<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 25, 1997
REGISTRATION NO. 333-29073
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SCM MICROSYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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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:
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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 delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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==================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
AMOUNT OFFERING AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) FEE
- --------------------------------------------------------------------------------------------------
Common Stock, $0.001 par
value....................... 3,875,500 shares $13.00 $50,381,500 $15,268(3)
==================================================================================================
</TABLE>
(1) Includes 505,500 shares issuable upon the exercise of the Underwriters'
over-allotment options.
(2) Estimated solely for the purpose of computing the amount of the registration
fee pursuant to Rule 457.
(3) $9,583 of this fee was previously paid to the Securities and Exchange
Commission in connection with initial filing of this Registration Statement
on June 12, 1997.
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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
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 August 25, 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 (the "U.S. Offering") and 750,000 shares are
being offered in a concurrent international offering outside the United States
(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.
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==========================================================================================================
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> 3
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> 4
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") and (ii) that the Underwriters' over-allotment options
are not exercised.
THE COMPANY
SCM Microsystems designs, develops and manufactures hardware, firmware and
software products for data security and access control applications. 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'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 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 market by:
(i) 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; (ii) employing an open-systems, remotely
upgradeable architecture that provides compatibility across a range of hardware
platforms and software environments; and (iii) including in certain of its smart
card reader products encryption/decryption capabilities that address the
inherent speed and performance limitations of smart cards. The Company addresses
the needs of the DVB 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 "NRSS-B" standards
promulgated by the National Renewable Security Standards Committee (the "NRSS
Committee") of the Society of Cable and Telecommunication Engineers; (ii)
include real time, high-bandwidth 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.
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
3
<PAGE> 5
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 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
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Common Stock offered by the Company........... 3,250,000 shares
Common Stock offered by Selling 120,000 shares
Stockholders................................
---------------------------------------------
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 9,915,243 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>
- ---------------
(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) 351,500 shares of Common Stock issuable upon
exercise of stock options granted subsequent to June 30, 1997 at an exercise
price of $9.50 per share; and (iii) 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. 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> 6
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
------- ------- ------- ------- ------- ------
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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>
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<CAPTION>
JUNE 30, 1997
--------------------------
CONSOLIDATED BALANCE SHEET DATA: ACTUAL AS ADJUSTED(3)
------- --------------
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Cash and cash equivalents......................................... $10,942 $ 43,705
Working capital................................................... 13,694 48,794
Total assets...................................................... 20,665 53,428
Redeemable convertible preferred stock............................ 21,781 --
Total stockholders' equity (deficit).............................. (7,223) 49,658
</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, and the Automatic Conversion. See "Use of Proceeds" and
"Capitalization."
5
<PAGE> 7
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 the timing of recognition of
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 products to the U.S. government. In addition, a significant portion of
the Company's net sales are generated during the fourth quarter as a result of
the year-end holiday buying season. The Company's dependence on fourth quarter
results is expected to increase to the extent that net sales of its DVB products
increase.
Initial sales of the Company's products to a new customer typically involve
a relatively lengthy 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> 8
Based upon the factors enumerated above, the Company believes that its
operating results may vary significantly in future periods and that
period-to-period comparisons should not be relied upon as 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, particularly smart card-based readers and
DVB-CAMs. 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 targeted to provide 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
standard. 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."
7
<PAGE> 9
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
demonstrate such advantages, there can be no assurance that OEMs will elect to
incorporate the Company's products into their current or future systems, or if
they do, that related system and manufacturing requirements can or will be met.
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 supplies to the DoD. Absent significant future revenues
from alternative sources, 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 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
8
<PAGE> 10
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. In some cases, these vendors also
support the Company's products and those of its competitors. 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
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 and changes in customer requirements, or may be able 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; 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 12 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 headquarters are located in Los Gatos, California and
Pfaffenhofen, Germany, and the Company's 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. 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's information systems to be consolidated, to function in
9
<PAGE> 11
a complex environment and to be fully scalable. 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.
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. 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
10
<PAGE> 12
products. Although the Company believes it will be able to rely on other
manufacturing sources in order to meet its near-term capacity 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.
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 corporation, and mechanical
components for use in its smart card reader product exclusively from Stocko, a
German corporation. The Company's reliance on its 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 new and enhanced
products on a timely and continuous basis 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."
11
<PAGE> 13
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 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. Although the Company does not currently
engage in hedging activities with respect to its foreign currency exposure, the
Company may evaluate hedging strategies intended to reduce such exposure in the
future. 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 would 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.
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 Mr. LeRoux 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
12
<PAGE> 14
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
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 business and 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.
The Company has no present plans, agreements or commitments with respect to any
material acquisitions of other businesses, products or technologies. 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
22.5% of the Company's outstanding shares of Common Stock. Accordingly, these
stockholders, acting together, will continue to be able to exert significant
influence over all 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 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 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.
13
<PAGE> 15
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 make a Public Offer to inform the German regulatory authorities and
the public of the offer, provide certain disclosure to the target company's
stockholders, generally treat stockholders equally in an offer, and 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.
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. 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. See
"Underwriting."
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 9,915,243 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 6,545,243 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
10,000 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
3,745,044 shares will become eligible for sale pursuant to Rule 144 or Rule 701
under the Securities Act, and 2,732,581 additional shares will become eligible
for sale thereafter under Rule 144. See "Shares Eligible for Future Sale."
Holders of an aggregate of 6,078,947 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 $6.99 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> 16
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
$23.0 million for the 6,545,243 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 $55.6 million based on the assumed initial
public offering price. See "Dilution" and "Principal and Selling Stockholders."
15
<PAGE> 17
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 estimated
underwriting discount and 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 has a $2.5 million revolving line of credit
with a U.S. bank expiring in August 1997. Under such line of credit, the Company
must 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> 18
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 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 9,915,243 shares as adjusted(2)................. 2 10
Additional paid-in capital........................................... 2,446 59,320
Deferred compensation................................................ (188) (188)
Accumulated deficit.................................................. (8,903) (8,903)
Currency translation adjustment...................................... (581) (581)
------- -------
Total stockholders' equity (deficit).............................. (7,223) 49,658
------- -------
Total capitalization......................................... $16,895 $49,658
======= =======
</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) 351,500 shares of Common Stock issuable upon
exercise of stock options granted subsequent to June 30, 1997 at an exercise
price of $9.50 per share; and (iii) 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. See "Management -- Employee Stock Plans"
and Notes 4 and 11 of Notes to Consolidated Financial Statements.
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<PAGE> 19
DILUTION
The pro forma net tangible book value of the Company as of June 30, 1997
was $14,558,000 or $2.18 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. 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 $49,658,000 or $5.01 per share. This
represents an immediate increase in net tangible book value to existing
stockholders of $2.83 per share and an immediate dilution to new investors of
$6.99 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....... $2.18
Increase per share attributable to new investors............ 2.83
-----
Pro forma net tangible book value per share after this
offering.................................................... 5.01
------
Dilution per share to new investors........................... $ 6.99
======
</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).................. 6,665,243 67.2% $22,975,000 37.1% $ 3.45
New investors(1).......................... 3,250,000 32.8% 39,000,000 62.9% 12.00
--------- ----- ----------- -----
Total........................... 9,915,243 100.0% $61,975,000 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) Sales by Selling Stockholders in this offering will reduce the number of
shares of Common Stock held by existing stockholders to 6,545,243 shares or
approximately 66% 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 34% 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 granted options to purchase an aggregate of 351,500 shares of Common
Stock at an exercise price of $9.50 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> 20
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)......................... (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,
------------------------------------------- JUNE 30,
1993 1994 1995 1996 1997
------- ------- ------- ------- --------
(IN THOUSANDS)
<S> <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> 21
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 manufactures hardware, firmware and
software products for data security and access control applications. The Company
sells security and access products to OEM computer, telecommunication and DVB
component and system manufacturers. The Company's objective is to leverage its
expertise in PCMCIA 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 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 headquarters
are located in Los Gatos, California, its international headquarters are located
near Munich, Germany and its 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
20
<PAGE> 22
ended December 31, 1996 and the six months ended June 30, 1997, the Company's
sales denominated in U.S. dollars represented approximately 76.3% and 65.0% of
the Company's total net sales, respectively. Although the Company does not
currently engage in risk management activities with respect to its foreign
currency exposure, the Company may evaluate hedging strategies intended to
reduce such exposure in the future. 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."
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 expense................................... (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>
21
<PAGE> 23
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 for the
first six months of 1997, compared to $1.2 million in the first six months of
1996, an increase of 20.2%. This increase 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 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 both 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, but to generally
remain consistent with the 1996 results as a percentage of net sales.
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 but that such expenses will generally remain relatively
consistent with the 1996 results as a percentage of net sales.
Net Interest Income (Expense). Net interest income (expense) 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, resulting in a reduction
22
<PAGE> 24
of debt and corresponding interest expense and 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
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 for 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 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.
23
<PAGE> 25
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 Expense. 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 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, an increase of 20.4%. This increase in absolute amount 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 Expense. 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.
24
<PAGE> 26
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
--------- -------- --------- -------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
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)......................... (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)......................... (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>
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<PAGE> 27
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 the timing of
recognition of 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.
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<PAGE> 28
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 $318,000 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 $2.7 million).
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. In addition, the
Company has a $2.5 million revolving line of credit with a U.S. bank expiring in
August 1997. The U.S. line of credit bears interest at the rate of prime plus
1.0% (9.25% at June 30, 1997). Borrowings under the U.S. line of credit are
secured by all of the Company's assets. At June 30, 1997, no amounts were
outstanding under the U.S. line of credit. The Company is in the process of
renegotiating and extending its U.S. line of credit, and believes it will be
able to do so on terms substantially equivalent to or more favorable than the
terms of the existing 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.
27
<PAGE> 29
BUSINESS
SCM Microsystems designs, develops and manufactures hardware, firmware and
software products for data security and access control applications. The Company
sells security and access products to OEM computer, telecommunication and DVB
component and system manufacturers. The Company's objective is to leverage its
expertise in PCMCIA 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 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 and 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
that enterprises seek solutions which will allow them to expand access to data
while maintaining adequate security.
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<PAGE> 30
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.
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
29
<PAGE> 31
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 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.
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<PAGE> 32
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 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 for: (i) broadcasters to upgrade systems
installed in their customers' homes
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<PAGE> 33
by downloading new operating system software onto the universal set-top box,
(ii) 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) 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 and
NRSS-B 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.
THE SCM MICROSYSTEMS SOLUTION
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
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<PAGE> 34
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,
which 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' subscription desires 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 developments with properly tailored products, this upgradeable
architecture protects the investments in smart card hardware.
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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 has successfully had the DVB-CI
specification adopted as the standard by the PCMCIA. The Company intends to
maintain an active role in these and other appropriate 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 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.
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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:
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRODUCT CATEGORY FEATURES
<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>
- --------------------------------------------------------------------------------
35
<PAGE> 37
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRODUCT CATEGORY FEATURES
<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 any 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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commerce. Because of its encryption capabilities, the reader is particularly
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
established by the DVB Project. 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 who have purchased in excess of $300,000 of the
Company's products during the year ended December 31, 1996.
<TABLE>
<S> <C>
---------------------------------------------------------------------------------
OEM PRODUCTS PURCHASED
---------------------------------------------------------------------------------
Bull Smart Card Readers; DVB Modules
Dell PC Card Adapters
France Telecom Smart Card Readers; DVB Modules
Gateway PC Card Adapters
IBM PC Card Adapters
Kirch Group (BetaDigital) DVB Modules
Packard Bell PC Card Adapters
Schlumberger Smart Card Readers
Siemens/Nixdorf PC Card Adapters; Smart Card Readers
Sun Microsystems 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
card. Kirch also can download completely new services to the modules, permitting
new capabilities, such as
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<PAGE> 40
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.
