwriting discounts
and commissions received by the U.S. Underwriters, in
each case as set forth in the table on the cover page
of the Prospectus. The relative fault shall be
determined by reference to, among other things,
whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to
state a material fact relates to information supplied
by the Company, the Selling Stockholders or the U.S.
Underwriters and the parties' relative intent,
knowledge, access to information and opportunity to
correct or prevent such statement or omission. The
Company, the Selling Stockholders and the U.S.
Underwriters agree that it would not be just and
equitable if contribution were determined by pro rata
allocation (even if the U.S. Underwriters were treated
as one entity for such purpose) or by any other method
of allocation which does not take account of the
equitable considerations referred to above. The amount
paid or payable by an indemnified party as a result of
the losses, claims, damages, liabilities or expenses
(or actions in respect thereof) referred to above
shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in
connection with investigating, defending, settling or
compromising any such claim. Notwithstanding the
provisions of this subsection (d), no U.S. Underwriter
shall be required to contribute any amount in excess
of the amount by which the total price at which the
shares of the Stock underwritten by it and distributed
to the public were offered to the public exceeds the
amount of any damages which such U.S. Underwriter has
otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or
alleged omission. The U.S. Underwriters' obligations
to contribute are several in proportion to their
respective underwriting obligations and not joint. No
person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who
was not guilty of such fraudulent misrepresentation.
(e) Promptly after receipt by an indemnified party under
subsection (a), (b) or (c) above of notice of the
commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection,
notify the indemnifying party in writing of the
commencement thereof; but the omission to so notify
the indemnifying party shall not relieve the
indemnifying party from any liability that it may have
to any indemnified party except to the extent that any
such delay results in
24
<PAGE> 25
the loss of the ability to assert any affirmative or
negative defense the loss of which is materially
prejudicial to the disposition of this matter.
7 Survival of Indemnities, Representations, Warranties, etc. The
respective indemnities, covenants, agreements, representations,
warranties and other statements of the Company and its
subsidiaries, the Selling Stockholders and the several U.S.
Underwriters, as set forth in this Agreement or made by them
respectively, pursuant to this Agreement, shall remain in full
force and effect, regardless of any investigation made by or on
behalf of any U.S. Underwriter, the Selling Stockholders, the
Company or any of its officers or directors or any controlling
person, and shall survive delivery of and payment for the Stock
until all applicable statutes of limitation have expired.
8 Conditions of U.S. Underwriters' Obligations. The respective
obligations of the several U.S. Underwriters hereunder shall be
subject to the accuracy, at and (except as otherwise stated herein)
as of the date hereof and at and as of each of the Closing Dates,
of the representations and warranties made herein by the Company
and the Selling Stockholders to compliance at and as of each of the
Closing Dates by the Company and the Selling Stockholders with
their covenants and agreements herein contained and other
provisions hereof to be satisfied at or prior to each of the
Closing Dates, and to the following additional conditions:
(a) The Registration Statement shall have become effective
and no stop order suspending the effectiveness thereof
shall have been issued and no proceedings for that
purpose shall have been initiated or, to the knowledge
of the Company or the Representatives, shall be
threatened by the Commission, and any request for
additional information on the part of the Commission
(to be included in the Registration Statement or the
Prospectus or otherwise) shall have been complied with
to the reasonable satisfaction of the Representatives.
Any filings of the Prospectus, or any supplement
thereto, required pursuant to Rule 424(b) or Rule 434
of the Rules and Regulations, shall have been made in
the manner and within the time period required by Rule
424(b) and Rule 434 of the Rules and Regulations, as
the case may be.
(b) The Representatives shall have been satisfied that
there shall not have occurred any change prior to each
of the Closing Dates, in the condition (financial or
otherwise), properties, business, management, net
worth or results of operations of the Company and its
subsidiaries considered as a whole, or any change in
the capital stock, short-term or long-term debt of the
Company and its subsidiaries considered as a whole,
such that (i) the Registration Statement or the
Prospectus, or any amendment or supplement thereto,
contains an untrue statement of fact which, in the
reasonable opinion of the Representatives, is
material, or omits to state a fact which, in the
reasonable opinion of the Representatives, is required
to be stated therein or is necessary to make the
statements therein not misleading or (ii) it is
impracticable in the reasonable judgment of the
Representatives to proceed with the public offering or
purchase the Stock as contemplated hereby.
(c) The Representatives shall be satisfied that no legal
or governmental action, suit or proceeding affecting
the Company which is material and adverse to the
Company or which affects or may affect the Company's
or the Selling Stockholders' ability to perform their
respective obligations under this Agreement shall have
been instituted or threatened and
25
<PAGE> 26
there shall have occurred no material adverse
development in any existing such action, suit or
proceeding.
(d) At the time of execution of this Agreement, the
Representatives shall have received from KPMG Peat
Marwick LLP, independent certified public accountants,
a letter, dated the date hereof, in form and substance
satisfactory to the U.S. Underwriters to the effect
set forth in Exhibit I hereto.
(e) The Representatives shall have received from KPMG Peat
Marwick LLP, independent certified public accountants,
letters, dated each of the Closing Dates, to the
effect that such accountants reaffirm, as of each of
the Closing Dates, and as though made on each of the
Closing Dates, the statements made in the letter
furnished by such accountants pursuant to paragraph
(d) of this Section 8.
(f) The Representatives shall have received (i) from
Wilson Sonsini Goodrich & Rosati, Professional
Corporation, United States securities counsel for the
Company; (ii) from ______________, German counsel for
the Company; and (iii) from ______________,
intellectual property counsel to the Company, an
opinion, dated each of the Closing Date, to the effect
set forth in Exhibits II, III and IV hereto,
respectively.
(g) The Representatives shall have received from Rogers &
Wells, counsel for the U.S. Underwriters, their
opinion dated each of the Closing Dates with respect
to the incorporation of the Company, the validity of
the Stock, the Registration Statement and the
Prospectus and such other related matters as it may
reasonably request, and the Company shall have
furnished to such counsel such documents as they may
request for the purpose of enabling them to pass upon
such matters.
(h) The Representatives shall have received from _______
______________, counsel for the Selling Stockholders,
an opinion dated the Closing Date, to the effect set
forth in Exhibit V.
(i) The Representatives shall have received a certificate
or certificates, dated each of the Closing Dates, of
the chief executive officer or the President and the
chief financial or accounting officer of the Company
to the effect that:
(i) No stop order suspending the
effectiveness of the Registration
Statement has been issued, and, to the
knowledge of the signers, no proceedings
for that purpose have been instituted or
are pending or contemplated under the
Securities Act;
(ii) Neither any Pre-effective Prospectus, as
of its date, nor the Registration
Statement nor the Prospectus, nor any
amendment or supplement thereto, as of
the time when the Registration Statement
became effective and at all times
subsequent thereto up to the delivery of
such certificate, contained any untrue
statement of a material fact or omitted
to state any material fact required to be
stated therein or necessary to make the
statements therein, in light of the
circumstances under which they were made,
not misleading;
(iii) The representations and warranties of the
Company in this Agreement are true and
correct at and as of each of the Closing
Dates, and the Company has complied with
26
<PAGE> 27
all the agreements and performed or
satisfied all the conditions on its part
to be performed or satisfied at or prior
to the Closing Dates; and
(iv) Since the respective dates as of which
information is given in the Registration
Statement and the Prospectus, and except
as disclosed in or contemplated by the
Prospectus, (i) there has not been any
material adverse change or a development
involving a material adverse change in
the condition (financial or otherwise),
properties, business, management, net
worth or results of operations of the
Company and its subsidiaries considered
as a whole; (ii) the business and
operations conducted by the Company and
its subsidiaries have not sustained a
loss by strike, fire, flood, accident or
other calamity (whether or not insured)
of such a character as to interfere
materially with the conduct of the
business and operations of the Company
and its subsidiaries considered as a
whole; (iii) no legal or governmental
action, suit or proceeding is pending or
to the knowledge of the signers
threatened against the Company which is
material to the Company, whether or not
arising from transactions in the ordinary
course of business, or which may
materially and adversely affect the
transactions contemplated by this
Agreement; (iv) since such dates and
except as so disclosed, the Company has
not incurred any material liability or
obligation, direct, contingent or
indirect, made any change in its capital
stock (except pursuant to the 1997
Plans), made any material change in its
short-term or funded debt or repurchased
or otherwise acquired any of the
Company's capital stock; and (v) the
Company has not declared or paid any
dividend, or made any other distribution,
upon its outstanding capital stock
payable to stockholders of record on a
date prior to the Closing Date.
(j) The Selling Stockholders shall have furnished to the
Representatives certificates as to the accuracy, at
and as of each of the Closing Dates, of the
representations and warranties made herein by them and
as to compliance at and as of each of the Closing
Dates by them with their covenants and agreements
herein contained and other provisions hereof to be
satisfied at or prior to each of the Closing Dates,
and as to satisfaction of the other conditions to the
obligations of the U.S. Underwriters hereunder.
(k) Cowen shall have received the written agreements,
substantially in the form of Exhibit V hereto, of the
officers, directors and certain holders of Common
Stock that each will not offer, sell, assign,
transfer, encumber, contract to sell, register for
sale, grant an option to purchase or otherwise dispose
of, other than by operation of law, gifts, pledges or
dispositions by estate representatives, any shares of
Common Stock (including, without limitation, Common
Stock which may be deemed to be beneficially owned by
such officer, director or holder in accordance with
the Rules and Regulations) during the 180 days
following the date of the final Prospectus except as
provided therein.
(l) The Nasdaq National Market shall have approved the
Stock for listing, subject only to official notice of
issuance.
(m) The International Stock to be issued and sold by the
Company and the Selling Stockholders shall have been
duly authorized for listing by the Neuer Markt of the
Frankfurt Stock Exchange.
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<PAGE> 28
(n) The Closing under the International Underwriting
Agreement shall have occurred concurrently with the
Closing hereunder on the Closing Date.
All opinions, certificates, letters and other documents will be in
compliance with the provisions hereunder only if they are
reasonably satisfactory in form and substance to the
Representatives. The Company will furnish to the Representatives
conformed copies of such opinions, certificates, letters and other
documents as the Representatives shall reasonably request. If any
of the conditions hereinabove provided for in this Section shall
not have been satisfied when and as required by this Agreement,
this Agreement may be terminated by the Representatives by
notifying the Company of such termination in writing or by telegram
at or prior to each of the Closing Dates, but Cowen, on behalf of
the Representatives, shall be entitled to waive any of such
conditions.
9 Effective Date. This Agreement shall become effective immediately
as to Sections 5, 6, 7, 9, 10, 11, 13, 14, 15, 16 and 17 and, as to
all other provisions, at 11:00 a.m. New York City time on the first
full business day following the effectiveness of the Registration
Statement or at such earlier time after the Registration Statement
becomes effective as the Representatives may determine on and by
notice to the Company or by release of any of the Stock for sale to
the public. For the purposes of this Section 9, the Stock shall be
deemed to have been so released upon the release for publication of
any newspaper advertisement relating to the Stock or upon the
release by you of notices (i) advising U.S. Underwriters that the
shares of Stock are released for public offering or (ii) offering
the Stock for sale to securities dealers, whichever may occur
first.
10 Termination. This Agreement (except for the provisions of Section
5) may be terminated by the Company at any time before it becomes
effective in accordance with Section 9 by notice to the
Representatives and may be terminated by the Representatives at any
time before it becomes effective in accordance with Section 9 by
notice to the Company. In the event of any termination of this
Agreement under this or any other provision of this Agreement,
there shall be no liability of any party to this Agreement to any
other party, other than as provided in Sections 5, 6 and 11 and
other than as provided in Section 12 as to the liability of
defaulting U.S. Underwriters.
This Agreement may be terminated after it becomes effective by the
Representatives by notice to the Company (i) if at or prior to the
First Closing Date trading in securities on any of the New York
Stock Exchange or the Nasdaq National Market System shall have been
suspended (other than any short term suspension of trading pursuant
to any "circuit breaker" provisions of the New York Stock Exchange)
or minimum or maximum prices shall have been established on any
such exchange or market, or a banking moratorium shall have been
declared by New York or United States authorities; (ii) trading of
any securities of the Company shall have been suspended on any
exchange or in any over-the-counter market; (iii) if at or prior to
the First Closing Date there shall have been (A) an outbreak or
escalation of hostilities between the United States and any foreign
power or of any other insurrection or armed conflict involving the
United States or (B) any material change in financial markets or
any calamity or crisis which, in the reasonable judgment of the
Representatives, makes it
28
<PAGE> 29
impractical or inadvisable to offer or sell the Stock on the terms
contemplated by the Prospectus; (iv) if there shall have been any
development or prospective development involving particularly the
business or properties or securities of the Company or any of its
subsidiaries or the transactions contemplated by this Agreement,
which, in the reasonable judgment of the Representatives, makes it
impracticable or inadvisable to offer or deliver the Stock on the
terms contemplated by the Prospectus; (v) if there shall be any
litigation or proceeding, pending or threatened, which, in the
reasonable judgment of the Representatives, makes it impracticable
or inadvisable to offer or deliver the on the terms contemplated by
the Prospectus; or (vi) if there shall have occurred any of the
events specified in the immediately preceding clauses (i) - (v)
together with any other such event that makes it, in the reasonable
judgment of the Representatives, impractical or inadvisable to
offer or deliver the Stock on the terms contemplated by the
Prospectus.
11 Reimbursement of U.S. Underwriters. Notwithstanding any other
provisions hereof, if this Agreement shall not become effective by
reason of any election of the Company or the Selling Stockholder
pursuant to the first paragraph of Section 10 or shall be
terminated by the Representatives under Section 8 (excluding
Section 8(g)) or Section 10, the Company will bear and pay the
expenses specified in Section 5 hereof and, in addition to their
obligations pursuant to Section 6 hereof, the Company will
reimburse the reasonable out-of-pocket expenses of the several U.S.
Underwriters (including reasonable fees and disbursements of
counsel for the U.S. Underwriters) incurred in connection with this
Agreement and the proposed purchase of the Stock, and promptly upon
demand the Company will pay such amounts to you as Representatives.
12 Substitution of U.S. Underwriters. If any U.S. Underwriter or U.S.
Underwriters shall default in its or their obligations to purchase
shares of Stock hereunder and the aggregate number of shares which
such defaulting U.S. Underwriter or U.S. Underwriters agreed but
failed to purchase does not exceed ten percent (10%) of the total
number of shares underwritten, the other U.S. Underwriters shall be
obligated severally, in proportion to their respective commitments
hereunder, to purchase the shares which such defaulting U.S.
Underwriter or U.S. Underwriters agreed but failed to purchase. If
any U.S. Underwriter or U.S. Underwriters shall so default and the
aggregate number of shares with respect to which such default or
defaults occur is more than ten percent (10%) of the total number
of shares underwritten and arrangements satisfactory to the
Representatives and the Company for the purchase of such shares by
other persons are not made within forty-eight (48) hours after such
default, this Agreement shall terminate.
If the remaining U.S. Underwriters or substituted U.S. Underwriters
are required hereby or agree to take up all or part of the shares
of Stock of a defaulting U.S. Underwriter or U.S. Underwriters as
provided in this Section 12, (i) the Company and the Selling
Stockholders shall have the right to postpone the Closing Dates for
a period of not more than five (5) full business days in order that
the Company may effect whatever changes may thereby be made
necessary in the Registration Statement or the Prospectus or in any
other documents or arrangements, and the Company agrees promptly to
file any amendments to the Registration Statement or supplements to
the Prospectus which may thereby be made necessary, and (ii) the
respective numbers of shares to be purchased by the remaining U.S.
Underwriters or substituted U.S. Underwriters shall be taken as the
basis of their underwriting obligation for all purposes of this
Agreement. Nothing herein contained shall relieve any defaulting
U.S. Underwriter of its liability to the Company, the Selling
Stockholders or the other U.S. Underwriters for damages occasioned
by its default hereunder. Any termination of this Agreement
pursuant to this Section 12 shall be without liability on the part
of any non-defaulting U.S. Underwriter, the Selling Stockholders or
the Company, except for expenses to be paid or reimbursed pursuant
to Section 5 and except for the provisions of Section 6.
13 Notices. All communications hereunder shall be in writing and, if
sent to the U.S. Underwriters shall be mailed, delivered or
facsimilied and confirmed to you, as their Representatives c/o
Cowen & Company at Financial Square, New York. New York 10005
except that notices given to a U.S. Underwriter pursuant to Section
6 hereof shall be sent to such U.S. Underwriter at the address
29
<PAGE> 30
furnished by the Representatives or, if sent to the Company, shall
be mailed, delivered or facsimilied and confirmed c/o SCM
Microsystems, Inc., 131 Albright Way, Los Gatos, California 95030,
Attention: President.
14 Successors. This Agreement shall inure to the benefit of and be
binding upon the several U.S. Underwriters, the Company and the
Selling Stockholders and their respective successors and legal
representatives. Nothing expressed or mentioned in this Agreement
is intended or shall be construed to give any person other than the
persons mentioned in the preceding sentence any legal or equitable
right, remedy or claim under or in respect of this Agreement, or
any provisions hereby contained, this Agreement and all conditions
and provisions hereof being intended to be and being for the sole
and exclusive benefit of such persons and for the benefit of no
other person; except that the representations, warranties,
covenants, agreements and indemnities of the Company and the
Selling Stockholders contained in this Agreement shall also be for
the benefit of the person or persons, if any, who control any U.S.
Underwriter or U.S. Underwriters within the meaning of Section 15
of the Securities Act or Section 20 of the Exchange Act, and the
indemnities of the several U.S. Underwriters shall also be for the
benefit of each director of the Company, each of its officers who
has signed the Registration Statement and the person or persons, if
any, who control the Company within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act.
15 Applicable Law. This Agreement shall be governed by and construed
in accordance with the substantive laws of the State of New York.
16 Authority of the Representatives. In connection with this
Agreement, you will act for and on behalf of the several U.S.
Underwriters, and any action taken under this Agreement by Cowen,
as Representative, will be binding on all the U.S. Underwriters;
and any action taken under this Agreement by any of the
Attorneys-in-fact will be binding all the Selling Stockholders.
17 Partial Unenforceability. The invalidity or unenforceability of any
Section, paragraph or provision of this Agreement shall not affect
the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this
Agreement is for any reason determined to be invalid or
unenforceable, there shall be deemed to be made such minor changes
(and only such minor changes) as are necessary to make it valid and
enforceable.
18 General. This Agreement constitutes the entire agreement of the
parties to this Agreement and supersedes all prior written or oral
and all contemporaneous oral agreements, understandings and
negotiations with respect to the subject matter hereof.
In this Agreement, the masculine, feminine and neuter genders and
the singular and the plural include one another. The section
headings in this Agreement are for the convenience of the parties
only and will not affect the construction or interpretation of this
Agreement. This Agreement may be amended or modified, and the
observance of any term of this Agreement may be waived, only by a
writing signed by the party or parties to this Agreement directly
affected by such amendment, modification or waiver.
19 Counterparts. This Agreement may be signed in two (2) or more
counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same
instrument.
30
<PAGE> 31
If the foregoing correctly sets forth our understanding, please indicate your
acceptance thereof in the space provided below for that purpose, whereupon this
letter and your acceptance shall constitute a binding agreement between us.
Very truly yours,
SCM MICROSYSTEMS, INC.
By:
Name:
Title:
For purposes of agreeing to the indemnification provisions set forth in Section
6 of this agreement:
SCM MICROSYSTEMS GmbH
By:_____________________________________
Name:
Title:
Accepted and delivered in SELLING STOCKHOLDERS
- as of LISTED IN SCHEDULE B
the date first above written.
COWEN & COMPANY By:__________________________
HAMBRECHT & QUIST LLC
Acting on their own behalf
and as Representatives of the several By:__________________________
U.S. Underwriters referred to in the Attorney-in-fact
foregoing Agreement.
By: COWEN & COMPANY
By: Cowen Incorporated,
its general partner
By:_____________________________________
Name:
Title:
31
<PAGE> 32
SCHEDULE A
U.S. UNDERWRITERS
<TABLE>
<CAPTION>
Name Number of Number of
Firm Shares Optional Shares
to be to be
Purchased Purchased
----------- -----------
<S> <C> <C>
Cowen & Company..................
Hambrecht & Quist LLC ...........
----------- -----------
Total
=========== ===========
</TABLE>
<PAGE> 33
SCHEDULE B
SELLING STOCKHOLDERS
32
<PAGE> 34
SCHEDULE C
SUBSIDIARIES
33
<PAGE> 35
SCHEDULE D
LIST OF PARTIES EXECUTING LOCK-UP AGREEMENTS
34
<PAGE> 36
EXHIBIT I
[Form of Accountant's Letter]
The Accountants shall confirm that they are independent accountants to the
Company within the meaning of the Securities Act and the Rules, that the
response to Item 10 of the Registration Statement is correct insofar as it
relates to them and stating that:
a. in their opinion the audited financial statements
and financial statement schedules included in the Registration
Statement and the Prospectus and reported on by them comply as to
form in all material respects with the applicable accounting
requirements of the Securities Act and the Rules and Regulations;
b. on the basis of a reading of the amounts included
in the Registration Statement and the Prospectus under the headings
"Summary Consolidated Financial Data" and "Selected Consolidated
Financial Data," carrying out certain procedures (but not an
examination in accordance with generally accepted auditing
standards) which would not necessarily reveal matters of
significance with respect to the comments set forth in such letter,
a reading of the minutes of the meetings of the stockholders and
directors of the Company, and inquiries of certain officials of the
Company who have responsibility for financial and accounting
matters of the Company as to transactions and events subsequent to
the date of the latest audited financial statements, except as
disclosed in the Registration Statement and the Prospectus, nothing
came to their attention which caused them to believe that:
(1) the amounts in "Summary Consolidated
Financial Data," and "Selected Consolidated Financial
Data" included in the Registration Statement and the
Prospectus do not agree with the corresponding amounts
in the audited or unaudited financial statements from
which such amounts were derived; or
(2) with respect to the Company, there
were, at a specified date not more than five business
days prior to the date of the letter, any change in
the capital stock of the Company, increase in the
long-term debt of the Company or any decreases in net
income or in stockholders' equity in the Company, as
compared with the amounts shown on the Company's
audited balance sheet for the fiscal year ended
December 31, 1996 included in the Registration
Statement; and
c. they have performed certain other procedures as may
be permitted under generally acceptable auditing standards as a
result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the
general accounting records of the Company) set forth in the
Registration Statement and the Prospectus and reasonably specified
by the Representatives agrees with the accounting records of the
Company; and
d. based upon the procedures set forth in clauses (ii)
and (iii) above and a reading of the amounts included in the
Registration Statement under the headings "Summary Consolidated
Financial Data" and "Selected Consolidated Financial Data" included
in the Registration Statement and Prospectus and a reading of the
financial
35
<PAGE> 37
statements, from which certain of such data were derived, nothing
has come to their attention that gives them reason to believe that
the "Selected Consolidated Financial Data" included in the
Registration Statement and Prospectus do not comply as to the form
in all material respects with the applicable accounting
requirements of the Securities Act and the Rules or that the
information set forth therein is not fairly stated in relation to
the financial statements included in the Registration Statement or
Prospectus from which certain of such data were derived are not in
conformity with generally accepted accounting principles applied on
a basis substantially consistent with that of the audited financial
statements included in the Registration Statement and Prospectus.
36
<PAGE> 38
Exhibit II
[Form of Opinion of Wilson Sonsini Goodrich & Rosati]
1. The Company and each of the corporations set forth in Exhibit A
hereto (the "US Subsidiaries") have been duly incorporated and are validly
existing and in good standing as corporations under the laws of their respective
jurisdictions of incorporation, are duly qualified to do business and are in
good standing as foreign corporations in [list], which, to such counsel's
knowledge are the only jurisdictions in which such qualification is necessary,
and have all corporate power necessary to own or hold their respective
properties and conduct their businesses as described in the Prospectus;
2. The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and nonassessable
and all of the Shares to be issued and sold by the Company to the U.S.
Underwriters pursuant to the Underwriting Agreement and to the International
Managers pursuant to the International Underwriting Agreement have been duly and
validly authorized and, when issued and delivered against payment therefor as
provided for in the Underwriting Agreement or the International Underwriting
Agreement, as the case may be, shall be duly and validly issued, fully paid and
non-assessable and free of any pre-emptive or similar rights; and all of the
issued shares of capital stock of the US Subsidiary have been duly and validly
authorized and issued and are fully paid and non-assessable and are owned
directly or indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims;
3. Other than as described in the Prospectus there are no
pre-emptive or other rights to subscribe for or to purchase, nor any restriction
upon the voting or transfer of, any of the Shares pursuant to the Company's
Certificate of Incorporation or By-Laws or pursuant to any agreement or other
instrument known to us;
4. Except as disclosed in the Prospectus, to our knowledge, there
are no legal or governmental proceedings pending to which the Company or the US
Subsidiary is a party or of which any property or assets of the Company or the
US Subsidiary is the subject which, if determined adversely to the Company or
the US Subsidiary, could, individually or in the aggregate, reasonably be
expected to have a material adverse effect on the Company and its subsidiaries
taken as a whole; and, to our knowledge, no such proceedings are threatened or
contemplated by governmental authorities or other third parties;
5. The Company and the US Subsidiary have full corporate power and
authority to enter into the Underwriting Agreement and the International
Underwriting Agreement and to perform their respective obligations thereunder
(including to issue, sell and deliver the Shares), and each of the Underwriting
Agreement and the International Underwriting Agreement has been duly and validly
authorized, executed and delivered by the Company and the US Subsidiary and is a
valid and binding obligation of each of the Company and the US Subsidiary,
enforceable against each of them in accordance with their respective terms.
6. The execution, delivery and performance of the Underwriting
Agreement and the International Underwriting Agreement by the Company and the
consummation of the transactions contemplated by the Underwriting Agreement and
the International Underwriting Agreement by the Company will not result in a
breach or violation of (A) any of the terms or provisions of or constitute a
default under any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument that is filed as an exhibit to the Registration
Statement, (B) the Certificate of Incorporation or By-laws or the
<PAGE> 39
certificate of incorporation or by-laws of the US Subsidiary, or (C) any law,
order, rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or the US Subsidiary or any of their properties or
result in the creation of a lien;
7. No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the Company or
the US Subsidiary of the transactions contemplated by the Underwriting Agreement
or the International Underwriting Agreement, except such as may be required by
the National Association of Securities Dealers, Inc. (the "NASD"), the Neuer
Markt of the Frankfurt Stock Exchange or under the Securities Act or the
Exchange Act or the securities or "Blue Sky" laws of any jurisdiction in
connection with the purchase and distribution of the Shares by the U.S.
Underwriters or the International Managers;
8. The Registration Statement was declared effective under the
Securities Act as of ____, 1997, the Prospectus was filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations on ____, 1997, and no stop
order suspending the effectiveness of the Registration Statement has been issued
and to our knowledge no proceeding for that purpose is pending or threatened by
the Commission;
9. The Registration Statement and the Prospectus and any amendments
or supplements thereto (other than the financial statements and the notes
thereto and the schedules and other financial and statistical data included in
the Registration Statement or the Prospectus as to which we express no opinion)
comply as to form in all respects with the requirements of the Securities Act
and the Rules and Regulations;
10. Other than as described in the Prospectus and to our knowledge,
there are no contracts, agreements or understandings between the Company and any
person granting such person the right (other than rights which have been waived
or satisfied) to require the Company to file a registration statement under the
Securities Act with respect to any securities of the Company owned or to be
owned by such person or to require the Company to include such securities in the
securities registered pursuant to this Registration Statement or in any
securities being registered pursuant to any other registration statement filed
by the Company under the Securities Act;
11. The descriptions in the Registration Statement and Prospectus of
legal or governmental proceedings, contracts and other documents are accurate in
all material respects and such descriptions fairly present the information
required to be disclosed, and to our knowledge, there are no legal or
governmental proceedings or any contracts or documents of a character required
to be described in the Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement which are not described or filed as
required;
12. The descriptions in the Registration Statement and the
Prospectus under the captions "Risk Factors -- Concentration of Stock Ownership;
Anti-Takeover Provisions," Risk Factors -- Shares Eligible for Future Sale,"
Description of Common Stock" and "Shares Eligible for Future Sale," solely to
the extent they reflect matters of federal law arising under the laws of the
United States or of the Delaware General Corporation Law or legal conclusions
relating to such laws, accurately summarize and fairly present the legal and
regulatory matters described therein; and
13. Neither the Company nor the US Subsidiary is nor will they be
immediately after receiving the proceeds from the sale of the Shares, an
"investment company" or an entity "controlled" by an "investment company" as
such terms are defined in the Investment Company Act of 1940, as amended.
2
<PAGE> 40
In addition, although we have not undertaken, except as otherwise
indicated herein, to determine independently, and do not assume any
responsibility for, the accuracy or completeness of the statements in the
Registration Statement, we have participated in conferences with officers and
other representatives of the Company, at which conferences representatives of
the Representatives, counsel to the Underwriters and representatives of the
independent certified public accountants of the Company were present, and at
which conferences the contents of the Registration Statement and Prospectus and
related matters were discussed, and based upon the foregoing nothing has come to
our attention that has caused us to believe that the Registration Statement at
the time the Registration Statement became effective, or the Prospectus, as of
its date and as of the date hereof, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that any amendment or
supplement to the Prospectus, as of its respective date, and as of the date
hereof, contained any untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading (it being understood
that we express no belief with respect to the financial statements and the notes
thereto and the schedules and other financial and statistical data included in
the Registration Statement or the Prospectus).
3
<PAGE> 41
SCHEDULE A
[U.S. Underwriters]
<PAGE> 42
SCHEDULE B
[International Managers]
<PAGE> 43
Exhibit III
[Form of Opinion of Issuer's German Counsel]
1. SCM Microsystems GmbH, a ______ (the "Company") has been duly
organized and is validly existing as ___________ in good standing under the laws
of Germany, is duly qualified to do business and is in good standing as a
foreign corporation in each jurisdiction in which its ownership or leasing of
property or the conduct of its business, as known by us, requires such
qualification except to the extent that the failure to so qualify would not have
a material adverse effect on the Company, and has all power and authority
(corporate and other) necessary to own or hold its properties and conduct its
business;
2. All of the issued shares of capital stock of the Company have
been duly and validly authorized and issued and are fully paid, non-assessable
and are owned of record by SCM Microsystems, Inc., a Delaware corporation ('SCM
Microsystems"), free and clear of all liens, encumbrances, equities or claims;
3. Other than as described in the Prospectus there are no
pre-emptive or other rights to subscribe for or to purchase, nor any restriction
upon the voting or transfer of, any of the capital stock of the Company pursuant
to the Company's organizational documents or pursuant to any agreement or other
instrument;
4. Except as disclosed in the Prospectus, to our knowledge, there
are no legal or governmental proceedings pending to which the Company is a party
or of which any property or assets of the Company is the subject which, if
determined adversely to the Company, could individually or in the aggregate have
a material adverse effect on the Company and, to our knowledge, no such
proceedings are threatened or contemplated by governmental authorities or other
third parties;
5. The statements in the Prospectus under the heading "Risk Factors
- -- Proprietary Technology and Intellectual Property" and "Business --
Proprietary Technology and Intellectual Property," insofar as such statements
constitute summary descriptions of the legal matters, documents or proceedings
referred to therein, fairly present the information called for with respect to
such legal matters, documents or proceedings and such statements do not omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading;
6. to such counsel's knowledge, the Company owns or possesses all
patents, trademarks, trademark registrations, service marks, service mark
registrations, trade names, copyrights, licenses, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and rights described in the Prospectus as
being owned by it or necessary for the conduct of its business; and to such
counsel's knowledge, except as described in the Prospectus, the Company has not
received any notice of infringement of or conflict with and such counsel knows
of no infringement of or conflict with asserted rights of others with respect
to any such patents, trademarks, service marks or other proprietary information
or materials which could result in any material adverse effect on the Company
and to the knowledge of such counsel there is no infringement or violation by
others of any of the Company's patents, licenses, trade secrets, trademarks,
service marks or other proprietary information or materials which in the
judgment of such counsel could materially affect the use thereof by the Company;
7. the patents have been licensed to the Company as described in
the Prospectus, and such licenses are valid, binding and enforceable; and the
Company has rights to the products and technology covered thereby as described
in the Prospectus;
8. The Company has full corporate power and authority to enter into
the Underwriting Agreement and the International Underwriting Agreement and to
perform its obligations thereunder, and the Underwriting Agreement and the
International Underwriting Agreement have each been duly and validly authorized,
executed and delivered by the Company;
9. The execution, delivery and performance of the Underwriting
Agreement and the International Underwriting Agreement and the consummation of
the transactions contemplated by the Underwriting Agreement and the
International Underwriting Agreement will not result in a breach or violation of
any of (A) the terms or provisions of or constitute a default under any
indenture, mortgage, deed of trust note agreement or other agreement or
instrument known to us to which the Company is a
<PAGE> 44
party or by which any of its properties is or may be bound, (B) the
organizational documents of the Company, or (C) any law, order, rule or
regulation of any court or governmental agency or body having jurisdiction over
the Company or any of its properties nor will such execution, delivery and
performance result in the creation of a lien;
10. No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the Company of
the transactions contemplated by the Underwriting Agreement or the International
Underwriting Agreement.
11. The Prospectus used in connection with the application to list
the International Stock on the Neuer Markt of the Frankfurt Stock Exchange and
any amendments or supplements thereto comply as to form in all respects with the
requirements of German law.
12. The International Stock has been approved for listing on the
Neuer Markt of the Frankfurt Stock Exchange.
In addition, although we have not undertaken, except as otherwise
indicated herein, to determine independently, and do not assume any
responsibility for, the accuracy or completeness of the statements in the
Registration Statement, we have participated in the preparation of the
Registration Statement and the Prospectus (including the German translation
version thereof), including review and discussion of the contents thereof, and
nothing has come to our attention that has caused us to believe that the
Registration Statement at the time the Registration Statement became effective,
or the Prospectus (including the German translation version thereof), as of its
date and as of the date hereof, contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or that any amendment or
supplement to the Prospectus (including the German translation version thereof),
as of its respective date, and as of the date hereof, contained any untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading (it being understood that we express no belief
with respect to the financial statements and the notes thereto and the schedules
and other financial and statistical data included in the Registration Statement
or the Prospectus).
2
<PAGE> 45
SCHEDULE A
[U.S. Underwriters]
<PAGE> 46
SCHEDULE B
[International Managers]
<PAGE> 47
Exhibit IV
[Form of Intellectual Property Counsel Opinion]
1. The statements in the Prospectus under the heading "Risk Factors -
Proprietary Technology and Intellectual Property" and "Business - Proprietary
Technology and Intellectual Property," insofar as such statements constitute
summary descriptions of the legal matters, documents or proceedings referred to
therein, fairly present the information called for with respect to such legal
matters, documents or proceedings and such statements do not omit to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading;
2. to such counsel's knowledge, the Company owns or possesses all
patents, trademarks, trademark registrations, service marks, service mark
registrations, trade names, copyrights, licenses, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and rights described in the Prospectus as
being owned by it or necessary for the conduct of its business; and to such
counsel's knowledge, except as described in the Prospectus, the Company has not
received any notice of infringement of or conflict with and such counsel
knows of no infringement of or conflict with asserted rights of others with
respect to any such patents, trademarks, service marks or other proprietary
information or materials which could result in any material adverse effect on
the Company and to the knowledge of such counsel there is no infringement or
violation by others of any of the Company's patents, licenses, trade secrets,
trademarks, service marks or other proprietary information or materials which
in the judgment of such counsel could materially affect the use thereof by
the Company; and
3. the patents have been licensed to the Company as described in the
Prospectus, and such licenses are valid, binding and enforceable; and the
Company has rights to the products and technology covered thereby as described
in the Prospectus.
<PAGE> 48
SCHEDULE A
[U.S. Underwriters]
<PAGE> 49
SCHEDULE B
[International Managers]
<PAGE> 50
Exhibit V
[Form of Opinion of Selling Stockholders' Counsel]
1. The Underwriting Agreement, the International Underwriting
Agreement, the Custody Agreement, the Power of Attorney and the Lock-Up
Agreement to be executed by the Selling Stockholder each have been duly and
validly executed and delivered by or on behalf of each Selling Stockholder.
