<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 26, 1998
REGISTRATION NO. 333-47635
================================================================================
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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<S> <C> <C>
DELAWARE 3577 77-0444317
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYEE
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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<S> <C>
JEFFREY D. SAPER, ESQ. MICHAEL S. IMMORDINO, ESQ.
KENNETH M. SIEGEL, ESQ. KARL A. ROESSNER, ESQ.
N. ANTHONY JEFFRIES, ESQ. DAVID M. DETWEILER, ESQ.
JAN-MARC VAN DER SCHEE, ESQ. JOHN CAFIERO, ESQ.
WILSON SONSINI GOODRICH & ROSATI ROGERS & WELLS
PROFESSIONAL CORPORATION CITY TOWER
650 PAGE MILL ROAD 40 BASINGHALL STREET
PALO ALTO, CA 94304 LONDON, EC2V 5DE
(650) 493-9300 ENGLAND
44-171-628-0101
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
<PAGE> 2
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 REGISTRATION OR QUALIFICATION
UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS (Subject to Completion)
March 25, 1998
3,000,000 SHARES
LOGO
COMMON STOCK
---------------------------
Of the 3,000,000 shares of Common Stock offered, 1,500,000 shares are being
offered hereby in the United States and Canada (the "U.S. Offering") and
1,500,000 shares are being offered in a concurrent international offering
outside the United States and Canada (the "International Offering"), subject to
transfers of shares between the U.S. Underwriters and International Underwriters
(collectively, the "Underwriters"). The public offering price and the aggregate
underwriting discount per share are identical for both offerings. The closing of
the U.S. Offering and International Offering are conditioned upon each other.
See "Underwriting."
Of the 3,000,000 shares of Common Stock offered, 1,000,000 shares are being
sold by SCM Microsystems, Inc. (the "Company") and 2,000,000 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.
The Common Stock is listed on the Nasdaq National Market under the symbol
"SCMM" and on the Neuer Markt of the Frankfurt Stock Exchange under the symbol
"SMY." On March 24, 1998, the last reported sales prices of shares of the Common
Stock on the Nasdaq National Market and the Neuer Markt of the Frankfurt Stock
Exchange were $67.25 and DM127.50 per share, respectively.
---------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 $750,000, 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 450,000
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 April , 1998.
---------------------------
COWEN & COMPANY
HAMBRECHT & QUIST
WESSELS, ARNOLD & HENDERSON
, 1998
<PAGE> 3
EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: (i) one to be
used in connection with an offering in the United States and Canada (the "U.S.
Prospectus") and (ii) the other to be used in connection with a concurrent
offering outside of the United States and Canada (the "International
Prospectus"). The U.S. Prospectus and the International Prospectus are identical
in all respects except for the front cover page and back cover page of the
International Prospectus, both of which are included herein after the final page
of the U.S. Prospectus and are labeled "Alternate Page for International
Prospectus." Final forms of each of the Prospectuses will be filed with the
Securities and Exchange Commission under Rule 424(b).
i
<PAGE> 4
[GRAPHICS]
- --------------------------------------------------------------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK
IN THE OPEN MARKET. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY
TIME. SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND CERTAIN SELLING
GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON
STOCK ON THE NASDAQ NATIONAL MARKET IMMEDIATELY PRIOR TO THE COMMENCEMENT OF
SALES IN THE OFFERING IN ACCORDANCE WITH RULE 103 OF REGULATION M UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE "UNDERWRITING."
<PAGE> 5
PROSPECTUS SUMMARY
This Prospectus contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. Except as set forth in the Consolidated Financial Statements
or as otherwise indicated, all information in this Prospectus assumes that the
Underwriters' over-allotment option is not exercised.
THE COMPANY
SCM Microsystems designs, develops and sells standards-compliant hardware,
firmware and software products and technologies used in smart card and other
token-based network security and conditional access systems. The Company's
objective is to leverage its expertise in smart card technologies, digital
platforms and its extensible, upgradeable smart card interface architecture to
meet the growing demand for secure access to digital information and networks.
The Company sells security and access products which include SwapBox PC Card
adapters, SwapSmart smart card readers, SwapAccess DVB-CAM modules, its SmartOS
universal smart card interface architecture and its CIMax DVB-CI interface chip.
The Company sells security and access products to original equipment
manufacturers ("OEMs") such as computer, telecommunication and digital video
broadcasting ("DVB") component and system manufacturers. The Company markets,
sells and licenses its products through a direct sales and marketing
organization primarily to OEMs and also through distributors, value-added
resellers ("VARs"), system integrators and resellers worldwide. OEM customers
include Dell, Hughes, Kirch Group (BetaDigital), Micron, Packard Bell,
Siemens/Nixdorf, Sysorex and Telenor.
The Company addresses the needs of the enterprise data security and
electronic commerce market by: (i) securing data before it is transmitted across
LANs, public switched networks or the Internet; (ii) providing a range of
products that enable smart cards to be read through standard PCMCIA slots thus
bridging the gap between smart cards and PCs, network computers ("NCs")and other
devices; and (iii) employing an open systems, remotely upgradeable architecture
that provides compatibility across a range of hardware platforms and software
environments. The Company addresses the needs of the conditional access market
by providing smart card-based Digital Video Broadcast -- Conditional Access
Module ("DVB-CAM") products that: (i) adhere to the European DVB-Common
Interface ("DVB-CI") standard, the United States "NRSS-B" standard promulgated
by the National Renewable Security Standards Committee of the Society of Cable
and Telecommunication Engineers and the OpenCable standard proposed by
CableLabs, a consortium of cable system operators; (ii) include real time,
high-bandwidth video decryption capabilities within the reader which can be
unlocked by smart card tokens, which by themselves are not capable of decrypting
digital video data at the rate required for DVB; and (iii) incorporate
read/write capabilities that permit DVB content and service providers to perform
a virtually no-cost upgrade of users' access rights as new products and services
are developed and introduced and as users' subscription desires change. The
Company has formed strategic relationships, including technology sharing
agreements, with a number of key industry players such as Gemplus, Intel and
Telenor.
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.
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 131 Albright Way, Los Gatos, California 95032
and the Company's telephone number is (408) 370-4888. Unless otherwise indicated
or the context otherwise requires, references to "SCM Microsystems" or the
"Company" should be deemed to be references to SCM Microsystems, Inc., its
German predecessor and its consolidated subsidiaries.
3
<PAGE> 6
RECENT DEVELOPMENTS
The Company has recently entered into a non-binding letter of intent to
acquire Intermart Systems K.K., a Japanese corporation, and its subsidiaries
("Intermart"). Intermart sells PC-based devices that provide access to a broad
range of small form factor digital media, including PCMCIA, Compact Flash and
Smart Media. In addition, Intermart has OEM relationships with Nikon, Fuji Film
and other major Japanese companies and has sales, marketing and engineering
operations in Japan and the United States. The Company believes that this
acquisition, if completed, would significantly enhance the Company's sales and
marketing presence in the Japanese market. Intermart generated approximately $3
million in revenues and a loss of approximately $400,000 for the nine month
period ended December 31, 1997. Pursuant to the letter of intent, the Company
would pay the sellers approximately $8 million in a combination of cash and
shares of Company Common Stock. In addition, the sellers may be paid up to an
additional $4 million in Company Common Stock based upon the acquired company
achieving certain performance criteria in the first year of post-acquisition
operations. The acquisition would be accounted for under the "purchase" method.
The Company has also entered into a non-binding letter of intent to acquire
Intellicard Systems, Pte Ltd, a Singapore corporation ("ICS"). ICS manufactures
certain of the Company's products, as well as certain third-party product lines
which require similar manufacturing capabilities. ICS is the Company's
distribution partner in Southeast Asia, and has business relationships and OEM
customers throughout the region. The Company believes ICS's engineering
resources in Singapore, its familiarity with the Company's product lines and its
experience in marketing smart card solutions in Southeast Asia, are
complementary to the Company's business. The Company also believes that
acquiring ICS will lower the cost of the Company's products and hence enhance
its competitiveness and improve gross margins. ICS generated approximately $6
million in revenues and $200,000 in net income for the year ended December 31,
1997. Pursuant to the letter of intent, the Company would pay the sellers
approximately $7 million in a combination of cash and shares of Company Common
Stock. The acquisition would be accounted for under the "purchase" method. See
"Certain Transactions."
Neither of the letters of intent discussed above is binding upon the
Company or the counter party. While the Company believes that the acquisitions
described above will be completed on the terms described above, there can be no
assurance that such transactions will be completed on such terms or at all.
These acquisitions will result in the write-off of purchased in-process research
and development and the amortization of goodwill and other assets. Moreover,
acquisitions entail a number of risks, and, even if completed, there can be no
assurance that the Company will receive the intended benefits from any
acquisition. See "Risk Factors -- Risk Associated With Acquisitions."
THE OFFERING
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<S> <C>
Common Stock offered by the Company.................. 1,000,000 shares
Common Stock offered by Selling Stockholders......... 2,000,000 shares
Total...................................... 3,000,000 shares(1)
Common Stock to be outstanding after the offering.... 12,244,062 shares(2)
Use of proceeds...................................... For general corporate purposes, including
working capital and capital expenditures.
See "Use of Proceeds."
Nasdaq National Market symbol........................ SCMM
Neuer Markt symbol................................... SMY
</TABLE>
- ---------------
(1) Includes 1,500,000 shares to be offered in the U.S. Offering and 1,500,000
shares to be offered in the International Offering.