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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<PAGE> 41
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 from technology development revenues received from OEM customers in
connection with design and development of application specific products. The
Company recognized $562,000, $543,000 and
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<PAGE> 42
$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.
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. Although the Company believes it will be
able to rely on other manufacturing sources in order to meet its near-term
capacity requirements, there can be no assurance in the future 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 throughout the production process. Finally, 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 its 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 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
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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, (iii) Gemplus, Hitachi and
Toshiba 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 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 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 and 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 support standards and
interoperability, technical features, ease of use, quality/reliability, level of
security, 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 incorporate these factors into its
products and to compete against current or future competitors 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. 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
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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
The Company is not party to any material legal proceedings at this time.
However, 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. In an unrelated context, Gemplus 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 Gemplus' stated licensing position, the matter can be resolved
without a material adverse effect on the Company's business and operating
results.
43
<PAGE> 45
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................... 47 Chairman of the Board
Steven Humphreys................... 35 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.................. 37 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....................... 36 Director
Randall Lunn(2).................... 47 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.
44
<PAGE> 46
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 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.
45
<PAGE> 47
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
46
<PAGE> 48
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($) OPTIONS(#) COMPENSATION($)(2)
- ---------------------------------------- --------- -------- ------------ ------------------
<S> <C> <C> <C> <C>
Robert Schneider........................ 154,800 63,000 50,576 1,935
Managing Director of German subsidiary
Steven Humphreys(1)..................... 76,064 -- 276,570 100
President and Chief Executive Officer
Bernd Meier............................. 154,800 99,000 201,025 1,935
Chief Operations Officer and Managing
Director of German subsidiary
Nicholas Efthymiou...................... 100,001 24,625 75,544 240
Vice President, U.S. Sales and
Business Development
</TABLE>
- ---------------
(1) Mr. Humphreys began working at the Company in August 1996.
(2) Represents life insurance premiums.
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................ 50,576 7% $0.10 7/7/2006 3,181 8,061
Steven Humphreys................ 276,570 38% 0.10 7/7/2006 17,393 44,078
Bernd Meier..................... 201,025 28% 0.10 7/7/2006 12,642 32,038
Nicholas Efthymiou.............. 75,544 10% 0.10 7/7/2006 4,751 12,040
</TABLE>
- ---------------
(1) Options generally vest as to 25% of the shares one year from the date of
grant and monthly thereafter for the succeeding 36 months. Options may
generally be exercised ahead of vesting, subject to a right of the Company
to repurchase the unvested portion of the shares if the optionee's status as
an employee or consultant is terminated or upon the optionee's death or
disability prior to the shares vesting.
(2) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by rules of the Securities and Exchange Commission and do not
represent the Company's estimate or projection of the Company's future
Common Stock prices. The actual value realized may be greater or less than
the potential realizable values set forth in the table.
47
<PAGE> 49
Year-End Option Values. The following table sets forth, for each of the
Named Executive Officers, the year-end value of unexercised options as of
December 31, 1996:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE(1) OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY
AT YEAR-END(#): OPTIONS AT YEAR-END($):
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE(2)
- ----------------------------------------------- ------------------------- ----------------------------
<S> <C> <C>
Robert Schneider............................... 88,988/ -- 185,095/ --
Steven Humphreys............................... -- /276,570 -- /575,266
Bernd Meier.................................... 239,437/ -- 498,029/ --
Nicholas Efthymiou............................. 88,348/ -- 183,734/ --
</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
48
<PAGE> 50
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
49
<PAGE> 51
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.
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 $5.72
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.
50
<PAGE> 52
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
OFFERINGS(1) OFFERING(1)
--------------------- SHARES ---------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- --------------------------------------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
Telenor Venture AS..................... 674,965 10.1% -- 674,965 6.8%
P.O. Box 6701, St. Olavs plass
N-0130 Oslo, Norway
(APM) AlpinvestInternational B.V.(2)... 784,128 11.8 -- 784,128 7.9
Gooimeer 3
P.O. Box 5073
1410 AB Naarden, The Netherlands
Robert Schneider(3).................... 686,944 10.3 80,000 606,944 6.1
c/o SCM Microsystems GmbH
Luitpoldstrasse 6
D-85276 Pfaffenhofen
Germany
TVM Techno Venture Management 667,857 10.0 -- 667,857 6.7
GmbH(4)..............................
c/o Friedrich Bornikoel
Tolzerstrasse 12A
82031 Grunwald
Germany
Bernd Meier(5)......................... 621,002 9.3 40,000 581,002 5.9
c/o SCM Microsystems GmbH
Luitpoldstrasse 6
D-85276 Pfaffenhofen
Germany
Vertex Investment (II) Ltd.(6)......... 580,187 8.7 -- 580,187 5.8
83, Science Park Drive
#01-01/02
Singapore 0511
Singapore
Intel Corporation...................... 349,650 5.2 -- 349,650 3.5
c/o Laila Partridge
2200 Mission College Boulevard
Santa Clara, CA 95052
Steven Humphreys(7).................... 276,570 4.0 -- 276,570 2.7
Nicholas Efthymiou(8).................. 219,591 3.3 -- 219,591 2.2
Friedrich Bornikoel(9)................. 677,023 10.1 -- 677,023 6.8
Bruce Graham(10)....................... 2,917 -- -- 2,917 --
Randall Lunn(11)....................... 670,774 10.1 -- 670,774 6.8
Poh Chuan Ng(12)....................... 2,917 -- -- 2,917 --
Andrew Vought(13)...................... 101,544 1.5 -- 101,544 1.0
All directors and executive officers as
a group (13 persons)(14)............. 2,419,206 34.6% 120,000 2,299,206 22.5%
</TABLE>
- ---------------
(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
51
<PAGE> 53
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) 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.
(8) Includes 131,243 shares held by Bernd Meier in trust for the benefit of Mr.
Efthymiou.
(9) 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.
(10) Includes options to purchase 2,917 shares of Common Stock exercisable
within 60 days of September 30, 1997.
(11) 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 2,917shares 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.
(12) Includes options to purchase 2,917 shares of Common Stock exercisable
within 60 days of September 30, 1997.
(13) 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.
(14) 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, 7, 8, 9, 10, 11, 12 and 13 above.
52
<PAGE> 54
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 6,665,243 shares of Common Stock
outstanding (after giving effect to the conversion of all Preferred Stock into
Common Stock) 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 189,191 shares of Common Stock at an
exercise price of $5.72 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.
53
<PAGE> 55
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 public of
the offer, provide certain disclosure to the target Company's stockholders,
generally treat stockholders equally in an offer, and 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.
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 6,078,947 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 First
National Bank of Boston.
54
<PAGE> 56
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, the Company will have outstanding
9,915,243 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 6,545,243
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 10,000 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 3,745,044 shares will become eligible for sale pursuant to Rule
144 or Rule 701 under the Securities Act ("Rule 701") and 2,732,581 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,
6,398,224 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.
55
<PAGE> 57
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") named
below, and each of the U.S. Underwriters, for whom Cowen & Company and Hambrecht
& Quist LLC are acting as representatives (the "U.S. Representatives"), have
severally agreed to purchase from the Company, the respective number of shares
of Common Stock set forth opposite the name of such U.S. Underwriter below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------------------------------------------------------------ ---------
<S> <C>
Cowen & Company...................................................
Hambrecht & Quist LLC.............................................
---------
Total................................................... 3,370,000
=========
</TABLE>
The U.S. Underwriting Agreement provides that the obligations of the U.S.
Underwriters are subject to certain conditions precedent and that the U.S.
Underwriters are committed to purchase all of the shares of Common Stock offered
hereby (other than those covered by the over-allotment option described below)
if any such shares are purchased.
The U.S. Underwriters propose to offer the shares of Common Stock directly
to the public at the public initially 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 U.S. 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 U.S. Representatives.
The Company and the Selling Stockholders have entered into an underwriting
agreement (the "International Underwriting Agreement") with the underwriters of
the international offering (the "International Underwriters") providing for the
concurrent offer and sale of 750,000 shares of Common Stock in an international
offering outside the United States. The offering price and aggregate
underwriting discounts and commissions per share for the two offerings are
identical. The completion of the offering made hereby is a condition to the
completion of the international offering, and vice versa. The representative of
the International Underwriters is Westdeutsche Landesbank Girozentrale (the
"International Representative").
Pursuant to an Agreement between the U.S. and International Underwriters
(the "Agreement Between") relating to the two offerings, each of the U.S.
Underwriters named herein has agreed that, as a part of the distribution of the
shares offered hereby and subject to certain exceptions, it will offer, sell or
deliver the shares of Common Stock, directly or indirectly, only in the United
States of America (including the States and the District of Columbia), its
territories, its possessions and other areas subject to its jurisdiction (the
"United States") and to U.S. persons, which term shall mean, for purposes of
this paragraph: (a) any individual who is a resident of the United States or (b)
any corporation, partnership or other entity organized in or under the laws of
the United States or any political subdivision thereof and whose office most
directly involved with the purchase is located in the United States. Each of the
International Underwriters has agreed pursuant to the Agreement Between that, as
a part of the distribution of the shares offered as a part of the international
offering and subject to certain exceptions, it will (i) not, directly or
indirectly, offer, sell or deliver shares of Common Stock (a) in the United
States or to any U.S. persons or (b) to any person who it believes intends to
reoffer, resell or deliver the shares in the United States or to any U.S.
persons and (ii) cause any dealer to whom it may sell such shares at any
concession to agree to observe a similar restriction.
56
<PAGE> 58
Pursuant to the Agreement Between, sales may be made between the U.S.
Underwriters and the International Underwriters 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 table, 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 U.S. and International
Underwriters against certain liabilities, including liabilities under the
Securities Act, and to contribute to payments the U.S. and International
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 U.S. and International 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 U.S. 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 U.S. Underwriters to reduce a short
position incurred by the U.S. Underwriters in connection with the offering. A
"penalty bid" is an arrangement permitting the U.S. Underwriters to reclaim the
selling concession otherwise accruing to a U.S. Underwriter or syndicate member
in connection with the offering if the Common Stock originally sold by such U.S.
Underwriter or syndicate member is purchased by the U.S. Underwriters in
syndicate covering transactions, in stabilization transactions or otherwise. The
U.S. 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 U.S. 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.
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
57
<PAGE> 59
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.
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.
58
<PAGE> 60
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> 61
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 August 11, 1997
F-2
<PAGE> 62
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; 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> 63
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> 64
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> 65
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> 66
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, Inc. (the Company) designs, develops and manufactures
hardware, firmware and software products for data security and access control
applications. The Company offers products that address the needs of the
enterprise data security market, digital video broadcasting market and PCMCIA
peripheral products. The Company currently sells its products to a number of OEM
customers. The Company is headquartered in California and maintains
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> 67
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> 68
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> 69
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> 70
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> 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.)
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> 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.)
- 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 7.55
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> 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.)
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) (1,102)
</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> 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.)
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> 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.)
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> 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.)
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
On April 28, 1997, a third party served the Company with a complaint
alleging that certain of the Company's products infringe certain claims of a
French patent held by the third party. While the outcome of any litigation is
uncertain, management of the Company believes that, based upon the defenses
available to
F-17
<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 and the third party's stated licensing position, the matter can be
resolved without material adverse effect on the Company's results of operations.
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> 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.)
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> 79
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 29
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 32
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> 80
============================================================
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............................ 15
Dividend Policy............................ 15
Capitalization............................. 16
Dilution................................... 17
Selected Consolidated Financial Data....... 18
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................... 19
Business................................... 27
Management................................. 43
Certain Transactions....................... 49
Principal and Selling Stockholders......... 50
Description of Capital Stock............... 52
Shares Eligible for Future Sale............ 53
Underwriting............................... 55
Legal Matters.............................. 57
Experts.................................... 57
Additional Available Information........... 57
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> 81
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> 82
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 Underwriting Agreement...................................... 1.1
Form of Amended and Restated Certificate of Incorporation prior to
completion of this offering....................................... 3.1
Form of 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
From January 1, 1994 through August 22, 1997 the Registrant has issued and
sold the following securities:
(i) 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; and
(ii) 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.