2. The Underwriting Agreement, the International Underwriting
Agreement, the Custody Agreement, the Power of Attorney and the Lock-Up
Agreement executed and delivered by the Selling Stockholders each constitute the
legal, valid and binding obligation of the Selling Stockholders enforceable
against each of the Selling Stockholders in accordance with their respective
terms except as the validity, legality and binding effect of each may be limited
or otherwise effected by (A) bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar statutes, rules, regulations or laws
affecting the enforcement of creditors' rights and remedies generally and (B)
the unavailability of, or limitation on the availability of, a particular right
or remedy (whether in a proceeding in law or equity) because of an equitable
principle or a requirement as to commercial reasonableness, conscionability or
good faith.
3. Each of the Selling Stockholders is the record owner of and has
marketable title to the Shares to be sold by such Selling Stockholder and, to
our knowledge, each Selling Stockholder has full legal right and power to enter
into the Underwriting Agreement and the International Underwriting Agreement and
to sell, transfer and deliver in the manner provided in the Underwriting
Agreement and the International Underwriting Agreement the Shares to be sold by
the Selling Stockholders.
4. The transfer and sale by the Selling Stockholders of the Shares
to be sold by the Selling Stockholders as contemplated in the Underwriting
Agreement and the International Underwriting Agreement will not violate any
agreement, judgment, decree, order, statute, rule or regulation which, to the
knowledge of such counsel, the Selling Stockholders are a party or by which
either Selling Stockholder is bound or subject.
5. All of the Selling Stockholders' rights in the Shares to be sold
by such Selling Stockholder, have been transferred to the Underwriters who have
severally purchased such Shares, free and clear of adverse claims, assuming that
the Underwriters purchased the same in good faith without notice of any adverse
claims.
6. To our knowledge, no consent, approval, authorization, license,
certificate, permit or order of any court, governmental or regulatory agency,
authority or body or financial institution is required in connection with the
performance of the Underwriting Agreement or the International Underwriting
Agreement by such Selling Stockholder or the consummation of the transactions
contemplated therein, including the delivery and sale of the Shares to be
delivered and sold by such Selling Stockholder, except such as have been
obtained and except such as may be required under state securities or blue sky
laws in connection with the purchase and distribution of the Shares by the
several Underwriters.
In addition, we have participated in conferences with officers and
other representatives of the Company, representatives of the Representatives and
representatives of the independent public accountants of the Company, at which
conferences the contents of the Registration Statement and the Prospectus and
related matters were discussed. While we have not undertaken to independently
verify and
<PAGE> 51
do not assume any responsibility for the accuracy, completeness or fairness of
the statements contained in the Registration Statement and the Prospectus
(except as specified in the foregoing opinion), on the basis of the foregoing,
no facts have come to our attention which lead us to believe that the
Registration Statement at the time it became effective (except with respect to
the financial statements and notes and schedules thereto and other financial
data, as to which we express no opinion) contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, or that the
Prospectus as amended or supplemented (except with respect to the financial
statements and notes schedules thereto and other financial data, as to which we
express no opinion) on the date thereof and the date hereof contained any untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
2
<PAGE> 52
SCHEDULE A
[U.S. Underwriters]
<PAGE> 53
SCHEDULE B
[International Managers]
<PAGE> 54
Exhibit VI
[Form of Lock-Up Agreement]
-----------------------
Print Stockholder Name
SCM MICROSYSTEMS, INC.
LOCK-UP AGREEMENT
Cowen & Company
Hambrecht & Quist LLC
As representatives of the
several Underwriters
c/o Cowen & Company
Financial Square
New York, New York 10005
Re: SCM Microsystems, Inc.
Ladies and Gentlemen:
In order to induce Cowen & Company ("Cowen") and Hambrecht & Quist LLC
(together, the "Representatives"), to enter into a certain underwriting
agreement with SCM Microsystems, Inc., a Delaware corporation (the "Company"),
with respect to the public offering of shares of the Company's Common Stock, par
value $ 0.001 per share ("Common Stock"), the undersigned hereby agrees that for
a period of 180 days following the date of the final prospectus filed by the
Company with the Securities and Exchange Commission in connection with such
public offering, the undersigned will not, without the prior written consent of
Cowen, directly or indirectly, (i) offer, sell, assign, transfer, encumber,
pledge, contract to sell, register for sale, grant an option to purchase or
otherwise dispose of, other than by operation of law, any shares of Common Stock
(including, without limitation, Common Stock which may be deemed to be
beneficially owned by the undersigned in accordance with the rules and
regulations promulgated under the Securities Act of 1933, as the same may be
amended or supplemented from time to time (such shares, the "Beneficially Owned
Shares") or (ii) enter into any swap or similar agreement that transfers, in
whole or in part, the economic risk of ownership of the Common Stock, whether
any such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise.
Notwithstanding the foregoing, this Lock-Up Agreement (the "Agreement") shall
not apply to shares of the Company's Common Stock (i) acquired through the
Company's directed shares program or (ii) acquired on the open market and that
shares so acquired may be sold or otherwise disposed of without regard to this
Agreement.
Notwithstanding the foregoing, if the undersigned is an individual, he or she
may transfer any Shares either during his or her lifetime or on death by will or
intestacy to his or her immediate family or to a trust the beneficiaries of
which are exclusively the undersigned and/or a member of his or her immediate
family or to a charitable organization; provided, however, that in any such case
it shall be a condition to the transfer that the transferee execute an agreement
stating that the transferee is receiving and holding
<PAGE> 55
the Shares transferred subject to the provisions of this Agreement, and there
shall be no further transfer of such Shares except in accordance with this
Agreement. For purposes of this Agreement, "immediate family" shall mean spouse,
lineal descendant, father, mother, brother or sister of the transferor and
"charitable organization" shall mean an organization described in Section
501(c)(3) of the Internal Revenue Code of 1986, as amended.
Notwithstanding the foregoing, if the undersigned is a partnership, the
partnership may transfer any Shares to a partner of such partnership or a
retired partner of such partnership who retires after the date hereof, or to the
estate of any such partner or retired partner, and any partner who is an
individual may transfer such Shares by gift, will or intestate succession to his
or her spouse or lineal descendants or ancestors; and if the undersigned is a
corporation, the corporation may transfer such Shares to any stockholder or
subsidiary of such corporation and any stockholder who is an individual may
transfer Shares by gift, will or intestate succession to his or her immediate
family or to a charitable organization; provided, however, that in any such
case, it shall be a condition to the transfer that the transferee execute an
agreement stating that the transferee is receiving and holding the Shares
subject to the provisions of this Agreement, and there shall be no further
transfer of such Shares except in accordance with this Agreement.
The undersigned agrees that the provisions of this Agreement shall be binding
also upon the successors, assigns, heirs and personal representatives of the
undersigned. The undersigned agrees and consents to the placing of legends
and/or the entry of stop transfer instructions with the Company's transfer agent
against the transfer of any shares of Common Stock or Beneficially Owned Shares
held by the undersigned except in compliance with this Agreement.
It is understood that, if the Underwriting Agreement does not become effective,
or if the Underwriting Agreement (other than the provisions thereof which
survive termination) shall terminate or be terminated prior to payment for and
delivery of the Shares, you will release us from our obligations under this
Agreement.
This Agreement shall terminate and be of no further force or effect in the event
that the offering contemplated by the Underwriting Agreement is not completed on
or before October 30, 1997.
Very truly yours,
----------------------------------------
(Signature)
----------------------------------------
(Title)
----------------------------------------
(Date)
<PAGE> 1
EXHIBIT 1.2
R&W Draft
9/3/97
750,000 Shares
SCM MICROSYSTEMS, INC.
Common Stock
INTERNATIONAL UNDERWRITING AGREEMENT
_____________, 1997
COWEN INTERNATIONAL L.P.
HAMBRECHT & QUIST LLC
WESTDEUTSCHE LANDESBANK GIROZENTRALE
As Lead Managers of the several International Managers
c/o Cowen International L.P.
One Angel Court
London EC2R 7HJ
Dear Sirs:
1 Introductory. SCM Microsystems, Inc., a Delaware corporation (the
"Company"), and the selling stockholders named in Schedule B hereto
(the "Selling Stockholders") propose to sell, pursuant to the terms
of this Agreement, to the several International Managers named in
Schedule A hereto (the "International Managers," or, each, an
"International Manager"), an aggregate of 750,000 shares of Common
Stock, $0.001 par value per share (the "Common Stock"), of the
Company. The aggregate of 750,000 shares so proposed to be sold is
hereinafter referred to as the "Firm Stock." The Company also
proposes to sell to the International Managers, upon the terms and
conditions set forth in Section 3 hereof, up to an additional
112,500 shares of Common Stock (the "Optional Stock"). The Firm
Stock and the Optional Stock are hereinafter collectively referred
to as the "Stock." Cowen International L.P. ("Cowen"), Hambrecht &
Quist LLC and Westdeutsche Landesbank Girozentrale are acting as
Lead Managers of the several International Managers and in such
capacity are hereinafter referred to as the "Lead Managers."
It is understood by all parties that the Company and the Selling
Stockholders are concurrently entering into an agreement dated the
date hereof (the "U.S. Underwriting Agreement") providing for the
sale by the Company and the Selling Stockholders of an aggregate of
2,620,000 shares of Common Stock (the "U.S. Stock") through
arrangements with certain U.S. Underwriters in the United States
and Canada (the "U.S. Underwriters"), for whom Cowen & Company and
Hambrecht & Quist LLC are acting as Representatives (the
"Representatives"). The International Managers and the U.S.
Underwriters simultaneously are entering into an agreement among
the International and U.S. underwriting syndicates (the "Agreement
Among U.S. Underwriters and International Managers") which
provides for, among other things, the transfer of shares of
1
<PAGE> 2
Common Stock between the two syndicates. Two forms of prospectus
are to be used in connection with the offer and sale of shares of
Common Stock contemplated by the foregoing, one relating to the
Stock and the other relating to the U.S. Stock. In addition, the
International version of the prospectus will be translated into
German for purposes of the application to list the International
Stock on the Neuer Markt of the Frankfurt Stock Exchange. Except as
used in the first paragraph hereof and in Section 3 and 8 herein,
and except as the context may otherwise require, references herein
to the Stock shall include all the shares of Common Stock which may
be sold pursuant to both this Agreement and the U.S. Underwriting
Agreement, and references herein to any prospectus whether in
preliminary or final form, and whether as amended or supplemented,
shall include the U.S. and the International versions thereof and
the German translation version of the International version.
2a. Representations and Warranties of the Company and its Subsidiaries.
The Company hereby represents and warrants to, and agrees with, the
several International Managers that:
(a) A registration statement on Form S-1 (File No.
333-29073) in the form in which it became or becomes
effective and also in such form as it may be when any
post-effective amendment thereto shall become
effective with respect to the Stock, including any
pre-effective prospectuses included as part of the
registration statement as originally filed or as part
of any amendment or supplement thereto, or filed
pursuant to Rule 424 under the Securities Act of 1933,
as amended (the "Securities Act"), and the rules and
regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission")
promulgated thereunder, copies of which have
heretofore been delivered to you, has been prepared by
the Company in conformity with the requirements of the
Securities Act and has been filed with the Commission
under the Securities Act; one or more amendments to
such registration statement, including in each case an
amended pre-effective prospectus, copies of which
amendments have heretofore been delivered to you, have
been so prepared and filed. If it is contemplated, at
the time this Agreement is executed, that a
post-effective amendment to the registration statement
will be filed and must be declared effective before
the offering of the Stock may commence, the term
"Registration Statement" as used in this Agreement
means the registration statement as amended by said
post-effective amendment. The term "Registration
Statement" as used in this Agreement shall also
include any registration statement relating to the
Stock that is filed and declared effective pursuant to
Rule 462(b) under the Securities Act. The term
"Prospectus" as used in this Agreement means the
prospectus in the form included in the Registration
Statement, or, (A) if the prospectus included in the
Registration Statement omits information in reliance
on Rule 430A under the Securities Act and such
information is included in a prospectus filed with the
Commission pursuant to Rule 424(b) under the
Securities Act, the term "Prospectus" as used in this
Agreement means the prospectus in the form included in
the Registration Statement as supplemented by the
addition of the Rule 430A information contained in the
prospectus filed with the Commission pursuant to Rule
424(b) and (B) if prospectuses that meet the
requirements of Section 10(a) of the Securities Act
are delivered pursuant to Rule 434 under the
Securities Act, then (i) the term "Prospectus" as used
in this Agreement means the "prospectus subject to
completion" (as such term is defined in Rule 434(g)
under the Securities Act) as supplemented by (a) the
addition of Rule 430A information or other information
contained in the form of prospectus delivered pursuant
to Rule 434(b)(2) under the Securities Act or (b) the
information contained in the term sheets described in
Rule 434(b)(3) under the Securities Act, and (ii) the
date of such prospectuses shall be deemed to be the
date of the term sheets. The term "Pre-effective
Prospectus" as used in this Agreement means the
2
<PAGE> 3
prospectus subject to completion dated September __,
1997, and as such prospectus shall have been amended
from time to time prior to the date of the Prospectus.
(b) The Commission has not issued or, to the Company's
knowledge, threatened to issue any order preventing or
suspending the use of any Pre-effective Prospectus, and,
at its date of issue, each Pre-effective Prospectus
complied in all material respects with the applicable
provisions of the Securities Act and did not contain any
untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary
in order to make the statements therein, in light of the
circumstances under which they were made, not
misleading, other than any noncompliance, untrue
statement or omission in a Pre-effective Prospectus that
has been corrected in the Prospectus; and, when the
Registration Statement becomes effective and at all
times subsequent thereto up to and including each of the
Closing Dates (as hereinafter defined), the Registration
Statement and the Prospectus and any amendments or
supplements thereto contained and will contain all
material statements and information required to be
included therein by the Securities Act and complied and
will comply in all material respects with the applicable
provisions of the Securities Act and neither the
Registration Statement nor the Prospectus, nor any
amendment or supplement thereto, contained or will
contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein
or necessary in order to make the statements therein, in
light of the circumstances under which they were made,
not misleading; provided, however, that the foregoing
representations and warranties shall not apply to
information contained in or omitted from any
Pre-effective Prospectus or the Registration Statement
or the Prospectus or any such amendment or supplement
thereto in reliance upon, and in conformity with,
written information furnished to the Company by the Lead
Managers on behalf of the several International
Managers, directly or through you, specifically for use
in the preparation thereof. With respect to the
preceding sentence, the Company acknowledges that the
only information furnished in writing by the Lead
Managers on behalf of the several International Managers
for use in the Pre-effective Prospectus, the
Registration Statement and the Prospectus is the
paragraph with respect to stabilization on the inside
front cover page of the Prospectus and the statements
contained under the caption "Underwriting" in the
Prospectus.
(c) The Registration Statement is effective under the
Securities Act and no stop order suspending
effectiveness of the Registration Statement or
suspending or preventing the use of the Prospectus has
been issued and no proceedings for that purpose have
been instituted or, to the Company's knowledge, are
threatened under the Securities Act; any required filing
of the Prospectus and any amendment or supplement
thereto pursuant to Rule 424(b) of the Rules and
Regulations has been or will be made in the manner and
within the time period required by Rule 424(b).
(d) There is no document, contract or other agreement of a
character required to be described in the Registration
Statement or Prospectus or to be filed as an exhibit to
the Registration Statement which is not described or
filed as required by the Securities Act or the Rules and
Regulations. Each agreement described in the
Registration Statement and the Prospectus or listed in
the Exhibits to the Registration Statement is in full
force and effect and is valid and enforceable by and
against the Company or its subsidiaries in accordance
with its terms, except to the extent that rights to
indemnity and contribution hereunder may be limited by
applicable bankruptcy, insolvency and other similar laws
affecting conditions, rights and rules of law governing
specific performance, injunctive relief and other
equitable remedies. Neither the Company nor any
subsidiary is in default in the
3
<PAGE> 4
observance or performance of any material term or
obligation to be performed by it under any such
agreement, and no event has occurred which, with notice
or lapse of time or both, would constitute such a
default, in any such case which default or event would
have a material adverse effect on the Company and its
subsidiaries taken as a whole. No default exists, and,
to the knowledge of the Company, no event has occurred
which, with notice or lapse of time or both would
constitute a default, in the due performance and
observance of any term, covenant or condition, by the
Company or any of its subsidiaries of any other
agreement or instrument to which the Company or any of
its subsidiaries is a party or by which any of them or
their respective properties or businesses may be bound
or affected, in any case which default or event could
reasonably be expected to have a material adverse effect
on the operations of the Company and its subsidiaries
considered as a whole.
(e) None of the Company or its subsidiaries is in violation
of any franchise, license, permit, judgment, decree,
order, statute or rule or regulation, which could
reasonably be expected to have a material adverse effect
on the operations of the Company and its subsidiaries
considered as a whole, or any term or provision of its
certificate of incorporation or by-laws.
(f) Subsequent to the respective dates as of which
information is given in the Registration Statement and
Prospectus, and except as set forth or contemplated in
the Prospectus, neither the Company nor any of its
subsidiaries has incurred any material liabilities or
obligations, direct or contingent, nor entered into any
transactions not in the ordinary course of business, and
there has not been any material adverse change in the
condition (financial or otherwise), properties,
business, management, net worth or results of operations
of the Company and its subsidiaries considered as a
whole, or any change in the capital stock, short-term or
long-term debt of the Company and its subsidiaries
considered as a whole, except for issuances of Common
Stock pursuant to the Company's 1997 Stock Plan, 1997
Employee Stock Purchase Plan, 1997 Director Option Plan,
1997 Stock Option Plan for French Employees and the 1997
Employee Stock Purchase Plan for Non-U.S. Employees
(collectively, the "1997 Plans").
(g) The financial statements, together with the related
notes and schedules, set forth in the Prospectus and
elsewhere in the Registration Statement fairly present,
the financial position and the results of operations and
changes in financial position of the Company and its
consolidated subsidiaries at the respective dates or for
the respective periods therein specified. Such
statements and related notes and schedules have been
prepared in accordance with generally accepted
accounting principles applied on a consistent basis
except as may be set forth in the Prospectus. The
summary and selected financial and statistical data set
forth in the Prospectus under the captions "Summary
Consolidated Financial Data," "Selected Consolidated
Financial Data," "Management's Discussion and Analysis
of Financial Condition and Results of Operations--
Results of Operations" and "-- Quarterly Results of
Operations" fairly present, on the basis stated in the
Registration Statement, the information set forth
therein as at the respective dates and for the
respective periods specified, and such data have been
presented on a basis consistent with the financial
statements so set forth in the Prospectus and other
financial information.
(h) To the Company's knowledge, KPMG Peat Marwick LLP, who
have expressed their opinions on the audited financial
statements and related schedules included in the
4
<PAGE> 5
Registration Statement and the Prospectus are
independent public accountants as required by the
Securities Act and the Rules and Regulations.
(i) The Company and each of its subsidiaries have been duly
organized and are validly existing and in good standing
as corporations under the laws of their respective
jurisdictions of organization, with power and authority
(corporate and other) to own or lease their properties
and to conduct their businesses as described in the
Registration Statement and the Prospectus; each of the
Company and its subsidiaries is in possession of and
operating in compliance with all material franchises,
grants, authorizations, licenses, permits, easements,
consents, certificates and orders required for the
conduct of its business, all of which are valid and in
full force and effect; and each of the Company and its
subsidiaries is duly qualified to do business and in
good standing as a foreign corporation in all other
jurisdictions where its ownership or leasing of
properties or the conduct of its businesses requires
such qualification, except where failure to so qualify
would not have a material adverse effect on the Company
and its subsidiaries considered as a whole. The Company
has and each of its subsidiaries have all requisite
power and authority, and all necessary consents,
approvals, authorizations, orders, registrations,
qualifications, licenses and permits of and from all
public regulatory or governmental agencies and bodies to
own, lease and operate its properties and conduct its
business as now being conducted and as described in the
Registration Statement and the Prospectus, and no such
consent, approval, authorization, order, registration,
qualification, license or permit contains a materially
burdensome restriction not adequately disclosed in the
Registration Statement and the Prospectus. The Company
owns or controls, directly or indirectly, only the
corporations, associations or other entities named in
Schedule C hereto.
(j) The Company's authorized and outstanding capital stock
is on the date hereof, and will be on the Closing Dates,
as set forth under the heading "Capitalization" in the
Prospectus; the outstanding shares of Common Stock of
the Company conform to the description thereof in the
Prospectus and have been duly authorized and validly
issued and are fully paid and nonassessable; and have
been issued in compliance with all federal and state
securities laws and were not issued in violation of or
subject to any pre-emptive rights or similar rights to
subscribe for or purchase securities. Except as
disclosed in and or contemplated by the Prospectus and
the consolidated financial statements of the Company and
related notes thereto included in the Prospectus, the
Company does not have outstanding any options or
warrants to purchase, or any pre-emptive rights or other
rights to subscribe for or to purchase any securities or
obligations convertible into, or any contracts or
commitments to issue or sell, shares of its capital
stock or any such options, rights, convertible
securities or obligations, except for options granted
subsequent to the date of information provided in the
Prospectus pursuant to the Company's employee and stock
option plans as disclosed in the Prospectus. The
description of the Company's stock option and other
stock plans or arrangements, and the options or other
rights granted or exercised thereunder, as set forth in
the Prospectus, accurately and fairly presents the
information required to be shown with respect to such
plans, arrangements, options and rights. All outstanding
shares of capital stock of each subsidiary have been
duly authorized and validly issued, and are fully paid
and nonassessable and are owned directly by the Company
or by another wholly owned subsidiary of the Company
free and clear of any liens, encumbrances, equities or
claims.
5
<PAGE> 6
(k) The Stock to be issued and sold by the Company to the
International Managers hereunder and the U.S Stock to be
issued and sold by the Company to the U.S. Underwriters
under the U.S. Underwriting Agreement has been duly and
validly authorized and, when issued and delivered
against payment therefor as provided herein and therein,
will be duly and validly issued, fully paid and
nonassessable and free of any pre-emptive or similar
rights and will conform to the description thereof in
the Prospectus and the International Managers and the
U.S. Underwriters will receive good title to the Stock
and the U.S. Stock, respectively, free and clear of all
liens, security interests, pledges, charges, claims and
encumbrances.
(l) Except as set forth in the Prospectus, there are no
legal or governmental proceedings pending to which the
Company or any of its subsidiaries is a party or of
which any property of the Company or any subsidiary is
subject, which, if determined adversely to the Company
or any such subsidiary, could individually or in the
aggregate be reasonably expected to (i) prevent or
adversely affect the transactions contemplated by this
Agreement, (ii) suspend the effectiveness of the
Registration Statement, (iii) prevent or suspend the use
of the Pre-effective Prospectus in any jurisdiction or
(iv) result in a material adverse change in the
condition (financial or otherwise), properties,
business, management, net worth or results of operations
of the Company and its subsidiaries considered as a
whole and the Company is not aware of any valid basis
for any such legal or governmental proceeding; and, to
the Company's knowledge, no such proceedings are
threatened or contemplated against the Company or any
subsidiary by governmental authorities or others.
Neither the Company nor any subsidiary is a party nor
subject to the provisions of any material injunction,
judgment, decree or order of any court, regulatory body
or other governmental agency or body. The description of
the Company's litigation under the heading "Legal
Proceedings" in the Prospectus is true and correct and
complies with the Rules and Regulations and no other
suit or proceeding before any court or governmental
authority known to the Company is required to be
disclosed in the Prospectus that is not so disclosed.
(m) The execution, delivery and performance of this
Agreement and the U.S. Underwriting Agreement and the
consummation of the transactions herein and therein
contemplated (A) will not result in any violation of the
provisions of the certificate of incorporation, by- laws
or other organizational documents of the Company or its
subsidiary, or any law, order, rule or regulation of any
court or governmental agency or body having jurisdiction
over the Company or its subsidiaries or any of their
respective properties or assets, and (B) will not
conflict with or result in a breach or violation of any
of the terms or provision of or constitute a default
under any indenture, mortgage, deed of trust, loan
agreement or other agreement or instrument to which the
Company or any of its subsidiaries is a party or by
which it or any of their respective properties is or may
be bound nor will such delivery and performance result
in the creation of a security interest, lien,
encumbrance, charge or claim.
(n) No consent, approval, authorization or order of any
court or governmental agency or body is required for the
execution, delivery and performance of this Agreement
and the U.S. Underwriting Agreement by the Company or
its subsidiaries and the consummation of the
transactions contemplated hereby and thereby (including
the issuance, sale and delivery of the Stock), except
such as may be required by the National Association of
Securities Dealers, Inc. (the "NASD"), the Neuer Markt
of the Frankfurt Stock Exchange or under the Securities
Act or the Securities Exchange Act of 1934, as amended
(the "Exchange
6
<PAGE> 7
Act") or the securities or "Blue Sky" laws of any
jurisdiction in connection with the purchase and
distribution of the Stock by the International Managers
and the U.S. Stock by the U.S. Underwriters.
(o) The Company has the full corporate power and authority
to enter into this Agreement and the U.S. Underwriting
Agreement and to perform its obligations hereunder and
thereunder (including to issue, sell and deliver the
Stock and the U.S. Stock), and this Agreement and the
U.S. Underwriting Agreement have each been duly and
validly authorized, executed and delivered by the
Company and each constitutes a valid and binding
obligation of the Company, enforceable against the
Company in accordance with their respective terms,
except to the extent that rights to indemnity and
contribution hereunder may be limited by federal or
state securities laws or the public policy underlying
such laws and except as may be limited by applicable
bankruptcy, insolvency and other similar laws affecting
conditions, rights and rules of law governing specific
performance, injunctive relief and other equitable
remedies.
(p) The Company and its subsidiaries are in all material
respects in compliance with, and conduct their
respective businesses in conformity with, all applicable
federal, state, local and foreign laws, rules and
regulations or any court or governmental agency or body;
to the knowledge of the Company, otherwise than as set
forth in the Registration Statement and the Prospectus,
no prospective change in any of such federal or state
laws, rules or regulations has been adopted which, when
made effective, could reasonably be expected to have a
material adverse effect on the operations of the Company
and its subsidiaries considered as a whole.
(q) The Company and its subsidiaries have filed all
necessary federal, state, local and foreign income,
payroll, franchise and other tax returns and have paid
all taxes shown as due thereon or with respect to any of
their properties, and there is no tax deficiency that
has been or to the knowledge of the Company is
reasonably likely to be, asserted against the Company or
any of its subsidiaries or any of their respective
properties or assets that would materially and adversely
affect the financial position, business or operations of
the Company and its subsidiaries considered as a whole.
(r) No person or entity has the right to require
registration of shares of Common Stock or other
securities of the Company because of the filing or
effectiveness of the Registration Statement or
otherwise, except for persons and entities who have
expressly waived such right or who have been given
proper notice and have failed to exercise such right
within the time or times required under the terms and
conditions of such right.
(s) Neither the Company nor any of its officers, directors
or affiliates has taken or will take, directly or
indirectly, any action designed or intended to stabilize
or manipulate the price of the Common Stock in violation
of Regulation M of the Exchange Act, or which caused or
resulted in, or which might in the future reasonably be
expected to cause or result in, stabilization or
manipulation of the price of the Common Stock in
violation of Regulation M of the Exchange Act.
(t) Each of the Company and each of its subsidiaries owns,
or possesses adequate and enforceable rights, either as
owner or licensee, to use all patents, trademarks
(including "SwapBox(TM)," "SwapSmart(TM),"
"SwapAcces(TM)" and "SmartOS(TM)"), trademark
registrations, service marks, service mark
registrations, trade names, copyrights, licenses,
7
<PAGE> 8
inventions, trade secrets, know-how and other similar
rights described in the Prospectus as being owned or
licensed by them and except as described in the
Prospectus the Company is not aware of any claim to the
contrary or any challenge by any other person to the
rights of the Company and its subsidiaries with respect
to the foregoing. The Company's business as now
conducted and as proposed to be conducted does not and
will not infringe or conflict with in any material
respect any patents, trademarks, service marks, trade
name, copyright, trade secrets, know-how, licenses or
other intellectual property or franchise right of any
person. Except as described in the Prospectus, no claim
has been made against the Company alleging the
infringement by the Company of any patent, trademark,
service mark, trade name, copyright, trade secret,
know-how, license in or other intellectual property
right or franchise right of any person.
(u) The Company is not involved in any labor dispute nor, to
the knowledge of the Company, is any such dispute
threatened. Except as described in the Prospectus, the
Company is not aware that (A) any executive, key
employee or significant group of employees of the
Company or any subsidiary plans to terminate employment
with the Company or any such subsidiary or (B) any such
executive or key employee is subject to any noncompete,
nondisclosure, confidentiality, employment, consulting
or similar agreement that would be violated by the
present or proposed business activities of the Company
and its subsidiaries. Neither the Company nor any
subsidiary has or expects to have any liability for any
prohibited transaction or funding deficiency or any
complete or partial withdrawal liability with respect to
any pension, profit sharing or other plan which is
subject to the Employee Retirement Income Security Act
of 1974, as amended ("ERISA"), to which the Company or
any subsidiary makes or ever has made a contribution and
in which any employee of the Company or any subsidiary
is or has ever been a participant. With respect to such
plans, the Company and each subsidiary is in compliance
in all material respects with all applicable provisions
of ERISA.
(v) No transaction has occurred, and no relationship, direct
or indirect, exists, between or among the Company or its
subsidiaries, on the one hand, and any of its
stockholders, officers, directors, customers or
suppliers of the Company or its subsidiaries or any
affiliate or affiliates of any such stockholder,
officer, director, customer or supplier, on the other
hand, that is required to be described and is not so
described in the Prospectus.
(w) The Company and its subsidiaries have, and the Company
and its subsidiaries as of the Closing Dates will have,
good and marketable title to all personal property owned
by them which is material to the business of the Company
or of its subsidiaries, in each case free and clear of
all liens, encumbrances and defects except such as are
described in the Prospectus or such as would not have a
material adverse effect on the Company and its
subsidiaries considered as a whole; and any real
property and buildings held under lease by the Company
and its subsidiaries are, or will be as of each of the
Closing Dates, held by them under valid, subsisting and
enforceable leases with such exceptions as would not
have a material adverse effect on the Company and its
subsidiaries considered as a whole, in each case except
as described in or contemplated by the Prospectus.
(x) The Company and its subsidiaries are insured by insurers
of recognized financial responsibility against such
losses and risks and in such amounts as are customary in
the businesses in which they are engaged or propose to
engage after giving effect to the transactions described
in the Prospectus; and neither the Company nor any
subsidiary of the Company has any reason to believe that
it will not be able to renew its existing
8
<PAGE> 9
insurance coverage as and when such coverage expires or
to obtain similar coverage from similar insurers as may
be necessary to continue their business at a cost that
would not have a material adverse effect on the Company
and its subsidiaries considered as a whole, except as
described in or contemplated by the Prospectus.
(y) Other than as contemplated by this Agreement and the
U.S. Underwriting Agreement, there is no broker, finder
or other party that is entitled to receive from the
Company any brokerage or finder's fee or other fee or
commission as a result of any of the transactions
contemplated by this Agreement or the U.S. Underwriting
Agreement.
(z) The Stock has been duly authorized for (i) quotation on
the National Association of Securities Dealers Automated
Quotation ("NASDAQ") National Market System, subject to
official Notice of Issuance, and (ii) listing on the
Neuer Markt of the Frankfurt Stock Exchange, and a
registration statement has been filed on Form 8-A
pursuant to Section 12 of the Exchange Act, which
registration statement complies in all material respects
with the Exchange Act.
(aa) The books, records and accounts of the Company and its
subsidiaries accurately and fairly reflect, in all
material respects, the transactions in, and dispositions
of, the assets of, and the results of operation of, the
Company and its subsidiaries. The Company and each of
its subsidiaries maintains a system of internal
accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in
accordance with management's general or specific
authorization; (ii) transactions are recorded as
necessary to permit preparation of financial statements
in conformity with generally accepted accounting
principles and to maintain accountability for assets;
(iii) access to assets is permitted only in accordance
with management's general or specific authorization; and
(iv) the recorded accountability for assets is compared
with existing assets at reasonable intervals and
appropriate action is taken with respect to any
differences.
(bb) To the Company's knowledge, neither the Company nor any
of its subsidiaries nor any employee or agent of the
Company or any of its subsidiaries has made any payment
of funds of the Company or any of its subsidiaries or
received or retained any funds in violation of any law,
rule or regulation, which payment, receipt or retention
of funds is of a character required to be disclosed in
the Prospectus.
(cc) Neither the Company nor any of its subsidiaries is or,
after application of the net proceeds of this offering
as described under the caption "Use of Proceeds" in the
Prospectus, will become an "investment company" or an
entity "controlled" by an "investment company" as such
terms are defined in the Investment Company Act of 1940,
as amended.
(dd) Each certificate signed by any officer of the Company
and delivered to the International Managers or counsel
for the International Managers shall be deemed to be a
representation and warranty by the Company as to the
matters covered thereby.
(ee) Neither the Company nor any of its subsidiaries, nor any
director, officer, agent, employee or other person
associated with or acting on behalf of the Company or
any of its subsidiaries, has used any corporate funds
for any unlawful contribution, gift, entertainment or
other unlawful expense relating to political activity;
made any direct or indirect unlawful payment to any
foreign or domestic government official or employee
9
<PAGE> 10
from corporate funds; or has violated or is in violation
of any provision of the Foreign Corrupt Practices Act of
1977.
(ff) An application for admission of the International Stock
(i) for trading on the regulated market ("Geregelter
Markt") of the Frankfurt Stock Exchange ("FSE") to be
submitted to the Admissions Committee of the FSE, and
(ii) to the "neuer Markt" of the FSE to be submitted to
the Executive Board of the Deutsche Borse AG, the
operator of the "Neuer Markt", copies of which have
heretofore been delivered to you (both of which
applications hereinafter referred to as the "Application
for Admission") have been [will be] prepared by the
Company in conformity with the requirements of the
German Securities Act ("BorsG"), the Regulations on
Admissions to the Stock Exchange ("BorsZulVO"), the
Regulations of the FSE ("BorsO"), and the rules and
regulations of the Neuer Markt segment of the FSE. All
representations and warranties set forth above (a)
through (ff) with regard to the registration and the
listing of the U.S.Stock with the SEC and at NASDAQ,
respectively, apply mutatis mutandis to the Company's
involvement in the listing of the International Stock
at the Neuer Markt of the FSE.
2b. Representations and Warranties and Agreements of the Selling
Stockholders. Each Selling Stockholder represents and warrants to,
and agrees with, the several International Managers that such
Selling Stockholder:
(a) Now has, and on the Closing Date will have, valid and
marketable title to the Stock and the U.S. Stock to be
sold by such Selling Stockholder, free and clear of any
lien, claim, security interest or other encumbrance,
including, without limitation, any restriction on
transfer, and has full right, power and authority to
enter into this Agreement, the Power of Attorney and the
Custody Agreement (each as hereinafter defined).
(b) Now has, and on the Closing Date will have, upon
delivery of and payment for each share of Stock
hereunder and U.S. Stock under the U.S. Underwriting
Agreement, full right, power and authority, and approval
required by law to sell, transfer, assign and deliver
the Stock being sold by such Selling Stockholder
hereunder and the U.S. Stock being sold by such Selling
Stockholder under the U.S. Underwriting Agreement, and
each of the several International Managers will acquire
valid and marketable title to all of the Stock being
sold to the International Managers by such Selling
Stockholder, free and clear of any liens, encumbrances,
equities claims, restrictions on transfer or other
defects whatsoever.
(c) For a period of 180 days after the date of this
Agreement, without the consent of Cowen & Company, such
Selling Stockholder will not offer, sell, assign,
transfer, encumber, contract to sell, grant an option to
purchase or otherwise dispose of any Stock or securities
convertible into or exchangeable for Stock, including,
without limitation Stock which may be deemed to be
beneficially owned by such Selling Shareholder in
accordance with the Rules and Regulations, except for
the Stock being sold hereunder and the U.S. Stock being
sold under the U.S. Underwriting Agreement.