(2) Includes options to purchase an aggregate of 60,000 shares of Common Stock
which options will be exercised prior to completion of, and the underlying
shares being sold in, this offering. Excludes 1,027,101 shares of Common
Stock issuable upon exercise of stock options outstanding as of March 24,
1998 at a weighted average exercise price of $6.82 per share and 51,191
shares of Common Stock subject to warrants outstanding as of such date at an
exercise price of $5.72 per share. See "Management -- Employee Stock Plans"
and Notes 4, 5 and 11 of Notes to Consolidated Financial Statements.
"SwapBox" and "SwapSmart" are registered trademarks of the Company and
"SwapAccess," "SmartOS," "Smart Transporter" and "CIMax" are trademarks of the
Company. This Prospectus also contains trademarks of other companies.
4
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net sales(1):
Security and access products................ $ -- $ 1,426 $12,520 $16,628 $27,606
PCMCIA peripheral products.................. 2,379 5,020 5,546 4,892 163
------- ------- ------- ------- -------
Total net sales........................ 2,379 6,446 18,066 21,520 27,769
------- ------- ------- ------- -------
Gross profit................................... 600 1,359 2,295 6,640 10,245
Operating expenses............................. 1,601 2,966 4,895 7,620 10,170
------- ------- ------- ------- -------
Income (loss) from operations.................. (1,001) (1,607) (2,600) (980) 75
------- ------- ------- ------- -------
Net income (loss).............................. (1,096) (1,868) (2,926) (1,110) 1,103
Accretion on redeemable convertible preferred
stock....................................... -- -- (139) (287) (802)
------- ------- ------- ------- -------
Net income (loss) applicable to common
stockholders................................ $(1,096) $(1,868) $(3,065) $(1,397) $ 301
======= ======= ======= ======= =======
Basic net income (loss) per share.............. $ (0.86) $ (1.46) $ (2.39) $ (1.09) $ 0.08
======= ======= ======= ======= =======
Diluted net income (loss) per share............ $ (0.86) $ (1.46) $ (2.39) $ (1.09) $ 0.06
======= ======= ======= ======= =======
Shares used in computations:
Basic net income (loss) per share(2)........ 1,280 1,280 1,280 1,280 3,819
======= ======= ======= ======= =======
Diluted net income (loss) per share(2)...... 1,280 1,280 1,280 1,280 5,015
======= ======= ======= ======= =======
Pro forma information:
Net income applicable to common
stockholders.............................. $ 1,103
=======
Pro forma diluted net income per share(3)... $ 0.14
=======
Shares used to compute pro forma diluted net
income per share.......................... 7,649
=======
</TABLE>
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<CAPTION>
DECEMBER 31, 1997
------------------------
AS
ACTUAL ADJUSTED(4)
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<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments........... $ 55,888 $ 119,093
Working capital............................................. 60,296 123,501
Total assets................................................ 67,365 130,570
Total stockholders' equity.................................. 61,472 124,677
</TABLE>
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(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) See Notes 1 of Notes to Consolidated Financial Statements for a discussion
of the number of shares used in per share calculations.
(3) Pro forma diluted net income per share gives effect to the conversion of the
redeemable convertible preferred stock into Common Stock on January 1, 1997,
or their respective dates of issuance if later. All redeemable convertible
preferred stock was converted into Common Stock on a one-for-one basis on
October 7, 1997, the date of the Company's initial public offering.
(4) Adjusted to reflect the sale of 1,000,000 shares of Common Stock offered by
the Company (after deducting the underwriting discounts and estimated
offering expenses payable by the Company) and the application of the
estimated net proceeds therefrom. See "Use of Proceeds" and
"Capitalization."
5
<PAGE> 8
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the shares of Common Stock offered hereby. This
Prospectus contains forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933, as amended (the "Securities Act"), and Section
21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). All
forward-looking statements in this Prospectus are based on information available
to the Company on the date hereof and assumptions which the Company believes are
reasonable, and the Company assumes no obligation to update any such
forward-looking statements. These forward-looking statements involve risks and
uncertainties. The Company's actual results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth in the following risk factors and elsewhere in this
Prospectus. 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 year ended December 31, 1997,
the Company incurred net operating losses on an annual basis since its inception
in 1993 through 1996. In view of the Company's loss history, there can be no
assurance that the Company will be able to 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 timing and
success of the Company's acquisitions and any related write-offs; 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; key personnel changes, anticipated or otherwise; and general economic
trends. In addition, because a high percentage of the Company's operating
expenses are fixed, a small variation in revenue can cause significant
variations in operating results from quarter to quarter. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company has experienced significant seasonality in its business, and
the Company's business and operating results are likely to be affected by
seasonality in the future. The Company has typically experienced higher net
sales in the third quarter and fourth quarter of each calendar year followed by
lower net sales and operating income in the first quarter and second quarter of
the following year. The Company believes that this trend has been principally
due to budgeting requirements of the U.S. government which influence the
purchasing patterns of OEMs which supply PCs and workstations incorporating the
Company's data security products to the U.S. government. The Company expects
that as sales of its DVB products, which are currently sold to OEMs mainly in
Europe for the consumer market, begin to represent a larger percentage of net
sales, the seasonality that the Company experiences may be further exacerbated
as these sales are likely to be strongest in the fourth quarter of the year.
Initial sales of the Company's products to a new customer typically involve
a sales cycle which can range from six to nine months during which the Company
may expend substantial financial resources and management time and effort with
no assurance that a sale will ultimately result. The length of the sales cycle
may vary depending on a number of factors over which the Company may have little
or no control, including product and technical requirements, and the level of
competition which the Company encounters in its selling
activities. Any delays in the sales cycle for new customers could have a
material adverse effect on the Company's business and operating results.
6
<PAGE> 9
Based upon the factors enumerated above, the Company believes that its
operating results may vary significantly in future periods and that historical
results are not reliable indicators of future performance. It is likely that, in
some future quarter or quarters, the Company's operating results will be below
the expectations of stock market analysts and investors. In such event, the
market price of the Company's Common Stock could decline significantly. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results of Operations."
DEPENDENCE ON EMERGING PRODUCT MARKETS; UNCERTAINTY OF MARKET ACCEPTANCE OF THE
COMPANY'S PRODUCTS
From the Company's inception through 1994, the Company focused on PCMCIA
peripheral products, including flash memory and fax/modem devices. In 1994, the
Company began emphasizing security and access products. The Company made the
final shipment of PCMCIA peripheral products in the quarter ended March 31,
1997, completing its exit from this business. As a result of the Company's
strategic shift in product focus, the proportion of security and access product
sales increased from 22.1% of total net sales in 1994 to 99.4% of total net
sales in 1997. The Company's net sales are now and will continue to be dependent
upon the success of its security and access products.
The Company's future growth and operating results will depend to a large
extent on the successful marketing and commercial viability of the Company's
security and access product families. Each of these product families addresses
needs in different emerging markets. Smart card token-based security
applications are able to provide protection from unauthorized access to digital
information. The Company believes that smart cards are ideally suited to serve
as tokens for network and electronic commerce security. Accordingly, the
Company's SwapBox and SwapSmart product families are designed to provide smart
card token-based security for PCs. However, there can be no assurance that the
smart card will become the industry standard for network and electronic commerce
security applications. The Company's DVB product family provides a means of
controlling access to digital television broadcasts. The Company's SwapAccess
DVB-CAM product implements the DVB-CI and OpenCable standards. To date, the
Company's DVB-CAM product has been implemented in a relatively limited number of
DVB set-top boxes in Europe. Although the Company believes that the DVB-CI
standard will eventually become the European standard for DVB conditional access
applications, there can be no assurance that the standard will be adopted, that
the European DVB market will further develop or that even if such standard is
adopted and the market further develops, the Company's DVB-CAM products will be
widely adopted. Furthermore, the market for DVB products in the United States
has only recently begun to develop. While the OpenCable standard has been
proposed 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 other standards are 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 suffer a material
adverse effect. See "-- Competition."
DEPENDENCE ON SALES TO OEMS
A substantial majority of the Company's products are intended for use as
components or subsystems in systems manufactured and sold by third party OEMs.
In 1997, almost all of the Company's sales were to OEMs and the Company expects
this dependence on OEM sales to continue. In 1997, sales to BetaDigital (a
division of the Kirch Group) accounted for 45% of total net sales and sales to
the Company's top 10 customers (all of which are OEMs) accounted for 80% 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
7
<PAGE> 10
that OEMs will elect to incorporate the Company's products into their current or
future systems. Further, the business strategies and manufacturing practices of
the Company's OEM customers are subject to change and any such change may result
in decisions by the customers to decrease their purchases of the Company's
products, seek other sources for products currently manufactured by the Company
or manufacture these products internally. The Company's OEM customers may also
seek price concessions from the Company. Failure of OEMs to incorporate the
Company's products into their systems, the failure of such OEMs' systems to
achieve market acceptance or any other event causing a decline in the Company's
sales to OEMs would have a material adverse effect on the Company's business and
operating results. See "Business -- Customers and Applications."
DEPENDENCE ON SALES TO GOVERNMENT CONTRACTORS
Approximately 50.6%, 39.2% and 27.5% of the Company's net sales during
1995, 1996 and 1997, respectively, were derived from sales of the Company's
SwapBox product for use by the U.S. government, all of which were made under
contracts between the Company and major OEMs that sell PCs to the United States
Department of Defense (the "DoD"). The Company believes that indirect sales to
the DoD are subject to a number of significant uncertainties, including timing
and availability of funding, unforeseen changes in the timing and quantity of
government orders and the competitive nature of government contracting
generally. Furthermore, the DoD has been reducing total expenditures over the
past few years in a number of areas and there can be no assurance that such
funding will not be reduced in the future. In addition, there is no assurance
that the Company will be able to modify existing products or develop new
products that will continue to meet the specifications of OEM suppliers to the
DoD. A significant loss of indirect sales to the U.S. government would have a
material adverse effect on the Company's business and operating results. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
DEPENDENCE ON DEVELOPMENT OF INDUSTRY RELATIONSHIPS
The Company is party to collaborative arrangements with a number of
corporations and is a member of key industry consortia. The Company has formed
strategic relationships, including technology sharing agreements, with a number
of key industry players such as Intel, Gemplus and Telenor. The Company
evaluates, on an ongoing basis, potential strategic alliances and intends to
continue to pursue such relationships. The Company's future success will depend
significantly on the success of its current arrangements and its ability to
establish additional arrangements. There can be no assurance that these
arrangements will result in commercially successful products. See
"Business -- Collaborative Industry Relationships."