The issuances referred to in paragraph (i) 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 Underwriting Agreement.
3.1* Third Amended and Restated Certificate of Incorporation of Registrant to be
effective prior to the completion of this offering.
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.
</TABLE>
II-2
<PAGE> 83
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ----------------------------------------------------------------------------
<S> <C>
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 Intentionally omitted.
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.
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.
(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.
II-3
<PAGE> 84
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> 85
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 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 25th day of
August 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. 1 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 August 25, 1997
- ----------------------------------------------- Executive Officer
Steven Humphreys (Principal Executive
Officer) and Director
/s/ JOHN NIEDERMAIER Vice President, Finance August 25, 1997
- ----------------------------------------------- and Chief Financial
John Niedermaier Officer (Principal
Financial and Accounting
Officer)
/s/ ROBERT SCHNEIDER* Chairman of the Board August 25, 1997
- -----------------------------------------------
Robert Schneider
/s/ BERND MEIER* Chief Operations Officer August 25, 1997
- ----------------------------------------------- and Director
Bernd Meier
/s/ FRIEDRICH BORNIKOEL* Director August 25, 1997
- -----------------------------------------------
Friedrich Bornikoel
/s/ BRUCE GRAHAM* Director August 25, 1997
- -----------------------------------------------
Bruce Graham
/s/ RANDALL LUNN* Director August 25, 1997
- -----------------------------------------------
Randall Lunn
/s/ POH CHUAN NG* Director August 25, 1997
- -----------------------------------------------
Poh Chuan Ng
/s/ ANDREW VOUGHT* Director August 25, 1997
- -----------------------------------------------
Andrew Vought
*By: /s/ JOHN NIEDERMAIER
- -----------------------------------------------
John Niedermaier
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 86
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> 87
EXHIBITS INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ----------------------------------------------------------------------------
<S> <C>
1.1** Form of Underwriting Agreement
3.1* Third Amended and Restated Certificate of Incorporation of Registrant to be
effective prior to the completion of this offering
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
</TABLE>
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ----------------------------------------------------------------------------
<S> <C>
10.20 Intentionally omitted
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
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 4.1
[STANDARD FORM OF STOCK CERTIFICATE]
<PAGE> 1
WILSON SONSINI GOODRICH & ROSATI
PROFESSIONAL CORPORATION
JOHN ARNOT WILSON
RETIRED
650 PAGE MILL ROAD
PALO ALTO, CALIFORNIA 94304-1050
TELEPHONE 650-493-9300 FACSIMILE 650-493-6811
EXHIBIT 5.1
August 22, 1997
SCM Microsystems, Inc.
131 Albright Way
Los Gatos, California 95032
RE: REGISTRATION STATEMENT ON FORM S-1
Ladies and Gentlemen:
We have examined the Registration Statement on Form S-1, filed by you
with the Securities and Exchange Commission (the "Commission") on August 22,
1997 (the "Registration Statement"), in connection with the registration under
the Securities Act of 1933, as amended, of up to 3,370,000 shares of your Common
Stock, par value $0.001 per share (the "Shares"). The Shares include an over-
allotment option granted by the Company to the Underwriters in the offering for
resale to the public as described in the Registration Statement. As your counsel
in connection with this transaction, we have examined the proceedings taken and
are familiar with the proceedings proposed to be taken by you in connection with
the sale and issuance of the Shares.
It is our opinion that upon conclusion of the proceedings being taken
or contemplated by us, as your counsel, to be taken prior to the issuance of the
Shares, and upon your completion of the proceedings being taken in order to
permit such transactions to be carried out in accordance with the securities
laws of the various states where required, the Shares, when issued and sold in
the manner described in the Registration Statement, will be legally and validly
issued, fully paid and nonassessable.
We consent to the use of this opinion as an exhibit to the Registration
Statement, and further consent to the use of our name wherever appearing in the
Registration Statement, including the prospectus constituting a part thereof,
and any amendment thereto.
Sincerely,
WILSON SONSINI GOODRICH & ROSATI
A Professional Corporation
<PAGE> 1
EXHIBIT 10.4
SCM MICROSYSTEMS, INC.
1997 DIRECTOR OPTION PLAN
1. Purposes of the Plan. The purposes of this 1997 Director Option Plan
are to attract and retain the best available personnel for service as Outside
Directors (as defined below), to provide additional incentive to the Outside
Directors of the Company to serve as Directors, and to encourage their continued
service on the Board.
All options granted hereunder shall be nonstatutory stock options.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" means the Board of Directors of the Company.
(b) "Code" means the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" means the common stock of the Company.
(d) "Company" means SCM Microsystems, Inc., a Delaware corporation.
(e) "Director" means a member of the Board.
(f) "Employee" means any person, including officers and Directors,
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a Director's fee by the Company shall not be sufficient in and of itself to
constitute "employment" by the Company.
(g) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(h) "Fair Market Value" means, as of any date, the value of Common
Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the Nasdaq
National Market or The Nasdaq SmallCap Market of The Nasdaq Stock Market, its
Fair Market Value shall be the closing sales price for such stock (or the
closing bid, if no sales were reported) as quoted on such exchange or system for
the last market trading day prior to the time of determination, as reported in
The Wall Street Journal or such other source as the Administrator deems
reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market Value of
a Share of Common Stock shall be the mean between the high bid and low asked
prices for the Common Stock on the date of determination, as reported in The
Wall Street Journal or such other source as the Board deems reliable; or
<PAGE> 2
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value thereof shall be determined in good faith by the
Board.
(i) "Option" means a stock option granted pursuant to the Plan.
(j) "Optioned Stock" means Shares subject to an Option.
(k) "Optionee" means a Director who holds an Option.
(l) "Outside Director" means a Director who is not an Employee.
(m) "Parent" means a "parent corporation," whether now or hereafter
existing, as defined in Section 424(e) of the Code.
(n) "Plan" means this 1997 Director Option Plan.
(o) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 10 of the Plan.
(p) "Subsidiary" means a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424(f) of the Internal Revenue Code of
1986.
3. Stock Subject to the Plan. Subject to the provisions of Section 10
of the Plan, the maximum aggregate number of Shares which may be optioned and
sold under the Plan is Fifty Thousand (50,000) Shares, plus an annual increase
to be added on July 1 of each year beginning in 1998 equal to (i) the Optioned
Stock underlying Options granted in the immediately preceding year, or (ii) a
lesser amount determined by the Board (collectively, the "Pool"). The Shares may
be authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, the unpurchased Shares which were subject thereto shall
become available for future grant or sale under the Plan (unless the Plan has
terminated). Shares that have actually been issued under the Plan shall not be
returned to the Plan and shall not become available for future distribution
under the Plan.
4. Administration and Grants of Options under the Plan.
(a) Procedure for Grants. All grants of Options under this Plan
shall be automatic and nondiscretionary and shall be made strictly in accordance
with the following provisions:
(i) No person shall have any discretion to select which Outside
Directors shall be granted Options or to determine the number of Shares to be
covered by Options granted to Outside Directors.
-2-
<PAGE> 3
(ii) Each Outside Director shall receive an initial option
(each, an "Initial Option") grant as follows:
(A) Each Outside Director who is serving in such capacity
on the date of adoption of this Plan by the Company's Board of Directors (March
24, 1997) shall be automatically granted an initial Option to purchase 5,000
Shares;
(B) Each Outside Director who joins the Company's Board of
Directors after March 24, 1997 shall be automatically granted an initial Option
to purchase 10,000 Shares (the on the date on which such person first becomes an
Outside Director, whether through election by the stockholders of the Company or
appointment by the Board to fill a vacancy; provided, however, that an Outside
Director shall not receive a Initial Option, if immediately prior to becoming an
Outside Director, such person was a Director.
(iii) Each Outside Director shall be automatically granted an
Option to purchase 5,000 Shares (a "Subsequent Option") on the date of the
annual meeting of stockholders of each year beginning in 1998 (or, if Directors
are elected by written consent of the stockholders, or at another stockholders'
meeting, then the options shall be granted on the date of such election)
provided that (A) he or she is then an Outside Director and (B) as of such date,
he or she shall have served on the Board for at least the preceding six (6)
months.
(iv) The terms of each Option granted hereunder shall be as
follows:
(A) the term of the Option shall be ten (10) years.
(B) the Option shall be exercisable only while the Optionee
remains a Director of the Company, except as set forth in Sections 8 and 10
hereof.
(C) the exercise price per Share shall be 100% of the Fair
Market Value per Share determined on the date of grant of the Option in
accordance with Section 2(h) hereof.
(D) subject to Section 10 hereof, the Option shall become
exercisable at the rate of 1/12th per month for each full month that has elapsed
from its date of grant, provided that the Optionee is serving as a Director on
the applicable vesting date.
(v) In the event that any Option granted under the Plan would
cause the number of Shares subject to outstanding Options plus the number of
Shares previously purchased under Options to exceed the Pool, then the remaining
Shares available for Option grant shall be granted under Options to the Outside
Directors on a pro rata basis. No further grants shall be made until such time,
if any, as additional Shares become available for grant under the Plan through
action of the Board or the stockholders to increase the number of Shares which
may be issued under the Plan or through can cellation or expiration of Options
previously granted hereunder.
-3-
<PAGE> 4
5. Eligibility. Options may be granted only to Outside Directors. All
Options shall be automatically granted in accordance with the terms set forth in
Section 4 hereof.
The Plan shall not confer upon any Optionee any right with respect
to continuation of service as a Director or nomination to serve as a Director,
nor shall it interfere in any way with any rights which the Director or the
Company may have to terminate the Director's relationship with the Company at
any time.
6. Term of Plan. The Plan shall become effective upon the earlier to
occur of its adoption by the Board. It shall continue in effect for a term of
ten (10) years unless sooner terminated under Section 11 of the Plan.
7. Form of Consideration. The consideration to be paid for the Shares
to be issued upon exercise of an Option, including the method of payment, shall
consist of (i) cash, (ii) check, (iii) other shares which (x) in the case of
Shares acquired upon exercise of an Option, have been owned by the Optionee for
more than six (6) months on the date of surrender, and (y) have a Fair Market
Value on the date of surrender equal to the aggregate exercise price of the
Shares as to which said Option shall be exercised, (iv) consideration received
by the Company under a cashless exercise program implemented by the Company in
connection with the Plan, or (v) any combination of the foregoing methods of
payment.
8. Exercise of Option.
(a) Procedure for Exercise; Rights as a Stockholder. Any Option
granted hereunder shall be exercisable at such times as are set forth in Section
4 hereof; provided, however, that no Options shall be exercisable until
stockholder approval of the Plan in accordance with Section 16 hereof has been
obtained.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of
such exercise has been given to the Company in accordance with the terms of the
Option by the person entitled to exercise the Option and full payment for the
Shares with respect to which the Option is exercised has been received by the
Company. Full payment may consist of any consideration and method of payment
allowable under Section 7 of the Plan. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized transfer
agent of the Company) of the stock certificate evidencing such Shares, no right
to vote or receive dividends or any other rights as a stockholder shall exist
with respect to the Optioned Stock, notwithstanding the exercise of the Option.
A share certificate for the number of Shares so acquired shall be issued to the
Optionee as soon as practicable after exercise of the Option. No adjustment
shall be made for a dividend or other right for which the record date is prior
to the date the stock certificate is issued, except as provided in Section 10 of
the Plan.
Exercise of an Option in any manner shall result in a decrease in
the number of Shares which thereafter may be available, both for purposes of the
Plan and for sale under the Option, by the number of Shares as to which the
Option is exercised.