(d) Has duly executed and delivered a power of attorney, in
substantially the form heretofore delivered by the Lead
Managers (the "Power of Attorney"), appointing
_________________ and __________________ and each of
them, as attorney-in-fact (the "Attorneys-in-fact") with
authority to execute and deliver this Agreement and the
U.S. Underwriting Agreement on behalf of
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<PAGE> 11
such Selling Stockholder, to authorize the delivery of
the shares of Stock to be sold by such Selling
Stockholder hereunder and the shares of U.S. Stock being
sold by such Selling Stockholder under the U.S.
Underwriting Agreement and otherwise to act on behalf of
such Selling Stockholder in connection with the
transactions contemplated by this Agreement and the U.S.
Underwriting Agreement.
(e) Has duly executed and delivered a custody agreement, in
substantially the form heretofore delivered by the Lead
Managers ( the "Custody Agreement"), with as custodian
(the "Custodian"), pursuant to which certificates in
negotiable form for the shares of Stock and the U.S.
Stock to be sold by such Selling Stockholder hereunder
and under the U.S. Underwriting Agreement have been
placed in custody for delivery under this Agreement and
the U.S. Underwriting Agreement.
(f) Has, by execution and delivery of each of this
Agreement, the U.S. Underwriting Agreement, the Power of
Attorney and the Custody Agreement, created valid and
binding obligations of such Selling Stockholder,
enforceable against such Selling Stockholder in
accordance with its terms, except to the extent that
rights to indemnity hereunder may be limited by federal
or state securities laws or the public policy underlying
such laws.
(g) The performance of this Agreement, the U.S. Underwriting
Agreement, the Custody Agreement and the Power of
Attorney, and the consummation of the transactions
contemplated hereby and thereby will not result in a
breach or violation by such Selling Stockholder of any
of the terms or provisions of, or constitute a default
by such Selling Stockholder under, any material
indenture, mortgage, deed of trust, trust (constructive
or other), loan agreement, lease, franchise, license or
other agreement or instrument to which such Selling
Stockholder is a party or by which such Selling
Stockholder or any of its properties is bound, or any
judgement of any court or governmental agency or body
applicable to such Selling Stockholder or any of its
properties, or to such Selling Stockholder's knowledge,
any statute, decree, order, rule or regulation of any
court or governmental agency or body applicable to such
Selling Stockholder or any of its properties.
Each Selling Stockholder agrees that the shares of Stock
and U.S. Stock represented by the certificates held in
custody under the Custody Agreement are for the benefit
of and coupled with and subject to the interests of the
International Managers, the U.S. Underwriters, the
Selling Stockholders, and the Company hereunder, and
that the arrangement for such custody and the
appointment of the Attorneys-in-fact are irrevocable;
that the obligations of such Selling Stockholder
hereunder shall not be terminated by operation of law,
whether by the death or incapacity, liquidation or
distribution of such Selling Stockholder, or any other
event, that if such Selling Stockholder should die or
become incapacitated or any other event occurs, before
the delivery of the Stock hereunder and the U.S. Stock
under the U.S. Underwriting Agreement, certificates for
the Stock and the U.S. Stock to be sold by such Selling
Stockholder shall be delivered on behalf of such Selling
Stockholder in accordance with the terms and conditions
of this Agreement, the U.S. Underwriting Agreement and
the Custody Agreement, and action taken by the
Attorneys-in-fact or any of them under the Power of
Attorney shall be as valid as if such death, incapacity,
or other event had not occurred, whether or not the
Custodian, the Attorneys-in-fact or any of them shall
have notice of such death, incapacity or other event.
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<PAGE> 12
3 Purchase by, and Sale and Delivery to, International
Managers--Closing Dates. The Company and the Selling Stockholders
agree, severally and not jointly, to sell to the International
Managers the Firm Stock with the number of shares to be sold by the
Company and each Selling Stockholder being the number of shares set
forth opposite his, her or its name in Schedule B, and on the basis
of the representations, warranties, covenants and agreements herein
contained, but subject to the terms and conditions herein set
forth, the International Managers agree, severally and not jointly,
to purchase the Firm Stock from the Company and the Selling
Stockholders, the number of shares of Firm Stock to be purchased by
each International Manager being set opposite its name in Schedule
A, subject to adjustment in accordance with Section 12 hereof. The
number of shares of Stock to be purchased by each International
Manager from each Selling Stockholder hereunder shall bear the same
proportion to the total number of shares of Stock to be purchased
by such International Manager hereunder as the number of shares of
stock being sold by each Selling Stockholder bears to the total
number of shares of Stock being sold by all Selling Stockholders,
subject to adjustment by the Lead Managers to eliminate fractions.
The purchase price per share to be paid by the International
Managers to the Company and the Selling Stockholders will be the
price per share set forth in the "Per Share" row of the table on
the cover page of the Prospectus under the heading "Proceeds to
Company" and "Proceeds to Selling Stockholders," respectively (the
"Purchase Price").
The Company and the Selling Stockholders will deliver the Firm Stock
to the Lead Managers for the respective accounts of the several
International Managers (in the form of definitive certificates,
issued in such names and in such denominations as the
Representatives may direct by notice in writing to the Company and
the Selling Stockholders given at or prior to 12:00 Noon, New York
Time, on the second full business day preceding the First Closing
Date (as defined below) or, if no such direction is received, in the
names of the respective International Managers or in such other
names as Cowen may designate (solely for the purpose of
administrative convenience) and in such denominations as Cowen may
determine), against payment of the aggregate Purchase Price
therefore by wire transfer in immediately available funds (same day
funds), to the Company and _________________________ as Custodian
for the Selling Stockholders, all at the offices of Wilson Sonsini
Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304.
The time and date of the delivery and closing shall be at 10:00
A.M., New York Time, on _________, 1997. The time and date of such
payment and delivery are herein referred to as the "First Closing
Date". The First Closing Date and the location of delivery of, and
the form of payment for, the Firm Stock may be varied by agreement
among the Company, Cowen and the Selling Stockholders. The First
Closing Date may be postponed pursuant to the provisions of Section
12.
The Company and the Selling Stockholders shall make the certificates
for the Stock available to the Lead Managers for examination on
behalf of the International Managers not later than 10:00 A.M., New
York time, on the business day preceding the First Closing Date at
the offices of Cowen & Company, Financial Square, New York, New York
10005.
It is understood that the Lead Managers, individually and not as
Lead Managers of the several International Managers, may (but shall
not be obligated to) make payment to the Company or to the Selling
Stockholders on behalf of any International Manager or International
Managers, for the Stock to be purchased by such International
Manager or International Managers. Any such payment by a Lead
Manager shall not relieve such International Manager or
International Managers from any of its or their other obligations
hereunder.
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<PAGE> 13
The several International Managers agree to make an initial public
offering of the Firm Stock at the initial public offering price set
forth on the cover page of the Prospectus as soon after the
effectiveness of the Registration Statement or the Application for
Admission as in their judgment is advisable. The Lead Managers
shall promptly advise the Company and the Selling Stockholders of
the making of the initial public offering.
For the purpose of covering any over-allotments in connection with
the distribution and sale of the Firm Stock as contemplated by the
Prospectus, the Company hereby grants to the International Managers
an option to purchase, severally and not jointly, up to an
aggregate of 112,500 shares of Optional Stock. The price per share
to be paid for the Optional Stock shall be the Purchase Price. The
option granted hereby may be exercised as to all or any party of
the Optional Stock at any time, and from time to time, not more
than thirty (30) days subsequent to the effective date of this
Agreement. No Optional Stock shall be sold and delivered unless the
Firm Stock previously has been, or simultaneously is, sold and
delivered. The right to purchase the Optional Stock or any portion
thereof may be surrendered and terminated at any time upon notice
by the International Managers to the Company.
The option granted hereby may be exercised by the International
Managers by giving written notice from Cowen to the Company setting
forth the number of shares of the Optional Stock to be purchased by
them and the date and time for delivery of and payment for the
Optional Stock. Each date and time for delivery of and payment for
the Optional Stock (which may be the First Closing Date, but not
earlier) is herein called an "Option Closing Date" and shall in no
event be earlier than two (2) business days nor later than ten (10)
business days after written notice is given. (The Option Closing
Date and the First Closing Date are herein called the "Closing
Dates".) Optional Stock shall be purchased for the account of each
International Manager in the same proportion as the number of
shares of Firm Stock set forth opposite such International
Manager's name in Schedule A hereto bears to the total number of
shares of Firm Stock (subject to adjustment by the International
Managers to eliminate odd lots). Upon exercise of the option of the
International Managers, the Company agrees to sell to the
International Managers the number of shares of Optional Stock set
forth in the written notice of exercise and the International
Managers agree, severally and not jointly and subject to the terms
and conditions herein set forth, to purchase the number of such
shares determined as aforesaid.
The Company will deliver the Optional Stock to the International
Managers (in the form of definitive certificates, issued in such
names and in such denominations as the Lead Managers may direct by
notice in writing to the Company given at or prior to 12:00 Noon,
New York Time, on the second full business day preceding the Option
Closing Date or, if no such direction is received, in the names of
the respective International Managers or in such other names as
Cowen may designate (solely for the purpose of administrative
convenience) and in such denominations as Cowen may determine),
against payment of the aggregate Purchase Price therefor by wire
transfer in immediately available funds (same day funds), payable
to the Company, all at the offices of Wilson Sonsini Goodrich &
Rosati, 650 Page Mill Road, Palo Alto, California 94304. The
Company shall make the certificates for the Optional Stock
available to the International Managers for examination not later
than 10:00 A.M., New York Time, on the business day preceding the
Option Closing Date at the offices of Cowen & Company, Financial
Square, New York, New York 10005. The Option Closing Date and the
location of delivery of, and the form of payment for, the Option
Stock may be varied by agreement between the Company and Cowen. The
Option Closing Date may be postponed pursuant to the provisions of
Section 12.
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<PAGE> 14
4 Covenants and Agreements of the Company. The Company covenants and
agrees with the several International Managers that:
(a) The Company will (i) if the Company and the Lead
Managers have determined not to proceed pursuant to Rule
430A of the Rules and Regulations, use its best efforts
to cause the Registration Statement to become effective,
(ii) if the Company and the Lead Managers have
determined to proceed pursuant to Rule 430A of the Rules
and Regulations, use its best efforts to comply with the
provisions of and make all requisite filings with the
Commission pursuant to Rule 430A and Rule 424 of the
Rules and Regulations and (iii) if the Company and the
Lead Managers have determined to deliver Prospectuses
pursuant to Rule 434 of the Rules and Regulations, to
use its best efforts to comply with all the applicable
provisions thereof. The Company will advise the Lead
Managers promptly as to the time at which the
Registration Statement becomes effective, will advise
the Lead Managers promptly of the issuance by the
Commission of any stop order suspending the
effectiveness of the Registration Statement or of the
institution of any proceedings for that purpose, and
will use its best efforts to prevent the issuance of any
such stop order and to obtain as soon as possible the
lifting thereof, if issued. The Company will advise the
Lead Managers promptly of the receipt of any comments of
the Commission or any request by the Commission for any
amendment of or supplement to the Registration Statement
or the Prospectus or for additional information and will
not at any time file any amendment to the Registration
Statement or supplement to the Prospectus which shall
not previously have been submitted to the Lead Managers
a reasonable time prior to the proposed filing thereof
or to which the Lead Managers shall reasonably object in
writing or which is not in compliance with the
Securities Act and the Rules and Regulations.
(b) The Company will prepare and file with the Commission,
promptly upon the request of the Lead Managers, any
amendments or supplements to the Registration Statement
or the Prospectus which in the opinion of the Lead
Managers may be necessary to enable the several
International Managers to continue the distribution of
the Stock and the several U.S. Underwriters to continue
the distribution of the U.S. Stock and will use its best
efforts to cause the same to become effective as
promptly as possible.
(c) If, at any time after the effective date of the
Registration Statement when a prospectus relating to the
Stock is required to be delivered under the Securities
Act, any event relating to or affecting the Company or
any of its subsidiaries occurs as a result of which the
Prospectus or any other prospectus as then in effect
would contain any untrue statement of a material fact,
or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under
which they were made, not misleading, or if it is
necessary at any time to amend the Prospectus to comply
with the Securities Act, the Company will promptly
notify the Lead Managers thereof and will prepare an
amended or supplemented prospectus which will correct
such statement or omission; and in case any
International Manager is required to deliver a
prospectus relating to the Stock nine (9) months or more
after the effective date of the Registration Statement,
the Company upon the request of the Lead Managers and at
the expense of
14
<PAGE> 15
such International Manager will prepare promptly such
prospectus or prospectuses as may be necessary to permit
compliance with the requirements of Section 10(a)(3) of
the Securities Act.
(d) The Company will deliver to each of the Lead Managers,
at or before the Closing Dates, one signed copy of the
Registration Statement, as originally filed with the
Commission, and one signed copy of all amendments
thereto including all financial statements and exhibits
thereto and will deliver to the Lead Managers such
number of unsigned copies of the Registration Statement,
including such financial statements but without
exhibits, and all amendments thereto, as the Lead
Managers may reasonably request. The Company will
deliver or mail to or upon the order the Lead Managers,
from time to time until the effective date of the
Registration Statement, as many copies of the
Pre-effective Prospectus as the Lead Managers may
reasonably request. The Company will deliver or mail to
or upon the order of the Lead Managers on the date of
the initial public offering, and thereafter from time to
time during the period when delivery of a prospectus
relating to the Stock is required under the Securities
Act, as many copies of the Prospectus, in final form or
as thereafter amended or supplemented as the Lead
Managers may reasonably request; provided, however, that
the expense of the preparation and delivery of any
prospectus required for use nine (9) months or more
after the effective date of the Registration Statement
shall be borne by the International Managers required to
deliver such prospectus.
(e) The Company will use its best efforts to cause, and
provide all information, documentation, and other
materials (whether contained or to be provided in the
German Prospectus or otherwise) to the FSE and the Lead
Managers as may be required or appropriate for, the
Application for Admission to become and remain
effective.
(f) The Company will make generally available to its
stockholders as soon as practicable, but not later than
fifteen (15) months after the effective date of the
Registration Statement, an earnings statement which will
be in reasonable detail (but which need not be audited)
and which will comply with Section 11(a) of the
Securities Act, covering a period of at least twelve
(12) months beginning after the "effective date" (as
defined in Rule 158 under the Securities Act) of the
Registration Statement.
(g) The Company will cooperate with the Lead Managers to
enable the Stock to be registered or qualified for
offering and sale by the International Managers and by
dealers under the securities laws of such jurisdictions
as the Lead Managers may designate and at the request of
the Lead Managers will make such applications and
furnish such consents to service of process or other
documents as may be required of it as the issuer of the
Stock for that purpose; provided, however, that the
Company shall not be required to qualify to do business
or to file a general consent (other than that arising
out of the offering or sale of the Stock) to service of
process in any such jurisdiction where it is not now so
subject. The Company will, from time to time, prepare
and file such statements and reports as are or may be
required of it as the issuer of the Stock to continue
such qualifications in effect for so long a period as
the Lead Managers may reasonably request for the
distribution of the Stock. The Company will advise the
Lead Managers promptly after the Company becomes aware
of the suspension of the qualifications or registration
of (or any such exception relating to) the Common Stock
of the Company for offering, sale or trading in any
jurisdiction or of any initiation or threat of any
proceeding for any such purpose, and in the event of the
issuance of any orders suspending such
15
<PAGE> 16
qualifications, registration or exception, the Company
will, with the cooperation of the Lead Managers use its
best efforts to obtain the withdrawal thereof.
(h) The Company will furnish to its stockholders annual
reports containing financial statements certified by
independent public accountants.
(i) The Company will maintain a transfer agent and registrar
for its Common Stock.
(j) For a period of one year after the date hereof, prior to
filing its quarterly statements on Form 10-Q, the
Company will have its independent auditors perform a
limited quarterly review of its quarterly numbers.
(k) The Company will not offer, sell, assign, transfer,
encumber, contract to sell, register for sale, grant an
option to purchase or otherwise dispose of, other than
by operation of law, gifts, pledges or dispositions by
estate representatives, any shares of Common Stock or
securities convertible into or exercisable or
exchangeable for Common Stock (including, without
limitation, Common Stock of the Company which may be
deemed to be beneficially owned by the Company in
accordance with the Rules and Regulations) during the
180 days following the date on which the price of the
Common Stock to be purchased by the International
Managers is set, other than (i) the Company's sale of
Common Stock hereunder, (ii) issuances of Common Stock,
stock options, stock purchase rights or other similar
rights issued pursuant to the 1997 Plans as described in
the Prospectus, and (iii) any Common Stock or preferred
stock issued by the Company in any transaction of the
type described in Rule 145 under the Securities Act or
otherwise issued by the Company in exchange for
technology or other non-cash assets of any third party.
(l) The Company will file with the Commission any reports on
Form SR required pursuant to Rule 463 of Rules and
Regulations, and will deliver promptly to the
Representatives a signed copy of each report on Form SR
filed by it with the Commission.
(m) The Company will apply the net proceeds from the sale of
the Stock as set forth in the description under "Use of
Proceeds" in the Prospectus.
(n) The Company will supply you with copies of all
correspondence to and from, and all documents issued to
and by, the Commission in connection with the
registration of the Stock under the Securities Act and
the Neuer Markt of the Frankfurt Stock Exchange in
connection with the sale of the Stock pursuant to this
Agreement.
(o) Prior to each of the Closing Dates the Company will
furnish to you, as soon as they have been prepared,
copies of any unaudited interim consolidated financial
statements of the Company and its subsidiaries for any
periods subsequent to the periods covered by the
financial statements appearing in the Registration
Statement and the Prospectus.
(p) Prior to the Closing Dates the Company will issue no
press release or other public communications directly or
indirectly and hold no press conference with respect to
the Company (other than customary product related sales
and marketing communications) or any of its
subsidiaries, the financial condition, results of
operations, business, prospects, assets or liabilities
of the Company any of them, or the offering of the
Stock, without your prior written consent, which shall
not be unreasonably withheld.
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<PAGE> 17
(q) During the period of five (5) years hereafter, the
Company will furnish to the Lead Managers, and upon
request of the Lead Managers, to each of the
International Managers: (i) as soon as practicable after
the end of each fiscal year, copies of the Annual Report
of the Company containing the balance sheet of the
Company as of the close of such fiscal year and
statements of income, stockholders' equity and cash
flows for the year then ended and the opinion thereon of
the Company's independent public accountants; (ii) as
soon as practicable after the filing thereof, copies of
each proxy statement, Annual Report on Form 10-K,
Quarterly Report on Form 10-Q, Report on Form 8-K or
other report filed by the Company with the Commission,
or the NASD or any securities exchange; (iii) as soon as
available, copies of any report or communication of the
Company mailed generally to holders of its Common Stock;
and (iv) from time to time such other information
concerning the Company as you may reasonably request.
(r) The covenants and agreements set forth above (a) through
(d) and (f) through (q) apply mutatis mutandis to the
Company's involvement in the listing of the Stock at the
FSE.
(s) The Company will adopt the German Code for Mergers and
Acquisitions ("Ubernahmekodex").
(t) The Company will maintain a Securities Caretaker
("Betreuer") as long as the International Stock is
listed at the Neuer Markt of the FSE.
(u) The Selling Stockholders will comply with the holding
requirements for their Stock established by the FSE for
securities listed at the Neuer Markt.
5 Payment of Expenses.
(a) The Company will pay (directly or by reimbursement) all
costs, fees and expenses incurred in connection with the
performance of the obligations of the Company and of the
Selling Stockholders under this Agreement and the U.S.
Underwriting Agreement and in connection with the
transactions contemplated hereby, including but not
limited to (i) all expenses and taxes incident to the
issuance and delivery of the Stock to the Lead Managers;
(ii) all expenses incident to the registration of the
Stock and the U.S. Stock under the Securities Act; (iii)
the costs of preparing stock certificates (including
printing and engraving costs); (iv) all fees and
expenses of the registrar and transfer agent of the
Stock and the U.S. Stock; (v) all necessary issue,
transfer and other taxes in connection with the issuance
and sale of the Stock to the International Managers;
(vi) fees and expenses of the Company's counsel and the
Company's independent accountants; (vii) all costs and
expenses incurred in connection with the preparation,
printing, filing, shipping and distribution of the
Registration Statement, each Pre-effective Prospectus
and the Prospectus (including all exhibits and financial
statements) and all amendments and supplements provided
for herein, the Selling Stockholders' Power of Attorney,
the Custody Agreement, the "Agreement Among U.S.
Underwriters and International Managers" between the
Lead Managers and the Representatives, the "Agreement
Among U.S. Underwriters" between the Representatives and
the U.S. Underwriters, the Master Selected Dealers'
Agreement, the U.S. Underwriters' Questionnaire and the
Blue Sky memoranda (including related fees and expenses
of counsel to the Underwriters) and this Agreement;
(viii) all filing fees, attorneys' fees and expenses
incurred by the Company or the U.S. Underwriters in
connection with exemptions from the qualifying or
registering (or obtaining qualification or registration
of) all or any part of the Stock for offer and sale
17
<PAGE> 18
and determination of its eligibility for investment
under the Blue Sky or other securities laws of such
jurisdictions as the Representatives may designate; (ix)
all fees and expenses paid or incurred in connection
with filings made with the NASD and the listing of the
Stock on the Neuer Markt of the FSE; and (x) all other
costs and expenses incurred by the Company and the
Selling Stockholders incident to the performance of
their obligations hereunder which are not otherwise
specifically provided for in this Section.
(b) In addition to their other obligations under Section
6(a) hereof, the Company and the Selling Stockholders
agree that, as an interim measure during the pendency of
any claim, action, investigation, inquiry or other
proceeding arising out of or based upon (i) any
statement or omission or any alleged statement or
omission by the Company or the Selling Stockholders or
(ii) any breach or inaccuracy in their representations
and warranties contained in this Agreement, they will
reimburse each International Manager on a quarterly
basis for all reasonable legal or other expenses
incurred in connection with investigating or defending
any such claim, action, investigation, inquiry or other
proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of
the Company's and each Selling Stockholder's obligation
to reimburse each International Manager for such
expenses and the possibility that such payments might
later be held to have been improper by a court of
competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been
improper, each International Manager shall promptly
return it to the Company or such Selling Stockholder, as
the case may be, together with interest, compounded
daily, determined on the basis of the prime rate (or
other commercial lending rate for borrowers of the
highest credit standing) announced from time to time by
Citibank, N.A., New York, New York (the "Prime Rate").
Any such interim reimbursement payments which are not
made to an International Manager in a timely manner as
provided below shall bear interest at the Prime Rate
from the due date for such reimbursement. This expense
reimbursement agreement will be in addition to any other
liability which the Company or any Selling Stockholder
may otherwise have. The request for reimbursement will
be sent to the Company with a copy to each Selling
Stockholder.
(c) In addition to its other obligations under Section 6(b)
hereof, each International Manager severally agrees
that, as an interim measure during the pendency of any
claim, action, investigation, inquiry or other
proceeding arising out of or based upon any statement or
omission, or any alleged statement or omission,
described in Section 6(b) hereof which relates to
information furnished to the Company pursuant to Section
6(c) hereof, it will reimburse the Company (and, to the
extent applicable, each officer, director, controlling
person or Selling Stockholder) on a quarterly basis for
all reasonable legal or other expenses incurred in
connection with investigating or defending any such
claim, action, investigation, inquiry or other
proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of
the International Managers' obligation to reimburse the
Company (and, to the extent applicable, each officer,
director, controlling person or Selling Stockholder) for
such expenses and the possibility that such payments
might later be held to have been improper by a court of
competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been
improper, the Company (and, to the extent applicable,
each officer, director, controlling person or Selling
Stockholder) shall promptly return it to the
International Managers together with interest,
compounded daily, determined on the basis of the Prime
Rate. Any such interim reimbursement payments which are
not made to the Company within thirty (30) days of a
request for reimbursement shall bear interest at the
Prime Rate from the
18
<PAGE> 19
date of such request. This indemnity agreement will be
in addition to any liability which such International
Manager may otherwise have.
(d) It is agreed that any controversy arising out of the
operation of the interim reimbursement arrangements set
forth in paragraph (b) and/or (c) of this Section 5,
including the amounts of any requested reimbursement
payments and the method of determining such amounts,
shall be settled by arbitration conducted under the
provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or
pursuant to the Code of Arbitration Procedure of the
NASD. Any such arbitration must be commenced by service
of a written demand for arbitration or written notice of
intention to arbitrate, therein electing the arbitration
tribunal. In the event the party demanding arbitration
does not make such designation of an arbitration
tribunal in such demand or notice, then the party
responding to said demand or notice is authorized to do
so. Such an arbitration would be limited to the
operation of the interim reimbursement provisions
contained in paragraph (b) and/or (c) of this Section 5
and would not resolve the ultimate propriety or
enforceability of the obligation to reimburse expenses
which is created by the provisions of Section 6.
6 Indemnification and Contribution.
(a) The Company and SCM Microsystems GmbH jointly
and severally agree to indemnify and hold harmless each
International Manager and each person, if any, who
controls such International Manager within the meaning
of the Securities Act and the respective officers,
directors, partners, employees, representatives and
agents of each of such International Manager
(collectively, the "Manager Indemnified Parties" and,
each, a "Manager Indemnified Party"), against any
losses, claims, damages, liabilities or expenses
(including the reasonable cost of investigating and
defending against any claims therefor and counsel fees
incurred in connection therewith), joint or several,
which may be based upon the Securities Act, or any
Federal, state or foreign statute, regulation or at
common law, (i) on the ground or alleged ground that any
Pre-effective Prospectus, the Registration Statement,
the Application for Admission or the Prospectus (or any
Pre-effective Prospectus, the Registration Statement or
the Prospectus as from time to time amended or
supplemented) includes or allegedly includes an untrue
statement of a material fact or omits to state a
material fact required to be stated therein or necessary
in order to make the statements therein, in light of the
circumstances under which they were made, not
misleading, unless such statement or omission was made
in reliance upon, and in conformity with, written
information furnished to the Company by any
International Manager, directly or through the Lead
Managers, specifically for use in the preparation
thereof and provided that the foregoing indemnity
agreement with respect to any Pre- effective Prospectus
shall not inure to the benefit of any International
Manager from whom the person asserting any such losses,
claims, damages or liabilities purchased Stock, or any
person controlling such International Manager, if a copy
of the Prospectus (as then amended or supplemented if
the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on
behalf of such International Manager to such person, if
required by law so to have been delivered, at or prior
to the written confirmation of the sale of the Stock to
such person, and the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to
such losses, claims, damages or liabilities, unless such
failure to deliver the Prospectus (as so amended or
supplemented) resulted from the Company's failure to
perform its obligations pursuant to Section 4(c) above
or (ii) for any act or failure to act or any alleged act
or failure to act
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<PAGE> 20
by any International Manager in connection with, or
relating in any manner to, the Stock or the offering
contemplated hereby, and which is included as part of or
referred to in any loss, claim, damage, liability or
expense arising out of or based upon matters covered by
clause (i) above (provided that the Company shall not be
liable under this clause (ii) to the extent that it is
determined in a final judgment by a court of competent
jurisdiction that such loss, claim, damage, or liability
or expense resulted directly from any such acts or
failures to act undertaken or omitted to be taken by
such International Manager through its gross negligence
or willful misconduct). The Company will be entitled to
participate at its own expense in the defense or, if it
so elects, to assume the defense of any suit brought to
enforce any such liability, but if the Company elects to
assume the defense, such defense shall be conducted by
counsel chosen by it and reasonably acceptable to the
International Managers. In the event the Company elects
to assume the defense of any such suit and retain such
counsel, any Manager Indemnified Parties, defendant or
defendants in the suit, may retain additional counsel
but shall bear the fees and expenses of such counsel
unless (i) the Company shall have specifically
authorized the retaining of such counsel or (ii) the
parties to such suit include both any such Manager
Indemnified Party and the Company, and such Manager
Indemnified Parties have been advised by counsel to the
International Managers that one or more legal defenses
may be available to it or them which may not be
available to the Company, in which case the Company
shall not be entitled to assume the defense of such suit
without the written consent of the Manager Indemnified
Parties party to such suit notwithstanding its
obligation to bear the fees and expenses of such
counsel. In circumstances where the Company does not
assume the defense of a suit for which indemnification
is sought by one or more Manager Indemnified Parties,
the Company will be obligated to bear the fees and
expenses of only one firm on behalf of all Manager
Indemnified Parties (plus local counsel, if, in the
judgment of the primary counsel to the Manager
Indemnified Parties use of such local counsel is
necessary). This indemnity agreement is not exclusive
and will be in addition to any liability which the
Company might otherwise have and shall not limit any
rights or remedies which may otherwise be available at
law or in equity to each Manager Indemnified Party.
(b) Each Selling Stockholder severally and not jointly
agrees to indemnify and hold harmless each Manager
Indemnified Party against any losses, claims, damages,
liabilities or expenses (including, unless such Selling
Stockholder elects to assume the defense, the reasonable
cost of investigating and defending against any claims
therefor and counsel fees incurred in connection
therewith), joint or several, which may be based upon
the Securities Act, or any Federal, state or foreign
statute, regulation or at common law, on the ground or
alleged ground that any Pre-Effective Prospectus, the
Registration Statement, the Application for Admission or
the Prospectus (or any Pre-Effective Prospectus, the
Registration Statement or the Prospectus, as from time
to time amended and supplemented) includes an untrue
statement of a material fact or omits to state a
material fact required to be stated therein or necessary
in order to make the statements therein, in light of the
circumstances under which they were made, not
misleading, unless such statement or omission was made
in reliance upon, and in conformity with, written
information furnished to the Company by any
International Manager, directly or through the Lead
Managers specifically for use in the preparation
thereof; provided however that with respect to any
untrue statement or omission or alleged untrue statement
or omission made in any Pre-Effective Prospectus, the
indemnity agreement contained in this subsection (b)
shall not inure to the benefit of any Manager
Indemnified Party from whom the person asserting any
such losses, claims, damages or liabilities purchased
the shares
20
<PAGE> 21
of Stock concerned to the extent that any such loss,
claim, damage or liability of such Manager Indemnified
Party results from the fact that a copy of the
Prospectus was not sent or given to such person at or
prior to the written confirmation of the sale of such
shares of Stock, as required by the Securities Act, and
if the untrue statement or omission concerned has been
corrected in the Prospectus. Such Selling Stockholder
shall be entitled to participate at his own expense in
the defense, or, if he so elects, to assume the defense
of any suit brought to enforce any such liability, but,
if such Selling Stockholder elects to assume the
defense, such defense shall be conducted by counsel
chosen by him. In the event that any Selling Stockholder
elects to assume the defense of any such suit and retain
such counsel, the Manager Indemnified Parties, defendant
or defendants in the suit, may retain additional counsel
but shall bear the fees and expenses of such counsel
unless (i) such Selling Stockholder shall have
specifically authorized the retaining of such counsel or
(ii) the parties to such suit include both such Manager
Indemnified Parties and such Selling Stockholder and
such Manager Indemnified Parties have been advised by
counsel that one or more legal defenses may be available
to it or them which may not be available to such Selling
Stockholder, in which case such Selling Stockholder
shall not be entitled to assume the defense of such suit
notwithstanding its obligation to bear the fees and
expenses of such counsel. This indemnity agreement is
not exclusive and will be in addition to any liability
which such Selling Stockholder might otherwise have and
shall not limit any rights or remedies which may
otherwise be available at law or in equity to each
Manager Indemnified Party. The Company and the Selling
Stockholders may agree, as among themselves and without
limiting the rights of the International Managers under
this Agreement, as to their respective amounts of such
liability for which they each shall be responsible.
Notwithstanding any other provision of this Agreement or
the U.S. Underwriting Agreement, the liability of each
Selling Stockholder to the International Managers and
U.S. Underwriters under this Agreement, the U.S.
Underwriting Agreement or otherwise shall be limited to
an amount equal to the aggregate initial public offering
price of the shares of Common Stock sold by such Selling
Stockholder in the initial public offering.
(c) Each International Manager severally and not jointly
agrees to indemnify and hold harmless the Company, each
of its directors, each of its officers who have signed
the Registration Statement and each person, if any, who
controls the Company within the meaning of the
Securities Act (collectively, the "Company Indemnified
Parties") and each Selling Stockholder (the "Selling
Stockholder Indemnified Parties") against any losses,
claims, damages, liabilities or expenses (including,
unless the International Manager or International
Managers elect to assume the defense, the reasonable
cost of investigating and defending against any claims
therefor and counsel fees incurred in connection
therewith), joint or several, which arise out of or are
based in whole or in part upon the Securities Act, the
Exchange Act or any other federal, state, local or
foreign statute or regulation, or at common law, on the
ground or alleged ground that any Pre-effective
Prospectus, the Registration Statement, the Application
for Admission, or the Prospectus (or any Pre-effective
Prospectus, the Registration Statement or the
Prospectus, as from time to time amended and
supplemented) includes an untrue statement of a material
fact or omits to state a material fact required to be
stated therein or necessary in order to make the
statements therein, in light of the circumstances in
which they were made, not misleading, but only insofar
as any such statement or omission was made in reliance
upon, and in conformity with, written information
furnished to the Company by such International Manager,
directly or through the Lead Managers, specifically for
use in the
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<PAGE> 22
preparation thereof. Such International Manager shall be
entitled to participate at its own expense in the
defense, or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but, if
such International Manager elects to assume the defense,
such defense shall be conducted by counsel chosen by it.
In the event that any International Manager elects to
assume the defense of any such suit and retain such
counsel, the Company Indemnified Parties or Selling
Stockholders Indemnified Parties and any other
International Manager or International Managers or
controlling person or persons, defendant or defendants
in the suit, shall bear the fees and expenses of any
additional counsel retained by them, respectively. The
International Manager against whom indemnity may be
sought shall not be liable to indemnify any person for
any settlement of any such claim effected without such
International Manager's consent. This indemnity
agreement is not exclusive and will be in addition to
any liability which such International Manager might
otherwise have and shall not limit any rights or
remedies which may otherwise be available at law or in
equity to any Company Indemnified Party or Selling
Stockholder Indemnified Party.
(d) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an
indemnified party under subsection (a), (b) or (c) above
in respect of any losses, claims, damages, liabilities
or expenses (or actions in respect thereof) referred to
herein, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as
a result of such losses, claims, damages, liabilities or
expenses (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative
benefits received by the Company and the Selling
Stockholders on the one hand and the International
Managers on the other from the offering of the Stock.
If, however, the allocation provided by the immediately
preceding sentence is not permitted by applicable law,
then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such
relative benefits but also the relative fault of the
Company and the Selling Stockholders on the one hand and
the International Managers on the other in connection
with the statements or omissions which resulted in such
losses, claims, damages, liabilities or expenses (or
actions in respect thereof), as well as any other
relevant equitable considerations. The relative benefits
received by the Company and the Selling Stockholders on
the one hand and the International Managers on the other
shall be deemed to be in the same proportion as the
total net proceeds from the offering (before deducting
expenses) received by the Company and the Selling
Stockholders bear to the total underwriting discounts
and commissions received by the International Managers,
in each case as set forth in the table on the cover page
of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether
the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a
material fact relates to information supplied by the
Company, the Selling Stockholders or the International
Managers and the parties' relative intent, knowledge,
access to information and opportunity to correct or
prevent such statement or omission. The Company, the
Selling Stockholders and the International Managers
agree that it would not be just and equitable if
contribution were determined by pro rata allocation
(even if the International Managers were treated as one
entity for such purpose) or by any other method of
allocation which does not take account of the equitable
considerations referred to above. The amount paid or
payable by an indemnified party as a result of the
losses, claims, damages, liabilities or expenses (or
actions in respect thereof) referred to above shall be
deemed to include any legal or other expenses reasonably
incurred by such indemnified party in connection with
investigating, defending, settling or compromising any
such
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<PAGE> 23
claim. Notwithstanding the provisions of this subsection
(d), no International Manager shall be required to
contribute any amount in excess of the amount by which
the total price at which the shares of the Stock
underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages
which such International Manager has otherwise been
required to pay by reason of such untrue or alleged
untrue statement or omission or alleged omission. The
International Managers' obligations to contribute are
several in proportion to their respective underwriting
obligations and not joint. No person guilty of
fraudulent misrepresentation (within the meaning of
Section 11(f) of the Securities Act or the equivalent
legal provision under German law) shall be entitled to
contribution from any person who was not guilty of such
fraudulent misrepresentation.