COMPETITION
The market for digital data security and access control products is
intensely competitive and characterized by rapidly changing technology. The
Company believes that competition in this market is likely to intensify as a
result of increasing demand for security products. The Company currently
experiences competition from a number of sources, including: (i) ActionTec,
Carry Computer Engineering, Greystone and Litronics in PC Card adapters; (ii)
Gemplus, SmartDisk Corporation, Philips and Tritheim in smart card readers and
universal smart card reader interfaces; and (iii) Gemplus in DVB-CAM modules.
The Company also experiences indirect competition from certain of its customers
which currently offer alternative products or are expected to introduce
competitive products in the future. The Company may in the future face
competition from these and other parties including new entrants that develop
digital information security products based upon approaches similar to or
different from those employed by the Company. In addition, there can be no
assurance that the market for digital data security and access control products
will not ultimately be dominated by approaches other than the approach marketed
by the Company.
Many of the Company's current and potential competitors have significantly
greater financial, technical, marketing, purchasing and other resources than the
Company, and as a result, may be able to respond more quickly to new or emerging
technologies or standards and to changes in customer requirements, or may be
able to devote greater resources to the development, promotion and sale of
products, or to deliver competitive
8
<PAGE> 11
products at a lower end user price. Current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address the needs of
the Company's prospective customers. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition is likely to result in price
reductions, reduced operating margins and loss of market share, any of which
could have a material adverse effect on the Company's business and operating
results.
The Company believes that the principal competitive factors affecting the
market for digital data security products include: the extent to which products
support industry standards and provide interoperability; technical features;
ease of use; quality/reliability; level of security; strength of distribution
channels; and price. There can be no assurance that the Company will be able to
compete as to these or other factors or that competitive pressures faced by the
Company will not have a material adverse effect on 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 $27.8 million in 1997. 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 have joined the Company within the past 20
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 78
as of December 31, 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 "--Risks Associated With Acquisitions,"
"-- Dependence on Key Personnel; Ability to Recruit Personnel," and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
RISK ASSOCIATED WITH ACQUISITIONS
The Company has recently entered into non-binding letters of intent with
two companies regarding the acquisition of such companies by the Company (see
"Prospectus Summary -- Recent Developments"), and the Company's strategy is to
pursue additional acquisitions and similar opportunities in the future. There
can be no assurance that the two pending acquisitions will be completed on a
timely basis or at all, nor that the Company will be able to identify additional
acquisition opportunities or complete any future acquisition transactions.
Future acquisitions by the Company may result in potentially dilutive issuances
of equity securities, the incurrence of debt, write-off of purchased in-process
research and development and amortization of goodwill and other intangible
assets, which could materially adversely affect the Company's operating results.
In addition, completed acquisitions present a number of significant risks and
uncertainties, including: the risks that the Company will not be able to retain
the employees or business relationships of the acquired company or otherwise
effectively integrate the operations of the acquired company with those of the
Company; the risk that the Company will fail to realize any synergies or other
cost reduction objectives expected from the acquisition; the risks that pursuing
acquisition opportunities and integrating acquired products, technologies or
companies may distract management from performing their regular
responsibilities; difficulties in the assimilation of the operations, products
and personnel of the acquired company; risks of entering markets in which the
Company has no direct prior experience; and, with respect to the acquisition of
operations located at any significant distance from the Company's primary
facilities, the risks and additional costs associated with managing
geographically disparate operations. There can be no assurance that the
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<PAGE> 12
Company will ever successfully complete an acquisition or that any such
acquisition will result in benefits to the Company. See "-- Integration of
Global Locations."
INTEGRATION OF GLOBAL LOCATIONS
The Company's U.S. headquarters are located in Los Gatos, California, its
European headquarters are located in Pfaffenhofen, Germany, and its research and
development facilities are located in Erfurt, Germany and La Ciotat, France. In
addition, a significant portion of the Company's contract manufacturing occurs
in Singapore. Operating in diverse geographic locations imposes a number of
risks and burdens on the Company, including the need to manage employees and
contractors from diverse cultural backgrounds and who speak different languages,
and difficulties associated with operating in a number of time zones. Although
the Company seeks to mitigate the difficulties associated with operating in
diverse geographic locations through the extensive use of electronic mail and
teleconferencing, there can be no assurance that it will not encounter
unforeseen difficulties or logistical barriers in operating in diverse
locations. Furthermore, operations in widespread geographic locations require
the Company to implement and operate complex information systems that are
capable of providing timely information which can readily be consolidated.
Although the Company believes that its information systems are adequate, the
Company may in the future have to implement new information systems.
Implementation of such new information systems may be costly and may require
training of personnel. Any failure or delay in implementing these systems,
procedures and controls on a timely basis, if necessary, or in expanding these
areas in an efficient manner at a pace consistent with the Company's business
could have a material adverse effect on the Company's business and operating
results.
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 and SwapSmart trademarks
are registered in the United States and certain other countries and the Company
has other trademark applications allowed and pending in various countries. The
Company will continue to evaluate the registration of additional trademarks as
appropriate. The Company currently has four U.S. and one Japanese, one German,
one British, and one French patents issued, and various U.S., German and other
patent applications pending, and exclusive licenses under various other U.S. and
foreign patents associated with its products. Furthermore, the Company has an
option 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 and operating results.
There has also been substantial litigation in the technology industry
regarding intellectual property rights, and litigation may be necessary to
protect the Company's proprietary technology. The Company has from time to time
received claims that it is infringing upon third parties' intellectual property
rights, and there can be no assurance that third parties will not in the future
claim infringement by the Company with respect to current or future products,
patents, trademarks or other proprietary rights. In addition, a third party has
alleged that the Company has infringed the third party's trademarks and engaged
in unfair competition. See "Business -- Legal Proceedings." The Company expects
that companies in the computer and digital information security market will
increasingly be subject to infringement claims as the number of products and
competitors in the Company's target markets grows. Any such claims or litigation
may be time-consuming and costly, cause product shipment delays, require the
Company to redesign its products or require the Company to enter into royalty or
licensing agreements, any of which could have a material adverse effect on the
Company's business and operating results. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy aspects
of the Company's products or to obtain and use information and software that the
10
<PAGE> 13
Company regards as proprietary. In addition, the laws of some foreign countries
do not protect proprietary and intellectual property rights to as great an
extent as do the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary and intellectual property rights
will be adequate or that the Company's competitors will not independently
develop similar technology, duplicate the Company's products or design around
patents issued to the Company or other intellectual property rights of the
Company.
DEPENDENCE ON CONTRACT AND OFFSHORE MANUFACTURING; LIMITED NUMBER OF SUPPLIERS
OF KEY COMPONENTS
The Company has implemented a global sourcing strategy that it believes
will enable it to achieve greater economies of scale, improve gross margins and
maintain uniform quality standards for its products. The Company currently
sources its products through three contract manufacturers in Europe and Asia. In
the event any of the Company's contract manufacturers are unable or unwilling to
continue to manufacture the Company's products, the Company may have to rely on
other current manufacturing sources or identify and qualify new contract
manufacturers. In this regard, one of the Company's contract manufacturers has
recently been involved in bankruptcy proceedings and may be unable to continue
manufacturing the Company's products. In the event that such manufacturer (or
any other key supplier) were unable to meet the Company's requirements, there
can be no assurance that the Company would be able to identify or qualify new
contract manufacturers in a timely manner or that such manufacturers would
allocate sufficient capacity to the Company in order to meet its requirements.
Any significant delay in the Company's ability to obtain adequate supplies of
its products from its current or alternative sources would have a material
adverse effect on 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 ICS in Singapore. The Company
has recently entered into a non-binding letter of intent to acquire ICS. See
"Prospectus Summary -- Recent Developments." 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 ICS'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 currency fluctuations, transportation delays and interruptions,
difficulties in staffing, 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 ICS and mechanical components for use in its smart card reader
product exclusively from Stocko, a German-based supplier. The Company's reliance
on sole source suppliers involves several risks, including a potential inability
to obtain an adequate supply of required components, price increases, late
deliveries and poor component quality. Although to date the Company has been
able to purchase its requirements of such components, there can be no assurance
that the Company will be able to obtain its full requirements of such components
in the future or that prices of such components will not increase. In addition,
there can be no assurance that problems with respect to yield and quality of
such components and timeliness of deliveries will not occur. Disruption or
termination of the supply of these components could delay shipments of the
Company's products and could have a material adverse effect on the Company's
business and operating results. Such delays could also damage relationships with
current and prospective customers. See "Business -- Manufacturing."