-4-
<PAGE> 5
(b) Termination of Continuous Status as a Director. Subject to
Section 10 hereof, in the event an Optionee's status as a Director terminates
(other than upon the Optionee's death or total and permanent disability (as
defined in Section 22(e)(3) of the Code)), the Optionee may exercise his or her
Option, but only within three (3) months following the date of such termination,
and only to the extent that the Optionee was entitled to exercise it on the date
of such termination (but in no event later than the expiration of its ten (10)
year term). To the extent that the Optionee was not entitled to exercise an
Option on the date of such termination, and to the extent that the Optionee does
not exercise such Option (to the extent otherwise so entitled) within the time
specified herein, the Option shall terminate.
(c) Disability of Optionee. In the event Optionee's status as a
Director terminates as a result of total and permanent disability (as defined in
Section 22(e)(3) of the Code), the Optionee may exercise his or her Option, but
only within twelve (12) months following the date of such termination, and only
to the extent that the Optionee was entitled to exercise it on the date of such
termination (but in no event later than the expiration of its ten (10) year
term). To the extent that the Optionee was not entitled to exercise an Option on
the date of termination, or if he or she does not exercise such Option (to the
extent otherwise so entitled) within the time specified herein, the Option shall
terminate.
(d) Death of Optionee. In the event of an Optionee's death, the
Optionee's estate or a person who acquired the right to exercise the Option by
bequest or inheritance may exercise the Option, but only within twelve (12)
months following the date of death, and only to the extent that the Optionee was
entitled to exercise it on the date of death (but in no event later than the
expiration of its ten (10) year term). To the extent that the Optionee was not
entitled to exercise an Option on the date of death, and to the extent that the
Optionee's estate or a person who acquired the right to exercise such Option
does not exercise such Option (to the extent otherwise so entitled) within the
time specified herein, the Option shall terminate.
9. Non-Transferability of Options. Unless determined otherwise by the
Board, an Option may not be sold, pledged, assigned, hypothecated, transferred,
or disposed of in any manner other than by will or by the laws of descent or
distribution and may be exercised, during the lifetime of the Optionee, only by
the Optionee. If the Board makes an Option transferable, such Option shall
contain additional terms and conditions as the Board deems appropriate.
10. Adjustments Upon Changes in Capitalization, Dissolution, Merger or
Asset Sale.
(a) Changes in Capitalization. Subject to any required action by
the stockholders of the Company, the number of Shares covered by each
outstanding Option, the number of Shares which have been authorized for issuance
under the Plan but as to which no Options have yet been granted or which have
been returned to the Plan upon cancellation or expiration of an Option, as well
as the price per Share covered by each such outstanding Option, and the number
of Shares issuable pursuant to the automatic grant provisions of Section 4
hereof shall be proportionately adjusted for any increase or decrease in the
number of issued Shares resulting from a stock split, reverse stock split, stock
dividend, combination or reclassification of the Common Stock, or any other
increase or decrease in the number of issued Shares effected without receipt of
consideration by the Company; provided, however, that conversion of any
convertible securities of the Company shall not be deemed to have been "effected
without receipt of consideration." Except as expressly provided herein, no
issuance by the Company of
-5-
<PAGE> 6
shares of stock of any class, or securities convertible into shares of stock of
any class, shall affect, and no adjustment by reason thereof shall be made with
respect to, the number or price of Shares subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, to the extent that an Option has not
been previously exercised, it shall terminate immediately prior to the
consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the Company
with or into another corporation or the sale of substantially all of the assets
of the Company, outstanding Options may be assumed or equivalent options may be
substituted by the successor corporation or a Parent or Subsidiary thereof (the
"Successor Corporation"). If an Option is assumed or substituted for, the Option
or equivalent option shall continue to be exercisable as provided in Section 4
hereof for so long as the Optionee serves as a Director or a director of the
Successor Corporation. Following such assumption or substitution, if the
Optionee's status as a Director or director of the Successor Corporation, as
applicable, is terminated other than upon a voluntary resignation by the
Optionee, the Option or option shall become fully exercisable, including as to
Shares for which it would not otherwise be exercisable. Thereafter, the Option
or option shall remain exercisable in accordance with Sections 8(b) through (d)
above.
If the Successor Corporation does not assume an outstanding Option or
substitute for it an equivalent option, the Option shall become fully vested and
exercisable, including as to Shares for which it would not otherwise be
exercisable. In such event the Board shall notify the Optionee that the Option
shall be fully exercisable for a period of thirty (30) days from the date of
such notice, and upon the expiration of such period the Option shall terminate.
For the purposes of this Section 10(c), an Option shall be considered
assumed if, following the merger or sale of assets, the Option confers the right
to purchase or receive, for each Share of Optioned Stock subject to the Option
immediately prior to the merger or sale of assets, the consideration (whether
stock, cash, or other securities or property) received in the merger or sale of
assets by holders of Common Stock for each Share held on the effective date of
the transaction (and if holders were offered a choice of consideration, the type
of consideration chosen by the holders of a majority of the outstanding Shares).
If such consideration received in the merger or sale of assets is not solely
common stock of the successor corporation or its Parent, the Administrator may,
with the consent of the successor corporation, provide for the consideration to
be received upon the exercise of the Option, for each Share of Optioned Stock
subject to the Option, to be solely common stock of the successor corporation or
its Parent equal in fair market value to the per share consideration received by
holders of Common Stock in the merger or sale of assets.
11. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend, or discontinue the Plan, but no amendment, alteration,
suspension, or discontinuation shall be made which would impair the rights of
any Optionee under any grant theretofore made, without his or her consent. In
addition, to the extent necessary and desirable to comply with any applicable
law, regulation
-6-
<PAGE> 7
or stock exchange rule, the Company shall obtain stockholder approval of any
Plan amendment in such a manner and to such a degree as required.
(b) Effect of Amendment or Termination. Any such amendment or
termination of the Plan shall not affect Options already granted and such
Options shall remain in full force and effect as if this Plan had not been
amended or terminated.
12. Time of Granting Options. The date of grant of an Option shall, for
all purposes, be the date determined in accordance with Section 4 hereof.
13. Conditions Upon Issuance of Shares. Shares shall not be issued
pursuant to the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares pursuant thereto shall comply with all
relevant provisions of law, including, without limitation, the Securities Act of
1933, as amended, the Exchange Act, the rules and regulations promulgated
thereunder, state securities laws, and the requirements of any stock exchange
upon which the Shares may then be listed, and shall be further subject to the
approval of counsel for the Company with respect to such compliance.
As a condition to the exercise of an Option, the Company may
require the person exercising such Option to represent and warrant at the time
of any such exercise that the Shares are being purchased only for investment and
without any present intention to sell or distribute such Shares, if, in the
opinion of counsel for the Company, such a representation is required by any of
the aforementioned relevant provisions of law.
Inability of the Company to obtain authority from any regulatory
body having jurisdiction, which authority is deemed by the Company's counsel to
be necessary to the lawful issuance and sale of any Shares hereunder, shall
relieve the Company of any liability in respect of the failure to issue or sell
such Shares as to which such requisite authority shall not have been obtained.
14. Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan.
15. Option Agreement. Options shall be evidenced by written option
agreements in such form as the Board shall approve.
16. Stockholder Approval. Continuance of the Plan shall be subject to
approval by the stockholders of the Company acting at a duly constituted meeting
of stockholders or by written consent, which consent shall be obtained at or
prior to the first annual meeting of stockholders held subsequent to the first
granting of an Option hereunder. Such stockholder approval shall be obtained in
the degree and manner required under applicable state and federal law and any
stock exchange rules. Failure to obtain such approval shall result in
termination of this Plan, but shall not affect options granted hereunder prior
to such termination.
-7-
<PAGE> 8
SCM MICROSYSTEMS, INC.
1997 DIRECTOR OPTION PLAN
DIRECTOR OPTION AGREEMENT
SCM Microsystems, Inc., a Delaware corporation (the "Company"), has granted
to _____________________________________(the "Optionee"), an option in all
respects subject to the terms, definitions and provisions of the Company's 1997
Director Option Plan (the "Plan"), which is incorporated herein by reference.
This Option is a nonstatutory option and is not intended to qualify for any
special tax benefits to the Optionee. The terms defined in the Plan shall have
the same defined meanings herein.
1. Number of Shares. This Option represents the right to purchase [________
(____________)]shares of the Company's Common Stock (the "Optioned Stock").
2. Date of Grant. This Option was granted on
3. Exercise Price. The exercise price is $ for each share of Common
Stock.
4. Exercise of Option. This Option shall be exercisable during its term in
accordance with the provisions of Section 8 of the Plan as follows:
(i) Right to Exercise.
(a) This Option shall become exercisable cumulatively as to 1/12th
of the Optioned Stock for each full month that has elapsed from the date of
grant indicated above provided that Optionee is serving as a Director on the
applicable vesting date.
(b) This Option may not be exercised for a fraction of a share.
(c) In the event of Optionee's death, disability or other
termination of service as a Director, the exercisability of the Option is
governed by Section 8 of the Plan.
(ii) Method of Exercise. This Option shall be exercisable by written
notice which shall state the election to exercise the Option and the number of
Shares in respect of which the Option is being exercised. Such written notice,
in the form attached hereto as Exhibit A, shall be signed by the Optionee and
shall be delivered in person or by certified mail to the Secretary of the
Company. The written notice shall be accompanied by payment of the exercise
price.
<PAGE> 9
5. Method of Payment. Payment of the exercise price shall be by any of
the following, or a combination thereof. at the election of the Optionee:
(i) cash:
(ii) check: or
(iii) delivery of a properly executed exercise notice together with such
other documentation as the Company and the broker, if applicable, shall require
to effect an exercise of the Option and delivery to the Company of the sale or
loan proceeds required to pay the exercise price.
6. Restrictions on Exercise. This Option may not be exercised if the
issuance of such Shares upon such exercise or the method of payment of
consideration for such shares would constitute a violation of any applicable
federal or state securities or other law or regulations, or if such issuance
would not comply with the requirements of any stock exchange upon which the
Shares may then be listed. As a condition to the exercise of this Option, the
Company may require Optionee to make any representation and warranty to the
Company as may be required by any applicable law or regulation.
7. Non-Transferability of Option. This Option may not be transferred in
any manner otherwise than by will or by the laws of descent or distribution and
may be exercised during the lifetime of Optionee only by the Optionee. The terms
of this Option shall be binding upon the executors, administrators, heirs,
successors and assigns of the Optionee.
8. Term of Option. This Option may not be exercised more than ten (10)
years from the date of grant of this Option, and may be exercised during such
period only in accordance with the Plan and the terms of this Option.
9. Taxation Upon Exercise of Option. Optionee understands that, upon
exercise of this Option, he or she will recognize income for tax purposes in an
amount equal to the excess of the then Fair Market Value of the Shares purchased
over the exercise price paid for such Shares. Since the Optionee is subject to
Section 16(b) of the Securities Exchange Act of 1934, as amended, under certain
limited circumstances the measurement and timing of such income (and the
commencement of any capital gain holding period) may be deferred, and the
Optionee is advised to contact a tax advisor concerning the application of
Section 83 in general and the availability a Section 83(b) election in
particular in connection with the exercise of the Option. Upon a resale of such
Shares by the Optionee, any difference between the sale price and the Fair
Market Value of the Shares on the date of exercise of the Option, to the extent
not included in income as described above, will be treated as capital gain or
loss.
-2-
<PAGE> 10
SCM MICROSYSTEMS, INC.,
a Delaware corporation
By:
--------------------------------------
Optionee acknowledges receipt of a copy of the Plan and represents that he
or she is familiar with the terms and provisions thereof, and hereby accepts
this Option subject to all of the terms and provisions thereof. Optionee hereby
agrees to accept as binding, conclusive and final all decisions or
interpretations of the Board upon any questions arising under the Plan.