(e) Promptly after receipt by an indemnified party under
subsection (a), (b) or (c) above of notice of the
commencement of any action, such indemnified party
shall, if a claim in respect thereof is to be made
against the indemnifying party under such subsection,
notify the indemnifying party in writing of the
commencement thereof; but the omission to so notify the
indemnifying party shall not relieve the indemnifying
party from any liability that it may have to any
indemnified party except to the extent that any such
delay results in the loss of the ability to assert any
affirmative or negative defense the loss of which is
materially prejudicial to the disposition of this
matter.
7 Survival of Indemnities, Representations, Warranties, etc. The
respective indemnities, covenants, agreements, representations,
warranties and other statements of the Company and its
subsidiaries, the Selling Stockholders and the several
International Managers, as set forth in this Agreement or made by
them respectively, pursuant to this Agreement, shall remain in full
force and effect, regardless of any investigation made by or on
behalf of any International Manager, the Selling Stockholders, the
Company or any of its officers or directors or any controlling
person, and shall survive delivery of and payment for the Stock
until all applicable statutes of limitation have expired.
8 Conditions of International Managers Obligations. The respective
obligations of the several International Managers hereunder shall
be subject to the accuracy, at and (except as otherwise stated
herein) as of the date hereof and at and as of each of the Closing
Dates, of the representations and warranties made herein by the
Company and the Selling Stockholders to compliance at and as of
each of the Closing Dates by the Company and the Selling
Stockholders with their covenants and agreements herein contained
and other provisions hereof to be satisfied at or prior to each of
the Closing Dates, and to the following additional conditions:
(a) The Registration Statement and the Application for
Admission shall have become effective and no stop order
suspending the effectiveness thereof shall have been
issued and no proceedings for that purpose shall have
been initiated or, to the knowledge of the Company or
the Lead Managers, shall be threatened by the
Commission, and any request for additional information
on the part of the Commission (to be included in the
Registration Statement or the Prospectus or otherwise)
shall have been complied with to the reasonable
satisfaction of the Lead Managers. Any filings of the
Prospectus, or any supplement thereto, required pursuant
to Rule 424(b) or Rule 434 of the Rules and Regulations,
shall have been made in the manner and within the time
period required by Rule 424(b) and Rule 434 of the Rules
and Regulations, as the case may be.
23
<PAGE> 24
(b) The Lead Managers shall have been satisfied that there
shall not have occurred any change prior to each of the
Closing Dates, in the condition (financial or
otherwise), properties, business, management, net worth
or results of operations of the Company and its
subsidiaries considered as a whole, or any change in the
capital stock, short-term or long-term debt of the
Company and its subsidiaries considered as a whole, such
that (i) the Registration Statement or the Prospectus,
or any amendment or supplement thereto, contains an
untrue statement of fact which, in the reasonable
opinion of the Lead Managers, is material, or omits to
state a fact which, in the reasonable opinion of the
Lead Managers, is required to be stated therein or is
necessary to make the statements therein not misleading
or (ii) it is impracticable in the reasonable judgment
of the Lead Managers to proceed with the public offering
or purchase the Stock as contemplated hereby.
(c) The Lead Managers shall be satisfied that no legal or
governmental action, suit or proceeding affecting the
Company which is material and adverse to the Company or
which affects or may affect the Company's or the Selling
Stockholders' ability to perform their respective
obligations under this Agreement shall have been
instituted or threatened and there shall have occurred
no material adverse development in any existing such
action, suit or proceeding.
(d) At the time of execution of this Agreement, the Lead
Managers shall have received from KPMG Peat Marwick LLP,
independent certified public accountants, a letter,
dated the date hereof, in form and substance
satisfactory to the International Managers to the effect
set forth in Exhibit I hereto.
(e) The Lead Managers shall have received from KPMG Peat
Marwick LLP, independent certified public accountants,
letters, dated each of the Closing Dates, to the effect
that such accountants reaffirm, as of each of the
Closing Dates, and as though made on each of the Closing
Dates, the statements made in the letter furnished by
such accountants pursuant to paragraph (d) of this
Section 8.
(f) The Lead Managers shall have received (i) from Wilson
Sonsini Goodrich & Rosati, Professional Corporation,
United States securities counsel for the Company; (ii)
from ______________, German counsel for the Company; and
(iii) from ____________, intellectual property counsel
to the Company, an opinion, dated each of the Closing
Date, to the effect set forth in Exhibits II, III and
IV hereto, respectively.
(g) The Lead Managers shall have received from Rogers &
Wells, counsel for the International Managers, their
opinion dated each of the Closing Dates with respect to
the incorporation of the Company, the validity of the
Stock, the Registration Statement and the Prospectus and
such other related matters as it may reasonably request,
and the Company shall have furnished to such counsel
such documents as they may request for the purpose of
enabling them to pass upon such matters.
(h) The Lead Managers shall have received from ___________,
counsel for the Selling Stockholders, an opinion dated
the Closing Date, to the effect set forth in Exhibit V.
(i) The Lead Managers shall have received a certificate or
certificates, dated each of the Closing Dates, of the
chief executive officer or the President and the chief
financial or accounting officer of the Company to the
effect that:
24
<PAGE> 25
(i) No stop order suspending the effectiveness
of the Registration Statement has been
issued, and, to the knowledge of the
signers, no proceedings for that purpose
have been instituted or are pending or
contemplated under the Securities Act;
(ii) Neither any Pre-effective Prospectus, as of
its date, nor the Registration Statement nor
the Prospectus, nor any amendment or
supplement thereto, as of the time when the
Registration Statement became effective and
at all times subsequent thereto up to the
delivery of such certificate, contained any
untrue statement of a material fact or
omitted to state any material fact required
to be stated therein or necessary to make
the statements therein, in light of the
circumstances under which they were made,
not misleading;
(iii) The representations and warranties of the
Company in this Agreement are true and
correct at and as of each of the Closing
Dates, and the Company has complied with all
the agreements and performed or satisfied
all the conditions on its part to be
performed or satisfied at or prior to the
Closing Dates; and
(iv) Since the respective dates as of which
information is given in the Registration
Statement and the Prospectus, and except as
disclosed in or contemplated by the
Prospectus, (i) there has not been any
material adverse change or a development
involving a material adverse change in the
condition (financial or otherwise),
properties, business, management, net worth
or results of operations of the Company and
its subsidiaries considered as a whole; (ii)
the business and operations conducted by the
Company and its subsidiaries have not
sustained a loss by strike, fire, flood,
accident or other calamity (whether or not
insured) of such a character as to interfere
materially with the conduct of the business
and operations of the Company and its
subsidiaries considered as a whole; (iii) no
legal or governmental action, suit or
proceeding is pending or to the knowledge of
the signers threatened against the Company
which is material to the Company, whether or
not arising from transactions in the
ordinary course of business, or which may
materially and adversely affect the
transactions contemplated by this Agreement;
(iv) since such dates and except as so
disclosed, the Company has not incurred any
material liability or obligation, direct,
contingent or indirect, made any change in
its capital stock (except pursuant to the
1997 Plans), made any material change in its
short-term or funded debt or repurchased or
otherwise acquired any of the Company's
capital stock; and (v) the Company has not
declared or paid any dividend, or made any
other distribution, upon its outstanding
capital stock payable to stockholders of
record on a date prior to the Closing Date.
(j) The Selling Stockholders shall have furnished to the
Lead Managers certificates as to the accuracy, at and as
of each of the Closing Dates, of the representations and
warranties made herein by them and as to compliance at
and as of each of the Closing Dates by them with their
covenants and agreements herein contained and other
provisions hereof to be satisfied at or prior to each of
the Closing Dates, and as to satisfaction of the other
conditions to the obligations of the International
Managers hereunder.
(k) Cowen & Company shall have received, on behalf of the
several International Managers, the written agreements,
substantially in the form of Exhibit V hereto, of the
officers, directors and certain holders of Common Stock
that each will not offer, sell, assign,
25
<PAGE> 26
transfer, encumber, contract to sell, register for sale,
grant an option to purchase or otherwise dispose of,
other than by operation of law, gifts, pledges or
dispositions by estate representatives, any shares of
Common Stock (including, without limitation, Common
Stock which may be deemed to be beneficially owned by
such officer, director or holder in accordance with the
Rules and Regulations) during the 180 days following the
date of the final Prospectus except as provided therein.
(l) The Nasdaq National Market shall have approved the U.S.
Stock for listing, subject only to official notice of
issuance.
(m) The International Stock to be issued and sold by the
Company and the Selling Stockholders shall have been
duly authorized for listing on the Neuer Markt of the
Frankfurt Stock Exchange.
(n) The Closing under the U.S. Underwriting Agreement shall
have occurred concurrently with the Closing hereunder on
the Closing Date.
All opinions, certificates, letters and other documents will be in
compliance with the provisions hereunder only if they are
reasonably satisfactory in form and substance to the Lead Managers.
The Company will furnish to the Lead Managers conformed copies of
such opinions, certificates, letters and other documents as the
Lead Managers shall reasonably request. If any of the conditions
hereinabove provided for in this Section shall not have been
satisfied when and as required by this Agreement, this Agreement
may be terminated by the Lead Managers by notifying the Company of
such termination in writing or by telegram at or prior to each of
the Closing Dates, but [Cowen], on behalf of the Lead Managers,
shall be entitled to waive any of such conditions.
9 Effective Date. This Agreement shall become effective immediately
as to Sections 5, 6, 7, 9, 10, 11, 13, 14, 15, 16 and 17 and, as to
all other provisions, at 11:00 a.m. New York City time on the first
full business day following the effectiveness of the Registration
Statement or at such earlier time after the Registration Statement
becomes effective as the Lead Managers may determine on and by
notice to the Company or by release of any of the Stock for sale to
the public. For the purposes of this Section 9, the Stock shall be
deemed to have been so released upon the release for publication of
any newspaper advertisement relating to the Stock or upon the
release by you of notices (i) advising International Managers that
the shares of Stock are released for public offering or (ii)
offering the Stock for sale to securities dealers, whichever may
occur first.
10 Termination. This Agreement (except for the provisions of Section
5) may be terminated by the Company at any time before it becomes
effective in accordance with Section 9 by notice to the Lead
Managers and may be terminated by the Lead Managers at any time
before it becomes effective in accordance with Section 9 by notice
to the Company. In the event of any termination of this Agreement
under this or any other provision of this Agreement, there shall be
no liability of any party to this Agreement to any other party,
other than as provided in Sections 5, 6 and 11 and other than as
provided in Section 12 as to the liability of defaulting
International Managers.
This Agreement may be terminated after it becomes effective by the
Lead Managers by notice to the Company (i) if at or prior to the
First Closing Date trading in securities on any of the New York
Stock Exchange or the Nasdaq National Market System shall have been
suspended (other than any short term suspension of trading pursuant
to any "circuit breaker" provisions of
26
<PAGE> 27
the New York Stock Exchange) or minimum or maximum prices shall
have been established on any such exchange or market, or a banking
moratorium shall have been declared by New York or United States
authorities; (ii) trading of any securities of the Company shall
have been suspended on any U.S. or foreign exchange or in any U.S.
or foreign over-the-counter market; (iii) if at or prior to the
First Closing Date there shall have been (A) an outbreak or
escalation of hostilities between the United States and any foreign
power or of any other insurrection or armed conflict involving the
United States or (B) any material change in financial markets or
any calamity or crisis which, in the reasonable judgment of the
Lead Managers, makes it impractical or inadvisable to offer or sell
the Stock on the terms contemplated by the Prospectus; (iv) if
there shall have been any development or prospective development
involving particularly the business or properties or securities of
the Company or any of its subsidiaries or the transactions
contemplated by this Agreement, which, in the reasonable judgment
of the Lead Managers, makes it impracticable or inadvisable to
offer or deliver the Stock on the terms contemplated by the
Prospectus; (v) if there shall be any litigation or proceeding,
pending or threatened, which, in the reasonable judgment of the
Lead Managers, makes it impracticable or inadvisable to offer or
deliver on the terms contemplated by the Prospectus; or (vi) if
there shall have occurred any of the events specified in the
immediately preceding clauses (i) - (v) together with any other
such event that makes it, in the reasonable judgment of the Lead
Managers, impractical or inadvisable to offer or deliver the Stock
on the terms contemplated by the Prospectus.
11 Reimbursement of International Managers. Notwithstanding any other
provisions hereof, if this Agreement shall not become effective by
reason of any election of the Company or the Selling Stockholder
pursuant to the first paragraph of Section 10 or shall be
terminated by the Lead Managers under Section 8 (excluding Section
8(g)) or Section 10, the Company will bear and pay the expenses
specified in Section 5 hereof and, in addition to their obligations
pursuant to Section 6 hereof, the Company will reimburse the
reasonable out-of-pocket expenses of the several International
Managers (including reasonable fees and disbursements of counsel
for the International Managers) incurred in connection with this
Agreement and the proposed purchase of the Stock, and promptly upon
demand the Company will pay such amounts to you as Lead Managers.
12 Substitution of International Managers. If any International
Manager or International Managers shall default in its or their
obligations to purchase shares of Stock hereunder and the aggregate
number of shares which such defaulting International Manager or
International Managers agreed but failed to purchase does not
exceed ten percent (10%) of the total number of shares
underwritten, the other International Managers shall be obligated
severally, in proportion to their respective commitments hereunder,
to purchase the shares which such defaulting International Manager
or International Managers agreed but failed to purchase. If any
International Manager or International Managers shall so default
and the aggregate number of shares with respect to which such
default or defaults occur is more than ten percent (10%) of the
total number of shares underwritten and arrangements satisfactory
to the Lead Managers and the Company for the purchase of such
shares by other persons are not made within forty-eight (48) hours
after such default, this Agreement shall terminate.
If the remaining International Managers or substituted
International Managers are required hereby or agree to take up all
or part of the shares of Stock of a defaulting International
Manager or International Managers as provided in this Section 12,
(i) the Company and the Selling Stockholders shall have the right
to postpone the Closing Dates for a period of not more than five
(5) full business days in order that the Company may effect
whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus or in any other documents or
27
<PAGE> 28
arrangements, and the Company agrees promptly to file any
amendments to the Registration Statement or supplements to the
Prospectus which may thereby be made necessary, and (ii) the
respective numbers of shares to be purchased by the remaining
International Managers or substituted International Managers shall
be taken as the basis of their underwriting obligation for all
purposes of this Agreement. Nothing herein contained shall relieve
any defaulting International Manager of its liability to the
Company, the Selling Stockholders or the other International
Managers for damages occasioned by its default hereunder. Any
termination of this Agreement pursuant to this Section 12 shall be
without liability on the part of any non-defaulting International
Manager, the Selling Stockholders or the Company, except for
expenses to be paid or reimbursed pursuant to Section 5 and except
for the provisions of Section 6.
13 Notices. All communications hereunder shall be in writing and, if
sent to the International Managers shall be mailed, delivered or
facsimilied and confirmed to you, as their Lead Managers c/o Cowen
& Company at Financial Square, New York. New York 10005 except that
notices given to an International Manager pursuant to Section 6
hereof shall be sent to such International Manager at the address
furnished by the Lead Managers or, if sent to the Company, shall be
mailed, delivered or facsimilied and confirmed c/o SCM
Microsystems, Inc., 131 Albright Way, Los Gatos, California 95030,
Attention: President.
14 Successors. This Agreement shall inure to the benefit of and be
binding upon the several International Managers, the Company and
the Selling Stockholders and their respective successors and legal
representatives. Nothing expressed or mentioned in this Agreement
is intended or shall be construed to give any person other than the
persons mentioned in the preceding sentence any legal or equitable
right, remedy or claim under or in respect of this Agreement, or
any provisions hereby contained, this Agreement and all conditions
and provisions hereof being intended to be and being for the sole
and exclusive benefit of such persons and for the benefit of no
other person; except that the representations, warranties,
covenants, agreements and indemnities of the Company and the
Selling Stockholders contained in this Agreement shall also be for
the benefit of the person or persons, if any, who control any
International Manager or International Managers within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange
Act, and the indemnities of the several International Managers
shall also be for the benefit of each director of the Company, each
of its officers who has signed the Registration Statement and the
person or persons, if any, who control the Company within the
meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act.
15 Applicable Law. This Agreement shall be governed by and construed
in accordance with the substantive laws of the State of New York.
16 Authority of Lead Managers. In connection with this Agreement, you
will act for and on behalf of the several International Managers,
and any action taken under this Agreement by Cowen, as Lead
Manager, will be binding on all the International Managers; and
any action taken under this Agreement by any of the
Attorneys-in-fact will be binding all the Selling Stockholders.
17 Partial Unenforceability. The invalidity or unenforceability of any
Section, paragraph or provision of this Agreement shall not affect
the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this
Agreement is for any reason determined to be invalid or
unenforceable, there shall be deemed to be made such minor changes
(and only such minor changes) as are necessary to make it valid and
enforceable.
28
<PAGE> 29
18 General. This Agreement constitutes the entire agreement of the
parties to this Agreement and supersedes all prior written or oral
and all contemporaneous oral agreements, understandings and
negotiations with respect to the subject matter hereof.
In this Agreement, the masculine, feminine and neuter genders and
the singular and the plural include one another. The section
headings in this Agreement are for the convenience of the parties
only and will not affect the construction or interpretation of this
Agreement. This Agreement may be amended or modified, and the
observance of any term of this Agreement may be waived, only by a
writing signed by the party or parties to this Agreement directly
affected by such amendment, modification or waiver.
19 Counterparts. This Agreement may be signed in two (2) or more
counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same
instrument.
29
<PAGE> 30
If the foregoing correctly sets forth our understanding, please indicate your
acceptance thereof in the space provided below for that purpose, whereupon this
letter and your acceptance shall constitute a binding agreement between us.
Very truly yours,
SCM MICROSYSTEMS, INC.
By:_____________________________________
Name:
Title:
For purposes of agreeing to the indemnification provisions set forth in Section
6 of this agreement:
SCM MICROSYSTEMS GmbH
By:_____________________________________
Name:
Title:
Accepted and delivered in SELLING STOCKHOLDERS
- as of LISTED IN SCHEDULE B
the date first above written.
COWEN INTERNATIONAL L.P. By:_____________________________________
HAMBRECHT & QUIST LLC
WESTDEUTSCHE LANDESBANK
GIROZENTRALE
Acting on their own behalf
and as Lead Managers of
the several International By:_____________________________________
Managers referred to in Attorney-in-fact
the foregoing Agreement.
By: COWEN INTERNATIONAL L.P.
By:___________________________________
Its general partner
By:_____________________________
Name:
Title:
30
<PAGE> 31
SCHEDULE A
INTERNATIONAL MANAGERS
<TABLE>
<CAPTION>
Number of Number of
Firm Shares Optional Shares
to be to be
Name Purchased Purchased
- ---- --------- ---------
<S> <C> <C>
Cowen International L.P. ......................................
Hambrecht & Quist LLC .........................................
Westdeutsche Landesbank Girozentrale ..........................
--------- ---------
Total
========= =========
</TABLE>
31
<PAGE> 32
SCHEDULE B
SELLING STOCKHOLDERS
32
<PAGE> 33
SCHEDULE C
SUBSIDIARIES
33
<PAGE> 34
SCHEDULE D
LIST OF PARTIES EXECUTING LOCK-UP AGREEMENTS
34
<PAGE> 35
EXHIBIT I
[Form of Accountant's Letter]
The Accountants shall confirm that they are independent accountants to the
Company within the meaning of the Securities Act and the Rules, that the
response to Item 10 of the Registration Statement is correct insofar as it
relates to them and stating that:
a. in their opinion the audited
financial statements and financial statement schedules
included in the Registration Statement and the
Prospectus and reported on by them comply as to form in
all material respects with the applicable accounting
requirements of the Securities Act and the Rules and
Regulations;
b. on the basis of a reading of
the amounts included in the Registration Statement and
the Prospectus under the headings "Summary Consolidated
Financial Data" and "Selected Consolidated Financial
Data," carrying out certain procedures (but not an
examination in accordance with generally accepted
auditing standards) which would not necessarily reveal
matters of significance with respect to the comments set
forth in such letter, a reading of the minutes of the
meetings of the stockholders and directors of the
Company, and inquiries of certain officials of the
Company who have responsibility for financial and
accounting matters of the Company as to transactions and
events subsequent to the date of the latest audited
financial statements, except as disclosed in the
Registration Statement and the Prospectus, nothing came
to their attention which caused them to believe that:
(1) the amounts in
"Summary Consolidated Financial Data," and
"Selected Consolidated Financial Data"
included in the Registration Statement and
the Prospectus do not agree with the
corresponding amounts in the audited or
unaudited financial statements from which
such amounts were derived; or
(2) with respect to
the Company, there were, at a specified date
not more than five business days prior to
the date of the letter, any change in the
capital stock of the Company, increase in
the long-term debt of the Company or any
decreases in net income or in stockholders'
equity in the Company, as compared with the
amounts shown on the Company's audited
balance sheet for the fiscal year ended
December 31, 1996 included in the
Registration Statement; and
c. they have performed certain
other procedures as may be permitted under generally
acceptable auditing standards as a result of which they
determined that certain information of an accounting,
financial or statistical nature (which is limited to
accounting, financial or statistical information derived
from the general accounting records of the Company) set
forth in the Registration Statement and the Prospectus
and reasonably specified by the Representatives agrees
with the accounting records of the Company; and
d. based upon the procedures set
forth in clauses (ii) and (iii) above and a reading of
the amounts included in the Registration Statement under
the headings "Summary Consolidated Financial Data" and
"Selected Consolidated Financial Data" included in the
Registration Statement and Prospectus and a reading of
the financial
35
<PAGE> 36
statements, from which certain of such data were
derived, nothing has come to their attention that gives
them reason to believe that the "Selected Consolidated
Financial Data" included in the Registration Statement
and Prospectus do not comply as to the form in all
material respects with the applicable accounting
requirements of the Securities Act and the Rules or that
the information set forth therein is not fairly stated
in relation to the financial statements included in the
Registration Statement or Prospectus from which certain
of such data were derived are not in conformity with
generally accepted accounting principles applied on a
basis substantially consistent with that of the audited
financial statements included in the Registration
Statement and Prospectus.
36
<PAGE> 37
Exhibit II
[Form of Opinion of Wilson Sonsini Goodrich & Rosati]
1. The Company and each of the corporations set forth in Exhibit A
hereto (the "US Subsidiaries") have been duly incorporated and are validly
existing and in good standing as corporations under the laws of their respective
jurisdictions of incorporation, are duly qualified to do business and are in
good standing as foreign corporations in [list] which, to such counsel's
knowledge are the only jurisdictions in which such qualification is necessary,
and have all corporate power necessary to own or hold their respective
properties and conduct their businesses as described in the Prospectus;
2. The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and nonassessable
and all of the Shares to be issued and sold by the Company to the U.S.
Underwriters pursuant to the Underwriting Agreement and to the International
Managers pursuant to the International Underwriting Agreement have been duly and
validly authorized and, when issued and delivered against payment therefor as
provided for in the Underwriting Agreement or the International Underwriting
Agreement, as the case may be, shall be duly and validly issued, fully paid and
non-assessable and free of any pre-emptive or similar rights; and all of the
issued shares of capital stock of the US Subsidiary have been duly and validly
authorized and issued and are fully paid and non-assessable and are owned
directly or indirectly by the Company, free and clear of all liens,
encumbrances, equities or claims;
3. Other than as described in the Prospectus there are no
pre-emptive or other rights to subscribe for or to purchase, nor any restriction
upon the voting or transfer of, any of the Shares pursuant to the Company's
Certificate of Incorporation or By-Laws or pursuant to any agreement or other
instrument known to us;
4. Except as disclosed in the Prospectus, to our knowledge, there
are no legal or governmental proceedings pending to which the Company or the US
Subsidiary is a party or of which any property or assets of the Company or the
US Subsidiary is the subject which, if determined adversely to the Company or
the US Subsidiary, could, individually or in the aggregate, reasonably be
expected to have a material adverse effect on the Company and its subsidiaries
taken as a whole; and, to our knowledge, no such proceedings are threatened or
contemplated by governmental authorities or other third parties;
5. The Company and the US Subsidiary have full corporate power and
authority to enter into the Underwriting Agreement and the International
Underwriting Agreement and to perform their respective obligations thereunder
(including to issue, sell and deliver the Shares), and each of the Underwriting
Agreement and the International Underwriting Agreement has been duly and validly
authorized, executed and delivered by the Company and the US Subsidiary and is a
valid and binding obligation of each of the Company and the US Subsidiary,
enforceable against each of them in accordance with their respective terms.
6. The execution, delivery and performance of the Underwriting
Agreement and the International Underwriting Agreement by the Company and the
consummation of the transactions contemplated by the Underwriting Agreement and
the International Underwriting Agreement by the Company will not result in a
breach or violation of (A) any of the terms or provisions of or constitute a
default under any indenture, mortgage, deed of trust, loan agreement or other
agreement or instrument that is filed as an exhibit to the Registration
Statement, (B) the Certificate of Incorporation or By-laws or the
<PAGE> 38
certificate of incorporation or by-laws of the US Subsidiary, or (C) any law,
order, rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or the US Subsidiary or any of their properties or
result in the creation of a lien;
7. No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the Company or
the US Subsidiary of the transactions contemplated by the Underwriting Agreement
or the International Underwriting Agreement, except such as may be required by
the National Association of Securities Dealers, Inc. (the "NASD"), the Neuer
Markt of the Frankfurt Stock Exchange or under the Securities Act or the
Exchange Act or the securities or "Blue Sky" laws of any jurisdiction in
connection with the purchase and distribution of the Shares by the U.S.
Underwriters or the International Managers;
8. The Registration Statement was declared effective under the
Securities Act as of ____, 1997, the Prospectus was filed with the Commission
pursuant to Rule 424(b) of the Rules and Regulations on ____, 1997, and no stop
order suspending the effectiveness of the Registration Statement has been issued
and to our knowledge no proceeding for that purpose is pending or threatened by
the Commission;
9. The Registration Statement and the Prospectus and any amendments
or supplements thereto (other than the financial statements and the notes
thereto and the schedules and other financialand statistical data included in
the Registration Statement or the Prospectus as to which we express no opinion)
comply as to form in all respects with the requirements of the Securities Act
and the Rules and Regulations;
10. Other than as described in the Prospectus and to our knowledge,
there are no contracts, agreements or understandings between the Company and any
person granting such person the right (other than rights which have been waived
or satisfied) to require the Company to file a registration statement under the
Securities Act with respect to any securities of the Company owned or to be
owned by such person or to require the Company to include such securities in the
securities registered pursuant to this Registration Statement or in any
securities being registered pursuant to any other registration statement filed
by the Company under the Securities Act;
11. The descriptions in the Registration Statement and Prospectus of
legal or governmental proceedings, contracts and other documents are accurate in
all material respects and such descriptions fairly present the information
required to be disclosed, and to our knowledge, there are no legal or
governmental proceedings or any contracts or documents of a character required
to be described in the Registration Statement or Prospectus or to be filed as
exhibits to the Registration Statement which are not described or filed as
required;
12. The descriptions in the Registration Statement and the
Prospectus under the captions "Risk Factors -- Concentration of Stock Ownership;
Anti-Takeover Provisions," Risk Factors -- Shares Eligible for Future Sale,"
Description of Common Stock" and "Shares Eligible for Future Sale," solely to
the extent they reflect matters of federal law arising under the laws of the
United States or of the Delaware General Corporation Law or legal conclusions
relating to such laws, accurately summarize and fairly present the legal and
regulatory matters described therein; and
13. Neither the Company nor the US Subsidiary is nor will they be
immediately after receiving the proceeds from the sale of the Shares, an
"investment company" or an entity "controlled" by an "investment company" as
such terms are defined in the Investment Company Act of 1940, as amended.
2
<PAGE> 39
In addition, although we have not undertaken, except as otherwise
indicated herein, to determine independently, and do not assume any
responsibility for, the accuracy or completeness of the statements in the
Registration Statement, we have participated in conferences with officers and
other representatives of the Company, at which conferences representatives of
the Representatives, counsel to the Underwriters and representatives of the
independent certified public accountants of the Company were present, and at
which conferences the contents of the Registration Statement and Prospectus and
related matters were discussed, and based upon the foregoing nothing has come to
our attention that has caused us to believe that the Registration Statement at
the time the Registration Statement became effective, or the Prospectus, as of
its date and as of the date hereof, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that any amendment or
supplement to the Prospectus, as of its respective date, and as of the date
hereof, contained any untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading (it being understood
that we express no belief with respect to the financial statements and the notes
thereto and the schedules and other financial and statistical data included in
the Registration Statement or the Prospectus).
3
<PAGE> 40
SCHEDULE A
[U.S. Underwriters]
<PAGE> 41
SCHEDULE B
[International Managers]
<PAGE> 42
Exhibit III
[Form of Opinion of Issuer's German Counsel]
1. SCM Microsystems GmbH, a ______ (the "Company") has been duly
organized and is validly existing as ___________ in good standing under the laws
of Germany, is duly qualified to do business and is in good standing as a
foreign corporation in each jurisdiction in which its ownership or leasing of
property or the conduct of its business, as known by us, requires such
qualification except to the extent that the failure to so qualify would not have
a material adverse effect on the Company, and has all power and authority
(corporate and other) necessary to own or hold its properties and conduct its
business;
2. All of the issued shares of capital stock of the Company have
been duly and validly authorized and issued and are fully paid, non-assessable
and are owned of record by SCM Microsystems, Inc., a Delaware corporation ('SCM
Microsystems"), free and clear of all liens, encumbrances, equities or claims;
3. Other than as described in the Prospectus there are no
pre-emptive or other rights to subscribe for or to purchase, nor any restriction
upon the voting or transfer of, any of the capital stock of the Company pursuant
to the Company's organizational documents or pursuant to any agreement or other
instrument;
4. Except as disclosed in the Prospectus, to our knowledge, there
are no legal or governmental proceedings pending to which the Company is a party
or of which any property or assets of the Company is the subject which, if
determined adversely to the Company, could individually or in the aggregate have
a material adverse effect on the Company and, to our knowledge, no such
proceedings are threatened or contemplated by governmental authorities or other
third parties;
5. The statements in the Prospectus under the heading "Risk
Factors -- Proprietary Technology and Intellectual Property" and "Business --
Proprietary Technology and Intellectual Property," insofar as such statements
constitute summary descriptions of the legal matters, documents or proceedings
referred to therein, fairly present the information called for with respect to
such legal matters, documents or proceedings and such statements do not omit to
state any material fact required to be stated therein or necessary to make the
statements therein not misleading;
6. to such counsel's knowledge, the Company owns or possesses all
patents, trademarks, trademark registrations, service marks, service mark
registrations, trade names, copyrights, licenses, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and rights described in the Prospectus as
being owned by it or necessary for the conduct of its business; and to such
counsel's knowledge, except as described in the Prospectus, the Company has not
received any notice of infringement of or conflict with and such counsel knows
of no infringement of or conflict with asserted rights of others with respect
to any such patents, trademarks, service marks or other proprietary information
or materials which could result in any material adverse effect on the Company
and to the knowledge of such counsel there is no infringement or violation by
others of any of the Company's patents, licenses, trade secrets, trademarks,
service marks or other proprietary information or materials which in the
judgment of such counsel could materially affect the use thereof by the Company;
7. the patents have been licensed to the Company as described in
the Prospectus, and such licenses are valid, binding and enforceable; and the
Company has rights to the products and technology covered thereby as described
in the Prospectus;
8. The Company has full corporate power and authority to enter into
the Underwriting Agreement and the International Underwriting Agreement and to
perform its obligations thereunder, and the Underwriting Agreement and the
International Underwriting Agreement have each been duly and validly authorized,
executed and delivered by the Company;
9. The execution, delivery and performance of the Underwriting
Agreement and the International Underwriting Agreement and the consummation of
the transactions contemplated by the Underwriting Agreement and the
International Underwriting Agreement will not result in a breach or violation of
any of (A) the terms or provisions of or constitute a default under any
indenture, mortgage, deed of trust note agreement or other agreement or
instrument known to us to which the Company is a
<PAGE> 43
party or by which any of its properties is or may be bound, (B) the
organizational documents of the Company, or (C) any law, order, rule or
regulation of any court or governmental agency or body having jurisdiction over
the Company or any of its properties nor will such execution, delivery and
performance result in the creation of a lien;
10. No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the Company of
the transactions contemplated by the Underwriting Agreement or the International
Underwriting Agreement.
11. The Prospectus used in connection with the application to list
the International Stock on the Neuer Markt of the Frankfurt Stock Exchange and
any amendments or supplements thereto comply as to form in all respects with the
requirements of German law.
12. The International Stock has been approved for listing on the
Neuer Markt of the Frankfurt Stock Exchange.
In addition, although we have not undertaken, except as otherwise
indicated herein, to determine independently, and do not assume any
responsibility for, the accuracy or completeness of the statements in the
Registration Statement, we have participated in the preparation of the
Registration Statement and the Prospectus (including the German translation
version thereof), including review and discussion of the contents thereof, and
nothing has come to our attention that has caused us to believe that the
Registration Statement at the time the Registration Statement became effective,
or the Prospectus (including the German translation version thereof), as of its
date and as of the date hereof, contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or that any amendment or
supplement to the Prospectus (including the German translation version thereof),
as of its respective date, and as of the date hereof, contained any untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading (it being understood that we express no belief
with respect to the financial statements and the notes thereto and the schedules
and other financial and statistical data included in the Registration Statement
or the Prospectus).
2
<PAGE> 44
SCHEDULE A
[U.S. Underwriters]
<PAGE> 45
SCHEDULE B
[International Managers]
<PAGE> 46
Exhibit IV
[Form of Intellectual Property Counsel Opinion]
1. The statements in the Prospectus under the heading "Risk Factors -
Proprietary Technology and Intellectual Property" and "Business - Proprietary
Technology and Intellectual Property," insofar as such statements constitute
summary descriptions of the legal matters, documents or proceedings referred to
therein, fairly present the information called for with respect to such legal
matters, documents or proceedings and such statements do not omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading;
2. to such counsel's knowledge, the Company owns or possesses all
patents, trademarks, trademark registrations, service marks, service mark
registrations, trade names, copyrights, licenses, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and rights described in the Prospectus as
being owned by it or necessary for the conduct of its business; and to such
counsel's knowledge, except as described in the Prospectus, the Company has not
received any notice of infringement of or conflict with and such counsel knows
of no infringement of or conflict with asserted rights of others with respect
to any such patents, trademarks, service marks or other proprietary information
or materials which could result in any material adverse effect on the Company
and to the knowledge of such counsel there is no infringement or violation by
others of any of the Company's patents, licenses, trade secrets, trademarks,
service marks or other proprietary information or materials which in the
judgment of such counsel could materially affect the use thereof by the
Company's and
3. the patents have been licensed to the Company as described in the
Prospectus, and such licenses are valid, binding and enforceable; and the
Company has rights to the products and technology covered thereby as described
in the Prospectus.
<PAGE> 47
SCHEDULE A
[U.S. Underwriters]
<PAGE> 48
SCHEDULE B
[International Managers]
<PAGE> 49
Exhibit V
[Form of Opinion of Selling Stockholders' Counsel]
1. The Underwriting Agreement, the International Underwriting
Agreement, the Custody Agreement, the Power of Attorney and the Lock-Up
Agreement to be executed by the Selling Stockholder each have been duly and
validly executed and delivered by or on behalf of each Selling Stockholder.
2. The Underwriting Agreement, the International Underwriting
Agreement, the Custody Agreement, the Power of Attorney and the Lock-Up
Agreement executed and delivered by the Selling Stockholders each constitute the
legal, valid and binding obligation of the Selling Stockholders enforceable
against each of the Selling Stockholders in accordance with their respective
terms except as the validity, legality and binding effect of each may be limited
or otherwise effected by (A) bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance or other similar statutes, rules, regulations or laws
affecting the enforcement of creditors' rights and remedies generally and (B)
the unavailability of, or limitation on the availability of, a particular right
or remedy (whether in a proceeding in law or equity) because of an equitable
principle or a requirement as to commercial reasonableness, conscionability or
good faith.