DEPENDENCE ON NEW PRODUCTS; RAPID TECHNOLOGICAL CHANGE
The markets for the Company's products are characterized by rapid
technological change, changing customer needs, frequent new product introduction
and evolving industry standards and short product lifecycles. The introduction
by the Company or its competitors of products embodying new technologies and the
emergence of new industry standards could render the Company's existing products
obsolete and unmarketable. Therefore, the Company's future success will depend
upon its ability to successfully develop
11
<PAGE> 14
and to introduce on a timely and continuous basis new and enhanced products that
keep pace with technological developments and emerging industry standards and
address the increasingly sophisticated needs of its customers. The timing and
success of product development is unpredictable due to the inherent uncertainty
in anticipating technological developments, the need for coordinated efforts of
numerous technical personnel and the difficulties in identifying and eliminating
design flaws prior to product release. Any significant delay in releasing new
products could have a material adverse effect on the ultimate success of a
product and other related products and could impede continued sales of
predecessor products, any of which could have a material adverse effect on the
Company's business and operating results. There can be no assurance that the
Company will be able to introduce new products on a timely basis, that new
products introduced by the Company will achieve any significant degree of market
acceptance or that any such acceptance will be sustained for any significant
period. Failure of new products to achieve or sustain market acceptance could
have a material adverse effect on the Company's business and operating results.
See "Business -- Research and Development."
RISKS OF INTERNATIONAL SALES; CURRENCY FLUCTUATIONS
The Company was originally a German corporation and continues to conduct a
substantial portion of its business in Europe. Approximately 49.0%, 52.5% and
68.7% of the Company's revenues in 1995, 1996 and 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 could have a
material adverse effect on the Company's business and operating results.
As a result of the Company's multinational operations and sales, the
Company's operating results are subject to significant fluctuations based upon
changes in the exchange rates of certain currencies, particularly the German
mark, in relation to the U.S. dollar. The Company does not currently engage in
hedging activities with respect to its foreign currency exposure. Although
management will continue to monitor the Company's exposure to currency
fluctuations, and, when appropriate, may use financial hedging techniques in the
future to minimize the effect of these fluctuations, there can be no assurance
that exchange rate fluctuations would have a material adverse effect on the
Company's business and operating results. In the future, the Company could be
required to denominate its product sales in other currencies, which would make
the management of currency fluctuations more difficult and expose the Company to
greater risks in this regard. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
PRODUCT LIABILITY RISKS
Customers rely on the Company's token-based security products to prevent
unauthorized access to their digital content. A malfunction of or design defect
in the Company's products could result in tort or warranty claims. Although the
Company attempts to reduce the risk of exposure from such claims through
warranty disclaimers and liability limitation clauses in its sales agreements
and by maintaining product liability insurance, there can be no assurance that
such measures will be effective in limiting the Company's liability for any such
damages. Any liability for damages resulting from security breaches could be
substantial and could have a material adverse effect on the Company's business
and operating results. In addition, a well-publicized actual or perceived
security breach involving token-based security systems could adversely affect
the market's perception of token-based security products in general, or the
Company's products in particular, regardless of whether such breach is
attributable to the Company's products. This could result in a decline in demand
for the Company's products, which would have a material adverse effect on the
Company's business and operating results.
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<PAGE> 15
YEAR 2000 COMPLIANCE
Many currently installed computer systems and software products are coded
to accept only two digit entries in the date code field. These date code fields
will need to accept four digit entries to distinguish 21st century dates from
20th century dates. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to comply with such "Year 2000"
requirements. Although the Company believes that its products and systems are
Year 2000 compliant, the Company utilizes third-party equipment and software
that may not be Year 2000 compliant. Failure of such third-party equipment or
software to operate properly with regard to the Year 2000 and thereafter could
require the Company to incur unanticipated expenses to remedy any problems,
which could have a material adverse effect on the Company's business and
operating results. Furthermore, the purchasing patterns of customers or
potential customers may be affected by Year 2000 issues as companies expend
significant resources to correct their current systems for Year 2000 compliance.
These expenditures may result in reduced funds available to purchase products
and services such as those offered by the Company, which could have a material
adverse effect on the Company's business and operating results.
DEPENDENCE ON KEY PERSONNEL; ABILITY TO RECRUIT PERSONNEL
The Company's future performance depends in significant part upon the
continued service of Robert Schneider, the Company's Chairman of the Board,
Steven Humphreys, the Company's President and Chief Executive Officer, and Bernd
Meier, the Company's Chief Operations Officer, as well as its other key
technical and senior management personnel. The Company provides compensation
incentives such as bonuses, benefits and option grants (which are typically
subject to vesting over four years) to attract and retain qualified employees.
In addition, the Company's German subsidiary has entered into substantially
similar employment agreements with each of Messrs. Schneider and Meier pursuant
to which each serves as a Managing Director of the subsidiary. Each of the
respective agreements has no set termination date, may be terminated by the
subsidiary or the officer with six months notice, and provides that the officer
is bound by a non-compete provision during the one-year period following his
termination. Non-compete agreements are, however, generally difficult to enforce
and therefore these provisions may not provide significant protection to the
Company. The Company also has an employment agreement with Jean-Yves Le Roux,
its Vice President, Engineering, that is terminable by either party at will. The
Company does not have employment agreements with any of its other key employees
and does not maintain key man life insurance on any of its employees. The loss
of the services of one or more of the Company's officers or other key employees
could have a material adverse effect on the Company's business and operating
results. The Company believes that its future success will depend in large part
on its continuing ability to attract and retain highly qualified technical and
management personnel. Competition for such personnel is intense, and there can
be no assurance that the Company can retain its key technical and management
employees or that it can attract, assimilate or retain other highly qualified
technical and management personnel in the future. See "Business -- Employees"
and "Management."
POSSIBLE VOLATILITY OF STOCK PRICE
The market price of the Common Stock has experienced significant
fluctuations since the Company's initial public offering in October 1997 and may
continue to fluctuate significantly. The market price of the Common Stock may be
significantly affected by factors such as the announcement of new products or
product enhancements by the Company or its competitors, technological innovation
by the Company or its competitors, quarterly variations in the Company's results
of operation, changes in earnings estimates by market analysts, and general
market conditions or market conditions specific to particular industries. In
particular, the stock prices for many companies in the technology and emerging
growth sector have experienced wide fluctuations which have often been unrelated
to the operating performance of such companies. Such fluctuations may adversely
affect the market price of the Common Stock. See "Price of Common Stock."
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BROAD MANAGEMENT DISCRETION IN USE OF PROCEEDS
The Company currently has no specific use planned for 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. The Company may use a portion of these
funds for the acquisition of complementary businesses, products and
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
19.8% of the Company's outstanding shares of Common Stock. Accordingly, these
stockholders, acting together, will continue to be able to exert significant
influence over matters requiring stockholder approval, including the election of
the Company's directors and the approval of mergers and other change in control
transactions involving the Company. See "Management," "Principal and Selling
Stockholders" and "Description of Capital Stock."
Certain provisions of the Company's Amended and Restated Certificate of
Incorporation, amended Bylaws, Delaware law and the Company's indemnification
agreements with its officers and directors may be deemed to have an
anti-takeover effect. Such provisions may delay, deter or prevent a tender offer
or takeover attempt that a stockholder might consider to be in that
stockholder's best interests, including attempts that might result in a premium
over the market price for the shares held by stockholders.
The Company's Board of Directors may issue additional shares of Common
Stock or establish one or more classes or series of Preferred Stock, having the
number of shares (up to 10,000,000), designations, relative voting rights,
dividend rates, liquidation and other rights, preferences and limitations as
determined by the Board of Directors without stockholder approval. The foregoing
provisions give the Board of Directors, acting without stockholder approval, the
ability to prevent, or render more difficult or costly, the completion of a
takeover transaction that stockholders might view as being in their best
interests. The Company's Amended and Restated Certificate of Incorporation and
Bylaws, as amended, also contain a number of provisions that could impede a
takeover or change in control of the Company, including but not limited to the
elimination of stockholders' ability to take action by written consent without a
meeting and the elimination of cumulative voting in the election of directors.
The Company is subject to the anti-takeover provisions of Section 203 of
the Delaware General Corporation Law. In general, the statute prohibits a
publicly-held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless the
business combination is approved in a prescribed manner.
In addition, in connection with its listing on the Neuer Markt of the
Frankfurt Stock Exchange, the Company is 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, to provide certain disclosure to the target company's
stockholders, to generally treat stockholders equally in an offer, and to comply
with certain other procedural requirements. In addition, the German Code gives
broad authority to the German regulatory authorities to interpret the German
Code and to review and regulate specific Public Offers. Compliance with the
German Code could have the effect of delaying, deterring or preventing a tender
offer or takeover attempt that a stockholder might consider to be in that
stockholder's best interests, including attempts that might result in a premium
over the market price for the shares held by stockholders.
The Company licenses certain technology from a third party pursuant to a
license that is not transferable by the Company without the prior written
consent of the third party. This provision may prohibit the transfer of such
technology in a merger or consolidation of the Company with another company. As
a result, this provision may have the effect of discouraging or preventing an
acquisition of the Company.
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<PAGE> 17
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 12,244,062 shares outstanding (12,694,062 shares
if the Underwriters' over-allotment option is exercised in full) assuming no
further exercise of options or warrants outstanding as of March 25, 1998. Of
these shares, the 3,000,000 shares offered hereby (3,450,000 shares if the
Underwriters' over-allotment option is exercised in full), together with an
aggregate of 6,320,451 shares (comprising (i) shares sold in the Company's
initial public offering, (ii) shares sold into the public market subsequent to
the Company's public offering, and (iii) shares issued prior to the Company's
initial public offering that are eligible for unrestricted sale in the public
market) will be freely tradeable without restriction after the offering. Of the
remaining 2,923,610 shares (the "Restricted Shares"), 225,691 will be eligible
for sale immediately following the offering subject to compliance with the
volume and other restrictions of Rule 144 under the Securities Act of 1933, as
amended ("Rule 144"). Holders of the remaining 2,928,863 Restricted Shares have
signed lock-up agreements with the underwriters and therefore may not sell such
shares until expiration of the lock-up agreements 90 days after the date of this
prospectus. These locked-up shares will become eligible for sale into the public
market upon expiration of the lock-up agreements, subject in certain cases to
compliance with the volume and other restrictions of Rule 144. Upon the
completion of this offering, the holders of approximately 2.9 million shares of
Common Stock will be entitled to certain rights with respect to the registration
of such shares under the Securities Act. See "Description of Capital
Stock -- Registration Rights."