Dated:_________________ __________________________________________
(Signature of Optionee)
-3-
<PAGE> 11
EXHIBIT A
DIRECTOR OPTION EXERCISE NOTICE
SCM Microsystems. Inc.
131 Albright Way
Los Gatos. CA 95030
Attention: Chief Financial Officer
1. Exercise of Option. The undersigned ("Optionee") hereby elects to
exercise Optionee's option to purchase __________ shares of the Common Stock
(the "Shares") of SCM Microsystems, Inc. (the "Company") under and pursuant to
the Company's 1997 Director Option Plan and the Director Option Agreement
dated_______________ (the "Agreement").
2. Representations of Optionee. Optionee acknowledges that Optionee has
received, read and understood the Agreement.
3. Tax Consequences. Optionee understands that Optionee may suffer adverse
tax consequences as a result of Optionee's purchase or disposition of the
Shares. Optionee represents that Optionee has consulted with any tax
consultant(s) Optionee deems advisable in connection with the purchase or
disposition of the Shares and that Optionee is not relying on the Company for
any tax advice.
4. Delivery of Payment. Optionee herewith delivers to the Company the
aggregate purchase price for the Shares that Optionee has elected to purchase
and has made provision for the payment of any federal or state withholding taxes
required to be paid or withheld by the Company.
5. Entire Agreement. The Agreement is incorporated herein by reference.
This Exercise Notice and the Agreement constitute the entire agreement of the
parties and supersede in their entirety all prior undertakings and agreements of
the Company and Optionee with respect to the subject matter hereof. This
Exercise Notice and the Agreement are governed by California law except for that
body of law pertaining to conflict of laws.
Submitted by: Accepted by:
OPTIONEE: SCM MICROSYSTEMS. INC.
________________________________ By:___________________________________
Its:__________________________________
Address:
________________________________ 131 Albright Way
________________________________ Los Gatos, CA 95030
Dated:__________________________ Dated:________________________________
<PAGE> 1
EXHIBIT 10.19
TEAMING AGREEMENT
BETWEEN : MATRA COMMUNICATION
A French company having its registered office at 50 rue du
President Sadate, 29101 Quimper, France,
hereinafter called "MC,"
duly represented by: A. WEIL Vice President
AND : SCM MICRO-SYSTEM GMBH
a company with registered office at Luitpoldstra e 6,
85276 Pfaffenhofen, Germany
hereinafter called "SCM,"
duly represented by: Mr. Bernd MEIER
General Manager
AND : TEMIC/MATRA MHS
a company with registered office at La Chantrerie - BP
3008 Route de Gachet - 44087 NANTES Cedex 03 FRANCE
hereinafter called "TEMIC," duly represented by: Mr.
Stephane SCHMOLL Vice President Marketing
Jointly and/or separately referred to as "the Party(ies)."
WHEREAS SCM has an important know-how in the field of PCMCIA and already
manufactures PCMCIA modules;
WHEREAS TEMIC has an important know-how in the field of VLSI integration
and wishes to develop a chipset for an optimized version of the PCMCIA
DMUX-descrambler-interface which it wishes to later include in its price list
and brings its know-how in design architecture and manufacturing of VLSI.
WHEREAS MC has developed an important know-how in the field of MUX-DMUX,
and of conditional access systems and smart cards;
WHEREAS FRANCE TELECOM has issued a call for tender concerning a
possible Study Contract for the VIACCESS module.
-1-
<PAGE> 2
Therefore, the Parties have decided to join their respective
competencies to submit a proposal in response to such call for tender
(hereinafter, "the Project") and have expressed their wish to define their
relationship within this framework.
Now, therefore the Parties have agreed upon the following provisions:
1 - SUBJECT OF THE AGREEMENT
The subject matter of this agreement is to define:
- The principles under which the Parties will collaborate and especially
to define their respective rights and obligations in the preparation of the
offer as well as during the performance of the Project.
- The principles under which the Parties will manufacture and sell the
results of the Project. This Agreement includes the access control DVB-CI
derivative modules that the Parties will subsequently develop.
2 - WORKING TEAM
In view of answering FRANCE TELECOM's call for tender the Parties will
constitute a working team in charge of preparing the proposal.
The terms and conditions of this proposal will be further defined in a
specific agreement to be discussed between the Parties, which will in particular
allocate their respective tasks and roles of the Parties as well as their
obligations vis-a-vis FRANCE TELECOM.
3 - BASIC ALLOCATION OF TASKS
In the event that FRANCE TELECOM finally awards the Project to the
Parties:
3.1. During the study and development phase of the Project, MC will be
project leader, SCM will be joint contractor and TEMIC will be sub-contractor.
During the manufacturing and supply phase, each party supplying the
VIACCESS module will be responsible for its own part of the supply.
3.2. TEMIC will together with MC and SCM develop a PCMCIA interface
component which will integrate an optimized version of the DMUX and a PCMCIA-DVB
interface. TEMIC will be allowed to put this component in its price list.
3.3. MC will put at the disposal of TEMIC and SCM its know-how mentioned
in the above preamble and within the scope of the Study Contract.
-2-
<PAGE> 3
3.4. SCM and MC will jointly perform a feasibility study of the PCMCIA
module. The manufacturing cost calculation will be performed jointly by the two
companies and the final production price will be the aggregate value of the most
cost effective items of either Party.
3.5. The production of PCMCIA modules will be:
* either realized by SCM which will sell them directly and
supply them to MC on an OEM basis, at most favored
customer's terms and conditions. SCM will in such case pay
MC the relevant royalties on the modules sold directly by
it.
* Or realized by MC which will sell them directly and supply
them to SCM on an OEM basis, at most favored customer's
terms and conditions. MC will in such case pay SCM the
relevant royalties on the modules sold directly by it.
* Or realized by both SCM and MC. In this last case each
party will pay the other the relevant royalties on
quantities of modules sold by it.
3.6. TEMIC will pay MC and SCM the relevant royalties on the components
sold by it to third parties.
3.7. The royalty rate to be paid by the Parties as mentioned above will
be [ * ] and finally determined in the Final Agreement as defined in clause 7.
4 - LIABILITY
The parties shall be jointly responsible in the capacity of tenderer to
FRANCE TELECOM but in the implementation of the Project each Party shall be
solely responsible for its tasks pursuant to the allocation of tasks provided
for in clause 3 hereabove.
Each Party shall indemnify and hold the other Parties harmless in
respect of direct loss or expense incurred by the other Parties as a result of
action or default in connection with the Project or failure to implement Project
responsibilities on the part of such Party. The liability of each Party under
this clause shall be limited to the selling price of the equipment and service
as detailed in those parts of the Project for which that Party is responsible.
5 - EXCLUSIVITY
Each party commits not to remit a separate proposal to FRANCE TELECOM
either alone or with third parties and not to participate alone or with third
parties regarding the performance of the Project.
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
-3-
<PAGE> 4
6 - LEGAL STATUS OF THE AGREEMENT
The Parties hereby declare that in executing this agreement they do not
intend to create any legal entity or partnership whatsoever and that they
expressly exclude any type of "affectio sociatis" or any sharing of profits
resulting from the Project.
7 - FINAL AGREEMENT
The parties shall establish the necessary agreements in order to reach a
final agreement based on the principles herein set forth (the "Final
Agreement").
This Final Agreement will remain in force for an expected duration of 10
years to duly take in consideration the product life duration and the proper
return expected which will be generated by the respective payment of royalties
among the Parties.
8 - COMING INTO FORCE - DURATION
This agreement comes into force on the date it is signed by all the
parties and shall remain in force until the signature of the Final Agreement or
until the rejection of the joint offer by FRANCE TELECOM.
It shall in any event be null and void if FRANCE TELECOM has not made
its decision or if the Final Agreement has not been concluded at the latest on
30/06/1996, except if the parties have agreed in writing to extend its validity
before such date and their cooperation which will be defined through a new
agreement.
9 - INFORMATION EXCHANGE
Subject to the attached Non Disclosure Agreement, the parties will
communicate to one another the relevant information in their possession which
may be useful in the realization of their joint task or in the definition of the
interfaces between their respective tasks.
10 - INTELLECTUAL PROPERTY RIGHTS
Except as regards the rights granted to FRANCE TELECOM within the scope
of the Study Contract, each Party shall remain the owner of the studies,
manufacturing processes and software developed by it within the scope of the
Project.
11 - MEDIA
Any and all advertising which may be done by one Party concerning the
Project shall be done only with the prior written consent of the other Parties
and shall make clearly appear the role and tasks performed by the other Parties
under the Project.
-4-
<PAGE> 5
12 - ASSIGNMENT
The Parties hereby declare that this agreement has been concluded on an
"intuitu personae" basis. Consequently no Party shall be entitled to or assign
all or part of its rights and obligations under this agreement without the prior
consent of the other Parties.
13 - JURISDICTION
Any dispute which may occur in the course of the performance or in the
interpretation of this agreement shall in the lack of amicable settlement
between the Parties, submitted to the Courts of the place of the claimer to
which the Parties grant jurisdiction.
Executed in triplicate in Bois d'Arcy this 6th day October 1995.
<TABLE>
<CAPTION>
For and on behalf of 11/24/1995 For and on behalf of 10/27/1995
<S> <C> <C> <C>
MATRA COMMUNICATION SCM MICRO-SYSTEM GmbH
[stamp] [stamp]
Name Antoine WEIL Name SCM Microsystems
Senior Vice President SCM Microsystems GmbH
Signature Head of Multimedia Business Unit Signature Luitpoldstrasse 6 - 85276 Pfaffenhofen
Rue J.-P. Timbaud - B.P. 26 Tel. 08441/896-0 / Fax 08441/82884
78392 BOIS D'ARCY Cedex - FRANCE
[illegible signature]
For and on behalf of s\ [illegible signature]
TEMIC
Name [illegible printed name]
Signature [illegible signature]
</TABLE>
-5-
<PAGE> 1
EXHIBIT 10.20
[INTENTIONALLY OMITTED]
<PAGE> 1
EXHIBIT 10.21
DEVELOPMENT AND LICENSE AGREEMENT
THIS AGREEMENT, effective as of March 6, 1997 (the "Effective Date"), is made
and entered into by and between Intel Corporation ("Intel"), a Delaware
corporation with a business address at 5000 W. Chandler Blvd., Chandler Arizona
85226 and SCM Microsystems, Inc., a Delaware corporation with a business address
at 131 Albright Way, Los Gatos, California 95030.
RECITALS
SCM has developed technology that combines the capability of a PCMCIA card and a
microprocessor-based smart card compliant with International Standards
Organization ("ISO") specification 7816 for use in PCMCIA slots.
SCM has also developed VHDL models and silicon implementations of ISO 7816 smart
card physical interfaces and software technology for use with compliant smart
cards in PC applications.
Intel has developed [* ] Intel Architecture microprocessors and [* ] technology
which may be suitable for use in PCMCIA-based applications.
Intel and SCM desire to cooperate in the development of certain [* ] products
which utilize the respective technical capabilities of both companies.
Intel and SCM are interested in developing and promoting various industry
standards applicable to [* ] products.
Intel is interested in licensing SCM's ISO 7816 smart card VHDL models for
incorporation in various Intel products.
Intel and SCM are engaged in independent development of [* ] software and desire
to cross license certain patents related to such development.
Intel and SCM are interested in establishing an equity investment that
facilitates a collaborative business relationship of the parties in a manner
consistent with the requirements of both companies.
AGREEMENT
1.0 DEFINITIONS
*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
1.1 "SCM Products" means the PCMCIA form factor products or items
to be developed by or for SCM which incorporate Intel
Technical Information [* ].