3. Each of the Selling Stockholders is the record owner of and has
marketable title to the Shares to be sold by such Selling Stockholder and, to
our knowledge, each Selling Stockholder has full legal right and power to enter
into the Underwriting Agreement and the International Underwriting Agreement and
to sell, transfer and deliver in the manner provided in the Underwriting
Agreement and the International Underwriting Agreement the Shares to be sold by
the Selling Stockholders.
4. The transfer and sale by the Selling Stockholders of the Shares
to be sold by the Selling Stockholders as contemplated in the Underwriting
Agreement and the International Underwriting Agreement will not violate any
agreement, judgment, decree, order, statute, rule or regulation which, to the
knowledge of such counsel, the Selling Stockholders are a party or by which
either Selling Stockholder is bound or subject.
5. All of the Selling Stockholders' rights in the Shares to be sold
by such Selling Stockholder, have been transferred to the Underwriters who have
severally purchased such Shares, free and clear of adverse claims, assuming that
the Underwriters purchased the same in good faith without notice of any adverse
claims.
6. To our knowledge, no consent, approval, authorization, license,
certificate, permit or order of any court, governmental or regulatory agency,
authority or body or financial institution is required in connection with the
performance of the Underwriting Agreement or the International Underwriting
Agreement by such Selling Stockholder or the consummation of the transactions
contemplated therein, including the delivery and sale of the Shares to be
delivered and sold by such Selling Stockholder, except such as have been
obtained and except such as may be required under state securities or blue sky
laws in connection with the purchase and distribution of the Shares by the
several Underwriters.
In addition, we have participated in conferences with
officers and other representatives of the Company, representatives of the
Representatives and representatives of the independent public accountants of the
Company, at which conferences the contents of the Registration Statement and the
Prospectus and related matters were discussed. While we have not undertaken to
independently verify and
<PAGE> 50
do not assume any responsibility for the accuracy, completeness or fairness of
the statements contained in the Registration Statement and the Prospectus
(except as specified in the foregoing opinion), on the basis of the foregoing,
no facts have come to our attention which lead us to believe that the
Registration Statement at the time it became effective (except with respect to
the financial statements and notes and schedules thereto and other financial
data, as to which we express no opinion) contained any untrue statement of a
material fact or omitted to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, or that the
Prospectus as amended or supplemented (except with respect to the financial
statements and notes schedules thereto and other financial data, as to which we
express no opinion) on the date thereof and the date hereof contained any untrue
statement of a material fact or omitted to state a material fact necessary in
order to make the statements therein, in the light of the circumstances under
which they were made, not misleading.
2
<PAGE> 51
SCHEDULE A
[U.S. Underwriters]
<PAGE> 52
SCHEDULE B
[International Managers]
<PAGE> 53
Exhibit VI
[Form of Lock-Up Agreement]
-----------------------
Print Stockholder Name
SCM MICROSYSTEMS, INC.
LOCK-UP AGREEMENT
Cowen & Company
Hambrecht & Quist LLC
As representatives of the
several Underwriters
c/o Cowen & Company
Financial Square
New York, New York 10005
Re: SCM Microsystems, Inc.
Ladies and Gentlemen:
In order to induce Cowen & Company ("Cowen") and Hambrecht & Quist LLC
(together, the "Representatives"), to enter into a certain underwriting
agreement with SCM Microsystems, Inc., a Delaware corporation (the "Company"),
with respect to the public offering of shares of the Company's Common Stock, par
value $ 0.001 per share ("Common Stock"), the undersigned hereby agrees that for
a period of 180 days following the date of the final prospectus filed by the
Company with the Securities and Exchange Commission in connection with such
public offering, the undersigned will not, without the prior written consent of
Cowen, directly or indirectly, (i) offer, sell, assign, transfer, encumber,
pledge, contract to sell, register for sale, grant an option to purchase or
otherwise dispose of, other than by operation of law, any shares of Common Stock
(including, without limitation, Common Stock which may be deemed to be
beneficially owned by the undersigned in accordance with the rules and
regulations promulgated under the Securities Act of 1933, as the same may be
amended or supplemented from time to time (such shares, the "Beneficially Owned
Shares") or (ii) enter into any swap or similar agreement that transfers, in
whole or in part, the economic risk of ownership of the Common Stock, whether
any such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise.
Notwithstanding the foregoing, this Lock-Up Agreement (the "Agreement") shall
not apply to shares of the Company's Common Stock (i) acquired through the
Company's directed shares program or (ii) acquired on the open market and that
shares so acquired may be sold or otherwise disposed of without regard to this
Agreement.
Notwithstanding the foregoing, if the undersigned is an individual, he or she
may transfer any Shares either during his or her lifetime or on death by will or
intestacy to his or her immediate family or to a trust the beneficiaries of
which are exclusively the undersigned and/or a member of his or her immediate
family or to a charitable organization; provided, however, that in any such case
it shall be a condition to the transfer that the transferee execute an agreement
stating that the transferee is receiving and holding
<PAGE> 54
the Shares transferred subject to the provisions of this Agreement, and there
shall be no further transfer of such Shares except in accordance with this
Agreement. For purposes of this Agreement, "immediate family" shall mean spouse,
lineal descendant, father, mother, brother or sister of the transferor and
"charitable organization" shall mean an organization described in Section
501(c)(3) of the Internal Revenue Code of 1986, as amended.
Notwithstanding the foregoing, if the undersigned is a partnership, the
partnership may transfer any Shares to a partner of such partnership or a
retired partner of such partnership who retires after the date hereof, or to the
estate of any such partner or retired partner, and any partner who is an
individual may transfer such Shares by gift, will or intestate succession to his
or her spouse or lineal descendants or ancestors; and if the undersigned is a
corporation, the corporation may transfer such Shares to any stockholder or
subsidiary of such corporation and any stockholder who is an individual may
transfer Shares by gift, will or intestate succession to his or her immediate
family or to a charitable organization; provided, however, that in any such
case, it shall be a condition to the transfer that the transferee execute an
agreement stating that the transferee is receiving and holding the Shares
subject to the provisions of this Agreement, and there shall be no further
transfer of such Shares except in accordance with this Agreement.
The undersigned agrees that the provisions of this Agreement shall be binding
also upon the successors, assigns, heirs and personal representatives of the
undersigned. The undersigned agrees and consents to the placing of legends
and/or the entry of stop transfer instructions with the Company's transfer agent
against the transfer of any shares of Common Stock or Beneficially Owned Shares
held by the undersigned except in compliance with this Agreement.
It is understood that, if the Underwriting Agreement does not become effective,
or if the Underwriting Agreement (other than the provisions thereof which
survive termination) shall terminate or be terminated prior to payment for and
delivery of the Shares, you will release us from our obligations under this
Agreement.
This Agreement shall terminate and be of no further force or effect in the event
that the offering contemplated by the Underwriting Agreement is not completed on
or before October 30, 1997.
Very truly yours,
--------------------------------------
(Signature)
--------------------------------------
(Title)
--------------------------------------
(Date)
2
<PAGE> 1
EXHIBIT 10.20
AMENDMENT AGREEMENT
This Amendment Agreement ("Agreement") is made as of ______________,
1997 (the "Effective Date") by and between SCM Microsystems, Inc. (the
"Company"), SCM Microsystems GmbH, a wholly-owned subsidiary of the Company (the
"Subsidiary") and Technologie-Beteiligungs-Gesellschaft mbH der Deutschen
Ausgleichsbank ("TBG").
WHEREAS, the Subsidiary and TBG have entered into a Participation
Agreement dated October 22, 1993 (the "1993 Participation Agreement") and a
Participation Agreement dated June 8, 1995 (the "1995 Participation Agreement")
(each a Participation Agreement, and together, the "Participation Agreements");
WHEREAS, the Subsidiary has borrowed an aggregate of DM 4,000,000 from
the TBG pursuant to the Participation Agreements (the "Principal Amount");
WHEREAS, the Company is currently undertaking an initial public offering
of its Common Stock (the "IPO");
WHEREAS, the Subsidiary, the Company and TBG agree to amend the
Participation Agreements in order to facilitate the IPO;
NOW THEREFORE, in consideration of the mutual promises made herein, the
Subsidiary, the Company and TBG (collectively referred to as "the Parties")
hereby agree as follows:
1. Termination. The Subsidiary, the Company and TBG hereby terminate
Sections 9 and 12.1 of the 1993 Participation Agreement and Sections 9 and 12.1
of the 1995 Participation Agreement pursuant to Section 14.1 of each respective
Participation Agreement.
2. Payment of the Principal Amount. Notwithstanding the repayment
provisions of the Participation Agreements, in the event that the Company
completes an IPO while amounts remain outstanding under the Participation
Agreements, the Company agrees to pay the Principal Amount, together with
accrued interest as provided in Section 3 below, to TBG within 45 days following
completion of the IPO. In addition, the Company may pre-pay the Principal Amount
and accrued interest at any time without penalty.
3. Payment of Interest. The Company agrees to pay interest on the
Principal Amount as follows: 5% interest per annum in regard of the DM 1,000,000
borrowed by the Subsidiary pursuant to the 1993 Participation Agreement and 6%
interest per annum in regard of the DM 3,000,000 borrowed by the Subsidiary
pursuant to the 1995 Participation Agreement. Interest will accumulate and will
be paid at such time as the Principal Amount is repaid.
4. Warrant. In consideration of TBG's agreement to terminate Sections 9
and 12.1 of each Participation Agreement, concurrent with the execution of this
Agreement the Company will issue to TBG a warrant representing the right to
purchase 138,000 (one hundred thirty eight thousand) shares of the Company's
Common Stock (the "Warrant"). The Warrant will be exercisable at $5.72 per share
of the
<PAGE> 2
Company's Common Stock (the "Exercise Price") and will expire two years from the
Effective Date. The form of Warrant to be issued is attached hereto as Exhibit
A. The shares of the Company's Common Stock issuable upon the exercise of the
Warrant will, upon issuance and receipt of the Exercise Price therefor, be fully
paid and nonassessable. During the period within which the Warrant may be
exercised, the Company shall at all times have authorized and reserved for
issuance sufficient shares of its Common Stock to provide for the exercise of
the Warrant.
5. Investment Representations of TBG.
5.1. Experience. TBG has substantial experience in evaluating and
investing in private placement transactions of securities in companies similar
to the Company so that it is capable of evaluating the merits and risks of its
investment in the Company and has the capacity to protect its own interests.
5.2. Investment. TBG is acquiring the Warrant and the shares of Common
Stock issuable upon exercise of the Warrant (the "Shares") for investment for
its own account, not as a nominee or agent, and not with the view to, or for
resale in connection with, any distribution thereof. TBG understands that the
Warrant and the Shares have not been, and will not be, registered under the
Securities Act of 1933, as amended (the "Act").
5.3. Rule 144. TBG acknowledges that the Warrant and the Shares must be
held indefinitely unless subsequently registered under the Act or unless an
exemption from such registration is available. TBG is aware of the provisions of
Rule 144 promulgated under the Act which permit limited resale of shares
purchased in a private placement subject to the satisfaction of certain
conditions, including, among other things, the existence of a public market for
the shares, the availability of certain current public information about the
Company, the resale occurring not less than one year after a party has purchased
and paid for the security to be sold, the sale being effected through a
"broker's transaction" or in transactions directly with a "market maker" and the
number of shares being sold during any three-month period not exceeding
specified limitations.
6. Confidential Information. TBG shall maintain the confidentiality of
all confidential and proprietary information of the Company made available to it
pursuant to Section 6 of each Participation Agreement.
7. No Other Modifications. Except as modified by this Agreement, the
Participation Agreements shall remain unmodified and in full force and effect.
8. Amendments. This Agreement may only be amended by a written
instrument signed by each of the parties.
9. Governing Law. This Agreement shall be governed by the laws of the
Federal Republic of Germany.
-2-
<PAGE> 3
10. Counterparts. This Agreement may be executed in counterparts, and
each counterpart shall have the same force and effect as an original and shall
constitute an effective, binding agreement on the part of each of the
undersigned.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
Effective Date.
SCM MICROSYSTEMS GMBH
By_______________________________
SCM MICROSYSTEMS, INC.
By_______________________________
TECHNOLOGIE-BETEILIGUNGS- GESELLSCHAFT M.B.H.
By_______________________________
-3-
<PAGE> 4
EXHIBIT A
SCM MICROSYSTEMS, INC.
COMMON STOCK WARRANT
NO. 1997C-1 VOID AFTER___________________, 1999
THIS WARRANT AND THE SHARES WHICH MAY BE PURCHASED UPON THE EXERCISE OF THIS
WARRANT HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT AND HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR ANY STATE
SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED OR
HYPOTHECATED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF COUNSEL
SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH SALE, OFFER, PLEDGE OR
HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS DELIVERY
REQUIREMENTS OF THE ACT AND OF ANY APPLICABLE STATE SECURITIES LAWS UNLESS SOLD
PURSUANT TO RULE 144 OF THE ACT.
THIS CERTIFIES THAT, for value received, Technologie-Beteiligungs-Gesellschaft
m.b.H. (the "HOLDER") is entitled to subscribe for and purchase 138,000 (one
hundred thirty eight thousand) shares of fully paid and nonassessable Common
Stock of SCM Microsystems, Inc., a Delaware company (the "COMPANY"), at an
exercise price of US$5.72 per share. Such number of shares and exercise price
shall be subject to adjustment as provided in Section 3 below.
1. Method of Exercise; Payment.
(a) Cash Exercise. The purchase rights represented by this
Warrant may be exercised by the Holder, in whole or in part, by the surrender of
this Warrant (with the notice of exercise form attached hereto as EXHIBIT A duly
executed) at the principal office of the Company, and by the payment to the
Company, by certified, cashier's or other check, of an amount equal to the
aggregate Exercise Price for the number of shares of Common Stock being
purchased.
(b) Net Issue Exercise. In lieu of exercising this Warrant in a
cash exercise, the Holder may elect to exercise this Warrant, in whole or in
part, on a "net exercise" basis, and upon such net exercise shall be entitled to
receive shares equal to the value of the portion of this Warrant so canceled.
Such net exercise shall be effected by surrender of this Warrant at the
principal office of the Company together with notice of election to exercise by
means of a net issuance exercise, in which event the Company shall issue to the
Holder a number of shares of the Common Stock of the Company computed using the
following formula:
X = Y (A-B)
------
A
Where X = the number of shares of Common Stock to be issued to the Holder.
Y = the number of shares of Common Stock purchasable under this Warrant
to be canceled upon such net exercise.
<PAGE> 5
A = the Fair Market Value of one share of Common Stock on the date of
exercise.
B = the Exercise Price (as adjusted to the date of such calculation).
For purposes of this Warrant, the Fair Market Value of the Common Stock shall
mean such fair market value as is reasonably determined by the Board of
Directors of the Company in good faith from time to time, provided that upon an
exercise of the Warrant after the effectiveness of the Company's initial public
offering, Fair Market Value shall mean the closing price quoted on any exchange
on which the Common Stock is listed as published in the Wall Street Journal for
the ten trading days prior to the date of determination of fair market value.
(c) Stock Certificates. In the event of any exercise of the
rights represented by this Warrant, certificates for the Common Stock so
purchased shall be delivered to the Holder within a reasonable time and, unless
this Warrant has been fully exercised or has expired, a new Warrant representing
the shares with respect to which this Warrant shall not have been exercised
shall also be issued to the Holder within such time.
(d) Fractional Shares. The Warrant may not be exercised for
fractional shares.
2. Representations and Warranties of the Company. The Company
represents and warrants to the Holder as follows:
(a) Stock Fully Paid; Reservation of Shares. All of the Common
Stock issuable upon the exercise of the rights represented by this Warrant will,
upon issuance and receipt of the Exercise Price payable therefor, be fully paid
and nonassessable. During the period within which the rights represented by this
Warrant may be exercised, the Company shall at all times have authorized and
reserved for issuance a sufficient number of shares of its Common Stock to
provide for the exercise of the rights represented by this Warrant.
(b) Corporate Power. The Company will have at the Closing Date
all requisite legal and corporate power to execute and deliver this Warrant, to
sell and issue the shares of Common Stock hereunder and to carry out and perform
its obligations under the terms of this Warrant.
(c) Authorization. All corporate action on the part of the
Company, its directors and stockholders necessary for the authorization,
execution, delivery and performance of this Warrant by the Company, the
authorization, sale, issuance and delivery of the shares of Common Stock and the
performance of the Company's obligations hereunder has been taken or will be
taken promptly after the date hereof. This Warrant, when executed and delivered
by the Company, shall constitute a valid and binding obligation of the Company
enforceable in accordance with its terms.
3. Adjustment of Exercise Price and Number of Shares.
(a) Stock Splits, Etc. In the event that the Company shall, at
any time after the original issuance date of this Warrant, subdivide the
outstanding shares of Common Stock or issue a
-2-
<PAGE> 6
stock dividend on its outstanding shares of Common Stock payable in shares of
Common Stock, then the number of shares of Common Stock issuable upon exercise
of this Warrant immediately prior to such subdivision or the issuance of such
stock dividend shall be proportionately increased, and the Exercise Price shall
be proportionately decreased, and in the event that the Company shall, at any
time after the original issuance date of this Warrant, combine the outstanding
shares of Common Stock then the number of shares of Common Stock issuable upon
exercise of this Warrant immediately prior to such combination shall be
proportionately decreased, and the Exercise Price shall be proportionately
increased, effective at the close of business on the date of such subdivision,
stock dividend or combination, as the case may be.
(b) Reclassifications, Etc. In the case of any reclassification,
recapitalization or change of the Common Stock (other than any action for which
adjustment is made pursuant to Section 3(a) hereof), the Company shall execute a
new warrant providing that the Holder of this Warrant shall have the right to
exercise such new warrant and to procure upon such exercise and payment of the
same aggregate Exercise Price, in lieu of the shares of Common Stock theretofore
exercisable upon exercise of this Warrant, the kind and amount of shares, other
securities, money or property receivable upon such reclassification,
recapitalization or change of the Common Stock.
(c) Notice of Adjustments. Whenever the number of shares of
Common Stock purchasable hereunder or the Exercise Price thereof shall be
adjusted pursuant to Section 3, the Company shall provide notice to the Holder
setting forth, in reasonable detail, the event requiring the adjustment, the
amount of the adjustment, the method by which such adjustment was calculated,
and the number of shares of Common Stock which may be purchased and the Exercise
Price therefor after giving effect to such adjustment.
4. Representations and Warranties by the Holder. The Holder
represents and warrants to the Company as follows:
(a) This Warrant and the shares of Common Stock issuable upon
exercise hereof are being acquired for the Holder's own account, for investment
and not with a view to, or for resale in connection with, any distribution or
public offering thereof within the meaning of the Act. Upon exercise of this
Warrant, the Holder shall, if so requested by the Company, confirm in writing,
in a form satisfactory to the Company, that the securities issuable upon
exercise of this Warrant are being acquired for investment and not with a view
toward distribution or resale.
(b) The Holder understands that the Warrant and the shares of
Common Stock issuable on exercise hereof have not been registered under the Act
by reason of their issuance in a transaction exempt from the registration and
prospectus delivery requirements of the Act pursuant to Section 4(2) thereof,
and that they must be held by the Holder indefinitely, and that the Holder must
therefore bear the economic risk of such investment indefinitely, unless a
subsequent disposition thereof is registered under the Act or is exempted from
such registration. The Holder further understands that the shares of Common
Stock issuable on exercise hereof have not been qualified under the blue sky
laws of any jurisdiction by reason of their issuance in a transaction exempt
from the qualification
-3-
<PAGE> 7
requirements of such blue sky laws, which exemption depends upon, among other
things, the bona fide nature of the Holder's investment intent expressed above.
(c) The Holder has such knowledge and experience in financial and
business matters that the Holder is capable of evaluating the merits and risks
of the purchase of this Warrant and the shares of Common Stock purchasable
pursuant to the terms of this Warrant and of protecting the Holder's interests
in connection therewith.
(d) The Holder is able to bear the economic risk of the purchase
of the Common Stock issuable on exercise of this Warrant.
(e) The Holder understands that no public market now exists for
any of the securities issued by the Company and that the Company has made no
assurances that a public market will ever exist for the Company's securities.
(f) The Holder knows of no public solicitation or advertisement
of an offer in connection with the proposed issuance and sale of the Warrant or
the Shares.
5. Restrictive Legend.
The Common Stock issuable on exercise of this Warrant shall
(unless registered under the Act) be stamped or imprinted with a legend in
substantially the following form:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED. SUCH SHARES MAY NOT BE SOLD OR
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS THE
COMPANY RECEIVES AN OPINION OF COUNSEL REASONABLY ACCEPTABLE TO
IT STATING THAT SUCH SALE OR TRANSFER IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF SAID ACT.
COPIES OF THE AGREEMENTS COVERING THE PURCHASE OF THESE SHARES
AND RESTRICTING THEIR TRANSFER MAY BE OBTAINED AT NO COST BY
WRITTEN REQUEST MADE BY THE HOLDER OF RECORD OF THIS CERTIFICATE
TO THE SECRETARY OF THE COMPANY AT THE PRINCIPAL EXECUTIVE
OFFICES OF THE COMPANY."
The Company need not register a transfer of this Warrant or shares of Common
Stock issued on exercise of this Warrant unless the conditions specified in the
legend above are satisfied and, at the discretion of the Company, the Company
has received such representations from the transferee as the Company reasonably
deems necessary to ensure compliance with applicable securities laws.
6. Rights of Stockholders. No holder of this Warrant shall be entitled
as a Warrant holder, to vote or receive dividends or be deemed the holder of the
shares of Common Stock or any other securities of the Company which may at any
time be issuable on the exercise hereof for any purpose, nor
-4-
<PAGE> 8
shall anything contained herein be construed to confer upon the holder of this
Warrant, as such, any of the rights of a stockholder of the Company or any right
to vote for the election of directors or upon any matter submitted to
stockholders at any meeting thereof, or to give or withhold consent to any
corporate action (whether upon any recapitalization, issuance of stock,
reclassification of stock, change of par value, consolidation, merger,
conveyance, or otherwise) or to receive notice of meetings, or to receive
dividends or subscription rights or otherwise until the Warrant shall have been
exercised and the Shares purchasable upon the exercise hereof shall have become
deliverable, as provided herein.
7. Expiration of Warrant. This Warrant shall expire and shall no longer
be exercisable on 5:00 p.m., German local time, on July __, 1999.
8. Notices. All notices and other communications required or permitted
hereunder shall be in writing, shall be effective when given, and shall in any
event be deemed to be given upon receipt or, if earlier, (a) fifteen (15) days
after deposit with the U.S. Postal Service, the Postal Service of the Federal
Republic of Germany, or other applicable postal service, if delivered by first
class mail, postage prepaid, (b) upon delivery, if delivered by hand, (c) two
(2) business days after the business day of deposit with Federal Express or
similar overnight courier, freight prepaid or (d) one (1) business day after the
business day of facsimile transmission, if delivered by facsimile transmission
with copy by Federal Express or similar overnight courier, freight prepaid, and
shall be addressed (i) if to the Holder, at the Holder's address as set forth
beneath the Holder's signature to this Warrant, and (ii) if to the Company, at
the address of its principal corporate offices (attention: Company Secretary),
or at such other address as the Company shall have furnished to the other
parties hereto in writing.
9. Governing Law. This Warrant and all actions arising out of or in
connection with this Agreement shall be governed by and construed in accordance
with the laws of the State of California, without regard to the conflicts of law
provisions of the State of California or of any other state.
Issued this ____ day of_____________, 1997.
SCM MICROSYSTEMS, INC.
By:_________________________
Title:______________________
ACCEPTED:
_______________________________
By:____________________________
Title:_________________________
-5-
<PAGE> 9
EXHIBIT A
NOTICE OF EXERCISE
TO: SCM Microsystems, Inc.
131 Albright Way
Los Gatos, CA 95032
Attention: President
1. The undersigned hereby elects to purchase __________ shares of Common
Stock of SCM Microsystems, Inc. (the "COMPANY") pursuant to the terms of the
attached Warrant.
2. Method of Exercise (Please initial the applicable blank):
___ The undersigned elects to exercise the attached Warrant by
means of a cash payment, and tenders herewith payment in
full for the purchase price of the shares being purchased,
together with all applicable transfer taxes, if any.
___ The undersigned elects to exercise the attached Warrant by
means of the net exercise provisions of Section 1(b) of
the Warrant.
3. Please issue a certificate or certificates representing said shares
of Common Stock in the name of the under signed or in such other name as is
specified below:
---------------------------------------
(Name)
---------------------------------------
---------------------------------------
(Address)
4. The undersigned hereby represents and warrants as follows:
(a) The shares of Common Stock being acquired hereby (the
"SECURITIES") are being acquired for the account of the undersigned for
investment and not with a view to, or for resale, in connection with the
distribution thereof, and that the undersigned has no present intention of
distributing or reselling such shares.
(b) All representations and warranties of the undersigned set
forth in Section 4 of the attached Warrant are true and correct as of the date
hereof.
(c) The undersigned is aware of the Company's business affairs
and financial condition, and has acquired sufficient information about the
Company to reach an informed and knowledgeable decision to acquire the
Securities. The undersigned is purchasing the Securities for the undersigned's
own account for investment purposes only and not with a view to, or for the
resale in connection with, any "distribution" thereof for purposes of the
Securities Act of 1933, as amended (the "ACT").
(d) The undersigned understands that the Securities have not been
registered under the Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of its
investment intent as expressed herein. In this connection, the undersigned
understands that, in the view of the Securities and Exchange Commission (the
"SEC"), the statutory basis for such exemption may be unavailable if its
representation was predicated solely upon a present intention to hold these
Securities for the minimum capital gains period specified under tax
<PAGE> 10
statutes, for a deferred sale, for or until an increase or decrease in the
market price of the Securities, or for a period of one year or any other fixed
period in the future.
(e) The undersigned further understands that the Securities must
be held indefinitely unless subsequently registered under the Act or unless an
exemption from registration is otherwise available. Moreover, the undersigned
understands that the Company is under no obligation to register the Securities.
In addition, the undersigned understands that the certificate evidencing the
Securities will be imprinted with a legend which prohibits the transfer of the
Securities unless they are registered or such registration is not required in
the opinion of counsel for the Company.
(f) The undersigned is familiar with the provisions of Rule 144,
promulgated under the Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof, in a non-public offering subject to the satisfaction of certain
conditions. The Securities may be resold in certain limited circumstances
subject to the provisions of Rule 144, which requires among other things, except
as otherwise provided by section (k) of such Rule 144: (1) the availability of
certain public information about the Company, (2) the resale occurring not less
than one (1) year after the party has purchased, and made full payment for,
within the meaning of Rule 144, the securities to be sold; and, (3) in the case
of an affiliate, or of a non-affiliate who has held the securities less than two
(2) years, the sale being made through a broker in an unsolicited "broker's
transaction" or in transactions directly with a market maker (as said term is
defined under the Securities Exchange Act of 1934) and the amount of securities
being sold during any three (3) month period not exceeding the specified
limitations stated therein, if applicable.
(g) The undersigned further understands that in the event all of
the applicable requirements of Rule 144 are not satisfied, registration under
the Act, compliance with Regulation A, or some other registration exemption will
be required; and that, notwithstanding the fact that Rule 144 is not exclusive,
the Staff of the SEC has expressed its opinion that persons proposing to sell
private placement securities other than in a registered offering and otherwise
than pursuant to Rule 144 will have a substantial burden of proof in
establishing that an exemption from registration is available for such offers or
sales, and that such persons and their respective brokers who participate in
such transactions do so at their own risk.
By:_________________________
Title:______________________
Date:_______________________
-2-
<PAGE> 11
EXHIBIT B
FORM OF TRANSFER
(To be signed only upon transfer of Warrant)
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and transfers
unto _______________________________________________ the right represented by
the attached Warrant to purchase ____________ shares of the Common Stock of SCM
Microsystems, Inc. to which the attached Warrant relates, and appoints
______________ Attorney to transfer such right on the books of SCM Microsystems,
Inc. with full power of substitution in the premises.
Dated: ____________________
________________________________________
(Signature must conform in all respects to
the name of the Holder as specified on the
face of the Warrant)
________________________________________
________________________________________
(Address)
Signed in the presence of:
______________________________________
<PAGE> 1
EXHIBIT 10.24
The following
AGREEMENT
is hereby concluded by and between
BetaDigital Gesellschaft fur digitale Fernsehdienste mbH, represented by
General Manager, Mr. Gabor Toth, Betastr. 1, 85774 Unterfohring
and
SCM Microsystems GmbH, represented by General Manager, Mr. Bernd Meier, Luit-
poldstr. 6, 85276 Pfaffenhofen:
I. DEVELOPMENT CONTRACT
1. BetaDigital hereby engages SCM to develop a Conditional Access Module
(module) in accordance with the specification, construction plans and
bill of material attached as appendices 1 through 3; express reference
is hereby made thereto.
A component of the development order shall be the delivery of [*]
prototypes of the module. Half of the prototypes shall, in addition
to the foregoing description, be equipped with [ * ].
For this purpose, BetaDigital shall provide [ * ] which have already
been delivered shall be offset against this amount. Upon availability of
a new version of the [ * ] BetaDigital shall provide such new version;
SCM shall be obligated to incorporate the newest version of the [ * ]
into the development of the [ * ] and later serial fabrication.
BetaDigital shall supply [ * ].
Each module shall be provided with the label [ * ] in accordance with
the description set forth in appendix 4.
2. SCM shall deliver to BetaDigital the development documentation, which
must be fully created, as well as all other documents in connection with
the development for the hardware (such as electric circuit diagrams,
mechanical plans, PCB layout) and the software for the [ * ], to the
extent that these are created by SCM or in joint collaboration with
BetaDigital.
3. SCM shall transfer to BetaDigital the right to use the [ * ] arising in
connection with the development of the module, including the [ * ]; said
use right shall be [ * ].
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE> 2
The provisions of Sections 69 a and 69 b UrhG [German Copyright
Act] and Sections 69 d through 69 g UrhG shall remain unaffected.
4. It shall be responsibility of SCM that the services rendered by SCM do
not infringe upon the proprietary rights of third parties.
SCM shall defend BetaDigital in its own name against all claims which
are asserted by a third party on the grounds of alleged infringement of
industrial property rights (patents, patent applications, copyrights,
trademarks, rights to masks and semiconductor topologies, etc.) as a
result of the delivered or licensed products and shall compensate
BetaDigital for all judicially imposed costs and compensatory damage,
provided that BetaDigital - informs SCM promptly and in writing
concerning the assertion of such claims, - provides SCM with all
necessary information, - provides reasonable support and - provided that
the authority to decide whether such claims shall be defended or settled
shall remain exclusively with SCM.
5. It shall be the responsibility of BetaDigital that the hardware and
software provided by BetaDigital does not infringe upon proprietary
rights of third parties.
BetaDigital shall defend SCM in its own name against all claims which
are asserted by a third party on the grounds of alleged infringement of
industrial property rights (patents, patent applications, copyrights,
trademarks, rights to masks and semiconductor topologies, etc.) as a
result of the delivered or licensed products and shall compensate SCM
for all judicially imposed costs and compensatory damage, provided that
SCM
- informs BetaDigital promptly and in writing concerning the assertion
of such claims,
- provides BetaDigital with all necessary information,
- provides reasonable support and - provided that the authority to
decide whether such claims shall be defended or settled shall remain
exclusively with BetaDigital.
6. SCM promises that it shall develop the module set forth in paragraph 1
by no later than [ * ] and shall do so in such a manner that serial
fabrication shall be [ * ].
7. Acceptance of the prototypes shall take place with the help of the
performance description in section 1, above, within a period of [ * ]
following delivery of the prototypes.
8. The [ * ] which are delivered shall remain the property of BetaDigital.
If a loss of ownership occurs as a result of combination, mixture or
processing, BetaDigital shall receive a [ * ] in accordance with the
[ * ] provided. The delivery of [ * ] shall not include a right on the
part of SCM to utilize, use or transfer any existing copyrights.
9. The development, manufacture and delivery of prototypes shall be
carried [ * ].
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE> 3
10. In the event of default in performance by SCM, BetaDigital shall be
entitled to withdraw from the entire agreement following the imposition
of a deadline and the threat of refusal. Claims for compensatory damages
for failure to perform shall be barred.
Default in performance shall not occur to the extent that BetaDigital
fails to perform in a timely manner a duty to supply to which it is
subject.
Otherwise, the statutory regulations shall apply; specifically, the
right of termination set forth in Section 649 BGD [German Civil Code]
shall remain unaffected.
II. PILOT SERIES PRODUCTION
1. BetaDigital shall order [ * ] units of the pilot series of the modules
in accordance with the performance description in section 1 of the
development order. If, during the development phase, the parties
mutually agree to modify the performance description, delivery shall be
made in accordance with the modified specification.
The release of the pilot series production shall be carried out by
BetaDigital. It shall take place in writing within [ * ] business days
following acceptance of the prototypes.
2. The components supplied by BetaDigital shall remain the property of
BetaDigital. If a loss of ownership occurs as a result of combination,
mixture or processing, BetaDigital shall receive a [ * ] in accordance
with the components provided. The delivery of components shall not
include a right on the part of SCM to utilize, use or transfer any
existing copyrights.
3. The delivery of the pilot series lot shall take place by [ * ]
4. The per module price of the pilot series shall be DM [*]. It shall be
understood that this price does not include the [ * ]
5. Delivery shall be made at the expense and risk of [ * ] to Nokia
Satellite Systems AB, Manvagen, 59183 Motola, Sweden.
6. Acceptance shall be carried out by Nokia in the capacity of
representative of BetaDigital. Checking shall be done by means of random
samples ([ * ] of the delivery).
If the receiving inspection reveals a projected defect ratio of [ * ] or
more, BetaDigital--represented by Nokia, if applicable--shall be
entitled to return the entire delivery at SCM's expense. SCM shall be
obligated to provide prompt replacement in the event of a return. In the
event of failure or delay of the replacement delivery, BetaDigital shall
be entitled to cancellation.
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 4
III. ORDER QUANTITY [ * ]
1. BetaDigital shall [ * ] order [ * ] modules (less the pilot
series) between[ * ] and [ * ]. The following shall fall within said
order quantity [ * ]:
- orders of a further developed Conditional Access Module
based on a separate development contract (concerning
software and/or hardware, and/or Conditional Access
Module with Common Interface and
- all orders by third parties, to the extent that they use
the module in connection with the d-box technology.
BetaDigital shall be entitled to hire an auditor to
inspect the orders of third parties at SCM.
For the first [ * ] units in connection with the order quantity [ * ],
the parties hereby agree among themselves upon a price per module of DM
[ * ]. It shall be understood that this price does not include the [ * ]
to be provided by BetaDigital.
3. SCM shall [ * ] supply at least [ * ] modules during [ * ].
BetaDigital shall order [ * ] units for delivery by [ * ]
and an additional [ * ] units for delivery by no later than [ * ].
To the extent that BetaDigital does not call for the
[*] units for delivery in the [ * ], an advance
toward material costs in the amount of [ * ] of the module price shall
be paid by [ * ], for the difference in unit number. The residual price
shall be paid according to the usual payment rules.
4. For the following [ * ] units in connection with the order quantity
[ * ], the parties hereby agree among themselves upon a price
determination by BetaDigital as follows:
[ * ]
- It is intended that the price determination [ * ]
in advance by BetaDigital--[ * ] after
sending the [ * ], if possible.
5. If the order quantity [ * ] is not satisfied within the stipulated
period of time, BetaDigital shall be obligated to pay [ * ](in lieu of
stipulated performance) for the order quantity not purchased.
6. To the extent that components are delivered by BetaDigital for the
production of the modules, SCM shall check them for their functionality
prior to use. The components shall remain the property of BetaDigital.
If a loss of ownership occurs through combination, mixture or
processing, BetaDigital shall receive [ * ] in accordance with the
components provided.
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 5
The delivery of components shall not include a right on the part of SCM
to utilize, use or transfer any existing copyrights. In the case of
orders by third parties in connection with the order quantity [ * ],
SCM shall be obligated to obtain consent in advance from BetaDigital
concerning the use of the components.