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock being offered by the Company (after deducting the underwriting
discount and estimated offering expenses payable by the Company) are estimated
to be approximately $63,204,750 ($91,984,388 if the Underwriters' over-allotment
option is exercised in full). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." The Company intends to use the 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 entered into non-binding letters of intent to acquire two separate
companies. See "Prospectus Summary -- Recent Developments." 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's U.S. line of credit requires the Company to
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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PRICE RANGE OF COMMON STOCK
The Company's Common Stock is quoted on the Nasdaq National Market under
the symbol "SCMM" and on the Neuer Markt of the Frankfurt Stock Exchange under
the symbol "SMY." The following table lists the high and low closing prices
since the Company's Common Stock began trading on the Nasdaq National Market on
October 7, 1997.
<TABLE>
<CAPTION>
NASDAQ
NATIONAL MARKET NEUER MARKT
---------------- ----------------------
HIGH LOW HIGH LOW
------ ------ --------- ---------
<S> <C> <C> <C> <C>
FISCAL 1997:
Fourth Quarter (From October 7, 1997).......... $31.50 $19.13 DM51.20 DM38.00
FISCAL 1998:
First Quarter (Through March 23, 1998)......... $88.00 $23.59 DM167.00 DM42.10
</TABLE>
On March 24, 1998, the closing prices of the Company's Common Stock were
$67.25 per share as reported by the Nasdaq National Market and DM127.50 per
share as reported by the Neuer Markt of the Frankfurt Stock Exchange.
16
<PAGE> 19
CAPITALIZATION
The following table sets forth the total capitalization of the Company at
December 31, 1997 and such capitalization adjusted to give effect to the sale of
the 1,000,000 shares of Common Stock offered by the Company (after deducting the
underwriting discount and estimated offering expenses). 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>
DECEMBER 31, 1997
----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Stockholders' equity (deficit):
Preferred Stock, $0.001 par value; 10,000,000 shares
authorized................................................ -- --
Common Stock, $0.001 par value; 40,000,000 authorized
shares; 10,714,978 shares issued and outstanding; and
11,714,978 shares as adjusted(1)....................... 11 12
Additional paid-in capital................................ 69,902 133,106
Deferred stock compensation............................... (125) (125)
Accumulated deficit....................................... (7,714) (7,714)
Cumulative translation adjustment......................... (602) (602)
------- --------
Total stockholders' equity............................. 61,472 124,677
------- --------
Total capitalization.............................. $61,472 $124,677
======= ========
</TABLE>
- ---------------
(1) Excludes: 1,156,185 shares of Common Stock issuable upon exercise of stock
options outstanding as of December 31, 1997 at a weighted average exercise
price of $6.78 per share and 451,191 shares of Common Stock subject to
warrants outstanding as of December 31, 1997 at a weighted average exercise
price of $12.62 per share. See "Management -- Employee Stock Plans" and
Notes 4, 5 and 11 of Notes to Consolidated Financial Statements.
17
<PAGE> 20
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data at December 31, 1996 and
1997 and for each of the years in the three-year period ended December 31, 1997
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 and 1995 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 are derived
from unaudited Consolidated Financial Statements of the Company that are not
included herein. 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>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
CONSOLIDATED STATEMENT OF OPERATIONS DATA: (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Net sales(1)
Security and access products..................... $ -- $ 1,426 $12,520 $16,628 $27,606
PCMCIA peripheral products....................... 2,379 5,020 5,546 4,892 163
------- ------- ------- ------- -------
Total net sales.......................... 2,379 6,446 18,066 21,520 27,769
Cost of sales...................................... 1,779 5,087 15,771 14,880 17,524
------- ------- ------- ------- -------
Gross profit....................................... 600 1,359 2,295 6,640 10,245
------- ------- ------- ------- -------
Operating Expenses:
Research and development......................... 691 1,162 1,399 2,386 2,940
Sales and marketing.............................. 564 1,224 2,057 3,230 4,221
General and administrative....................... 346 580 1,439 2,004 2,494
Settlement of patent claim....................... -- -- -- -- 515
------- ------- ------- ------- -------
Total operating expenses................. 1,601 2,966 4,895 7,620 10,170
------- ------- ------- ------- -------
Income (loss) from operations...................... (1,001) (1,607) (2,600) (980) 75
Interest income (expense), net................... (95) (261) (337) (304) 866
Foreign currency transaction gains............... -- -- 11 174 467
------- ------- ------- ------- -------
Income (loss) before income taxes.................. (1,096) (1,868) (2,926) (1,110) 1,408
Provision for income taxes....................... -- -- -- -- 305
------- ------- ------- ------- -------
Net income (loss).................................. (1,096) (1,868) (2,926) (1,110) 1,103
Accretion on redeemable convertible preferred
stock............................................ -- -- (139) (287) (802)
------- ------- ------- ------- -------
Net income (loss) applicable to common
stockholders..................................... $(1,096) $(1,868) $(3,065) $(1,397) $ 301
======= ======= ======= ======= =======
Basic net income (loss) per share.................. $ (0.86) $ (1.46) $ (2.39) $ (1.09) $ 0.08
======= ======= ======= ======= =======
Diluted net income (loss) per share................ $ (0.86) $ (1.46) $ (2.39) $ (1.09) $ 0.06
======= ======= ======= ======= =======
Shares used in computations:
Basic net income (loss) per share(2)............. 1,280 1,280 1,280 1,280 3,819
======= ======= ======= ======= =======
Diluted net income (loss) per share(2)........... 1,280 1,280 1,280 1,280 5,015
======= ======= ======= ======= =======
Pro forma information:
Net income applicable to common stockholders..... $ 1,103
=======
Pro forma diluted net income per share(3)........ $ 0.14
=======
Shared used to compute pro forma diluted net
income per share.............................. 7,649
=======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments................................... $ 115 $ 70 $ 739 $ 2,593 $55,888
Working capital (deficit)........................ 454 823 1,620 (1,787) 60,296
Total assets..................................... 1,829 3,452 8,143 11,459 67,365
Long-term debt, less current portion............. 503 3,027 2,147 -- --
Redeemable convertible preferred stock........... -- -- 4,781 5,068 --
Total stockholders' equity (deficit)............. 19 (2,027) (4,760) (6,024) 61,472
</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) See Notes 1 of Notes to Consolidated Financial Statements for a discussion
of the number of shares used in per share calculations.
(3) Pro forma diluted net income per share gives effect to the conversion of the
redeemable convertible preferred stock into Common Stock on January 1, 1997,
or their respective dates of issuance if later. All redeemable convertible
preferred stock was converted into Common Stock on a one-for-one basis on
October 7, 1997, the date of the Company's initial public offering.
18
<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 sells standards-compliant hardware,
firmware and software products and technologies used in smart card and other
token-based network security and conditional access systems. The Company's
objective is to leverage its expertise in smart card technologies, digital
platforms, and its extensible, upgradeable smart card interface architecture, to
meet the growing demand for secure access to digital information and networks.
The Company sells security and access products which include SwapBox PC Card
adapters, SwapSmart smart card readers, SwapAccess DVB-CAM modules, its SmartOS
universal smart card interface architecture and its CIMax DVB-CI interface chip.
The Company sells security and access products to OEMs such as computer,
telecommunication and DVB component and system manufacturers. The Company
markets, sells and licenses its products through a direct sales and marketing
organization primarily to OEMs and also through distributors, VARs, system
integrators and resellers worldwide. OEM customers include Dell, Hughes, Kirch
Group (BetaDigital), Micron, Packard Bell, Siemens/Nixdorf, Sysorex 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 99.4% of total net
sales in 1997. 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 1997, sales to BetaDigital, a division of the Kirch Group,
accounted for 45% of total net sales and sales to the Company's top 10 customers
accounted for 80% of total net sales. In addition, sales of the Company's
SwapBox product accounted for 54% and 34% of total net sales in 1996 and 1997,
respectively. A substantial majority of the SwapBox products sold by the Company
are sold to a number of major OEMs, including IBM, Dell and Packard Bell, each
of which in turn supplies products, such as desktop PCs, to the DoD. The Company
expects its business to continue to be substantially dependent upon sales of
SwapBox products to OEMs that are supplying the DoD, although such dependence
may decline as the Company expands its product lines and customer base. The
Company frequently enters into contracts with OEMs which provide for shipment of
certain quantities of products at specified future dates. Revenue from these
contracts, as well as from other sales, is recognized upon shipment of products.
The Company's dependence upon a limited number of significant customers imposes
certain risks on the Company. See "Risk Factors -- Dependence on Sales to OEMs,"
"-- Dependence on Sales to Government Contractors" and "-- Dependence on
Development of Industry Relationships."
As a result of the Company's multinational operations and sales, the
Company's operating results are subject to significant fluctuations based upon
changes in the exchange rates of certain currencies, particularly the German
mark, in relation to the U.S. dollar. For example, the Company's United States
headquarters are located in Los Gatos, California, its international
headquarters are located near Munich, Germany and its research and development
facilities are located in Erfurt, Germany and La Ciotat, France. In addition,
the
19
<PAGE> 22
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 years ended
December 31, 1996 and 1997, the Company's sales denominated in U.S. dollars
represented 55% and 39% of the Company's total net sales, respectively. The
Company does not currently engage in risk management activities with respect to
its foreign currency exposure. Although management will continue to monitor the
Company's exposure to currency fluctuations, there can be no assurance that
exchange rate fluctuations will not have a material adverse effect on the
Company's business and operating results.