1.2 "Licensed SCM IP" means all patents, copyrights, trade
secrets, and other intellectual property rights, which are
embodied in SCM Technical Information and which are reasonably
necessary for the manufacture, use or distribution of Licensed
Intel Products.
1.3 "Intel Technical Information" means technical product
documentation [* ] to be provided to SCM in accordance with
Section 2.4 below.
1.4 "SCM Technical Information" means the technical knowledge,
VHDL model(s), test programs and interface schematics for the
ISO 7816 interface and other semiconductor-related information
or documentation (but not software) to be provided to Intel in
accordance with Section 2.2 below.
1.5 [* ].
1.6 "Licensed Intel Products" means [* ] any other component,
module, board, or system-level product developed or
manufactured by or for Intel which incorporates or utilizes
SCM Technical Information.
1.7 "[* ] Specification" means any current or future
specifications for [* ] software that are published and
promulgated by PCMCIA.
1.8 "Licensed [* ] Software" means any software (in either source
code or object code form) which (1) is created and used
primarily to support or enhance the operations [*] devices;
(2) complies with the implements the [* ] Specification; and
(3) is owned by, or created by or for, either party to this
Agreement.
1.9 "Licensed Patents" means all issued utility patents and
utility models (1) which are applicable to Licensed [* ]
Software; and (2) which are owned by a party to this Agreement
or under which party to this Agreement has the right to grant
licenses of the scope granted herein, but only to the extent a
party is authorized to grant licenses without payment of
additional consideration to third parties.
1.10 "OEMs" means the original equipment manufacturers of computer
systems, computer motherboards or daughtercards, computer
add-in boards, wireless phones, PCMCIA cards, and any other
electronic devices (such as a digital cameras, printers,
digital audio recorders, etc.) that are connectable or can
directly transfer data to computer systems.
*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
2.0 DEVELOPMENT EFFORTS
2.1 SCM Obligations. SCM shall use commercially reasonable efforts
to develop SCM Products. It is anticipated by the parties that
SCM Products will be available in the marketplace no later
than six (6) months after Intel's first customer shipment [*].
2.2 SCM Technical Information. SCM shall provide Intel with SCM
Technical Information.
2.3 Intel Obligations. Intel shall use commercially reasonable
efforts to [* ]. Intel will provide SCM with early visibility
into [* ].
2.4 Intel Technical Information. Intel shall provide SCM with
Intel Technical Information. SCM agrees to use Intel Technical
Information only as necessary in developing SCM Products. SCM
shall not authorize others to use the Intel Technical
Information for any purpose without Intel's prior written
consent.
3.0 OWNERSHIP AND IP DEVELOPMENT
3.1 SCM Ownership. SCM shall retain all right, title, and
ownership of its preexisting intellectual property, including
without limitation the VHDL model for ISO 7816 interface and
SCM Technical Information, and of any intellectual property
created solely by SCM personnel under this Agreement.
3.2 Intel Ownership. Intel shall retain all right, title, and
ownership of its preexisting intellectual property, including
without limitation [* ] Intel Technical Information, and of
any intellectual property created solely by Intel personnel
under this Agreement.
3.3 Joint Ownership and IP Protection. The parties do not
anticipate joint development of intellectual property. In the
event that such joint development occurs or is likely to
occur, the parties agree to negotiate appropriate terms and
conditions covering such joint intellectual property. It is
the expectation of the parties that jointly developed
intellectual property will be jointly owned and that either
party will be free to exploit such jointly owned intellectual
property without accounting to the other party.
4.0 LICENSES
4.1 SCM Grant to Intel. SCM hereby grants to Intel a perpetual,
nonexclusive, royalty-free, worldwide right and license, with
a limited right to sublicense as set forth in Section 4.2
below, under Licensed SCM IP to (i) make, have made, use,
import, offer to sell, sell and otherwise distribute Licensed
Intel Products; and (ii) to use,
*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> 4
reproduce, display, distribute, make derivative works of, or
to have used, have reproduced, have displayed, have
distributed and have derivative works made of SCM Technical
Information for the sole purposes of exercising the license
grant of Section 4.1(i) above.
4.2 Limited Right to Sublicense. SCM authorizes Intel to provide a
limited sublicense of the rights granted in Section 4.1[* ]
for the sole purpose of developing [* ] support (i.e.,
software hooks, drivers and software [* ]) for SCM Technical
Information; provided however, that such sublicense is
authorized under this Agreement only if the sublicense [* ]
is subject to an express prohibition against any further
sublicense of SCM Technical Information and contains
confidentiality obligations with regard to SCM Technical
Information which are no less restrictive than those set forth
in Section 6. In addition, if Intel desires to sublicense its
resellers or end users to prepare derivative works of, or
reproduce SCM Technical Information for the purpose of making,
having made, using, selling, offering for sale, importing or
otherwise distributing Licensed Intel Products, the parties
shall consult with regard to each desired sublicense and agree
to negotiate in good faith a separate sublicense agreement.
4.3 Patent Cross License. Each party hereby grants to the other a
perpetual, nonexclusive, nontransferable, worldwide license
under its respective Licensed Patents (but not copyrights,
trade secrets, trademarks, or maskworks) to make, to have
made, to use, to sell and offer to sell (either directly or
indirectly) Licensed [* ] Software; provided however, that
neither party has any right to sublicense, transfer or assign,
in whole or in part, any of its rights under this license
grant, whether by operation of law, implication, estoppel or
otherwise except as provided in this Section 4.3. The
prohibition against sublicensing above notwithstanding, each
party authorizes the other party to provide a limited
sublicense only to OEMs to use, reproduce, perform, display,
make derivative works of and distribute Licensed [* ]
Software; provided, however, that such sublicense is
authorized under this Agreement only if the sublicense to OEMs
is subject to an express prohibition against any further
sublicense of Licensed FTL Software by the OEMs.
4.4 No Other Licenses. All rights not expressly granted in this
Section 4.0 are reserved to the owner, and no other licenses
are granted herein, by implication, estoppel or otherwise.
5.0 MARKETING COOPERATION
5.1 Press Releases. Neither party shall issue any press release or
other public statement regarding this Agreement or any work
done or to be done hereunder by the other party without the
prior written consent of the other party. Notwithstanding the
foregoing,
*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> 5
SCM may announce that SCM has licensed [* ] smart card
reader/writer technologies to Intel, provided Intel reviews
and approves such SCM announcement prior to its release. SCM
agrees that Intel has the option, but not the obligation, to
include a quote from an Intel manager in such SCM
announcement.
5.2 Strategic Cooperation. Intel and SCM shall make reasonable
efforts to coordinate their positions regarding, and to
include each other in, any international or other industry
standardization efforts which may affect existing or
anticipated product lines which are the subject of this
Agreement.
5.3 No Representations. SCM shall make no warranties or
representations to any third party regarding the performance,
capabilities, or functionality of [* ] or Licensed
Intel Products without the prior written approval of Intel.
Intel shall make no warranties or representations to any third
party regarding the performance, capabilities, or
functionality of SCM Products without the prior written
approval of SCM.
5.4 Availability of SCM Product. SCM shall use reasonable efforts
to market, maintain, and support SCM Product. It is
anticipated that SCM Product will be made available to the
marketplace through multiple channels of distribution.
Notwithstanding the foregoing, SCM shall have the right, in
its sole and absolute discretion, to discontinue any SCM
Product.
5.5 Other Marketing Plans. Intel will acknowledge SCM's
participation in the collaborative development effort
contemplated under this Agreement, with the goal of
highlighting SCM as a technology leader in providing PCMCIA
data security solutions. The timing, content and logistics for
such acknowledgment to be mutually agreed. Intel and SCM also
agree to discuss other possible cooperative marketing,
promotion, or distribution opportunities as they may appear
desirable.
6.0 CONFIDENTIALITY
6.1 Agreement Confidential. Each party agrees not to disclose the
existence or content of this Agreement without the written
approval of the other party. If it reasonably appears that
this Agreement or any portion of it must be filed with any
public agency, then the filing party shall first notify the
other party, and the parties shall use reasonable efforts to
preserve the confidential nature of this Agreement.
6.2 Information. "Confidential Information" shall mean SCM
Technical Information, Intel Technical Information, or other
technical or business information of a party (the "Discloser")
which is disclosed to the other party (the "Recipient") and
which consists of source code in any medium, or is marked as
"Confidential" if first provided in
*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> 6
tangible form, or is identified as confidential at the time of
oral disclosure and is, within thirty days, identified in
writing as Confidential Information. Except to the extent
licensed to do so hereunder, Recipient shall not reveal,
disclose or distribute the Discloser's Confidential
Information and shall maintain in confidence, and not disclose
it to any person other than Recipient's employees and
full-time contractors bound to confidentiality and whose
duties require such access. These obligations of
confidentiality shall not apply to information which is shown
to be (i) available to the public other than by breach of this
Agreement by Recipient; (ii) rightfully received by Recipient
from a third party without breach of a duty to the Discloser;
(iii) independently developed by Recipient's employees without
access to the Confidential Information; or (iv) known to
Recipient prior to first receipt of same from Discloser.
6.3 Term of Confidentiality. The obligations of confidentiality
set forth herein shall extend for five (5) years from the date
of receipt of the Confidential Information.
Expiration of an obligation of confidentiality shall not be
deemed a license to any patent, trade secret, copyright or
maskwork hereunder.
6.4 No Restrictions on Employees. Receipt of Confidential
Information under this Agreement shall not create any
obligation in any way limiting, restricting, or prohibiting
the receiving party's assignment of employees or contractors.
6.5 Use of Residual Information. Each party shall be free to use
residuals of the Confidential Information for any purpose
including use in development, manufacture, promotion, sale and
maintenance of its products and services. The term "residuals"
as used herein means information in nontangible form retained
by persons who have access to such Confidential Information.
This provision grants no patent or copyright license.
6.6 Reverse Engineering. Except to the extent a party is entitled
to receive all trade secret information regarding a particular
technology hereunder, where software has been provided solely
in object code format, the recipient party shall not
disassemble, decompile or otherwise reverse engineer such
software.
7.0 REPRESENTATIONS AND WARRANTIES
7.1 Right to Contract. Each party represents and warrants to the
other that it has the right to enter into and perform this
Agreement and that it has not done any act or entered into any
agreement which prevents performance of this Agreement.
7.2 Right to Grant Licenses. SCM represents and warrants that it
has the right to grant the licenses it is granting under
Section 4.0 of this Agreement.
<PAGE> 7
7.3 SCM Disclaimer. Except as provided in Section 7.2, SCM makes
no warranty with respect to Licensed SCM IP and SCM Technical
Information. LICENSED SCM IP AND SCM TECHNICAL INFORMATION ARE
PROVIDED "AS IS". SCM SPECIFICALLY DISCLAIMS ANY WARRANTY,
EXPRESS OR IMPLIED, INCLUDING BUT NOT LIMITED TO, ANY WARRANTY
OF MERCHANTABILITY, NON-INFRINGEMENT OF INTELLECTUAL PROPERTY,
FITNESS FOR ANY PARTICULAR PURPOSE, OR ANY OTHER WARRANTY
OTHERWISE ARISING OUT OF ANY PROPOSAL, SPECIFICATION OR
SAMPLE.
7.4 Intel Disclaimer. Intel makes no warranty with respect to
Intel Technical Information. INTEL TECHNICAL INFORMATION IS
PROVIDED "AS IS". INTEL SPECIFICALLY DISCLAIMS ANY WARRANTY,
EXPRESS OR IMPLIED INCLUDING, BUT NOT LIMITED TO, ANY WARRANTY
OF MERCHANTABILITY, NON-INFRINGEMENT OF INTELLECTUAL PROPERTY,
FITNESS FOR ANY PARTICULAR PURPOSE, OR ANY OTHER
WARRANTY OTHERWISE ARISING OUT OF ANY PROPOSAL,
SPECIFICATION OR SAMPLE.