IV. DELIVERY TERMS FOR DELIVERIES IN CONNECTION WITH THE ORDER QUANTITY
[ * ]
1. The lot size shall be [ * ] units.
2. The delivery times shall be a maximum of [ * ] from the time of
the order. Order and delivery time provisions shall be made by
BetaDigital or Nokia in its capacity as representative upon presentation
of a power of attorney.
3. Delivery shall be made at the expense and risk of [ * ] to Nokia
Satellite Systems AB, Manvagen, 59183 Motala, Sweden.
4. The described delivery deadline shall be binding with the exception of
the delivery of the first [ * ] units.
If SCM defaults with regard to a delivery or portions thereof, SCM shall
be obligated to pay lump-sum compensatory damages in the amount of [ * ]
of the invoice amount of the delivery affected by the defaults or
portion thereof for each week which is started as of the beginning of
the default. The lump-sum compensatory damage claim, however, shall be
limited to a maximum of [ * ] of the relevant invoice amount. SCM shall
be entitled to provide documentation of lower or an absence of damages;
in such a case, compensation shall be made therefor.
Default shall not take place to the extent that BetaDigital does not
provide the [ * ] a timely manner.
Acceptance shall be carried out by [ * ] in the capacity of
representative of BetaDigital. Checking shall be done by means of random
samples [ * ] of the delivery).
5. If the receiving inspection reveals a projected defect ratio of [ * ] or
more, BetaDigital--represented by Nokia, if applicable--shall be
entitled to return the entire delivery at SCM's expense. SCM shall be
obligated to provide prompt replacement in the event of a return. In the
event of failure or delay of the replacement delivery, BetaDigital shall
be entitled to cancellation. If a projected total of less than [ * ] of
the delivered modules are defective, BetaDigital shall be entitled to a
reduction on a percentage basis. Otherwise, guarantee shall be barred.
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 6
V. LIABILITY
1. SCM shall be liable without restriction for damages--regardless of the
legal grounds therefor--to the extent that such damages were caused by
intentional conduct or gross negligence or are attributable to the
absence of a promised attribute, or to the extent that the Product
Liability Act provides for mandatory liability.
2. Unless otherwise provided in section I.4, I.5, IV.4 or V.1, SCM shall be
liable up to a maximum of DM [ * ] German marks for personal injury and
property damage and up to a maximum of DM [ * ] German marks for other
damage, but not for lost profits or damages whose occurrence was
typically not foreseeable at the time of the conclusion of the contract.
3. Otherwise, further liability shall be barred.
VI. PAYMENT TERMS
Unless expressly agreed to the contrary, payments shall be due [ * ]
after invoicing.
VII. MISCELLANEOUS
1. This agreement shall replace the contractual relationship concerning the
fabrication and order of Conditional Access Modules with Common
Interface order letter dated [ * ] in its entirety.
2. In accordance with the non-disclosure agreements already stipulated on
[ * ], the parties shall be obligated to treat information and
knowledge arising from the collaboration in a strictly confidential
manner.
The parties hereby agree to pay a contractual penalty in the amount of
DM [ * ] for each instance of violation (the defense of a single
continuing offense shall be barred).
3. The appendices to this contract shall constitute substantial components
hereof.
4. This contract shall be governed by the law of the Federal Republic of
Germany.
5. The place of venue for all disputes concerning the validity and
performance of this agreement shall be Munich.
6. No oral collateral agreements exist. The parties hereby agree that
modifications of this contract and its appendices must be made in
writing; this shall also apply to modification of the written form
clause.
7. If individual provisions of this contract or portions thereof are or
should become invalid or void, the validity of the remaining provisions
shall not be affected.
Unterfohring, 10/9/96
s/Bernd Meier
[signature]
SCM Microsystems GmbH BetaDigital, Gessellschaft
fur digitale Fernsehdienste
mbH
General Manager General Manager
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 1
EXHIBIT 10.28
[LOGO]
AGREEMENT
between
Mr. Wolfgang Neifer
Rosenstrasse 9a
85354 Freising
- - Licensor -
and
SCM Microsystems GmbH
Luitpoldstrasse 6
85276 Pfaffenhofen
- - Licensee -
PREAMBLE
The Licensor is the holder or co-holder of the industrial property rights and
industrial property right applications listed in the appendix to this agreement
(hereinafter referred to as the "industrial property rights"). In view of the
planned hiring of the Licensor in an employment relationship as a salaried
employee of the Licensee, the Licensor hereby grants the Licensee an option to
exploit the industrial property rights subject to the conditions set forth
below.
1. INDUSTRIAL PROPERTY RIGHTS
The Licensor hereby declares that the list in the appendix to this agreement
contains all industrial property rights of which he is the solely entitled
holder, to the extent that they relate to subject matters which affect the
activities of the Licensee. The Licensor shall provide the Licensee with copies
with all industrial property right documents by no later than the time of
signing the agreement, including documents for not yet published applications.
2. OPTION
The Licensor hereby grants the Licensee an option to conclude a license
agreement to exploit the industrial property rights. For a period of six months
after signing this agreement, the option shall include the right to conclude an
exclusive license agreement. During this period, the Licensor shall not offer or
grant a third party a license to one or more industrial property rights.
Following an expiration of six months, an option shall exist to conclude a
non-exclusive license agreement to the industrial property rights for an
indefinite period. The Licensor shall not grant third parties an exclusive
license to one or more industrial property rights.
<PAGE> 2
[LOGO]
3. MAINTENANCE OF INDUSTRIAL PROPERTY RIGHTS
It shall be the responsibility of the Licensor to maintain the industrial
property rights and take all measures necessary to acquire and defend them. The
Licensee shall reimburse the Licensor for the costs incurred in acquiring,
maintaining and defending industrial property rights concerning which a license
agreement is concluded. The Licensee shall determine the patent law firm.
If the Licensor intends to relinquish an industrial property right, he shall
first offer the Licensee the right to assume it in exchange for reimbursement of
all costs incurred to that point in time in acquiring, maintaining and defending
it.
4. TERMS OF THE LICENSE AGREEMENT
The license agreement shall be concluded subject to customary terms and
conditions. A license rate of 1-2% of the invention-specific sales portion (less
industrial property right costs) shall be viewed as customary.
"Invention-specific" shall be those portions of a product or a process which are
substantially characterized by the invention. In the case of particularly high
sales, a graduated scale shall be created by application mutatis mutandis of
guideline 11 of the Act of 7/25/57 on Employee Inventions.
The Licensee may grant sub-licences to licence agreements which have been
concluded and extend the license to affiliated firms of the SCM group.
5. INVENTIONS DURING THE EMPLOYMENT RELATIONSHIP
In the case of inventions which the Licensor makes during the term of the
employment relationship, the provisions in this regard of a separate employment
contract shall apply.
6. TERM OF THE AGREEMENT
This agreement shall begin when it is signed by both parties and shall end at
the end of the employment relationship which is the subject matter of the
separate employment contract. The term of license agreements which are concluded
shall be independent of this agreement and shall be based upon the respective
license agreement.
Pfaffenhofen, 1/31/97 (Place, date) 1/31/97
[sig] [signature]
- ------------------------- -------------------------
SCM Microsystems GmbH (signature of the Licensor)
<PAGE> 3
ADDENDUM TO THE AGREEMENT BETWEEN SCM AND NEIFER, DATED JANUARY 31, 1997.
Both parties agree to extend the term of the option defined in Section 2 of the
Agreement from six to nine months.
/s/ signature /s/ W. Neifer
-----------------------------
Dipl.Ing. W. Neifer
SCM
<PAGE> 1
EXHIBIT 10.32
PATENT LICENSE AGREEMENT
This Patent License Agreement is made and entered into as of September 5,
1997, by and between GEMPLUS SCA, incorporated under the laws of France, having
its head office located Pare d'Activite de la Plaine de Jouques, Avenue du Pic
de Bertagne, 13420 Gemanos, France, represented by Mr. Marc LASSUS, (hereinafter
referred to as "GEMPLUS" which for purposes of this Patent License Agreement
includes all current subsidiaries, parents or affiliates controlling,
controlled by or under common control with GEMPLUS), and
SCM MICROSYSTEMS, INC., a Delaware corporation, having its head office located
131 Albright Way, Los Gatos, CA 95032, USA, represented by Mr. Robert SCHNEIDER,
(hereinafter referred to as "SCM" which for purposes of this Patent License
Agreement includes all current subsidiaries, parents or affiliates
controlling, controlled by or under common control with SCM MICROSYSTEMS, INC.)
PREAMBLE
Whereas SCM has marketed and is still selling PCMCIA products which GEMPLUS
alleges to be infringing certain intellectual property rights belonging to
GEMPLUS.
Whereas GEMPLUS has started a legal action against SCM before the Court of
Marseille, claiming patent infringement.
Whereas SCM and GEMPLUS desire to resolve the matter in friendly terms by
entering into certain agreements, including this Patent License Agreement.
NOW THEREFORE GEMPLUS AND SCM HEREBY AGREE AS FOLLOWS:
SECTION 1 - DEFINITIONS
The following definitions shall apply to this Agreement:
"GEMPLUS PATENTS" shall mean the patents and patent applications as listed in
Exhibit A attached to this Agreement, and/or any divisions, extensions,
continuations, continuations-in-part or reissues thereof.
<PAGE> 2
"SCM PATENTS" shall mean the SCM patents and patent applications as
listed in Exhibit B attached to this Agreement, and/or any divisions,
extensions, continuations, continuations-in-part or reissues thereof. "SCM
PATENTS" shall include certain patents and/or patent applications not owned by
SCM, but for which SCM has been granted or has the option to be granted access
through license rights with a right to sublicense, but shall exclude patents
and/or patent applications for which SCM has no current right(s) to sublicense
provided that (i) SCM identifies to Gemplus such non-sublicensable patents or
patent applications within ten (10) days of the date of this Agreement, and
(ii) SCM uses reasonable efforts to obtain sublicense rights for such patents
or patent applications requested by Gemplus. SCM patents shall also exclude
inventions listed on Exhibit B hereto as "planned-for-filing" unless an
application covering such invention(s) is filed on or before December 31, 1997.
"LICENSED PATENTS" shall mean either SCM PATENTS or GEMPLUS PATENTS, as the
case may be.
"LICENSED PRODUCTS" means any and all products and/or devices which employ or
are produced by the practice of inventions claimed in the Licensed Patents, and
if made, used or sold in the absence of the license granted under this Agreement
would infringe one or more of the Licensed Patents. [*] means the [*] of any
Licensed Product, [ * ].
"Sell", "sold", "sale" means to sell, lease, issue or otherwise dispose of the
Licensed Products to end users, either directly or through the use of
distributors. A sale shall be deemed to have occurred as of the date of shipment
by SCM or on the date of dispatch of a bill or invoice, whichever occurs first.
"TERRITORY" shall mean any country where any of the GEMPLUS PATENTS is filed.
SECTION 2 - GRANT OF LICENSE
2.1. GEMPLUS hereby grants to SCM and SCM hereby accepts from GEMPLUS, upon
terms and conditions specified herein, a non-exclusive, worldwide, non-
transferable license under the GEMPLUS PATENTS, to develop, make, have made for
sale by it, directly or through its original equipment manufacturers ("OEMs")
and other distribution channels, to use and to sell products and/or devices
which employ or are produced by the practice of inventions claimed in GEMPLUS
PATENTS, and if made, used or sold in the absence of the license granted under
this Agreement would infringe one or more of the GEMPLUS PATENTS.
Such license is to be effective throughout the period of pendency of the GEMPLUS
PATENTS and to the end of the full term of each of the GEMPLUS PATENTS. The
License granted to SCM is granted without the right to sublicense.
2.2 SCM MICROSYSTEMS INC. hereby grants to GEMPLUS and GEMPLUS hereby accepts
from SCM, upon terms and conditions specified herein, a non-exclusive,
worldwide, non-transferable license, under the SCM PATENTS, to develop, make,
have made for sale by it, directly or through its original equipment
manufacturers ("OEMs") and other distribution channels, to use and to sell
products and/or devices which employ or are produced by the practice of
inventions claimed in the SCM PATENTS, and if made, used or sold in the absence
of the license granted under this Agreement would infringe one or more of the
SCM PATENTS.
Such license is to be effective throughout the period of pendency of the SCM
PATENTS and to the end of the full term of each of the SCM PATENTS.
[*] CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION, CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO
THE OMITTED PORTIONS.
<PAGE> 3
The license granted to GEMPLUS is granted without the right to sublicense.
SECTION 3 - CONSIDERATION
3.1 In consideration of the license granted by GEMPLUS to SCM under Section
2.1 above, SCM hereby agrees to pay a running royalty per each unit of Licensed
Product manufactured and/or sold by SCM in the Territory and calculated on the
[*] of such Licensed Product, according to TABLE 1 below.
Up to a cumulative royalty amount of US $[*] to be calculated according to
Table 1 below, the royalties shall be deemed to have been prepaid.
Any royalty beyond the initial prepaid US $[*] shall be due and paid to
GEMPLUS as provided for below:
The royalty rate applied to Licensed Products is calculated according to the
application field for which the Licensed Product is to be used. Two Application
Fields are defined:
- - Application Field called [*], defined as Licensed Products used in [*]
applications and/or appliances;
- - Application Field called [*], defined as Licensed Products used in
connection with any application not defined as [*], such as, without
limitation, [*] applications.
TABLE 1
<TABLE>
<CAPTION>
Cumulative [ * ] of Product [*] Royalty Rate (%) [*] Royalty Rate (%)
- ------------------------------- -------------------- ------------------------
<S> <C> <C>
[*] [*] [*]
</TABLE>
3.2 The license from SCM to GEMPLUS under Section 2.2 above is granted in
consideration for a lumpsum of [*], fully prepaid.
3.3 Royalty payments
All royalties to GEMPLUS shall be in US$ and shall be exclusive of taxes and SCM
agrees to bear and be responsible for the payment of all such taxes, including,
but not limited to, all sales, use, rental receipt personal property or other
taxes and their equivalents which may be levied or assessed in connection with
this Agreement excluding only taxes based on GEMPLUS's net income.
- --------------------
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILLED SEPARATELY WITH
THE COMMISSION, CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE> 4
Within thirty (30) days after the end of each calendar quarter, SCM shall
submit a royalty report which shall be certified by an authorized
representative of SCM and shall state the number of Licensed Products
manufactured and/or sold in the Territory and the corresponding aggregate
royalties.
All royalty payments are due to GEMPLUS for each calendar quarter within thirty
(30) days after receipt of the royalty report.
It is agreed by the Parties that all computations relating to determination of
the amounts of royalties due and payable under the Agreement shall be made in
accordance with internationally recognized and generally accepted accounting
principles.
During the term of this Agreement, SCM shall maintain complete and accurate
records with respect to the sales of Licensed Products. GEMPLUS shall be
entitled upon ten (10) days prior written notice to audit the records of SCM at
any time during the term of this Agreement but no more than once a year and for
the sole purpose of confirming the accuracy of payments due hereunder. Any such
audit shall be performed during normal business hours and at GEMPLUS's expenses,
provided, however, if such audit reveals any underpayment of five percent (5%)
or more of the amount that should have been paid to GEMPLUS for the period
audited, then SCM shall bear the expense of such audit.
If any payment due to GEMPLUS is delayed, GEMPLUS reserves the right to charge
interest on a date to date basis from the original due date at one percentage
point higher than the prime interest rate as quoted by the head office of
Citibank N.A., New York, at the close of banking on such date, and to suspend
shipments or require cash on delivery for any subsequent deliveries hereunder.
SECTION 4 - IMPROVEMENTS
4.1.1. If at any time during the term of this Agreement any improvement to any
GEMPLUS PATENTS is specified by GEMPLUS, GEMPLUS may file an application for
such improvement and the provisions of this License Agreement shall apply to any
such application and patented improvements provided that such improvement is
made within 5 years after the effective date of this Agreement. Both parties
will consider the possibility to enter into a new licensing agreement regarding
improvements patented after the five year period.
4.1.2. If at any time during the term of this Agreement any improvement to any
SCM PATENT, is specified by SCM, SCM may file an application for such
improvement and the provisions of this License Agreement shall apply to such
application and patented improvements provided that such improvements are made
within 5 years of the effective date of this Agreement. Both parties will
consider to enter into a new licensing agreement regarding improvements patented
after the five year period.
For the purposes of this Section 4, an improvement is defined as any patentable
improvement to the LICENSED PATENTS which legally depends on the LICENSED
PATENTS, meaning that such patentable improvement cannot be used, implemented
and
<PAGE> 5
5
otherwise disposed of without infringing one or more of the claims of the
initial LICENSED PATENTS.
Section 5 - Maintaining obligations
GEMPLUS and SCM hereby undertake to use reasonable commercial efforts to
maintain at all times and at their respective expenses their respective
LICENSED PATENTS in the countries where may have been filed except where the
final Patent(s) are not issued by the relevant patent office.
Section 6 - Warranty and liability
GEMPLUS warrants and represents that: (i) it owns and has all valid right, title
and interest in and to the GEMPLUS PATENTS, (ii) it will diligently prosecute
the applications for the GEMPLUS PATENTS, and (iii) there is no existing or
threatened litigation pending against GEMPLUS with respect to the GEMPLUS
PATENTS.
SCM warrants and represents that: (i) except as set forth in the definition of
"SCM PATENTS" in Section 1 of this Agreement and in Exhibit B attached hereto,
SCM owns or possesses sufficient legal rights, title and interest in and to the
SCM PATENTS, (ii) it will diligently prosecute the applications for the SCM
PATENTS, and (iii) there is no existing or threatened litigation pending against
SCM with respect to the SCM PATENTS.
The parties agree that nothing in this Agreement is or shall be construed as:
(i) a warranty or representation by either party as to the validity or scope of
the LICENSED PATENTS; (ii) any warranty or representation by either party that
anything made, sold or otherwise disposed of under any license granted in this
Agreement is or will be free from infringement of patents, copyrights, and
other rights of third parties; (iii) an obligation on the part of either party
to bring or prosecute actions or suits against third parties for infringement;
or (iv) granting by implication, estoppel or otherwise any licenses under the
patents owned by either party other than the LICENSED PATENTS.
EXCEPT AS EXPRESSLY SET FORTH IN THIS AGREEMENT, GEMPLUS AND SCM MAKE NO
REPRESENTATIONS AND EXTEND NO WARRANTIES OF ANY KIND, EITHER EXPRESS OR IMPLIED.
THERE ARE NO EXPRESS OR IMPLIED WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A
PARTICULAR PURPOSE, OR THAT THE USE OF DEVICES THAT PRACTICE THE LICENSED
PATENTS WILL NOT INFRINGE ANY PATENT, COPYRIGHT, TRADEMARK OR OTHER RIGHTS.
Any warranty made by one party to its customers, users of Licensed Products or
any third-parties are made by such party alone and shall not bind the other
party or be deemed or trusted as having been made by the other party, and
service of any such warranty shall be the sole responsibility of the party
having made the warranty.
Section 7 - Name - Trademarks
<PAGE> 6
Each party shall legibly mark the Licensed Products with the relevant patent or
application numbers or markings to satisfy the laws of each country of the
Territory with the intent that neither party shall be precluded from claiming
any loss or damages in any action.
Nothing in this Agreement shall be construed as granting to SCM any right or
privilege to use the trademarks, tradenames or logos of GEMPLUS, and nothing in
this Agreement shall be construed as granting to GEMPLUS any right or privilege
to use the trademarks, tradenames or logos of SCM.
SECTION 8. TERM -- TERMINATION
8.1 This Agreement shall come into force and effect on the date of its
signature by both parties and shall expire, unless earlier terminated as
provided for in paragraph 8.2 below, or as otherwise stated in this Agreement,
on the expiration date of the last to expire of the LICENSED PATENTS.
8.2 Either party (the "Terminating Party") shall have the right to terminate
this Agreement -- (i) upon written notice if the other party (the "Terminated
Party") defaults in the performance of any of the material terms or conditions
of this Agreement and shall fail to remedy such default within (30) days after
receipt of notice in writing from the other party of the default complained of,
which notice shall specify the details of such default and of the intention of
the party serving the notice to terminate this Agreement under this paragraph,
unless such default is so remedied; or
-- (ii) immediately without notice, if the Terminated Party becomes
insolvent or goes into liquidation or receivership or is admitted to the
benefits of any procedure for the settlement or postponement of any debts or is
declared bankrupt or ceases to do business.
8.3 Effect of Termination: Upon termination of this Agreement by one party
under paragraph 8.2, the license granted by the Terminating Party under its
LICENSED PATENTS and/or its patented improvements if any, shall terminate and
be of no further effect, but any license granted by the Terminated Party under
its LICENSED PATENTS and its patented improvements if any, shall survive in
accordance with the terms of this Agreement.
8.4 Surviving any expiration or termination of this Agreement are
(i) SCM's obligation to continue submitting reports and making payment of
royalties accrued prior to expiration or termination, as described in
Section 3;
(ii) The provisions of Sections 3.3, 6, 7, 9, 10 and 12.
<PAGE> 7
7
Section 9 - Limitation of liability
In no event shall either party be liable to the other party or any third
parties for indirect, special or consequential damages, including without
limitation, any damage or injury to business earnings, profits or goodwill
suffered by any person arising from any use of the LICENSED PATENTS, no matter
what theory of liability.
The provisions of this Section 9 allocate the risks under this Agreement
between GEMPLUS and SCM and the parties have relied upon the limitations set
forth herein in determining whether to enter into this Agreement.
Section 10 - Applicable law - Disputes
This Agreement shall be governed by and construed in accordance with the laws
of France, without any reference to the choice-of-law provisions.
Section 11 - Notices
All notices, reports, requests, approvals and other communications required or
permitted under this Agreement must be in writing. They will be considered as
given (a) when delivered personally, (b) when sent by facsimile, or (c)
twenty-four (24) hours after having been sent by commercial overnight courier
with written verification of receipt. All such notices shall be addressed as
follows:
SCM MICROSYSTEMS, INC.
131 Albright Way, Los Gatos, CA 95032, USA
and if to GEMPLUS, addressed to:
GEMPLUS SCA, Legal Department
Parc d'Activites de la Plaine de Jouques, Avenue du Pic de Bartagne, 13420
Gemenos, France
or to such other addresses either Party shall from time to time, furnish in
writing to the other for such purpose.
Section 12 - Miscellaneous
12.1. This Agreement and the Exhibits thereto constitutes the complete and
final agreement between the parties with respect to the subject matter hereof
and supersedes all previous understanding relating to the subject matter hereof
whether oral or written.
12.2. Any modifications of or amendment to this Agreement requires written
form signed by duly authorized representatives of both parties.
12.3. If any provision of this Agreement should now or in the future be
considered as ineffective or void, this shall not affect the validity of the
remaining provisions. Any invalid provisions shall be replaced by lawful and
legally effective provisions suited to achieve the
<PAGE> 8
legal and economic results intended by the ineffective provisions. This shall
also apply for any omission in this Agreement to be remedied.
12.4. This Agreement shall not be assignable without the prior written consent
of the other party. This Agreement shall be binding upon all legal successors
and assigns of the parties.
12.5. Each Party undertakes to treat the terms and conditions of this Agreement
as strictly confidential and not disclose them to any third party other than its
attorneys, accountants, bankers and investors or potential investors, neither
completely nor partially, without the prior written consent of the other Party
or otherwise as required by Law.
12.6. SCM and GEMPLUS agree to comply with all Export Administration
Regulations of the United States Department of State, and all other United
States government regulations relating to the export of technical data and
equipment and products produced therefrom, which are applicable to SCM or
GEMPLUS with regard to any distribution of the Licensed Products by SCM or
GEMPLUS under the Licensed Patents.
12.7. Nothing herein contained shall be construed to require SCM or GEMPLUS to
exploit the rights licensed hereunder.
12.8. It is understood and agreed that, notwithstanding any other provisions
of this Agreement, breach of this Agreement may cause the other party
irreparable damage for which recovery of money would be inadequate, and that
the non-breaching party shall therefore be entitled, in addition to any other
remedies available to it at law or in equity, to seek injunctive relief to
protect such party's rights under this Agreement.
12.9. The failure of either party to enforce any provision of this Agreement
shall not be deemed to be a waiver of that provision.
12.10 Any dispute under this Agreement shall be settled by arbitration under
the Rules of ICC Arbitration. The arbitrator shall have authority to act as
amiable compositeur, and the place of arbitration shall be Brussels, London or
Luxembourg, as mutually agreed by the parties.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed in duplicate by their duly authorized respective representatives.
SCM MICROSYSTEMS, INC. GEMPLUS, SCA
By: By:
------------------------- --------------------------
Name: Name:
----------------------- ------------------------
Title: Title:
---------------------- -----------------------
<PAGE> 9
EXHIBIT A
GEMPLUS PATENTS LICENSED TO SCM
------------------------------------------------------------------
GEMPLUS REFERENCE PATENT REFERENCE FILING DATE
------------------------------------------------------------------
[*] [*] [*]
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EXHIBIT B
SCM PATENTS LICENSED TO GEMPLUS
------------------------------------------------------------------
PATENT REFERENCE FILING DATE
------------------------------------------------------------------
[*] [*]
- ---------------
* CERTAIN INFORMATION ON THIS PAGE HAS BEEN OMITTED AND FILED SEPARATELY WITH
THE COMMISSION. CONFIDENTIAL TREATMENT HAS BEEN REQUESTED WITH RESPECT TO THE
OMITTED PORTIONS.
<PAGE> 1
EXHIBIT 10.33
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SCM MICROSYSTEMS, INC.
----------------------
WARRANT ISSUANCE AND COMMON STOCK PURCHASE AGREEMENT
----------------------
SEPTEMBER 5, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
SCHEDULE OF EXHIBITS
Exhibit A and B - Form of Common Stock Purchase Warrants
Exhibit C - Schedule of Exceptions to Representations and Warranties of the
Company
Exhibit D - Form of Amendment to Amended and Restated Stockholders' Agreement
Exhibit E - Form of Settlement and Mutual General Release Agreement
Exhibit F - Form of License Agreement
Exhibit G - Form of Memorandum of Understanding
-i-
<PAGE> 3
SCM MICROSYSTEMS, INC.
WARRANT ISSUANCE AND COMMON STOCK PURCHASE AGREEMENT
THIS WARRANT ISSUANCE AND COMMON STOCK PURCHASE AGREEMENT (the
"Agreement") is entered into as of September 5, 1997, by and between SCM
Microsystems, Inc., a Delaware corporation (the "Company"), and Gemplus, a legal
entity under the laws of France (the "Purchaser"). On or before the First and
Second Closing (as defined below), the Purchaser may designate in writing one of
its wholly-owned subsidiaries which shall take title to the Warrants issuable,
and Common Shares purchasable, hereunder and, in such event, the term
"Purchaser" shall be deemed to include such subsidiary.
RECITALS
The Company and the Purchaser are currently involved in a
patent infringement dispute ("Dispute") pending in France, which the parties
desire to settle by entering into a settlement and mutual general release
agreement in the form attached to this Agreement (the "Settlement Agreement")
providing that the Company and Purchaser will settle and forever discharge and
release each other from all present and future liability arising out of the
Dispute;
As part of the settlement of the Dispute, and in consideration
of the Purchaser's agreement to withdraw its lawsuit currently pending in
France against the Company and release the Company from any liability arising
out of the Dispute in accordance with the Settlement Agreement, the Company
desires to (i) issue to the Purchaser warrants having a one-year term, to
purchase 200,000 shares of Common Stock of the Company at an exercise price of
$13.00 per share and an additional 200,000 shares of Common Stock at an
exercise price of $14.00 per share (together, the "Warrants"); (ii) enter into
a patent cross-license agreement pursuant to which the Company and the
Purchaser shall grant each other non-exclusive license rights under certain of
each other's patents; and (iii) enter into a non-binding memorandum of
understanding with the Purchaser setting forth the principal terms of a product
development and supply agreement for the development, manufacture, marketing
and distribution rights of products incorporating the parties' respective
technologies;
Following settlement of the Dispute with the Purchaser upon
the terms described above, the Company and the Purchaser desire to establish a
long-term relationship and, accordingly, the Company shall offer to sell and
issue to the Purchaser, upon the effectiveness of the Company's registration
statement on Form S-1 and initial public offering of shares of its Common Stock
thereunder (the "IPO"), up to 200,000 shares of the Company's Common Stock (the
"Common Shares") for an aggregate purchase price of $1,800,000 and to register
such Common Shares and the Common Stock issuable upon exercise of the Warrants
pursuant to a registration statement to be filed by the Company within 180 days
after the IPO, and to provide the Purchaser the opportunity to purchase an
additional 200,000 shares of the Company's Common Stock being registered as
part of the IPO at a price equal to the IPO price to the public but in no event
greater than $15.00 per share; and
1
<PAGE> 4
In connection with the Purchaser's acquisition of the Warrants
as described above, and the subsequent issuance and sale of the Common Shares
as described above, the Company desires to include Purchaser as a party to the
Company's Amended and Restated Stockholders' Agreement and thereby grant to
Purchaser substantially similar rights as provided to the other investors that
are parties thereto;
NOW, THEREFORE, in consideration of the mutual promises,
covenants and conditions hereinafter set forth, the parties hereto mutually
agree as follows:
1. Authorization of Issuance of Warrants and Sale of Common Shares..
1.1 Authorization of Warrants; Amended and Restated Certificate of
Incorporation. Pursuant to the terms and conditions hereof, the Company has
authorized the issuance to the Purchaser of two warrants to purchase up to a
total of 400,000 shares of Common Stock of the Company.
1.2 Issuance of Warrants. Subject to the terms and conditions
hereof, at the First Closing (as is defined in Section 2.1 below), the Company
shall issue to the Purchaser warrants to purchase up to 200,000 shares of
Common Stock of the Company at an exercise price of $13.00 per share, and up to
200,000 additional shares of Common Stock of the Company at an exercise price
of $14.00 per share, pursuant to the terms and conditions set forth in two
Common Stock Purchase Warrants, in the forms attached hereto as Exhibits A and
B (together, the "Warrants"). The shares of Common Stock issuable upon
exercise of the Warrants are collectively referred to herein as the "Warrant
Shares".
1.3 Authorization of Common Shares; Amended and Restated
Certificate of Incorporation. Pursuant to the terms and conditions hereof, the
Company has authorized the sale and issuance to the Purchaser of 200,000 shares
of its Common Stock (the "Common Shares").
1.4 Sale of Common Shares. Subject to the terms and conditions
hereof, at the Second Closing (as is defined in Section 2.2 below), for an
aggregate purchase price of $1,800,000 the Company will issue and sell to the
Purchaser, and the Purchaser will purchase from the Company, the Common Shares.
2. Closing Matters
2.1 First Closing. The closing of the issuance of the Warrants
pursuant to Section 1.2 above (the "First Closing") shall be held at the
offices of Morrison & Foerster LLP, at 755 Page Mill Road, Palo Alto,
California 94304 on September 5, 1997, or on such later date as shall be
acceptable to the Company and the Purchaser (the "First Closing Date").
2.2 Second Closing. The closing of the purchase and sale of the
Common Shares pursuant to Section 1.4 above (the "Second Closing") shall be
held at the offices of Wilson Sonsini Goodrich & Rosati at 650 Page Mill Road,
Palo Alto, California 94304 on the date that the conditions set forth in
Section 5.1(b) below are satisfied, or on such later date as shall be
acceptable to the Company and the Purchaser (the "Second Closing Date").
2
<PAGE> 5
2.3 Delivery. At the First Closing, the Company shall deliver to
the Purchaser warrant certificates representing the Warrants, pursuant to
Section 1.2 above. At the Second Closing, the Company shall deliver to
Purchaser a certificate registered in the Purchaser's name representing the
aggregate number of Common Shares to be issued and sold by the Company to the
Purchaser and the Purchaser shall deliver to the Company by check or wire
transfer payment for the Common Shares being purchased in the amount as set
forth in Section 1.4 above.
3. Representations and Warranties of the Company. The Company represents
and warrants and agrees with the Purchaser that, except as set forth on the
Schedule of Exceptions attached hereto as Exhibit C, which exceptions shall be
deemed to be representations and warranties as if made hereunder:
3.1 Organization and Standing. The Company is a corporation duly
organized and validly existing under, and by virtue of, the laws of the State
of Delaware and is in good standing under such laws.
3.2 Corporate Power. The Company has all requisite legal and
corporate power to enter into this Agreement, the Warrants, that certain waiver
and amendment to the Amended and Restated Stockholders' Agreement to be entered
into among the Company, the Purchaser and certain existing stockholders of the
Company in the form attached hereto as Exhibit D (the "Amendment to
Stockholders' Agreement"), the settlement and mutual general release agreement
to be entered into among the Company and the Purchaser in the form attached
hereto as Exhibit E (the "Settlement and Mutual General Release Agreement"),
the license agreement to be entered into among the Company and the Purchaser in
the form attached hereto as Exhibit F (the "License Agreement"), and the
memorandum of understanding between the Company and the Purchaser in the form
attached hereto as Exhibit G (the "MOU"), and to issue the Warrants hereunder
and to sell the Common Shares and to carry out and perform its obligations
under the terms of this Agreement, the Warrants, the Amendment to Stockholders'
Agreement, the Settlement and Mutual General Release Agreement, the License
Agreement and the MOU.
3.3 Capitalization. At the First Closing Date and Second Closing
Date, the authorized capital stock of the Company will consist of 40,000,000
shares of Common Stock and 10,000,000 shares of Preferred Stock, of which
854,038 shall be designated Series A Preferred Stock, 1,211,914 shall be
designated Series B Preferred Stock, 653,642 shall be designated Series C
Preferred Stock, 857,162 shall be designated Series D Preferred Stock, 462,985
shall be designated Series E Preferred Stock and 1,600,000 shall be designated
Series F Preferred Stock. Immediately prior to the issuance of the Common
Shares and Warrants hereunder, 1,866,710 shares of Common Stock, 854,038 shares
of Series A Preferred Stock, 1,211,914 shares of Series B Preferred Stock,
653,642 shares of Series C Preferred Stock, 765,864 shares of Series D
Preferred Stock, 463,285 shares of Series E Preferred Stock and 849,790 shares
of Series F Preferred Stock will be issued and outstanding. Except for the (a)
the conversion privileges of the Preferred Stock of the Company, (b) the right
of first refusal granted to the stockholders of the Company pursuant to the
Stockholders' Agreement, (c) warrants exercisable for up to an aggregate of
51,191 shares of Series D Preferred Stock, and (d) options to purchase up to an
aggregate of 1,017,426 shares of Common Stock of the Company held by employees
and consultants of the Company, there are no outstanding options, warrants,
rights (including
3
<PAGE> 6
conversion or preemptive rights) or agreements for the purchase or acquisition
from the Company of any shares of its capital stock.
3.4 Authorization
(a) All corporate action on the part of the Company, its
officers, directors and stockholders necessary for (i) the issuance of the
Warrants pursuant to this Agreement, (ii) the issuance and sale of the Warrant
Shares upon exercise of the Warrants and (iii) the execution, performance and
delivery by the Company of this Agreement, the Warrants, the Amendment to
Stockholders' Agreement, the Settlement and Mutual General Release Agreement,
and the License Agreement, have been taken or will be taken prior to the First
Closing hereunder, and all corporate action on the part of the Company, its
officers, directors and stockholders necessary for the sale and issuance of the
Common Shares pursuant to this Agreement have been taken or will be taken prior
to the Second Closing hereunder. This Agreement, the Warrants, the Amendment
to Stockholders' Agreement, the Settlement and Mutual General Release
Agreement, and the License Agreement, are valid and binding obligations of the
Company enforceable against it in accordance with their terms except as limited
by (i) applicable bankruptcy, insolvency, reorganization, moratorium or other
laws of general application relating to or affecting enforcement of creditors'
rights and rules or laws concerning equitable remedies and (ii) with respect to
the indemnification provisions of the Stockholders' Agreement, as limited by
applicable law.