The Company experiences substantial seasonality in its business, with
approximately one-third of annual net sales being realized in the first half of
the year and the remaining two-thirds being realized in the second half of the
year. In recent periods, this seasonality has been primarily the result of the
Company's reliance on sales of its SwapBox products to OEMs that in turn are
selling to U.S. government agencies. The buying pattern of U.S. government
agencies tend to be substantially weighted to the third quarter and, to a
somewhat lesser extent, the fourth quarter of the calendar year. The strength in
net sales in the third quarter which results from the U.S. government buying
patterns is somewhat offset by relatively weaker sales in Europe in the same
quarter as a result of the traditional European summer vacation patterns. The
Company expects that as sales of its DVB products, which are sold to OEMs mainly
in Europe for the consumer market, begin to represent a larger percentage of net
sales, the seasonality that the Company experiences may be further exacerbated
as such sales are likely to be strongest in the fourth quarter of the year. In
contrast to net sales, operating expenses tend to be spread relatively evenly
across the year. As a result, the Company's operating results have tended to be
weakest in first and second quarter of the year. See "-- Quarterly Results of
Operations."
The Company has recently entered into a non-binding letter of intent to
acquire Intermart for approximately $8 million in a combination of cash and
shares of Company Common Stock. In addition, the sellers of Intermart may be
paid up to an additional $4 million in Company Common Stock based upon Intermart
achieving certain performance criteria in the first year of post-acquisition
operations. Intermart sells PC-based devices that provide access to a broad
range of small form factor digital media, including PCMCIA, Compact Flash and
Smart Media. Intermart generated approximately $3 million in revenues and a loss
of approximately $400,000 for the nine month period ended December 31, 1997. The
Company has also entered into a non-binding letter of intent to acquire ICS for
approximately $7 million in a combination of cash and shares of Company Common
Stock. ICS manufactures certain of the Company's products, as well as certain
third-party product lines which require similar manufacturing capabilities. ICS
generated approximately $6 million in revenues and $200,000 in net income for
the year ended December 31, 1997. These acquisitions would be accounted for
under the "purchase" method.
Neither of the letters of intent discussed above is binding upon the
Company or the counter party. While the Company believes that the acquisitions
described above will be completed on the terms described above, there can be no
assurance that such transactions will be completed on such terms or at all.
These acquisitions will result in the write-off of purchased in-process research
and development and the amortization of goodwill and other intangible assets.
Moreover, acquisitions entail a number of risks, and, even if completed, there
can be no assurance that the Company will receive the intended benefits. See
"Risk Factors -- Risk Associated With Acquisitions."
20
<PAGE> 23
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>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Net sales:
Security and access products.............................. 69.3% 77.3% 99.4%
PCMCIA peripheral products................................ 30.7 22.7 0.6
----- ----- -----
Total net sales........................................ 100.0 100.0 100.0
Cost of sales............................................... 87.3 69.1 63.1
----- ----- -----
Gross profit................................................ 12.7 30.9 36.9
----- ----- -----
Operating expenses:
Research and development.................................. 7.7 11.1 10.6
Sales and marketing....................................... 11.4 15.0 15.2
General and administrative................................ 8.0 9.3 9.0
Settlement of patent claim................................ -- -- 1.8
----- ----- -----
Total operating expenses............................... 27.1 35.4 36.6
----- ----- -----
Income (loss) from operations............................... (14.4) (4.6) 0.3
Interest income (expense), net.............................. (1.9) (1.4) 3.1
Foreign currency transaction gain........................... 0.1 0.8 1.7
----- ----- -----
Income (loss) before income taxes........................... (16.2) (5.2) 5.1
Provision for income taxes.................................. -- -- 1.1
----- ----- -----
Net income (loss)........................................... (16.2) (5.2) 4.0
Accretion on redeemable convertible preferred stock......... (0.8) (1.3) (2.9)
----- ----- -----
Net income (loss) applicable to common stockholders....... (17.0)% (6.5)% 1.1%
===== ===== =====
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Net Sales. Net sales reflect the invoiced amount for goods shipped less
estimated returns. Revenue is recognized upon product shipment. Net sales were
$27.8 million in 1997, compared to $21.5 million in 1996, an increase of 29%.
Sales of security and access products were $27.6 million in 1997, compared to
$16.6 million in 1996, an increase of 66%. The substantial increase in security
and access products sales in 1997 was primarily related to sales of the
Company's DVB-CAM products, which products were first shipped in the fourth
quarter of 1996. Security and access products became the sole strategic product
focus following the Company's final shipment of PCMCIA peripheral products in
the quarter ended March 31, 1997, completing its exit from that business. One
customer accounted for 45% of the Company's net sales in 1997. Accounts
receivable from this customer totalled approximately $3.2 million at December
31, 1997.
Gross Profit. Gross profit was $10.2 million, or 36.9% of net sales, in
1997, compared to $6.6 million, or 30.9% of net sales, in 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
21
<PAGE> 24
insignificant. Accordingly, to date the Company has not capitalized any software
development costs. Research and development expenses were $2.9 million, or 10.6%
of net sales, in 1997, compared to $2.4 million, or 11.1% of net sales, in 1996.
The increase in research and development spending in absolute amount 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 products. The Company
believes that research and development expenses during 1998 will be higher than
in 1997 in absolute amount due to a higher number of personnel to support the
Company's new product development and customer projects.
Sales and Marketing. Sales and marketing expenses consist primarily of
employee compensation and trade show and other marketing costs. Sales and
marketing expenses were $4.2 million, or 15.2% of net sales, in 1997, compared
to $3.2 million, or 15.0% of net sales, in 1996. This increase in absolute
amount and as a percentage of net sales was due primarily to growth of the
Company's sales and marketing headcount and promotional efforts in the U.S. and
initial promotional efforts in the Asia-Pacific region. Sales and marketing
expenses in 1998 are expected to increase in absolute amount as the Company
continues to aggressively promote and identify business opportunities for the
Company's products on a worldwide basis.
General and Administrative. General and administrative expenses consist
primarily of compensation expenses for administrative employees. General and
administrative expenses were $2.5 million, or 9.0% of net sales, in 1997,
compared to $2.0 million, or 9.3% of net sales in 1996. General and
administrative expenses increased in absolute amount in 1997 primarily as a
result of increases in administrative headcount in the Company's U.S. and German
offices in support of higher levels of business activities, as well costs
associated with being a publicly-held company. The Company believes general and
administrative expenses in 1998 will increase in absolute amount as a result of
operating as a public company for a full year and normal wage and cost
increases.
Settlement of Patent Claim. In September 1997, the Company settled a patent
infringement claim with a third party. In connection therewith, the Company
incurred a one-time charge of $515,000, of which $453,000 represented a non-cash
charge equal to the estimated fair value of the common stock warrants issued to
the third party and $62,000 of legal costs.
Interest Income (Expense), Net. Interest income (expense), net consists of
interest earned on invested cash, offset by interest paid or accrued on
outstanding debt. Net interest income was $866,000 in 1997, compared to a net
expense of $304,000 in 1996. During 1997, the Company raised $11.4 million
through the sale of preferred stock, and converted $4.3 million of convertible
debt into preferred stock. In October 1997, the Company completed the sale of
3.8 million shares of Common Stock in an initial public offering, resulting in
net proceeds of $43.7 million. These transactions resulted in both a reduction
of outstanding debt and corresponding interest expense and an increase in
short-term investments and cash balances.
Foreign Currency Transaction Gains. In 1997 substantially all of the
foreign currency transaction gains of $467,000 relate to intercompany sales from
the German subsidiary to its US affiliates.
Income Taxes. Tax expense of $305,000 for the year ended December 31, 1997
resulted principally from tax liabilities associated with foreign operations of
the Company and minimum state 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, 1997, the Company had German net operating loss
carry forwards of approximately $1.4 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 $3.3 million and $1.6
million for U.S. federal and California income tax purposes, respectively. The
Company's utilization of a portion of the U.S. federal net operating loss carry
forwards is limited to approximately $340,000 per year. The Company had a
deferred tax asset as of December 31, 1997 of approximately $2.2 million and
recorded a full valuation allowance to offset these deferred tax assets as
management has concluded that it is more likely than not that the deferred tax
assets would not be realized in the future due to recent operating losses. 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 7 to the Consolidated
Financial Statements.
22
<PAGE> 25
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 of 1996.
Accounts receivable from this customer represented 25% of the Company's total
receivables as of December 31, 1996 due to the timing of shipments in the fourth
quarter. All such receivables were collected during the first quarter of 1997.
Consistent with the Company's shift away from PCMCIA peripheral products, sales
of such products were $4.9 million in 1996, compared to $5.5 million in 1995, a
decrease of 11.8%.
Gross Profit. Gross profit was $6.6 million, or 30.9% of net sales, in
1996, compared to $2.3 million, or 12.7% of net sales, in 1995. The substantial
increase in gross profit as a percentage of net sales in 1996 was primarily
attributable to three factors: (i) during 1996, the Company benefited from
manufacturing cost efficiencies associated with the increased sales of security
and access products; (ii) as part of the continued shift in 1996 from PCMCIA
peripheral products to security and access products, the Company introduced
certain new security and access products during 1996 that carried higher gross
margins than other products in the security and access product family; and (iii)
during 1996, the Company received approximately $1.6 million in nonrecurring
engineering revenues with relatively minimal cost of sales.