8.0 INTELLECTUAL PROPERTY INDEMNIFICATION
8.1 Indemnity. SCM agrees to defend, indemnify, and hold Intel
harmless against any loss, cost liability and expense
(including reasonable attorney's fees) arising from any action
or claim brought or threatened against Intel or its customers
alleging that the ISO 7816 smart card interface design
("Design") infringes any patent, copyright, trade secret, or
other intellectual property right of any third party. Intel
agrees to provide SCM with (1) prompt written notice of such
claim or action, (2) the opportunity to participate in the
defense or settlement of such claim or action, and (3)
reasonable information and assistance in the defense and/or
settlement any such claim or action.
8.2 Limited Remedies. In the event the Design is held, or in
Intel's reasonable opinion, may be held to constitute such
infringement, SCM, at its expense, will either (1) obtain for
Intel or its customers the right to continue to use the Design
as contemplated herein, (2) modify the Design so that it
becomes non-infringing (without materially altering its
functionality, or (3) replace the Design with a functionality
equivalent non-infringing design.
8.3 Limitations. Notwithstanding the foregoing, SCM assumes no
liability for infringement claims arising from (1) combination
of the Design with other products not provided by SCM, but
which would not cover the use of the Design standing alone,
(2) any modification of such Design not made by or under the
authority of SCM, where such infringement would not have
occurred but for such modifications, (3) compliance by SCM
with Intel's detailed specifications, or (4) any sublicense
<PAGE> 8
granted pursuant to Section 4.2, where such infringement would
not have occurred but for the circumstances arising out of
such sublicense.
8.4 Sole remedy. The foregoing states the entire obligation and
exclusive remedy with respect to any alleged intellectual
property infringement.
9.0 PURCHASING AND CROSS DISTRIBUTION
9.1 SCM's Purchase of Intel Products. SCM will purchase [* ] under
Intel's standard terms and conditions of sale, at prices which
are no less favorable to SCM than the average of the three
lowest prices [* ] sold by Intel to third parties during the
same calendar quarter for similar volumes. Intel Products
purchased by SCM shall be subject to Intel's standard
commercial warranty and intellectual property indemnification
provisions.
9.2 SCM Products. Intel may, upon its request, become a reseller
of SCM Products under reasonable terms and conditions to be
negotiated by the parties.
9.3 Terms and Conditions. Any purchase, distribution or resale
under this Section 9.0 shall be done pursuant to a separate
agreement to be negotiated by the parties.
10.0 EXPENSES
Each party shall invest in its own research and development efforts and
shall be responsible for its own expenses pursuant to the activities
contemplated under this Agreement.
11.0 OTHER LICENSES
Within ninety (90) days after the Effective Date, the parties agree to
enter into, and use good faith efforts to complete, negotiations
concerning the nonexclusive licensing [* ] to SCM under terms and
conditions to be negotiated.
12.0 TERM AND TERMINATION
12.1 Term. The initial term of this Agreement shall continue to be
three (3) years from the Effective Date, and may be renewed
thereafter for successive terms of one (1) year unless, two
(2) months prior to the expiration of the initial term or any
successor term, a party gives written notice that it desires
the Agreement to terminate as of the end of such term.
12.2 Breach. Either party may terminate this Agreement if the
other: (a) files or has filed against it a petition in
bankruptcy which it is not contesting in good faith; (b) has a
*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> 9
receiver appointed to handle its assets or affairs which it is
not contesting in good faith; or (c) makes or attempts to make
an assignment for benefit of creditors.
12.3 Survival. The following provisions and licenses shall survive
termination or expiration of this Agreement: Sections
(including any subsections) 1.0, 3.0, 4.0, 6.0, 7.0, 8.0,
10.0, 12.0, 13.0, and 14.0.
12.4 Survival of End-User Licenses. Where Intel has properly
granted an end-user a license, directly or indirectly, to use
Licensed Intel Products, the license to such end-user shall
survive notwithstanding the expiration or termination Intel's
right to grant further licenses to such technology.
13.0 GENERAL TERMS AND CONDITIONS
13.1 Independent Pricing. Pricing of any Licensed Intel Products
marketed and distributed by Intel or SCM Products marketed and
distributed by SCM will be at each party's sole discretion.
13.2 Export Restrictions. In the event any product is exported from
the United States or re-exported from a foreign destination by
either party, that party shall ensure that the distribution
and export/re-export of product is in compliance with all
laws, regulations, orders, or other restrictions of the U.S.
Export Administration Regulations. Both parties agree that
neither it nor any of its subsidiaries will export/re-export
any technical data, process, product, or service, directly or
indirectly, to any country for which the United States
government or any agency thereof requires an export license,
other governmental approval, or letter of assurance, without
first obtaining such license, approval or letter.
13.3 Notices and Requests. All notices, agreements and requests
under this Agreement shall be in writing and will reference
this Agreement, and will be deemed given upon delivery if
personally delivered or upon receipt if sent by registered or
certified mail, postage prepaid, return receipt requested, to
the addresses listed below, which addresses may be modified
upon subsequent written notice.
Notices to Intel: Notices to SCM:
Intel Corporation SCM Microsystems, Inc.
Attn: Legal Department Attn: Chief Executive Officer
M/S: CH6-404 131 Albright Way
5000 W. Chandler Blvd. Los Gatos, CA 95030
Chandler, AZ 85226
<PAGE> 10
13.4 Limitation of Liability. NEITHER PARTY SHALL HAVE ANY
LIABILITY TO THE OTHER PARTY BASED ON FAILURE TO ULTIMATELY
DEVELOP OR MARKET THE PRODUCTS OR TO CONSUMMATE THE ACTIVITIES
ENVISIONED HEREIN. IN NO EVENT SHALL EITHER PARTY HAVE ANY
LIABILITY TO THE OTHER ON ANY CAUSE OF ACTION RELATING TO THE
AGREEMENT FOR ANY INDIRECT, SPECIAL, INCIDENTAL,
CONSEQUENTIAL, LOSS OF PROFIT OR LOST OPPORTUNITY DAMAGES,
HOWEVER CAUSED, WHETHER OR NOT THE PARTY HAS ADVANCE NOTICE OF
THE POSSIBILITY OF SUCH DAMAGES. The parties acknowledge that
this limitation on potential liabilities is an essential
element in reaching the Agreement.
13.5 Evaluation and Independent Development. This Agreement does
not preclude Intel or SCM from evaluating, acquiring from
third parties not a party to this Agreement, independently
developing, or marketing similar products, or making and
entering into similar arrangements with other companies.
13.6 Assignment. Neither party may, by operation of law or
otherwise, assign any rights or obligations hereunder without
the prior written consent of the other party, which consent
may be withheld in a party's sole and absolute discretion. Any
attempt to assign any rights or obligations hereunder without
the other party's written consent will be voidable by the
other party.
13.7 Relationship Of Parties. Both parties are independent
contractors. Neither party will have the authority to act for
and or bind the other in any way, or to represent that either
is responsible for the acts of the other. Nothing herein will
be construed as forming a partnership or agency between the
parties.
14.0 INTERPRETATION, ENFORCEMENT AND LAW
14.1 Interpretation. The Section titles in this Agreement are
provided for convenience only and shall not affect the meaning
or interpretation of any term of this Agreement. A reference
to a Section shall be deemed a reference to all Sub-Sections
within the Section.
14.2 Disputes. In the event of any dispute between the parties,
Intel and SCM shall use good-faith efforts to resolve any
disagreement regarding the dispute inducing, as the parties
may deem appropriate, meetings between senior executives of
the parties, or other agreeable means. If such efforts are
unsuccessful, either party may initiate litigation
proceedings.
<PAGE> 11
14.3 Governing Law. This Agreement shall be governed by the laws of
the state of California, excluding its conflicts of law
provisions.
14.4 Future Majeure. Neither party will be liable for any failure
to perform due to unforeseen circumstances or causes beyond
the parties' reasonable control, including, but not limited
to, earthquakes, acts of God, war, riot embargoes, acts of
civil or military authorities, fire, flood, accident, strikes,
or inability to secure transportation, facilities, fuel,
energy, labor or materials. Time for performance will be
extended by the amount of any such delay.
14.5 Remedies. All rights and remedies, legal or equitable, whether
conferred hereunder, or by any other instrument or law will be
cumulative and may be exercised singularly or concurrently.
Failure by either party to enforce any term will not be deemed
a waiver of future enforcement of that or any other term.
14.6 Severable Provisions. If a court of competent jurisdiction
holds a provision of this Agreement to be invalid or
unenforceable, the other provisions of this Agreement shall
remain in full force and effect.
14.7 Merger and Modification. The terms and conditions set forth in
this Agreement, including the Recitals, constitute the entire
understanding and agreement between the parties with respect
to the subject matter hereof and supersede all prior and
contemporaneous agreements, understandings, negotiations and
discussions.
AGREED:
SCM Microsystems, Inc. Intel Corporation
By: By:
-------------------------------- ------------------------------
Name: Name:
-------------------------------- ------------------------------
Title: Title:
-------------------------------- ------------------------------
Date: Date:
-------------------------------- ------------------------------
<PAGE> 1
EXIHIBIT 10.26
[INTENTIONALLY OMITTED]
<PAGE> 1
EXHIBIT 10.30
DEVELOPMENT AND SUPPLY AGREEMENT
between
SCM Microsystems GmbH
Luitpoldstra e 6
D-85276 Pfaffenhofen
- - hereinafter "SCM"
and
TELENOR Conax
Fred, Olsensgt 6
N - 0152 OSLO
- - hereinafter "TELENOR"
1.0 PROGRAM DESCRIPTION
A. SCM will use reasonable endeavours to design, manufacture, test and
supply to TELENOR verification devices ("PROTOTYPES") to meet the
functional and parametric specification that has been mutually agreed
upon in writing by the parties ("SPECIFICATION").
B. Upon mutual written approval of the SPECIFICATION, SCM will implement
the design and fabricate and ship PROTOTYPES to TELENOR in accordance
with the agreed upon delivery schedule.
C. The deliverables, schedule, and charges are set forth in Appendix I
hereto:
2.0 PROTOTYPE ACCEPTANCE AND DISCLAIMER OF WARRANTIES AND REMEDIES
TELENOR shall perform acceptance testing within thirty (30) days after
receipt of PROTOTYPES to determine whether PROTOTYPES conform to the
SPECIFICATION. If within the acceptance period, TELENOR demonstrates
that the PROTOTYPES fail to meet the SPECIFICATION, SCM shall use
reasonable endeavours to correct the defect if technically feasible at
SCM's expense and to supply new PROTOTYPES within a reasonable period
after written notification of the defect and confirmation by SCM. If SCM
is unable to correct the defect, SCM shall refund all moneys paid to SCM
by TELENOR hereunder.
Notwithstanding any assistance SCM may provide in the definition of the
SPECIFICATION; SCM does not warrant adequacy of such specification with
respect to TELENOR's intended use and SCM shall not be responsible for
circuit performance in the TELENOR application.
Page/Seite 1
<PAGE> 2
The foregoing states the entire warranty. All other claims for warranty
or performance are excluded. This shall not apply to claims arising from
the lack of an assured characteristic, or because SCM concealed the
defect in bad faith.
No assured characteristics shall be deemed to be created by this
Agreement. Any assured characteristics may only be created by written
confirmation of the parties.