(b) The Warrant Shares issuable upon exercise of the
Warrants have been duly reserved for issuance, and upon issuance in accordance
with the terms of the Warrants, will be validly and duly issued, fully paid and
nonassessable and will be free of any liens or encumbrances; provided, however,
that such Warrants and the Warrant Shares may be subject to restrictions on
transfer under the Stockholders' Agreement and under applicable state or
federal securities laws as set forth herein or otherwise required by such laws
at the time a transfer is proposed. The Common Shares to be issued and sold
hereunder, when issued in compliance with the provisions of this Agreement and
the Certificate of Incorporation, will be validly issued, fully paid and
nonassessable, and will be free of any liens or encumbrances; provided,
however, that such Common Shares may be subject to restrictions on transfer
under the Stockholders' Agreement and under applicable state or federal
securities laws as set forth herein or otherwise required by such laws at the
time a transfer is proposed.
3.5 Securities Laws; Governmental Consent, etc. No consent,
approval or authorization of, or designation, declaration or filing with any
governmental authority on the part of the Company is required in connection
with the valid execution and delivery of this Agreement, the Warrants, the
Amendment to Stockholders' Agreement, the Settlement and Mutual General Release
Agreement, the License Agreement and the MOU, or the issuance of the Warrants
and Warrant Shares to be issued and sold pursuant to this Agreement and the
Warrants, or the offer, sale or issuance of the Common Shares to be issued and
sold pursuant to this Agreement, or the consummation of any other transaction
contemplated hereby or thereby, except, if required, qualifications or filings
under the Securities Act of 1933, as amended (the "Securities Act"), and
applicable state securities laws which qualifications or filings, if required,
will be obtained or made and will be effective within the time periods required
by law. The issuance of the Warrants and the Warrant Shares as provided in
this Agreement and the offer,
4
<PAGE> 7
sale and issuance of the Common Shares are and will be exempt from the
registration and prospectus delivery requirements of the Securities Act and
have been registered or qualified, or will be registered or qualified in a
timely manner (or are exempt from registration or qualification) under all
applicable state registration or qualification requirements.
3.6 Material Permits; Compliance with Laws The Company has all
permits, licenses, orders and approvals of any federal, state, local or foreign
governmental or regulatory body (collectively, the "Permits") that are material
to or necessary in the conduct of its business as now conducted; and all
Permits are in full force and effect, no violations have been recorded in
respect of any such Permits, and no proceeding is pending or threatened to
revoke or limit any such Permits. The Company is conducting, and has
conducted, its business and operations in compliance in all material respects
with all governmental laws, rules and regulations applicable thereto and is not
in violation or default in any material respect under any statute, regulation,
order, decree or governmental authorization applicable to it or any of its
properties or business as presently conducted or proposed to be conducted,
including without limitation environmental and health and safety laws, rules
and regulations.
3.7 Title to Property and Assets. The Company owns its property
and assets free and clear of all mortgages, liens, loans and encumbrances,
except such encumbrances and liens which arise in the ordinary course of
business and do not materially impair the Company's ownership or use of such
property or assets. With respect to the property and assets it leases, the
Company is in compliance with such leases and, to the best of its knowledge,
holds valid leasehold interests free of any liens, claims or encumbrances.
3.8 Compliance with Other Instruments. The Company is not in
violation or default of any provisions of its Certificate of Incorporation or
Bylaws, or of any instrument or contract to which it is a party or by which it
is bound, except where such violation or default would not have a material
adverse effect on the financial condition or results of operations of the
Company. The execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby will not result in any
such violation or be in conflict with or constitute, with or without the
passage of time and giving of notice, either a default under any such
provision, instrument or contract or an event which results in the creation of
any lien, charge or encumbrance upon any assets of the Company.
3.9 Litigation. There is no action, suit, proceeding or
investigation pending or, to the Company's knowledge, currently threatened
against the Company or its assets that questions the validity of this
Agreement, the Warrants, the Amendment to Stockholders' Agreement, the
Settlement and Mutual General Release Agreement, the License Agreement or the
MOU, or the right of the Company to enter into such agreements, or to
consummate the transactions contemplated hereby or thereby, or which might
result, either individually or in the aggregate, in any material adverse
changes in the financial condition or results of operations of the Company, nor
is the Company aware that there is any basis for the foregoing. The Company is
not a party to or subject to the provisions of any order, writ, injunction,
judgment or decree of any court or agency or instrumentality.
3.10 Subsidiaries. Except for SCM Microsystems GmbH, which is a
wholly-owned subsidiary of the Company, the Company does not own or control,
directly or indirectly, any
5
<PAGE> 8
interest in any corporation, association or other business entity. The Company
is not a participant in any joint venture, partnership or similar arrangement.
3.11 Material Contracts and Other Commitments. The Company does
not have any contract, agreement, lease or other commitment, written or oral,
absolute or contingent, other than (i) contracts for the purchase of supplies
and services that were entered into in the ordinary course of business and that
do not involve future payments by the Company in excess of $100,000; (ii) sales
contracts entered into in the ordinary course of business; (iii) license
agreements entered into in the ordinary course of business; and (iv) contracts
terminable at will by the Company on no more than sixty (60) days notice
without cost or liability to the Company. For purposes of this section,
employment contracts and contracts with labor unions and agreements pursuant to
which the Company licenses its intellectual property to third parties shall not
be considered contracts or agreements entered into in the ordinary course of
business.
3.12 Intellectual Property and Other Rights. The Company has all
franchises, permits, licenses and other similar authority necessary for the
conduct of its business as now being conducted by it (including products and
technology currently under development), the lack of which would materially and
adversely affect the financial condition and results of operations of the
Company. The Company is not in default under any such franchises, permits,
licenses or other similar authority, except where such default would not
materially and adversely affect the financial condition and results of
operations of the Company. To its knowledge, the Company has sufficient title
and ownership of all patents, patent rights, trademarks, trademark rights,
trade names, trade name rights and copyrights material to the conduct of its
business as now conducted (including products and technology currently under
development) without any conflict with or infringement of the rights of others
except, in all instances, the lack of title and ownership which would not have
a material adverse effect on the financial condition or results of operations
of the Company. The Company has not received any communications alleging that
the Company has violated or would violate any of the patents, trademarks, trade
names or copyrights of any other person or entity.
3.13 Financial Condition.
(a) The Company has delivered to the Purchaser its (i)
unaudited financial statements for the period ended June 30, 1997, and (ii)
audited financial statements for the year ended December 31, 1996
(collectively, the "Financial Statements"). The Financial Statements (i) are
complete and correct in all material respects, (ii) fairly present the
financial condition of the Company as of the date of the balance sheets
contained therein (the "Balance Sheets"), and the statement of operations
contained therein accurately presents the operating results of the Company
during the periods indicated therein, (iii) are in accordance with the books
and records of the Company, and (iv) have been prepared in accordance with
generally accepted accounting principles consistently applied; provided,
however, that the unaudited Financial Statements may not contain all footnotes
required by generally accepted accounting principles.
(b) As of June 30, 1997, the Company had no liabilities
of any nature (matured or unmatured, fixed or contingent) required by generally
accepted accounting principles to be provided for in the Balance Sheets which
were not provided for in the Balance Sheets.
6
<PAGE> 9
3.14 Changes. Since June 30, 1997, there has not been:
(a) any change in the assets, liabilities, financial
condition or operating results of the Company from that reflected in the
Financial Statements, except changes in the ordinary course of business which
have not been, in the aggregate, materially adverse; or
(b) to the Company's knowledge, any other event or
condition of any character which might materially and adversely affect the
assets, financial condition, operating results or business of the Company (as
such business is presently conducted).
3.15 Employees. The Company does not have any collective
bargaining agreements with any of its employees, and, to the Company's
knowledge, no labor union organizing activity is pending or threatened with
respect to the Company. To the Company's knowledge, no employee is obligated
under any agreement or judgment that would materially conflict with such
employee's obligation to use his or her best efforts to promote the interests
of the Company or that would materially conflict with the Company's business.
To the Company's knowledge, no employee is in material violation of the terms
of any employment agreement, proprietary information agreement, noncompetition
agreement or any other agreement relating to such employee's relationship with
any previous employer. Neither the execution nor delivery of this Agreement,
nor the carrying on of the Company's business by the employees of the Company,
nor the conduct of the Company's business as proposed, will, to the Company's
knowledge, conflict with or result in a breach of the terms, conditions or
provisions of, or constitute a default under, any contract, covenant or
instrument under which any of such employees is now obligated. The Company is
not a party to or bound by any currently effective employment contract,
deferred compensation agreement, bonus plan, incentive plan, profit sharing
plan, retirement agreement, or other employee compensation agreement. The
Company does not maintain, sponsor, or contribute to any program or arrangement
that is an "employee pension benefit plan," and "employee welfare benefit
plan," or a "multiemployer plan," as those terms are defined in Sections 3(2),
3(1) and 3(37) of the Employee Retirement Income Security Act of 1974, as
amended.
3.16 Registration Rights. Except as set forth in the Stockholders'
Agreement and Section 6.1 of this Agreement, the Company is not under any
obligation to register pursuant to the Securities Act any of its currently
outstanding securities or any of its securities that may hereafter be issued.
3.17 Tax Matters. The Company has accurately and timely filed all
federal income tax returns and all state and municipal tax returns that are
required to be filed by it and has paid or made provision for the payment of
all amounts due pursuant to such returns. The federal income tax returns of
the Company have not been audited by the Internal Revenue Service, and there
are no waivers in effect of the applicable statute of limitations for any
period. No deficiency assessment or proposed adjustment of federal income
taxes or state or municipal taxes of the Company is pending and the Company has
no knowledge of any proposed liability for any tax to be imposed.
3.18 Interested Party Transactions. No officer or director of the
Company has, either directly or indirectly, (a) an interest in any corporation,
partnership, proprietorship, association or
7
<PAGE> 10
other person or entity that, as presently contemplated, will furnish or sell
services or products to the Company or purchase services or products from the
Company or whose services or products are similar to those to be furnished or
sold by the Company or (b) a beneficial interest in any contract, agreement or
commitment to which the Company is a party or may be bound. No employee,
shareholder, officer or director of the Company is indebted (or committed to
make loans or extend or guarantee credit) to the Company nor is the Company
indebted to any of them. The Company is not a guarantor or indemnitor of any
indebtedness of any other person, firm or corporation.
3.19 Disclosure. No statement by the Company contained in this
Agreement and the exhibits attached hereto, the Financial Statements and any
written statement or certificate furnished or to be furnished to the Purchasers
pursuant hereto or in connection with the transactions contemplated hereby
(when read together) contains any untrue statement of a material fact or omits
to state a material fact necessary in order to make the statements contained
herein or therein not misleading in light of the circumstances under which they
were made.
4. Representations and Warranties of Purchaser and Restrictions on
Transfer Imposed by the Securities Act of 1933 and Applicable State Securities
Laws.
4.1 Representations and Warranties by Purchaser. Purchaser
represents and warrants to the Company as follows:
(a) The Common Shares, the Warrants, and the Warrant
Shares are being acquired for the Purchaser's own account, for investment and
not with a view to, or for resale in connection with, any distribution or
public offering thereof within the meaning of the Securities Act or the
applicable securities laws.
(b) The Purchaser understands that the Common Shares, the
Warrants, and the Warrant Shares have not been registered under the Securities
Act by reason of their issuance in a transaction exempt from the registration
and prospectus delivery requirements of the Securities Act pursuant to Section
4(2) thereof and Regulation D promulgated thereunder, that the Company has no
present intention of registering the Warrants or the Warrant Shares, that the
Common Shares, the Warrants, or the Warrant Shares must be held by the
Purchaser indefinitely, and that the Purchaser must therefore bear the economic
risk of such investment indefinitely, unless a subsequent disposition thereof
is registered under the Securities Act or is exempt from registration.
(c) During the negotiation of the transactions
contemplated herein, the Purchaser and its representatives and legal counsel
have been afforded full and free access to corporate books, financial
statements, records, contracts, documents and other information concerning the
Company and to its offices and facilities, have been afforded an opportunity to
ask such questions of the Company's officers, employees, agents, accountants
and representatives concerning the Company's business, operations, financial
condition, assets, liabilities and other relevant matters as they have deemed
necessary or desirable, and have been given all such information as has been
requested, in order to evaluate the merits and risks of the prospective
investments contemplated herein.
8
<PAGE> 11
(d) The Purchaser and its representatives have been
solely responsible for the Purchaser's own "due diligence" investigation of the
Company and its management and business, for its own analysis of the merits and
risks of this investment, and for its own analysis of the fairness and
desirability of the terms of the investment. In taking any action or
performing any role relative to the arranging of the proposed investment, the
Purchaser has acted solely in its own interest, and neither the Purchaser, nor
any of its agents or employees, has acted as an agent of the Company. The
Purchaser has such knowledge and experience in financial and business matters
that the Purchaser is capable of evaluating the merits and risks of the
purchase of the Common Shares and Warrants pursuant to the terms of this
Agreement and of protecting Purchaser's interests in connection therewith.
(e) The Purchaser is an "Accredited Investor" as that
term is defined in Rule 501 of Regulation D promulgated under the Securities
Act. The Purchaser is able to bear the economic risk of the purchase of the
Common Shares and Warrants pursuant to the terms of this Agreement, including a
complete loss of the Purchaser's investment in the Common Shares and Warrants.
(f) The Purchaser has the full right, power and authority
to enter into and perform the Purchaser's obligations under this Agreement, the
Warrants and the Stockholders' Agreement, and this Agreement, the Warrants and
the Stockholders' Agreement constitute valid and binding obligations of the
Purchaser enforceable in accordance with their terms except as limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other laws of
general application relating to or affecting enforcement of creditors' rights
and rules or laws concerning equitable remedies.
(g) No consent, approval or authorization of or
designation, declaration or filing with any governmental authority on the part
of the Purchaser is required in connection with the valid execution and
delivery of this Agreement, the Warrants or the Stockholders' Agreement.
4.2 Legends. Each certificate representing the Common Shares or
the Warrant Shares may be endorsed with the following legends:
(a) "THE SECURITIES REPRESENTED BY THIS
CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
AND ARE "RESTRICTED SECURITIES" AS DEFINED IN RULE
144 PROMULGATED UNDER THE ACT. THE SECURITIES MAY
NOT BE SOLD OR OFFERED FOR SALE OR OTHERWISE
DISTRIBUTED EXCEPT (I) IN CONJUNCTION WITH AN
EFFECTIVE REGISTRATION STATEMENT FOR THE SHARES
UNDER THE ACT, OR (II) IN COMPLIANCE WITH RULE 144
OR (III) PURSUANT TO AN OPINION OF COUNSEL TO THE
CORPORATION THAT SUCH
9
<PAGE> 12
REGISTRATION OR COMPLIANCE IS NOT REQUIRED AS TO SUCH SALE, OFFER OR
DISTRIBUTION."
(b) Any other legends required by applicable blue sky or
securities laws.
The Company need not register a transfer of any Common Shares or Warrant
Shares, and may also instruct its transfer agent not to register the transfer
of the Common Shares or Warrant Shares, unless the conditions specified in the
foregoing legends are satisfied.
4.3 Removal of Legend and Transfer Restrictions.
(a) Any legend endorsed on a certificate pursuant to
subsection 4.2(a) and the stop transfer instructions with respect to such
Common Shares or Warrant Shares shall be removed and the Company shall issue a
certificate without such legend to the holder thereof if such Common Shares or
Warrant Shares are registered under the Securities Act and a prospectus meeting
the requirements of Section 10 of the Securities Act is available, if such
legend may be properly removed under the terms of Rule 144 promulgated under
the Securities Act or if such holder provides the Company with an opinion of
counsel for such holder, reasonably satisfactory to legal counsel for the
Company, to the effect that a sale, transfer or assignment of such Common
Shares or Warrant Shares may be made without registration.
(b) Any legend endorsed on a certificate pursuant to
subsection 4.2(b) and the stop transfer instructions with respect to such
Common Shares or Warrant Shares shall be removed upon receipt by the Company of
an order of an appropriate state securities authority authorizing such removal.
5. Conditions to Closing.
5.1 Conditions to Obligations of the Company.
(a) First Closing. The obligation of the Company to
issue the Warrants to Purchaser at the First Closing is subject to the
fulfillment on or prior to the First Closing Date of the following conditions,
any of which may be waived by the Company:
(1) Representations and Warranties. The
representations and warranties made by the Purchaser in Section 4 hereof shall
be true and correct when made, and shall be true and correct on such First
Closing Date with the same force and effect as if they had been made on and as
of said date.
(2) Consents and Waivers. The Company shall have
obtained any and all consents (including all governmental or regulatory
consents, approvals or authorizations required in connection with the valid
execution and delivery of this Agreement and the Amendment to Stockholders'
Agreement), permits and waivers necessary or appropriate for consummation of
the transactions contemplated by this Agreement, the Warrants, the Amendment to
Stockholders' Agreement, the Settlement and Mutual General Release Agreement,
the License Agreement and the MOU.
10
<PAGE> 13
(3) Stockholders' Agreement. The Company, the
Purchaser and the other parties holding at least a majority of the Registrable
Securities (as defined in the Stockholders Agreement) and listed as signatories
thereto shall have executed and delivered the Amendment to Stockholders'
Agreement in the form attached hereto as Exhibit D.
(4) Settlement and Mutual General Release
Agreement. The Company and the Purchaser (including, if necessary, its
affiliates, subsidiaries or authorized representatives) shall have executed and
delivered the Settlement and Mutual General Release Agreement in the form
attached hereto as Exhibit E.
(5) License Agreement. The Company and the
Purchaser (including, if necessary, its affiliates, subsidiaries or authorized
representatives) shall have executed and delivered the License Agreement in the
form attached hereto as Exhibit F.
(6) Memorandum of Understanding. The Company and
the Purchaser (including, if necessary, its affiliates, subsidiaries or
authorized representatives) shall have executed the MOU attached hereto as
Exhibit G setting forth the principal terms of a product development and supply
agreement governing the development, manufacture and distribution rights of the
Company and the Purchaser with respect to products incorporating the parties'
respective technologies. The parties shall use their reasonable efforts to
agree upon and execute such an agreement within ninety (90) days after the
Closing.
(7) Legal Investment. At the time of the First
Closing, the issuance of the Warrants by the Company to the Purchaser hereunder
shall be legally permitted by all laws and regulations to which the Purchaser
and the Company are subject.
(b) Second Closing. The obligation of the Company to
sell and issue the Common Shares to the Purchaser at the Second Closing is
subject to the fulfillment on or prior to the Second Closing Date of the
following conditions, any of which may be waived by the Company:
(1) Incorporation of Conditions. The conditions
set forth in subsection 5.1(a)(1) through (a)(7) above shall have been
fulfilled.
(2) Legal Investment. At the time of the Second
Closing, the issuance and sale of the Common Shares by the Company to the
Purchaser hereunder shall be legally permitted by all laws and regulations to
which the Purchaser and the Company are subject.
(3) Effectiveness of Initial Public Offering.
The SEC shall have declared effective, and the Company begun its initial public
offering of shares of its Common Stock pursuant to, the Company's Registration
Statement No. 333-29073 on Form S-1 (the "Effective Date").
5.2 Conditions to Obligations of the Purchaser.
(a) First Closing. The Purchaser's obligation at the
First Closing to execute and deliver the Stockholders' Agreement, the
Settlement and Mutual General Release
11
<PAGE> 14
Agreement, the License Agreement and the MOU, is subject to the fulfillment on
or prior to the First Closing Date of the following conditions, any of which
may be waived by the Purchaser:
(1) Representations and Warranties Correct;
Performance of Obligations. The representations and warranties made by the
Company in Section 3 above shall be true and correct when made, and shall be
true and correct on the First Closing Date with the same force and effect as if
they had been made on and as of said date and the Company shall have performed
all obligations and conditions herein required to be performed or observed by
it on or prior to the First Closing Date.
(2) Incorporation of Conditions. The conditions
set forth in subsections (a)(2) through (a)(7) of Section 5.1 above shall have
been fulfilled.
(3) Common Stock Purchase Warrants. The Company
shall have executed and delivered the Warrants on the form attached hereto as
Exhibits A and B.
(4) Compliance Certificate. The Company shall
have delivered to the Purchaser a certificate, executed by the President of the
Company, dated as of the First Closing Date, certifying the fulfillment of the
conditions specified in subsection (a)(1) of this Section 5.2 and in subsection
(a)(2) of Section 5.1 above.
(5) Secretary's Certificate. The Company shall
have delivered to the Purchaser a certificate, executed by the Secretary of the
Company, dated as of the First Closing Date, certifying the authenticity of
attached copies of the Company's Certificate of Incorporation, Bylaws and
resolutions of the Board of Directors approving the transactions contemplated
hereby.
(6) Opinion of Company Counsel. The Purchaser
shall have received a legal opinion of counsel to the Company in form and
substance acceptable to the Purchaser and the Company.
(b) Second Closing. The Purchaser's obligation to
purchase the Common Shares at the Second Closing is subject to fulfillment on
or prior to the Second Closing Date of the following conditions, any of which
may be waived by the Purchaser:
(1) Incorporation of Conditions. The conditions
set forth in subsections (a)(1) through (a)(6) of this Section 5.2, and in
subsections (b)(2) and (b)(3) of Section 5.1 above, shall have been fulfilled.
6. Miscellaneous.
6.1 Filing of Registration Statement on Form S-3 for Common
Shares. The Company acknowledges and agrees that it shall, within one hundred
eighty (180) days after the Effective Date (as defined in Section 5.1(b)(3)
above) file with the SEC a registration statement on Form S-3 registering not
less than the aggregate number of Warrant Shares issuable upon exercise of the
Warrants and Common Shares purchased by the Purchaser at the Second Closing.
12
<PAGE> 15
6.2 Directed Shares in IPO. Subject to the fulfillment on or
prior to the Second Closing Date of the conditions set forth in subsections
(b)(1) through (b)(3) of Section 5.1 above, the Company shall provide Purchaser
the opportunity to purchase in the IPO up to 200,000 shares of Common Stock of
the Company being registered as part of the Company's IPO at a price equal to
the IPO offering price but in no event greater than $15.00 per share.
6.3 Governing Law. This Agreement shall be governed in all
respects by the laws of the State of California as such laws are applied to
agreements between California residents entered into and to be performed
entirely within California.
6.4 Survival. The representations, warranties, covenants and
agreements made herein shall survive the execution of this Agreement and the
Closing and shall in no way be affected by any investigation of the subject
matter thereof made by or on behalf of the Purchaser.
6.5 Successors and Assigns. Except as otherwise expressly
provided herein, the provisions hereof shall inure to the benefit of, and be
binding upon, the successors, assigns, heirs, executors and administrators of
the parties hereto.
6.6 Entire Agreement. This Agreement, the exhibits to this
Agreement and the other documents delivered pursuant hereto constitute the full
and entire understanding and agreement between the parties with regard to the
subjects hereof and thereof.
6.7 Notices, etc. All notices and other communications required
or permitted hereunder shall be in writing and shall be sent via facsimile,
overnight courier service or mailed by certified or registered mail, postage
prepaid, return receipt requested, addressed or sent (a) if to the Purchaser,
at the address or facsimile number of the Purchaser set forth below such
party's name on Exhibit A, or at such other address or number as the Purchaser
shall have furnished to the Company in writing, or (b) if to the Company, at
131 Albright Way, Los Gatos, California 95030 USA, Attn: President, or at such
other address or number as the Company shall have furnished to the Purchaser in
writing.
6.8 Severability. In case any provision of this Agreement shall
be declared invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby and the parties shall insert in place of the invalid or
unenforceable provision one of similar economic effect and intent.
6.9 Expenses. The Company and the Purchaser shall each bear their
respective expenses and legal fees incurred with respect to this Agreement and
the transactions contemplated hereby.
6.10 Titles and Subtitles. The titles of the paragraphs and
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
6.11 Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
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<PAGE> 16
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
SCM MICROSYSTEMS, INC.
a Delaware corporation
By:
---------------------------------
Steven Humphreys, President
GEMPLUS
a legal entity under the laws of France
By:
---------------------------------
------------------------------------
(Print Name)
Title:
------------------------------
COUNTERPART SIGNATURE PAGE TO COMMON
STOCK PURCHASE AGREEMENT
14
<PAGE> 17
SCHEDULE OF EXHIBITS
Exhibit A and B - Form of Common Stock Purchase Warrants
Exhibit C - Schedule of Exceptions to Representations and Warranties of the
Company
Exhibit D - Form of Waiver and Amendment to Amended and Restated Stockholders'
Agreement
Exhibit E - Form of Settlement and Mutual General Release Agreement
Exhibit F - Form of License Agreement
Exhibit G - Form of Memorandum of Understanding
15
<PAGE> 18
EXHIBIT A AND B
COMMON STOCK PURCHASE WARRANTS
<PAGE> 19
EXHIBIT C
SCHEDULE OF EXCEPTIONS
The following are the exceptions to the representations and warranties
made by SCM Microsystems, Inc. (the "Company") in Section 3 of the Warrant
Issuance and Common Stock Purchase Agreement dated as of September 5, 1997
(the "Agreement") at and as of the First Closing and Second Closing; provided,
however, that at and as of the Second Closing the representations and
warranties, and this Schedule of Exceptions (except as expressly indicated
herein), shall not reflect the transactions occurring at the First Closing
contemplated by the Agreement. Capitalized terms used in this exhibit, unless
otherwise specified, have the same meaning given them in the Agreement. Unless
otherwise expressly stated, the section references used herein are to the
particular subsections in Section 3 of the Agreement.
3.3 (Capitalization)
Immediately prior to the issuance and sale of the Common Shares to
Purchaser at the Second Closing, the capitalization of the Company as set forth
in Section 3.3 of the Agreement will not reflect (i) the issuance of the
Warrants to Purchaser at the First Closing and reservation of the Warrant
Shares by the Company for issuance upon exercise of the Warrants; (ii) the
Company's obligation to sell the Common Shares to Purchaser at the Second
Closing contingent upon satisfaction of the conditions set forth in Section
5.1(b) of the Agreement; (iii) the Company's obligation under Section 6.2 of
the Agreement to provide the Purchaser the opportunity to purchase in the IPO
up to 200,000 shares of Common Stock of the Company; and (iv) the shares of
Common Stock of the Company issued in its IPO.
3.5 (Securities Laws; Governmental Consent, etc.)
Pursuant to Section 6.1 of this Agreement, within 180 days after the
Effective Date (defined in Section 5.1(b)(3) of this Agreement), the Company
shall file with the SEC a registration statement on Form S-3 covering not less
than the aggregate number of Warrant Shares issuable upon exercise of the
Warrants to be issued to the Purchaser at the First Closing and the Common
Shares to be purchased by Purchaser at the Second Closing hereunder.
3.9 (Litigation) and 3.12 (Intellectual Property and Other Rights)
On April 28, 1997, Purchaser served the Company with a complaint
alleging that the Company's SwapSmart product infringes certain claims of a
French patent held by Purchaser. In an unrelated context, Purchaser has
indicated that it will offer licenses to the relevant patent on a
non-exclusive, non-discriminatory basis for a royalty not to exceed 1% of the
net selling price of products practicing the patent. While the outcome of any
litigation is uncertain, management of the Company believes that, based upon
the defenses available to the Company and Purchaser's stated licensing
position, the matter can be resolved without a material adverse effect on the
Company's business and operating results.
<PAGE> 20
The Company received a cease and desist letter dated July 31, 1995,
from the attorneys for Smith Corona Machines, Inc., regarding the alleged use
of "SCM" by the Company in its trade name as part of its trademark SCM SwapBox
for use with the combination floppy disk drive and PCCard slot product. Smith
Corona asserts that such use by the Company constitutes trademark infringement
and unfair competition under federal statutes and common law. Smith Corona had
demand the Company discontinue such alleged trade name and trademark uses of
the "SCM" mark. Gray Cary Ware and Friedenrich responded to the cease and
desist on behalf of the Company by letter dated January 8, 1996, denying Smith
Corona's claim. Smith Corona responded to our letter on February 22, 1996,
reiterating its demand.
3.11 (Material Contracts and Other Commitments)
The Company has the following material agreements:
- In May 1997, the Company and Telenor entered into a development and
supply agreement pursuant to which the Company will design,
manufacture, test and supply DVB-CAM modules to Telenor. Pursuant
to this agreement, Telenor may pay up to an aggregate of $1.2
million to the Company for development costs as the Company
achieves certain development milestones. Once the prototype has
been approved by Telenor, the Company will supply these modules
pursuant to the terms of the agreement. As part of this
arrangement, Telenor also made an equity investment of
approximately $5.5 million in the Company. Furthermore, the
Company has issued 34, 965 shares of Preferred Stock to a Telenor
affiliate, fifty percent (50%) of which will remain unvested until
the Company achieves the mid-point milestone of the project and has
been paid by Telenor for such milestone completion. Each party
will retain rights to its preexisting intellectual property, and it
is expected that any intellectual property that is jointly
developed under the agreement will be jointly owned.
- Supply agreement for fabricated metal components with Robinson
Nugent dated November 1996. The total obligations of the Company
under this agreement are estimated to be $300,000.
- Advanced purchase components agreement with Intellicard Systems,
dated May 1996. The total obligations of the Company under this
agreement are estimated to be $100,000.
- Purchase agreement for smart card reader modules with Avnet France,
dated October 1996. The total obligations of the Company under
this agreement are estimated to be $150,000.
3.12 (Intellectual Property and Other Rights)
See Item 3.9 above.
<PAGE> 21
3.15 (Employees)
The Company is aware that Purchaser has filed a criminal lawsuit
against one of the Company's current employees and a former Purchaser employee
alleging, among other things, theft by such employee of Purchaser's
intellectual property prior to such employee's commencement of employment with
the Company.
3.16 (Registration Rights)
See Item 3.5 above.
<PAGE> 22
EXHIBIT D
AMENDMENT TO AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
<PAGE> 23
EXHIBIT E
SETTLEMENT AND MUTUAL GENERAL RELEASE AGREEMENT
<PAGE> 24
EXHIBIT F
LICENSE AGREEMENT
<PAGE> 25
EXHIBIT G
MEMORANDUM OF UNDERSTANDING
<PAGE> 1
EXHIBIT 10.34
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE
UPON EXERCISE HEREOF (INCLUDING ANY SECURITIES ISSUABLE UPON
CONVERSION OF SUCH SHARE) HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AND SUCH WARRANT, SHARES AND SECURITIES MAY
NOT BE SOLD OR TRANSFERRED UNLESS SUCH SALE OR TRANSFER IS IN
ACCORDANCE WITH THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF
1933, AS AT THE TIME AMENDED, OR IN CONFORMITY WITH THE LIMITATIONS OF
RULE 144 OR SIMILAR RULE AS THEN IN EFFECT UNDER SUCH ACT, OR UNLESS
SOME OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT IS
AVAILABLE WITH RESPECT THERETO.
No. 1 Warrant to Purchase 200,000 Shares
of Common Stock
(Subject to Adjustment)
SCM MICROSYSTEMS, INC.
COMMON STOCK PURCHASE WARRANT
Void after September 5, 1998
SCM Microsystems, Inc., a Delaware corporation (the "Company"), hereby
certifies that, for value received, Gemplus, a legal entity under the laws of
France, or its assigns, is entitled, subject to the terms set forth below, to
purchase from the Company at any time or from time to time before 5:00 p.m.
Pacific time, on September 5, 1998 (the "Expiration Date"), 200,000 fully
paid and nonassessable shares of Common Stock of the Company, as constituted on
September 5, 1997 at the purchase price per share of $13.00 and otherwise in
accordance with the terms hereof. The number and character of such shares of
Common Stock and the purchase price therefor are subject to adjustment as
provided below.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
(a) The term "Common Stock" shall mean the Common Stock, par value
$0.001 per share, of the Company, and any other securities or property of the
Company or of any other person (corporate or otherwise) which the holder of
this Warrant at any time shall be entitled to receive on the exercise hereof,
in lieu of or in addition to Common Stock, or which at any time shall be
issuable in exchange for or in replacement of Common Stock.
(b) The term "Company" includes any corporation which shall
succeed to or assume the obligations of the Company hereunder.
1
<PAGE> 2
(c) The term "Warrant" shall mean this Warrant.
1. Initial Exercise Date; Expiration. This Warrant may be
exercised at any time or from time to time. It shall expire at 5:00 p.m.,
Pacific time, on the earliest of (a) September 5, 1998, or (b) the
consolidation or merger of the Company with or into any other corporation or
the sale or other transfer in a single transaction or a series of related
transactions of all or substantially all of the assets of the Company, or any
other reorganization of the Company unless the stockholders of the Company
immediately prior to any such transaction are holders of a majority of the
voting securities of the surviving or acquiring corporation immediately
thereafter (and for purposes of this calculation equity securities which any
stockholder or the Company owned immediately prior to such merger or
consolidation as a stockholder of another party to the transaction shall be
disregarded).
2. Exercise of Warrant; Partial Exercise, This Warrant may be
exercised in full or in part by the holder hereof by surrender of this Warrant,
with the form of subscription attached hereto duly executed by such holder, to
the Company at its principal office, accompanied by payment, in cash or by
certified or official bank check payable to the order of the Company, of the
purchase price of the shares of Common Stock (or any shares of stock or other
securities at the time issuable upon exercise of this Warrant) to be purchased
hereunder. For any partial exercise hereof, the holder shall designate in the
subscription the number of shares of Common Stock (or any shares of stock or
other securities at the time issuable upon exercise of this Warrant) that it
wishes to purchase. On any such partial exercise, the Company at its expense
shall forthwith issue and deliver to the holder hereof a new warrant of like
tenor, in the name of the holder hereof, which shall be exercisable for such
number of shares of Common Stock (or any shares of stock or other securities at
the time issuable upon exercise of this Warrant) represented by this Warrant
which have not been purchased upon such exercise.
In lieu of exercising any portion of this Warrant, the holder
may at any time and from time to time elect to receive, without payment of cash
or other consideration, shares of Common Stock (or any shares of stock or other
securities at the time issuable upon exercise of this Warrant) equal to the
value of this Warrant (or portion hereof being canceled) by surrender of this
Warrant to the Company together with notice of such election. In such event
the Company shall issue to the holder a number of shares of the Company's
Common Stock (or any shares of stock or other securities at the time issuable
upon exercise of this Warrant) computed using the following formula:
X = Y(A-B)
-------
A
where: X = The number of shares of Common Stock (or any shares
of stock or other securities at the time issuable
upon exercise of this Warrant) to be issued to the
holder.
2
<PAGE> 3
Y = The number of shares of Common Stock (or any shares
of stock or other securities at the time issuable
upon exercise of this Warrant) purchasable under this
Warrant.
A = The fair market value of one share of the Company's
Common Stock (or any shares of stock or other
securities at the time issuable upon exercise of this
Warrant) as of the date of such notice of election,
B = The exercise price, as adjusted to the date of such
notice of election.
For the purposes of this Section 2, fair market value of the Company's
Common Stock (or any shares of stock or other securities at the time issuable
upon exercise of this Warrant) as of a particular date (the "Determination
Date") shall mean:
(i) If the Company's Common Stock (or any shares of stock
or other securities at the time issuable upon exercise of this Warrant) is
traded on an exchange or is quoted on the National Association of Securities
Dealers, Inc. Automated Quotation ("NASDAQ") National Market System, then the
closing or last sale price, respectively, reported for the business day
immediately preceding the Determination Date.
(ii) If the Company's Common Stock (or any shares of stock
or other securities at the time issuable upon exercise of this Warrant) is not
traded on an exchange or on the NASDAQ National Market System but is traded in
the over-the-counter market, then the mean of the closing bid and asked prices
reported for the business day immediately preceding the Determination Date.
(iii) Except as provided in paragraph (iv) below, if the
Company's Common Stock (or any shares of stock or other securities at the time
issuable upon exercise of this Warrant) is not publicly traded, then as
determined in good faith by the Company's Board of Directors upon a review of
relevant factors,
(iv) If the Determination Date is the date on which the
Company's Common Stock (or any shares of stock or other securities at the time
issuable upon exercise of this Warrant) is first sold to the public by the
Company in a firm commitment public offering under the Securities Act of 1933,
as amended, then the initial public offering price (before deducting
commissions, discounts or expenses) at which the Common Stock (or any shares of
stock or other securities at the time issuable upon exercise of this Warrant)
is sold in such offering. Notwithstanding the foregoing, this Warrant may not
be exercised without payment of cash or other consideration as provided above
if the Company determines in good faith that such exercise would have an
material adverse effect on the Company's results of operations or financial
condition with respect to accounting treatment or financial reporting.