Research and Development. Research and development expenses totaled $2.4
million, or 11.1% of net sales, in 1996, compared to $1.4 million, or 7.7% of
net sales, in 1995. The increase in research and development spending during
1996 was primarily a result of increased headcount and development activity
associated with new product introductions and the opening of the Company's
research and development facility in France.
Sales and Marketing. Sales and marketing expenses totaled $3.2 million, or
15.0% of net sales, in 1996, compared to $2.1 million, or 11.4% of net sales, in
1995. Sales and marketing expenses in 1996 in absolute amount increased
primarily as a result of the costs associated with introducing several
significant new products during 1996 and the higher headcount costs associated
with supporting a broader base of customers and expanded line of products.
General and Administrative. General and administrative expenses totaled
$2.0 million, or 9.3% of net sales, in 1996, compared to $1.4 million, or 8.0%
of net sales, in 1995. General and administrative expenses increased in absolute
amount in 1996 and as a percentage of net sales primarily as a result of
increasing headcount and expanded facilities associated with the overall growth
in the business.
Interest Income (Expense), Net. Interest expense was immaterial as a
percentage of sales in both 1996 and 1995.
Income Taxes. The Company incurred losses in 1995 and 1996 and therefore
did not incur income tax obligations in these periods. As of December 31, 1996,
the Company had deferred tax assets of approximately $2.2 million, resulting
primarily from the net operating loss carryforwards, which is fully offset by a
valuation allowance.
23
<PAGE> 26
QUARTERLY RESULTS OF OPERATIONS
The following tables present certain unaudited consolidated statement of
operations data for each of the eight quarters in the two-year period ended
December 31, 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, SEPT. 30, DEC. 31,
1996 1996 1996 1996 1997 1997 1997 1997
--------- -------- --------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA
(IN THOUSANDS):
Net sales:
Security and access
products................... $2,811 $2,978 $4,927 $5,912 $4,202 $5,618 $7,952 $9,834
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 7,952 9,834
Cost of sales.................. 3,068 3,103 3,903 4,806 2,804 3,322 5,108 6,290
------ ------ ------ ------ ------ ------ ------ ------
Gross profit................... 1,189 1,153 2,097 2,201 1,561 2,296 2,844 3,544
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Research and development..... 624 556 598 608 628 790 713 809
Sales and marketing.......... 631 777 889 933 975 1,038 928 1,280
General and administrative... 441 467 605 491 548 585 597 764
Settlement of patent claim... -- -- -- -- -- -- 515 --
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses... 1,696 1,800 2,092 2,032 2,151 2,413 2,753 2,853
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations................... (507) (647) 5 169 (590) (117) 91 691
Interest income (expense),
net.......................... (25) (123) (70) (86) (28) 86 111 697
Foreign currency transaction
gain......................... 35 21 92 26 64 175 162 66
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income
taxes........................ (497) (749) 27 109 (554) 144 364 1,454
Provision for income taxes..... -- -- -- -- -- -- 30 275
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss).............. (497) (749) 27 109 (554) 144 334 1,179
Accretion on redeemable
convertible preferred
stock........................ (71) (72) (72) (72) (160) (318) (324) --
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) applicable to
common stockholders.......... $ (568) $ (821) $ (45) $ 37 $ (714) $ (174) $ 10 $1,179
====== ====== ====== ====== ====== ====== ====== ======
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% 100.0% 100.0%
PCMCIA peripheral products... 34.0 30.0 17.9 15.6 3.7 -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total net sales............ 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Cost of sales.................. 72.1 72.9 65.1 68.6 64.2 59.1 64.2 64.0
------ ------ ------ ------ ------ ------ ------ ------
Gross profit................... 27.9 27.1 35.0 31.4 35.8 40.9 35.8 36.0
------ ------ ------ ------ ------ ------ ------ ------
Operating expenses:
Research and development..... 14.7 13.1 10.0 8.7 14.4 14.1 9.0 8.2
Sales and marketing.......... 14.8 18.2 14.8 13.3 22.3 18.5 11.7 13.0
General and administrative... 10.3 11.0 10.1 7.0 12.6 10.4 7.5 7.8
Settlement of patent claim... -- -- -- -- -- -- 6.4 --
------ ------ ------ ------ ------ ------ ------ ------
Total operating expenses... 39.8 42.3 34.9 29.0 49.3 43.0 34.6 29.0
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) from
operations................... (11.9) (15.2) 0.1 2.4 (13.5) (2.1) 1.2 7.0
Interest income (expense),
net.......................... (0.6) (2.9) (1.2) (1.2) (0.6) 1.5 1.4 7.1
Foreign currency transaction
gain......................... 0.8 0.5 1.5 0.4 1.5 3.1 2.0 0.7
------ ------ ------ ------ ------ ------ ------ ------
Income (loss) before income
taxes........................ (11.7) (17.6) 0.5 1.6 (12.6) 2.5 4.6 14.8
Provision for income taxes..... -- -- -- -- -- -- 0.4 2.8
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss).............. (11.7) (17.6) 0.5 1.6 (12.6) 2.5 4.2 12.0
Accretion on redeemable
convertible preferred
stock........................ (1.7) (1.7) (1.2) (1.0) (3.7) (5.6) (4.1) --
------ ------ ------ ------ ------ ------ ------ ------
Net income (loss) applicable to
common stockholders.......... (13.4)% (19.3)% (0.7)% 0.6% (16.3)% (3.1)% 0.1% 12.0%
====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
24
<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. Gross margin increased in the first quarter of 1997 due
primarily to less than 4% of the Company's sales in the quarter resulting from
PCMCIA peripheral products. Gross margin increased in the second quarter of 1997
due to a sales mix favoring higher margin software and engineering project
revenues. Gross margins declined somewhat in the second half of 1997 as software
and engineering project revenues declined as a percentage of total sales,
combined with unit price declines experienced on the Company's SwapBox products.
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 and the second
quarter of 1997 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, except for a
sequential decline in the third quarter of 1997 due primarily to a drop in
marketing promotion and trade show costs and lower business travel expenses. 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. In the third quarter of 1997, the Company settled a patent infringement
claim and incurred a one-time expense of $515,000, consisting of $453,000 for
the estimated fair value of common stock warrants issued and legal expenses of
$62,000.
The Company's quarterly operating results have in the past varied and may
in the future vary significantly. In addition to seasonality, factors affecting
operating results include: level of competition; size, timing, cancellation or
rescheduling of significant orders; product configuration and mix; market
acceptance of new products and product enhancements; new product announcements
or introductions by the Company or its competitors; adoption of new technologies
and standards; deferrals of customer orders in anticipation of new products or
product enhancements; changes in pricing by the Company or its competitors; the
ability of the Company to develop, introduce and market new products and product
enhancements on a timely basis; hardware component costs and availability,
particularly with respect to hardware components obtained from sole sources; the
Company's success in expanding its sales and marketing programs; technological
changes in the market for digital information security products; levels of
expenditures on research and development; foreign currency exchange rates;
general economic trends and other factors. Because a high percentage of the
Company's operating expenses are fixed, a small variation in revenue can cause
significant variations in operating results from quarter to quarter. See
"-- Overview."
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<PAGE> 28
LIQUIDITY AND CAPITAL RESOURCES
Prior to the Company's initial public stock offering, the Company had
financed its operations principally through private placements of debt and
equity securities and, to a lesser extent, borrowings under bank lines of
credit. In October 1997, the Company completed the sale of 3.8 million shares of
Common Stock in an initial public offering ("IPO"), resulting in net proceeds of
$43.7 million. As of December 31, 1997, the Company's working capital was $60.3
million. Working capital increased during 1997 due primarily to the net proceeds
received from the IPO and $11.4 million from the private placement of redeemable
convertible preferred stock and the conversion of approximately $4.3 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.
During 1997, cash and cash equivalents increased by $22.9 million due
primarily to financing activities discussed previously, partially offset by
repayments of short-term debt of $3.7 million. Investing activities in 1997
consisted of $802,000 in capital equipment expenditures and purchases of
short-term investments of $30.3 million. Operating activities in the year
provided $1.2 million of cash, including net income of $1.1 million, non-cash
expenses for depreciation, amortization and stock warrants of $1.1 million and
increases in accounts payable and accrued expenses of $1.3 million and $574,000,
respectively, offset by an increase in receivables of $1.8 million, due
primarily to higher revenue levels, and an increase in inventory of $1.3 million
relating to an increase in backlog at December 31, 1997 compared to 1996.
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 $2.5 million
at December 31, 1997). One of these lines expires on March 31, 1998 and the
remaining two expire on September 30, 1998. The German lines of credit bear
interest at rates ranging from 7.0% to 8.75%. Borrowings under the German lines
of credit are unsecured. The Company also has a $3.0 million line of credit with
a U.S. bank which is secured by all assets of the Company, bears interest at the
bank's prime rate (8.5% at December 31, 1997), and expires in May 1999. At
December 31, 1997, no amounts were outstanding under any of the Company's lines
of credit. At December 31, 1997, the Company had no material commitments for
capital expenditures.
The Company expects to pay an aggregate of approximately $7.0 million in
cash in connection with its acquisitions of Intermart and ICS. 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 1999. 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.
26
<PAGE> 29
BUSINESS
SCM Microsystems designs, develops and sells standards-compliant hardware,
firmware and software products and technologies used in smart card and other
token-based network security and conditional access systems. The Company's
objective is to leverage its expertise in smart card technologies, digital
platforms, and its extensible, upgradeable smart card interface architecture to
meet the growing demand for secure access to digital information and networks.