3.0 PAYMENT SCHEDULE AND TERMS AND TERMINATION
SCM will invoice Telenor in accordance with the following schedule:
PROJECT PHASES
Phase 1: Functional Specification and Feasibility Study: [ * ]
- Overall hardware design definition - Software architecture [ * ]
definition - Detailed production cost estimates
Phase 2: Detailed Specifications: U$ [ * ]
[ * ]
- Processor Silicon specifications
- Electrical Design
- Mechanic specifications
- Software specifications
- Emulation environment for software development
Phase 3: [ * ] software on evaluation board: U$ [ * ]
[ * ]
- [ * ]
- [ * ]
- Software development
- Evaluation board
Phase 4: Prototype and production release U$ [ * ]
[ * ]
- Working prototype module
- Release for production
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
<PAGE> 3
Payment terms: Net 30 days from the date of SCM's invoice
Telenor may terminate after the completion of each phase of the four
phases as defined above. At each phase [ * ] will be billed [ * ].
In case the contract is terminated before phase two is completed, SCM
has the repurchase rights of 50 % of 34985 shares as outlined in the
side letter from Telenor from 30. April 1997 (Rune Rinnan).
4.0 DELAY
If SCM does not comply with the schedule set forth in Appendix 1,
TELENOR shall be entitled to set SCM a reasonable period after the
expire of which without the required performance from SCM, TELENOR shall
be entitled to terminate this Agreement by written notification to SCM.
In this case all development charges previously paid by Telenor shall be
refunded if SCM was responsible for the delay. All other claims are
excluded.
5.0 OTHER DAMAGE CLAIMS
Other damage claims of TELENOR against SCM (in particular because of
breach of advisory obligations or secondary contractual duties, breach
of contract, tortuous acts and culpa in contrahendo) are excluded. This
does not apply if damages are caused by an intentional act or the gross
negligence of an agent or employee of SCM. SCM shall not be liable,
however, where such damages are due to an intentional act or gross
negligence of an agent or employee of SCM who is not an executive or
legal representative of SCM, unless such damages are caused by
infringement of a major contractual obligation.
The claims specified above are subject to a limitation period of 6 (six)
months except for claims for tortuous acts.
6.0 PROPERTY RIGHTS
A. TELENOR agrees that incorporation by SCM of one or more SCM Standard
Modules in any integrated circuit design under this Agreement shall not
derogate in any way from SCM's rights in such Module(s) nor, subject to
the
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
Page/Seite 3
<PAGE> 4
following provisions of this Section, shall it limit the freedom of SCM
to use such Module(s) for the benefit of itself or of other parties. Any
new modules developed by SCM pursuant to this Agreement shall be deemed
to be SCM Standard Modules unless otherwise agreed in writing by the
parties. Title and all rights in any [ * ] and associated design rights
in [ * ], including the right to register such [ * ] under all
applicable statutes, and in the [ * ] arising out of performance under
this Agreement shall be owned exclusively by SCM.
B. SCM will assign a unique part number to device manufactured by SCM for
TELENOR hereunder and will not accept any purchase order from any other
customer for the supply of such device ordered by the unique part number
unless previously agreed in writing with TELENOR. In case of such
deliveries to other customers, SCM agrees to pay TELENOR [ * ] as
compensation for TELENOR's R&D contribution to a maximum [ * ]
7.0 INVENTIONS
Each party represents that it has agreements with its employees (which
term shall include agents, consultants and subcontractors) such that
ownership of intellectual property rights in and to any invention made
by its employees vests in the employer.
With respect to any invention made in the course of performance of this
agreement the following rules shall apply:
A. The intellectual property rights in and to any invention made solely by
one or more employees of either party shall be the sole property of that
party and no license thereunder shall be granted to the other party
except by separate written agreement. In case of a registered invention,
each party informs the other party about their invention.
B. The intellectual property rights in and to any invention made jointly by
one or more employees of SCM with one or more employees of TELENOR shall
be jointly owned by SCM and TELENOR with each party having unrestricted
right to licensee third parties thereunder without accounting to the
other.
The parties agree that the configuration of the device developed
pursuant to this Agreement shall not be deemed to be an invention by
either party.
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
Page/Seite 4
<PAGE> 5
8.0 PRODUCTION
A. TELENOR's purchases of production devices will be initiated by written
purchase orders and SCM's agreement to sell will be by written order
acknowledgement. Unless and until the parties execute a separate written
production agreement, the only terms and conditions of sale for
production devices shall be those set forth in SCM's Standard Terms and
Conditions of Sale in effect at the time of order acknowledgement.
B. TELENOR will be permitted to cancel any undelivered production devices
subject to the following agreed upon cancellation charges: [ * ]
C. Notwithstanding the fact that wafer fabrication and assembly may be
initiated at any given site, SCM reserves the right to support wafer
fabrication and assembly from any of SCM's internally qualified wafer
fabrication and assembly sites.
9.0 GENERAL
A. TELENOR agrees that it will not knowingly (1) export or reexport,
directly or indirectly, any technical data or devices (subject to the
Export Administration Regulations of the US and other applicable
jurisdictions) received from SCM under this Agreement, (2) disclose such
technical data for use in, or (3) export or reexport, directly or
indirectly, any direct product of such technical data to any destination
to which such export or reexport is restricted or prohibited by US or
non-US law, without obtaining prior authorization from US Department of
Commerce and other competent government authorities to the extent
required by those laws.
SCM will comply with those regulations and will apply to obtain the
necessary licenses for shipping the products to Telenor.
B. The existence, validity, and construction of this Agreement and
performance hereunder shall be governed by the laws of Germany and the
Munich courts to whose jurisdiction the parties hereby submit, shall
have exclusive jurisdiction to hear all disputes.
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
Page/Seite 5
<PAGE> 6
C. Consent by either party to, or waiver of, a breach by the other party,
whether express or implied, shall not constitute a consent to, waiver
of, or excuse for any other different or subsequent breach.
D. If any provision, or part of any provision of this Agreement, or the
Appendices hereto, is invalidated by operation of law or otherwise, the
provision or part will to that extent be deemed omitted and the
remainder of this Agreement, or applicable Appendix will remain in full
force and effect. Should the case arise, the parties agree that such
invalidated provision or part thereof shall be replaced by a similar but
legally valid provision which is as close as possible in commercial
effect to the invalidated provision or part thereof.
E. No information transmitted by either party to the other shall be
considered proprietary unless labelled accordingly and subject to a
separate written confidentiality agreement defining the rights and
obligations of the parties with respect thereto.
F. Neither party shall publicly announce or disclose the existence of this
Agreement or its terms and conditions, or advertise or release any
publicity regarding this Agreement, without the prior written consent of
the other party.
G. THIS AGREEMENT AND ITS APPENDIX ARE THE COMPLETE AND EXCLUSIVE STATEMENT
OF THE AGREEMENT BETWEEN THE PARTIES, WHICH SUPERSEDES ALL PROPOSALS OR
PRIOR AGREEMENTS, ORAL OR WRITTEN, AND ALL OTHER COMMUNICATIONS BETWEEN
THE PARTIES RELATING TO THE SUBJECT MATTER OF THIS AGREEMENT AND ANY
APPENDIX. NO ADDITION TO OR MODIFICATION OF THIS AGREEMENT SHALL BE
BINDING UPON EITHER PARTY UNLESS REDUCED IN WRITING AND DULY EXECUTED BY
THE PARTIES TO THIS AGREEMENT.
H. The provisions of Section 6 to 9 shall survive the termination or
cancellation of this Agreement.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed by
their duly authorized representatives.
SCM MICROSYSTEMS GMBH TELENOR
By: /s/ BERND MEIER By: /s/ OYSTEIN CARSEN
----------------------- -----------------------
Name: Bernd Meier Name: Oystein Carsen
--------------------- ---------------------
Title: COO Title: Managing Director
--------------------- --------------------
Date: 05/15/97 Date: 05/15/97
--------------------- ---------------------
Page/Seite 6
<PAGE> 7
APPENDIX 1
1.0 PRELIMINARY PRODUCT DESCRIPTION
See annex [ * ] MODULE TELENOR PROJECT"
After the first phase (see 5.0) the product description might be
readjusted upon agreement of both parties.
2.0 STANDARD DEVELOPMENT PACKAGE
See annex [ * ] MODULE TELENOR PROJECT" After the first phase
(see 5.0), the "standard development package" might be readjusted upon
agreement of both parties.
3.0 DEVELOPMENT CHARGES
See paragraph 3 in contract.
4.0 PAYMENT SCHEDULE
See paragraph 3 of contract.
5.0 PRELIMINARY DEVELOPMENT SCHEDULE
STAGE RESP. ESTIMATED
COMPLETION DATE Day/Month/Year
[ * ]
Further details as outlined in the project plan attached to the [ * ]
module Telenor project plan. After first phase the completion dates can be
readjusted upon agreement of both parties.
7.0 PRODUCTION DEVICE PRICING
for device integrated into DVB-CAM (similar to current CAM) As
production device pricing cannot be defined now the parties agree to
work together to achieve a price target of US [ * ] to US [ * ]. There
can be no guarantee that these prices can be achieved.
Following PROTOTYPE approval by TELENOR, SCM's estimated lead-time for
production devices is approx. [ * ] after receipt of TELENOR's order.
* CERTAIN CONFIDENTIAL INFORMATION ON THIS PAGE
HAS BEEN OMITTED AND FILED SEPARATELY WITH THE
SECURITIES AND EXCHANGE COMMISSION.
Page/Seite 7
<PAGE> 1
EXHIBIT 11.1
SCM Microsystems, Inc. and Subsidiaries
Statement Regarding Computation of Net Income Per Share
(in thousands, except per share data)
<TABLE>
<CAPTION>
Six month
Year ended, period ended,
December 31, 1996 June 30, 1997
----------------- --------------
<S> <C> <C>
Net loss $(1,110) $ (410)
Accretion on redeemable convertible preferred stock (287) (478)
Interest expense on convertible notes payable 96 --
------- ------
Net loss used in earnings per share calculation $(1,301) $ (888)
------- ------
Weighted average common shares outstanding 1,280 1,665
Weighted average convertible preferred stock and notes payable 2,631 3,992
Staff Accounting Bulletin No. 83 issuances and grants(1) 1,361 1,361
------- ------
Shares used to compute pro forma net loss per share 5,272 7,018
------- ------
Pro forma net loss per share $ (0.25) $(0.13)
------- ------
</TABLE>
(1) Pursuant to Securities and Exchange Commission Staff Accounting Bulletin No.
83, common stock, convertible preferred stock and convertible notes payable
issued for consideration below the assumed initial public offering (IPO) price,
and stock options and warrants granted with exercise prices below the IPO price
during the 12-month period preceding the date of the initial filing of the
Registration Statement, have been included in the calculation of common
equivalent shares, using the treasury stock method, as if they were outstanding
for all periods presented.
<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 August 11, 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
August 25, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF SCM MIROSYSTEMS, INC. AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL STATEMENTS AND
REGISTRATION STATEMENT ON FORM S-1.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 JUN-30-1997
<CASH> 2,593 10,942
<SECURITIES> 0 0
<RECEIVABLES> 5,447 5,982
<ALLOWANCES> 210 160
<INVENTORY> 2,279 2,396
<CURRENT-ASSETS> 10,628 19,801
<PP&E> 1,274 1,432
<DEPRECIATION> 456 582
<TOTAL-ASSETS> 11,459 20,665
<CURRENT-LIABILITIES> 12,415 6,107
<BONDS> 0 0
5,068 21,781
1 1
<COMMON> 1 2
<OTHER-SE> (6,026) (7,226)
<TOTAL-LIABILITY-AND-EQUITY> 11,459 20,665
<SALES> 21,520 9,983
<TOTAL-REVENUES> 21,520 9,983
<CGS> 14,880 6,126
<TOTAL-COSTS> 14,880 6,126
<OTHER-EXPENSES> 7,620 4,564
<LOSS-PROVISION> 159 0
<INTEREST-EXPENSE> 304 (58)
<INCOME-PRETAX> (1,110) (410)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (1,110) (410)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,110) (410)
<EPS-PRIMARY> (0.25) (0.13)
<EPS-DILUTED> (0.25) (0.13)
</TABLE>