3. When Exercise Effective. The exercise of this Warrant shall
be deemed to have been effected immediately prior to the close of business on
the business day on which this Warrant is surrendered to the Company as
provided in Section 2, and at such time the person in whose name any
certificate for shares of Common Stock (or any shares of stock or other
3
<PAGE> 4
securities at the time issuable upon exercise of this Warrant) shall be
issuable upon such exercise, as provided in Section 2, shall be deemed to be
the record holder of such Common Stock (or any shares of stock or other
securities at the time issuable upon exercise of this Warrant) for all
purposes.
4. Delivery on Exercise. As soon as practicable after the
exercise of this Warrant in full or in part, and in any event within twenty
(20) days thereafter, the Company at its expense (including the payment by it
of any applicable issue taxes) will cause to be issued in the name of and
delivered to the holder hereof, or as such holder may direct, a certificate or
certificates for the number of fully paid and nonassessable full shares of
Common Stock (or any shares of stock or other securities at the time issuable
upon exercise of this Warrant) to which such holder shall be entitled on such
exercise, together with cash, in lieu of any fraction of a share, equal to such
fraction of the current market value of one full share as determined in good
faith by the Board of Directors.
5. Adjustment of Purchase Price and Number of Shares. The
character of the shares of Common Stock issuable upon exercise of this Warrant
(or any shares of stock or other securities at the time issuable upon exercise
of this Warrant) and the purchase price therefor, are subject to adjustment
upon the occurrence of the following events:
5.1 Adjustment for Stock Splits, Stock Dividends,
Recapitalizations, etc. The exercise price of this Warrant and the number of
shares of Common Stock issuable upon exercise of this Warrant (or any shares of
stock or other securities at the time issuable upon exercise of this Warrant)
shall be appropriately adjusted to reflect any stock dividend, stock split,
combination of shares, reclassification, recapitalization or other similar
event affecting the number of outstanding shares of Common Stock (or such other
stock or securities). For example if there should be a 2-for-1 stock split,
the exercise price would be divided by two and such number of shares would be
doubled.
5.2 Adjustment for other Dividends and Distributions. In
case the Company shall make or issue, or shall fix a record date for the
determination of eligible holders entitled to receive, a dividend or other
distribution with respect to the Common Stock (or any shares of stock or other
securities at the time issuable upon exercise of the Warrant) payable in (i)
securities of the Company (other than shares of Common Stock) or (ii) assets
(excluding cash dividends paid or payable solely out of retained earnings),
then in each case, the holder of this Warrant on exercise hereof at any time
after the consummation, effective date or record date of such event, shall
receive, in addition to the Common Stock (or such other stock or securities)
issuable on such exercise prior to such date, the securities or such other
assets of the Company to which such holder would have been entitled upon such
date if such holder had exercised this Warrant immediately prior thereto (all
subject to further adjustment as provided in this Warrant).
5.3 Adjustment for Reclassification or Reorganization.
In case of any corporate reorganization or reclassification or change of the
outstanding securities of the Company, other than as described in the second
sentence of Section 1 above (any such transaction being hereinafter referred to
as a "Reorganization"), then, in each case, the holder of
4
<PAGE> 5
this Warrant, on exercise hereof at any time after the consummation or
effective date of such Reorganization (the "Effective Date"), shall receive, in
lieu of the Common Stock issuable on such exercise prior to the Effective Date,
the stock and other securities and property (including cash) to which such
holder would have been entitled upon the Effective Date if such holder had
exercised this Warrant immediately prior thereto (all subject to further
adjustment as provided in this Warrant).
5.4 Certificate as to Adjustments. In case of any
adjustment or readjustment in the price or kind of securities issuable on the
exercise of this Warrant, the Company will promptly give written notice thereof
to the holder of this Warrant in the form of a certificate, certified and
confirmed by an officer of the Company, setting forth such adjustment or
readjustment and showing in reasonable detail the facts upon which such
adjustment or readjustment is based.
6. No Impairment. The Company (a) will not increase the par
value of any shares of stock receivable on the exercise of this Warrant above
the amount payable therefor on such exercise, (b) will at all times reserve and
keep available a number of its authorized shares of Common Stock (or any shares
of stock or other securities at the time issuable upon exercise of this
Warrant), free from all preemptive rights therein, which will be sufficient to
permit the exercise in full of this Warrant, and (c) shall take all such action
as may be necessary or appropriate in order that all shares of Common Stock (or
any shares of stock or other securities at the time issuable upon exercise of
this Warrant) as may be issued pursuant to the valid exercise of this Warrant
will, upon issuance, be duly and validly issued, fully paid and nonassessable
and free from all taxes, liens and charges with respect to the issue thereof.
7. Notices of Record Date, etc. In the event of
(a) any taking by the Company of a record of the holders
of any class of securities for the purpose of determining the holders thereof
who are entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class
or any other securities or property, or to receive any other right, or
(b) any consolidation or merger of the Company with or
into any other corporation or the sale or other transfer in a single
transaction or a series of related transactions of all or substantially all of
the assets of the Company, or any other reorganization of the Company unless
the stockholders of the Company immediately prior to any such transaction are
holders of a majority of the voting securities of the surviving or acquiring
corporation immediately thereafter (and for purposes of this calculation equity
securities which any stockholder of the Company owned immediately prior to such
merger or consolidation as a stockholder of another party to the transaction
shall be disregarded), or
(c) any voluntary or involuntary dissolution, liquidation
or winding-up of the Company, or
(d) any proposed issue or grant by the Company of any
shares of stock of any class or any other securities, or any right or option to
subscribe for, purchase or otherwise acquire
5
<PAGE> 6
any shares of stock of any class or any other securities, then and in
each such event the Company will mail to the holder hereof a notice specifying
(i) the date on which any such record is to be taken for the purpose of such
dividend, distribution or right, and stating the amount and character of such
dividend, distribution or right, (ii) the date on which any such consolidation,
merger, sale or transfer of assets, reorganization, dissolution, liquidation or
winding-up is to take place, and the time, if any is to be fixed, as of which
the holders of record of Common Stock (or any shares of stock or other
securities at the time issuable upon the exercise of this Warrant) shall be
entitled to exchange their shares for securities or other property deliverable
on such consolidation, merger, sale or transfer of assets, reorganization,
dissolution, liquidation or winding-up, and (iii) the amount and character of
any-stock or other securities, or rights or options with respect thereto,
proposed to be issued or granted, the date of such proposed issue or grant and
the persons or class of persons to whom such proposed issue or grant is to be
offered or made. Such notice shall be mailed at least 20 days prior to the
date therein specified.
8. Exchange of Warrants. On surrender for exchange of this
Warrant, properly endorsed, to the Company, the Company at its expense will
issue and deliver to or on the order of the holder thereof a new Warrant of
like tenor, in the name of such holder or as such holder may direct, calling in
the aggregate on the face thereof for the number of shares of Common Stock (or
any shares of stock or other securities at the time issuable upon exercise of
this Warrant) called for on the face of the Warrant so surrendered.
9. Replacement of Warrants. On receipt by the Company of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of this Warrant and, in the case of any such loss, theft or
destruction of this Warrant, on delivery of an indemnity agreement reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of such Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
10. Investment Intent. Unless a current registration statement
under the Securities Act of 1933, as amended, shall be in effect with respect
to the securities to be issued upon exercise of this Warrant, the holder
thereof, by accepting this Warrant, covenants and agrees that, at the time of
exercise hereof, and at the time of any proposed transfer of securities
acquired upon exercise hereof, such holder will deliver to the Company a
written statement that the securities acquired by the holder upon exercise
hereof are for the own account of the holder for investment and are not
acquired with a view to, or for sale in connection with, any distribution
thereof (or any portion thereof) and with no present intention (at any such
time) of offering and distributing such securities (or any portion thereof).
11. Transfer. Subject to the transfer conditions referred to in
the legend endorsed hereon, this Warrant and all rights hereunder are
transferable, in whole or in part, without charge to the holder hereof upon
surrender of this Warrant with a properly executed assignment (in the form
annexed hereto) at the principal office of the Company. Upon any partial
transfer, the Company will at its expense issue and deliver to the holder
hereof a new Warrant of like tenor, in the name of the holder hereof, which
shall be exercisable for such number of shares of Common
6
<PAGE> 7
Stock (or any shares of stock or other securities at the time issuable upon
exercise of this Warrant) which were not so transferred,
12. No Rights or Liability as a Stockholder. This Warrant does
not entitle the holder hereof to any voting rights or other rights as a
stockholder of the Company. No provisions hereof, in the absence of
affirmative action by the holder hereof to purchase Common Stock (or any shares
of stock or other securities at the time issuable upon exercise of this
Warrant), and no enumeration herein of the rights or privileges of the holder
hereof shall give rise to any liability of such holder as a stockholder of the
Company.
13. Notices. All notices referred to in this Warrant shall be in
writing and shall be delivered personally or by certified or registered mail,
return receipt requested, postage prepaid and will be deemed to have been given
when so delivered or mailed (i) to the Company, at its principal executive
offices and (ii) to the holder of this Warrant, at such holder's address as it
appears in the records of the Company (unless otherwise indicated by such
holder).
14. Payment of Taxes. All shares of Common Stock (or any shares
of stock or other securities at the time issuable upon exercise of this
Warrant) issued upon the valid exercise of this Warrant shall be validly
issued, fully paid and nonassessable, and the Company shall pay all taxes and
other governmental charges that may be imposed in respect to the issue or
delivery thereof.
15. Miscellaneous. This Warrant and any term hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the Company and the holder of this Warrant. This Warrant is being
delivered in the State of California and shall be governed by and construed and
enforced in accordance with the internal laws of the State of California
(without reference to any principles of the conflicts of laws). The headings
in this Warrant are for purposes of reference only, and shall not limit or
otherwise affect any of the terms hereof.
Dated: September 5, 1997
SCM MICROSYSTEMS, INC.
By:
-------------------------------
Steve Humphreys, President
7
<PAGE> 8
FORM OF SUBSCRIPTION
(To be signed only on exercise of warrant)
TO: SCM Microsystems, Inc.
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, __________* shares of Common Stock of SCM Microsystems,
Inc. and herewith makes payment of $_______ therefor, and requests that the
certificates for such shares be issues in the name of, and delivered to
_____________________________________ whose address is _______________________
_________________________________________________.
________________________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant)
________________________________________
________________________________________
(Address)
Dated:
________________________________________
* Insert here the number of shares as to which the Warrant is being exercised.
<PAGE> 9
FORM OF ASSIGNMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and
transfers unto _________________ the right represented by the within Warrant to
purchase shares of Common Stock of SCM Microsystems, Inc., to which the within
Warrant relates, and appoints __________________ Attorney to transfer such
right on the books of SCM Microsystems, Inc., with full power of substitution
in the premises.
________________________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant)
________________________________________
________________________________________
(Address)
Dated:
________________________________________
<PAGE> 1
EXHIBIT 10.35
THE WARRANT REPRESENTED BY THIS CERTIFICATE AND THE SHARES ISSUABLE
UPON EXERCISE HEREOF (INCLUDING ANY SECURITIES ISSUABLE UPON
CONVERSION OF SUCH SHARE) HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AND SUCH WARRANT, SHARES AND SECURITIES MAY
NOT BE SOLD OR TRANSFERRED UNLESS SUCH SALE OR TRANSFER IS IN
ACCORDANCE WITH THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT OF
1933, AS AT THE TIME AMENDED, OR IN CONFORMITY WITH THE LIMITATIONS OF
RULE 144 OR SIMILAR RULE AS THEN IN EFFECT UNDER SUCH ACT, OR UNLESS
SOME OTHER EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT IS
AVAILABLE WITH RESPECT THERETO.
No. 2 Warrant to Purchase 200,000 Shares
of Common Stock
(Subject to Adjustment)
SCM MICROSYSTEMS, INC.
COMMON STOCK PURCHASE WARRANT
Void after September 5, 1998
SCM Microsystems, Inc., a Delaware corporation (the "Company"), hereby
certifies that, for value received, Gemplus, a legal entity under the laws of
France, or its assigns, is entitled, subject to the terms set forth below, to
purchase from the Company at any time or from time to time before 5:00 p.m.
Pacific time, on September 5, 1998 (the "Expiration Date"), 200,000 fully
paid and nonassessable shares of Common Stock of the Company, as constituted on
September 5, 1997 at the purchase price per share of $14.00 and otherwise in
accordance with the terms hereof. The number and character of such shares of
Common Stock and the purchase price therefor are subject to adjustment as
provided below.
As used herein the following terms, unless the context otherwise
requires, have the following respective meanings:
(a) The term "Common Stock" shall mean the Common Stock, par value
$0.001 per share, of the Company, and any other securities or property of the
Company or of any other person (corporate or otherwise) which the holder of
this Warrant at any time shall be entitled to receive on the exercise hereof,
in lieu of or in addition to Common Stock, or which at any time shall be
issuable in exchange for or in replacement of Common Stock.
(b) The term "Company" includes any corporation which shall
succeed to or assume the obligations of the Company hereunder.
1
<PAGE> 2
(c) The term "Warrant" shall mean this Warrant.
1. Initial Exercise Date; Expiration. This Warrant may be
exercised at any time or from time to time. It shall expire at 5:00 p.m.,
Pacific time, on the earliest of (a) September 5, 1998, or (b) the
consolidation or merger of the Company with or into any other corporation or
the sale or other transfer in a single transaction or a series of related
transactions of all or substantially all of the assets of the Company, or any
other reorganization of the Company unless the stockholders of the Company
immediately prior to any such transaction are holders of a majority of the
voting securities of the surviving or acquiring corporation immediately
thereafter (and for purposes of this calculation equity securities which any
stockholder or the Company owned immediately prior to such merger or
consolidation as a stockholder of another party to the transaction shall be
disregarded).
2. Exercise of Warrant; Partial Exercise, This Warrant may be
exercised in full or in part by the holder hereof by surrender of this Warrant,
with the form of subscription attached hereto duly executed by such holder, to
the Company at its principal office, accompanied by payment, in cash or by
certified or official bank check payable to the order of the Company, of the
purchase price of the shares of Common Stock (or any shares of stock or other
securities at the time issuable upon exercise of this Warrant) to be purchased
hereunder. For any partial exercise hereof, the holder shall designate in the
subscription the number of shares of Common Stock (or any shares of stock or
other securities at the time issuable upon exercise of this Warrant) that it
wishes to purchase. On any such partial exercise, the Company at its expense
shall forthwith issue and deliver to the holder hereof a new warrant of like
tenor, in the name of the holder hereof, which shall be exercisable for such
number of shares of Common Stock (or any shares of stock or other securities at
the time issuable upon exercise of this Warrant) represented by this Warrant
which have not been purchased upon such exercise.
In lieu of exercising any portion of this Warrant, the holder
may at any time and from time to time elect to receive, without payment of cash
or other consideration, shares of Common Stock (or any shares of stock or other
securities at the time issuable upon exercise of this Warrant) equal to the
value of this Warrant (or portion hereof being canceled) by surrender of this
Warrant to the Company together with notice of such election. In such event
the Company shall issue to the holder a number of shares of the Company's
Common Stock (or any shares of stock or other securities at the time issuable
upon exercise of this Warrant) computed using the following formula:
X = Y(A-B)
-------
A
where: X = The number of shares of Common Stock (or any shares
of stock or other securities at the time issuable
upon exercise of this Warrant) to be issued to the
holder.
2
<PAGE> 3
Y = The number of shares of Common Stock (or any shares
of stock or other securities at the time issuable
upon exercise of this Warrant) purchasable under this
Warrant.
A = The fair market value of one share of the Company's
Common Stock (or any shares of stock or other
securities at the time issuable upon exercise of this
Warrant) as of the date of such notice of election,
B = The exercise price, as adjusted to the date of such
notice of election.
For the purposes of this Section 2, fair market value of the Company's
Common Stock (or any shares of stock or other securities at the time issuable
upon exercise of this Warrant) as of a particular date (the "Determination
Date") shall mean:
(i) If the Company's Common Stock (or any shares of stock
or other securities at the time issuable upon exercise of this Warrant) is
traded on an exchange or is quoted on the National Association of Securities
Dealers, Inc. Automated Quotation ("NASDAQ") National Market System, then the
closing or last sale price, respectively, reported for the business day
immediately preceding the Determination Date.
(ii) If the Company's Common Stock (or any shares of stock
or other securities at the time issuable upon exercise of this Warrant) is not
traded on an exchange or on the NASDAQ National Market System but is traded in
the over-the-counter market, then the mean of the closing bid and asked prices
reported for the business day immediately preceding the Determination Date.
(iii) Except as provided in paragraph (iv) below, if the
Company's Common Stock (or any shares of stock or other securities at the time
issuable upon exercise of this Warrant) is not publicly traded, then as
determined in good faith by the Company's Board of Directors upon a review of
relevant factors,
(iv) If the Determination Date is the date on which the
Company's Common Stock (or any shares of stock or other securities at the time
issuable upon exercise of this Warrant) is first sold to the public by the
Company in a firm commitment public offering under the Securities Act of 1933,
as amended, then the initial public offering price (before deducting
commissions, discounts or expenses) at which the Common Stock (or any shares of
stock or other securities at the time issuable upon exercise of this Warrant)
is sold in such offering. Notwithstanding the foregoing, this Warrant may not
be exercised without payment of cash or other consideration as provided above
if the Company determines in good faith that such exercise would have an
material adverse effect on the Company's results of operations or financial
condition with respect to accounting treatment or financial reporting.
3. When Exercise Effective. The exercise of this Warrant shall
be deemed to have been effected immediately prior to the close of business on
the business day on which this Warrant is surrendered to the Company as
provided in Section 2, and at such time the person in whose name any
certificate for shares of Common Stock (or any shares of stock or other
3
<PAGE> 4
securities at the time issuable upon exercise of this Warrant) shall be
issuable upon such exercise, as provided in Section 2, shall be deemed to be
the record holder of such Common Stock (or any shares of stock or other
securities at the time issuable upon exercise of this Warrant) for all
purposes.
4. Delivery on Exercise. As soon as practicable after the
exercise of this Warrant in full or in part, and in any event within twenty
(20) days thereafter, the Company at its expense (including the payment by it
of any applicable issue taxes) will cause to be issued in the name of and
delivered to the holder hereof, or as such holder may direct, a certificate or
certificates for the number of fully paid and nonassessable full shares of
Common Stock (or any shares of stock or other securities at the time issuable
upon exercise of this Warrant) to which such holder shall be entitled on such
exercise, together with cash, in lieu of any fraction of a share, equal to such
fraction of the current market value of one full share as determined in good
faith by the Board of Directors.
5. Adjustment of Purchase Price and Number of Shares. The
character of the shares of Common Stock issuable upon exercise of this Warrant
(or any shares of stock or other securities at the time issuable upon exercise
of this Warrant) and the purchase price therefor, are subject to adjustment
upon the occurrence of the following events:
5.1 Adjustment for Stock Splits, Stock Dividends,
Recapitalizations, etc. The exercise price of this Warrant and the number of
shares of Common Stock issuable upon exercise of this Warrant (or any shares of
stock or other securities at the time issuable upon exercise of this Warrant)
shall be appropriately adjusted to reflect any stock dividend, stock split,
combination of shares, reclassification, recapitalization or other similar
event affecting the number of outstanding shares of Common Stock (or such other
stock or securities). For example if there should be a 2-for-1 stock split,
the exercise price would be divided by two and such number of shares would be
doubled.
5.2 Adjustment for other Dividends and Distributions. In
case the Company shall make or issue, or shall fix a record date for the
determination of eligible holders entitled to receive, a dividend or other
distribution with respect to the Common Stock (or any shares of stock or other
securities at the time issuable upon exercise of the Warrant) payable in (i)
securities of the Company (other than shares of Common Stock) or (ii) assets
(excluding cash dividends paid or payable solely out of retained earnings),
then in each case, the holder of this Warrant on exercise hereof at any time
after the consummation, effective date or record date of such event, shall
receive, in addition to the Common Stock (or such other stock or securities)
issuable on such exercise prior to such date, the securities or such other
assets of the Company to which such holder would have been entitled upon such
date if such holder had exercised this Warrant immediately prior thereto (all
subject to further adjustment as provided in this Warrant).
5.3 Adjustment for Reclassification or Reorganization.
In case of any corporate reorganization or reclassification or change of the
outstanding securities of the Company, other than as described in the second
sentence of Section 1 above (any such transaction being hereinafter referred to
as a "Reorganization"), then, in each case, the holder of
4
<PAGE> 5
this Warrant, on exercise hereof at any time after the consummation or
effective date of such Reorganization (the "Effective Date"), shall receive, in
lieu of the Common Stock issuable on such exercise prior to the Effective Date,
the stock and other securities and property (including cash) to which such
holder would have been entitled upon the Effective Date if such holder had
exercised this Warrant immediately prior thereto (all subject to further
adjustment as provided in this Warrant).
5.4 Certificate as to Adjustments. In case of any
adjustment or readjustment in the price or kind of securities issuable on the
exercise of this Warrant, the Company will promptly give written notice thereof
to the holder of this Warrant in the form of a certificate, certified and
confirmed by an officer of the Company, setting forth such adjustment or
readjustment and showing in reasonable detail the facts upon which such
adjustment or readjustment is based.
6. No Impairment. The Company (a) will not increase the par
value of any shares of stock receivable on the exercise of this Warrant above
the amount payable therefor on such exercise, (b) will at all times reserve and
keep available a number of its authorized shares of Common Stock (or any shares
of stock or other securities at the time issuable upon exercise of this
Warrant), free from all preemptive rights therein, which will be sufficient to
permit the exercise in full of this Warrant, and (c) shall take all such action
as may be necessary or appropriate in order that all shares of Common Stock (or
any shares of stock or other securities at the time issuable upon exercise of
this Warrant) as may be issued pursuant to the valid exercise of this Warrant
will, upon issuance, be duly and validly issued, fully paid and nonassessable
and free from all taxes, liens and charges with respect to the issue thereof.
7. Notices of Record Date, etc. In the event of
(a) any taking by the Company of a record of the holders
of any class of securities for the purpose of determining the holders thereof
who are entitled to receive any dividend or other distribution, or any right to
subscribe for, purchase or otherwise acquire any shares of stock of any class
or any other securities or property, or to receive any other right, or
(b) any consolidation or merger of the Company with or
into any other corporation or the sale or other transfer in a single
transaction or a series of related transactions of all or substantially all of
the assets of the Company, or any other reorganization of the Company unless
the stockholders of the Company immediately prior to any such transaction are
holders of a majority of the voting securities of the surviving or acquiring
corporation immediately thereafter (and for purposes of this calculation equity
securities which any stockholder of the Company owned immediately prior to such
merger or consolidation as a stockholder of another party to the transaction
shall be disregarded), or
(c) any voluntary or involuntary dissolution, liquidation
or winding-up of the Company, or
(d) any proposed issue or grant by the Company of any
shares of stock of any class or any other securities, or any right or option to
subscribe for, purchase or otherwise acquire
5
<PAGE> 6
any shares of stock of any class or any other securities, then and in each such
event the Company will mail to the holder hereof a notice specifying (i) the
date on which any such record is to be taken for the purpose of such dividend,
distribution or right, and stating the amount and character of such dividend,
distribution or right, (ii) the date on which any such consolidation, merger,
sale or transfer of assets, reorganization, dissolution, liquidation or
winding-up is to take place, and the time, if any is to be fixed, as of which
the holders of record of Common Stock (or any shares of stock or other
securities at the time issuable upon the exercise of this Warrant) shall be
entitled to exchange their shares for securities or other property deliverable
on such consolidation, merger, sale or transfer of assets, reorganization,
dissolution, liquidation or winding-up, and (iii) the amount and character of
any-stock or other securities, or rights or options with respect thereto,
proposed to be issued or granted, the date of such proposed issue or grant and
the persons or class of persons to whom such proposed issue or grant is to be
offered or made. Such notice shall be mailed at least 20 days prior to the
date therein specified.
8. Exchange of Warrants. On surrender for exchange of this
Warrant, properly endorsed, to the Company, the Company at its expense will
issue and deliver to or on the order of the holder thereof a new Warrant of
like tenor, in the name of such holder or as such holder may direct, calling in
the aggregate on the face thereof for the number of shares of Common Stock (or
any shares of stock or other securities at the time issuable upon exercise of
this Warrant) called for on the face of the Warrant so surrendered.
9. Replacement of Warrants. On receipt by the Company of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of this Warrant and, in the case of any such loss, theft or
destruction of this Warrant, on delivery of an indemnity agreement reasonably
satisfactory in form and amount to the Company or, in the case of any such
mutilation, on surrender and cancellation of such Warrant, the Company at its
expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
10. Investment Intent. Unless a current registration statement
under the Securities Act of 1933, as amended, shall be in effect with respect
to the securities to be issued upon exercise of this Warrant, the holder
thereof, by accepting this Warrant, covenants and agrees that, at the time of
exercise hereof, and at the time of any proposed transfer of securities
acquired upon exercise hereof, such holder will deliver to the Company a
written statement that the securities acquired by the holder upon exercise
hereof are for the own account of the holder for investment and are not
acquired with a view to, or for sale in connection with, any distribution
thereof (or any portion thereof) and with no present intention (at any such
time) of offering and distributing such securities (or any portion thereof).
11. Transfer. Subject to the transfer conditions referred to in
the legend endorsed hereon, this Warrant and all rights hereunder are
transferable, in whole or in part, without charge to the holder hereof upon
surrender of this Warrant with a properly executed assignment (in the form
annexed hereto) at the principal office of the Company. Upon any partial
transfer, the Company will at its expense issue and deliver to the holder
hereof a new Warrant of like tenor, in the name of the holder hereof, which
shall be exercisable for such number of shares of Common
6
<PAGE> 7
Stock (or any shares of stock or other securities at the time issuable upon
exercise of this Warrant) which were not so transferred,
12. No Rights or Liability as a Stockholder. This Warrant does
not entitle the holder hereof to any voting rights or other rights as a
stockholder of the Company. No provisions hereof, in the absence of
affirmative action by the holder hereof to purchase Common Stock (or any shares
of stock or other securities at the time issuable upon exercise of this
Warrant), and no enumeration herein of the rights or privileges of the holder
hereof shall give rise to any liability of such holder as a stockholder of the
Company.
13. Notices. All notices referred to in this Warrant shall be in
writing and shall be delivered personally or by certified or registered mail,
return receipt requested, postage prepaid and will be deemed to have been given
when so delivered or mailed (i) to the Company, at its principal executive
offices and (ii) to the holder of this Warrant, at such holder's address as it
appears in the records of the Company (unless otherwise indicated by such
holder).
14. Payment of Taxes. All shares of Common Stock (or any shares
of stock or other securities at the time issuable upon exercise of this
Warrant) issued upon the valid exercise of this Warrant shall be validly
issued, fully paid and nonassessable, and the Company shall pay all taxes and
other governmental charges that may be imposed in respect to the issue or
delivery thereof.
15. Miscellaneous. This Warrant and any term hereof may be
changed, waived, discharged or terminated only by an instrument in writing
signed by the Company and the holder of this Warrant. This Warrant is being
delivered in the State of California and shall be governed by and construed and
enforced in accordance with the internal laws of the State of California
(without reference to any principles of the conflicts of laws). The headings
in this Warrant are for purposes of reference only, and shall not limit or
otherwise affect any of the terms hereof.
Dated: September 5, 1997
SCM MICROSYSTEMS, INC.
By:
----------------------------------
Steve Humphreys, President
7
<PAGE> 8
FORM OF SUBSCRIPTION
(To be signed only on exercise of warrant)
TO: SCM Microsystems, Inc.
The undersigned, the holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, __________* shares of Common Stock of SCM Microsystems,
Inc. and herewith makes payment of $_______ therefor, and requests that the
certificates for such shares be issues in the name of, and delivered to
_____________________________________ whose address is _______________________
_________________________________________________.
_______________________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant)
_______________________________________
_______________________________________
(Address)
Dated:
_______________________________________
* Insert here the number of shares as to which the Warrant is being exercised.
<PAGE> 9
FORM OF ASSIGNMENT
(To be signed only on transfer of Warrant)
For value received, the undersigned hereby sells, assigns, and
transfers unto _________________ the right represented by the within Warrant to
purchase shares of Common Stock of SCM Microsystems, Inc., to which the within
Warrant relates, and appoints __________________ Attorney to transfer such
right on the books of SCM Microsystems, Inc., with full power of substitution
in the premises.
_______________________________________
(Signature must conform in all respects
to name of holder as specified on the
face of the Warrant)
_______________________________________
_______________________________________
(Address)
Dated:
_______________________________________
<PAGE> 1
EXHIBIT 10.36
WAIVER AND AMENDMENT TO AMENDED
AND RESTATED STOCKHOLDERS' AGREEMENT
This Waiver and Amendment is entered into as of this 5th day of September,
1997, by and among SCM Microsystems, Inc., a Delaware corporation (the
"Company") and certain of those parties to the Amended and Restated
Stockholders' Agreement, dated April 11, 1997 (the "Stockholders' Agreement"),
listed in Exhibit A hereto (the "Existing Stockholders and Note Holders"). All
capitalized terms not otherwise defined herein shall have the meaning ascribed
to them in the Stockholders' Agreement.
RECITALS
1. The Stockholders' Agreement provides at Section 2 thereof for
certain rights of first offer in favor of the Existing Stockholders and Note
Holders of the Company with respect to proposed new issues by the Company of
its equities securities (or rights to acquire such equity securities).
2. The Company is contemplating the offer, sale and issuance to
Gemplus, a legal entity under the laws of France ("Gemplus"), of (i) 200,000
shares of Common Stock of the Company at a purchase price of $9.00 per share,
and (ii) Warrants to purchase up to an additional 200,000 shares of Common Stock
of the Company at an exercise price of $13.00 per share and an additional
200,000 shares of Common Stock at an exercise price of $14.00 per share
(together, the "Warrants"). To the extent they are then unexercised, the
Warrants will expire one year after issuance or upon any earlier merger, sale or
other change of voting control of the Company. In connection with such
offering, the Company and the Existing Stockholders and Note Holders desire to
waive certain rights of first offer set forth in Section 2 of the Stockholders'
Agreement as set forth herein.
3. In addition, the Company and the Existing Stockholders and
Note Holders desire to amend the Stockholders' Agreement in order to extend to
Gemplus substantially the same or similar rights and benefits of the Existing
Stockholders and Note Holders under the Stockholders' Agreement with respect to
the Common Stock and Warrants to be purchased by Gemplus, and the Common Stock
issuable upon exercise of such Warrants.
4. The parties have agreed to the terms of this waiver and
amendment in consideration for the mutual promises, covenants and agreements
contained herein.
1
<PAGE> 2
WAIVER AND AMENDMENT
1. That certain right of first offer set forth in Section 2 of
the Stockholders' Agreement is hereby waived as to all Existing Stockholders
and Note Holders with respect to the issuance and sale to Gemplus of (i) the
Gemplus Shares (as defined below); and (ii) the Gemplus Warrants (as defined
below), and the Common Stock issuable or issued upon exercise thereof. The
Company hereby consents to such waiver.
2. Upon the closing of the sale of the Gemplus Shares and Gemplus
Warrants to Gemplus (the "Closing"), and provided Gemplus agrees in writing to
become bound by all terms and conditions thereof, Gemplus shall be made a party
to the Stockholders' Agreement.
3. In addition, effective upon the Closing, the Existing
Stockholders and Note Holders consent to and do hereby amend the Stockholders'
Agreement as follows:
(a) the definitions of "Existing Stockholders" and
"Stockholders" in the Stockholders Agreement shall be deemed to include
Gemplus;
(b) Section 1.1(e) shall be amended to read in its
entirety:
"(e) The term "Registrable Securities" means all
of the following to the extent the same have not been resold to the
public: (i) shares of Common Stock of the Company held by, or
issuable upon conversion of the Preferred Stock of the Company held by
the Existing Stockholders, the Note Holders and the Purchasers as of
the date of this Agreement, (ii) the Debtholder Shares, (iii) the
Warrantholder Shares, (iv) the Gemplus Shares, (v) all shares of
Common Stock and other securities issued or issuable in respect of the
Common Stock referred to in clauses (i), (ii), (iii) and (iv) by
reason of a stock split, stock dividend, stock combination,
recapitalization or the like."
(c) Section 1.1(i) shall be amended to read in its
entirety:
"(i) The term "Shares" shall mean the shares of
Common Stock and Preferred Stock of the Company, and in any provision
where the context requires a vote or counting of Shares, the shares of
Preferred Stock shall be counted based upon the number of shares of
Common Stock into which such shares of Preferred Stock are then
convertible, and the shares of Common Stock shall be counted as
including the number of shares of Common Stock for which the Gemplus
Warrants are then exercisable."
(d) New section 1.1(k) shall be added which shall read in
its entirety:
"(k) The term "Gemplus" shall mean Gemplus, a legal
entity organized under the laws of France."
(e) New Section 1.1(l) shall be added which shall read in
its entirety:
2
<PAGE> 3
"(l) The term "Gemplus Shares" shall mean (i)
200,000 shares of Common Stock of the Company issued to Gemplus, (ii)
up to 400,000 shares of Common Stock of the Company issuable to
Gemplus upon exercise of the Gemplus Warrants, pursuant to that
certain Common Stock and Warrant Purchase Agreement dated as of
September 5, 1997 between the Company and Gemplus (the "Gemplus
Agreement) and (iii) all shares of Common Stock and other securities
issued or issuable in respect of the Common Stock referred to in
clauses (i) and (ii) by reason of a stock split, stock dividend, stock
combination, recapitalization or the like. For purposes of
calculating the number of Gemplus Shares under any provision of this
Agreement, the Gemplus Warrants shall be deemed to have been exercised
in full and the shares of Common Stock of the Company issued
thereunder to Gemplus.
(f) New Section 1.1 (m) shall be added to read in its
entirety:
"(m) The term "Gemplus Warrants" shall mean (i) a
Warrant to purchase 200,000 shares of the Common Stock of the Company
at an exercise price of $13.00 per share, and (ii) a Warrant to
purchase 200,000 shares of the Common Stock of the Company at an
exercise price of $14.00 per share, issued to Gemplus pursuant to the
Gemplus Agreement and evidenced by the Warrant instruments of even
date therewith.
4. The Company hereby agrees to such amendments to the
Stockholders' Agreement.
5. In accordance with Section 6.1 of the Stockholders' Agreement,
this Waiver and Amendment shall be effective upon its execution and delivery by
the Company and Existing Stockholders and Note Holders holding a majority of
the Registrable Securities (as defined in the Stockholders' Agreement).
COMPANY:
SCM MICROSYSTEMS, INC.,
a Delaware corporation
By:
---------------------------
Steve Humphreys, President
3
<PAGE> 4
SCM MICROSYSTEMS, INC.
COUNTERPART SIGNATURE PAGE
TO WAIVER AND AMENDMENT TO
AMENDED AND RESTATED STOCKHOLDERS' AGREEMENT
SEPTEMBER 5, 1997
"HOLDER"
-------------------------
-------------------------------------
Print Name of Holder
By:
----------------------------------
Signature
-------------------------------------
Print Name of Signatory
-------------------------------------
Print Title
Address: ---------------------------
---------------------------
---------------------------
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT AND REPORT ON SCHEDULE
The Board of Directors
SCM Microsystems, Inc.:
The audits referred to in our report dated March 31, 1997, except as to Note 10
which is as of September 5, 1997 included the related financial statement
schedule as of December 31, 1996, and for each of the years in the three-year
period ended December 31, 1996, included in the registration statement. This
financial statement schedule is the responsibility of the Company's management.
Our responsibility is to express an opinion on this financial statement schedule
based on our audits. In our opinion, such financial statement schedule, when
considered in relation to the basic consolidated financial statements taken as a
whole, presents fairly, in all material respects, the information set forth
therein.
We consent to the use of our reports included herein and to the reference to our
firm under the headings "Selected Consolidated Financial Data" and "Experts" in
the registration statement.
KPMG Peat Marwick LLP
Palo Alto, California
September 5, 1997