The Company sells security and access products which include SwapBox PC Card
adapters, SwapSmart smart card readers, SwapAccess DVB-CAM modules, its SmartOS
universal smart card interface architecture and its CIMax DVB-CI interface chip.
The Company sells security and access products to OEMs such as computer,
telecommunication and DVB component and system manufacturers. The Company
markets, sells and licenses its products through a direct sales and marketing
organization primarily to OEMs and also through distributors, VARs, system
integrators and resellers worldwide. OEM customers include Dell, Hughes, Kirch
Group (BetaDigital), Micron, Packard Bell, Siemens/Nixdorf, Sysorex and Telenor.
INDUSTRY BACKGROUND
Individuals and corporations increasingly rely upon computer networks, the
Internet, intranets and direct broadcast systems to access information,
entertainment and data in a digital form from their homes and workplaces. This
increasing proliferation and reliance upon digital data has caused data security
to become a paramount concern of businesses, government, educational
institutions and consumers. Regardless of whether the issue is controlling
access to proprietary or confidential information such as business data or
health records, or whether it is attempting to limit access to digital video
broadcasts to paying subscribers, content providers, network and data managers
and users of digital data are concerned with controlling access to data and
maintaining data security. The enterprise data security market, including
electronic commerce applications, and the market for DVB conditional access
require a range of products to address their needs.
ENTERPRISE DATA SECURITY AND ELECTRONIC COMMERCE
Enterprise Data Security
Enterprise computing has evolved from highly centralized mainframe
computers to widely distributed client/server network-based solutions. Modern
enterprises frequently employ one or more local area networks to connect
computer users located in a single facility, wide area networks and intranets to
connect users in disparate facilities, and the Internet or direct electronic
links to provide internal users access to third party information and to provide
customers, vendors and other interested third parties with access to an
enterprise's computing resources or information. Internet usage is expected to
increase from approximately 50 million Web users worldwide in 1997 to
approximately 175 million users worldwide by 2002 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.
Data has become increasingly vulnerable to unauthorized access as
enterprises move toward distributed computing and make data more accessible to
internal and external users. According to the Computer Security Institute
("CSI"), 65% of respondents to its 1997 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
27
<PAGE> 30
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.
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 $10 billion in
1997 to $223 billion in 2001. 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.
GRAPHIC
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, 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.
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<PAGE> 31
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 codes known only by specific users; and
tokens, which are user-specific physical devices that only authorized users
possess. Passwords, while easier to use, are also the least secure because they
tend to be short and static, and are often transmitted without encryption. As a
result, passwords are vulnerable to decoding or observation and subsequent use
by unauthorized persons. Tokens are small devices ranging from simple credit
card-like devices to more complex devices capable of generating
time-synchronized or challenge-response access codes. Certain token-based
systems require both possession of the token itself and a personal
identification number ("PIN") to indicate that the token is being used by an
authorized user. Such an approach, referred to as two-factor authentication,
provides much greater security than single factor systems such as passwords or
the simple possession of a token.
Early implementation of tokens include magnetic strip cards, which are
plastic cards with data encoded on a magnetic strip on the card. These cards are
typically used in automated teller machine ("ATM") and credit card transactions.
ATM cards are an example of a two-factor authentication system. ATM cards
require the user to possess the ATM card and to know the PIN associated with the
card before engaging in any transaction. While suitable for certain
applications, the magnetic strip 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 28 million
PCMCIA slots in 1997 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 Frost & Sullivan, the European market for smart cards has far
outpaced that of the United States. Frost & Sullivan estimates that in 1997 the
U.S. accounted for approximately 20 million units (2%) of the 795 million unit
worldwide smart card market, and projects that the worldwide market will grow to
2.2 billion units by 2001. By the year 2001, Frost & Sullivan estimates that
Europe, Asia/Pacific and the Americas will account for 63%, 19% and 16%,
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 and Netscape 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 incorporated
smart card access or smart card security features into Microsoft Windows NT 5.0
and Netscape Communicator 5.0, respectively. Sun Microsystems has released a
Java API for smart cards and
29
<PAGE> 32
has integrated the Company's SmartOS smart card interface architecture and Smart
Transporter chip into the next generation of its Java Station, which is expected
to begin shipping in the summer of 1998. 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,
Security Dynamics and Intel will drive the adoption of smart card technology for
security applications in the United States. The Company also believes that as
smart card-based security systems become accepted in the United States, users
outside the United States will adopt similar systems.
There are several reasons for these endorsements of smart card-based data
security solutions. Key end-user benefits include ease-of-use, low cost,
convenience and durability. Even more compelling is the architectural simplicity
of these systems. E-mail messages, purchase orders, credit card numbers, video
clips, data inquiries and other confidential transmissions are secured as they
are sent. Therefore, these secure transmissions can be opened only by the
intended recipient, thus eliminating many of the security weakpoints of the
communications infrastructure between the parties. Other solutions such as
firewalls, secure modems and SSL software may continue to be used or added
without interfering with the smart-card based security. The Company believes
that smart cards provide the easiest, most flexible, most cost-effective way to
achieve the key benefits of a secure, authenticated transaction between two or
more parties regardless of the specific infrastructure between them. The
smartcard 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, smart card reader 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
satellite dish receiver) 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 in Europe, the
DVB Project, an international consortium of over 170 enterprises involved in
varying aspects of DVB including France Telecom, Deutsche
30
<PAGE> 33
Telekom, Nokia, Sony and Philips, has developed the DVB-CI standard. This
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: (i) for broadcasters to upgrade
systems installed in their customers' homes by downloading new operating system
software onto the universal set-top box; (ii) for customers to use one universal
set-top box to access digital content from various service providers by
inserting the appropriate conditional access module for each particular service
provider; and (iii) for service providers to secure access to new or additional
services by issuing new tokens coded for access to such services.
GRAPHIC
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 addition, in the United Kingdom, the BDB Consortium
has defined a reference design for set-top boxes for the British digital
television market that is compliant with the DVB-CI standard. In the United
States, the NRSS Committee has proposed the NRSS-B standard for a conditional
access system which is substantially similar to the DVB-CI standard. In February
1998, CableLabs, a research and development consortium of cable television
system operators including most of the largest multi-system operators ("MSOs")
in the United States, adopted a standard for a point of development module as
part of the OpenCable specification. The point of development module is a PCMCIA
Type II extended device which incorporates a smart card reader and conditional
access software to provide flexible security for digital set-top boxes. This
OpenCable standard is an extension of the NRSS-B
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<PAGE> 34
standard. 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,
OpenCable and similar standards will require the development of hardware that is
capable of real time, high bandwidth decryption of the video signal and is
remotely updatable to permit providers to offer new content and services without
the need to replace equipment. While the current implementations of these
standards use set-top boxes, the Company believes that as the standards evolve
and as flexible hardware solutions become available, the DVB-CI and OpenCable
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 used in smart card and
other token-based network security systems and conditional access to DVB content
and services. Through the use of its extensible core technologies, the Company
is able to offer products that address the specific needs of diverse market
applications such as enterprise data security, electronic commerce and DVB
conditional access.
Enterprise Data Security and Electronic Commerce. The Company's products
address the needs of the enterprise data security and electronic commerce
markets as described below.
PCMCIA BRIDGES FOR SMART CARDS. The Company offers a range of products
which enable smart cards to be read and written through standard PCMCIA ports.
This eliminates the requirement for special purpose smart card readers and
provides interoperability between smart cards and PCs, network computers and
other devices equipped with standard PCMCIA ports.
STANDARDS-BASED, INTEROPERABLE PRODUCTS. The Company's products employ
an open-systems architecture that provides compatibility across a range of
hardware platforms and software environments. The Company's products are
remotely upgradeable so that compatibility can be maintained as the security
infrastructure evolves.
SPEED AND PERFORMANCE. Certain of the Company's smart card reader
products transparently extend the speed and performance capabilities of smart
cards used as security tokens by including encryption/decryption capabilities.
By this approach, smart cards are used as keys to activate the
encryption/decryption capabilities of the reader thus eliminating the speed and
performance limitations inherent in smart cards.
Digital Video Broadcasting. The Company's products address the needs of the
DVB market as described below.
INEXPENSIVE, EASY TO DELIVER CONDITIONAL ACCESS MODULES. The Company
provides smart card-based conditional access readers and modules that adhere to
the DVB-CI and OpenCable standards. These products enable digital content and
service providers to control and meter access to content and services through
the use of inexpensive smart cards.
REAL TIME, HIGH-BANDWIDTH DESCRAMBLING CAPABILITIES. The Company's
products are structured to use smart cards as keys to activate the
high-bandwidth capabilities of PC Cards. By this approach, smart card-based
tokens, which by themselves are not capable of descrambling digital video data
at the rate required for digital video broadcast, can still be used to control
and meter access to DVB content and services.
REMOTE UPGRADE CAPABILITIES. The Company's DVB products incorporate
read/write capabilities that permit content and service providers to perform a
virtually no-cost upgrade of users' access rights as new products and services
are developed and introduced and as users' subscriptions change.
STRATEGY
The Company's objective is to utilize its expertise in smart card
technologies, digital platforms, and its extensible, updatable smart card
interface architecture to meet the growing demand for secure access to digital
information and networks. The Company believes it is well positioned to
capitalize on the significant growth
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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.
Expand Range of Product Applications. Most of 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 has developed chip-level versions of certain of its products in
order to reduce their cost and facilitate their easy integration into future
generations of televisions, PCs, NCs and other digital platforms. These include
the Company's SmartTransporter chip for smart card readers and CIMax DVB-CI chip
for the DVB-CAM market. The Company intends to continue to develop silicon-level
versions of, and to pursue silicon-level integration of, its products in an
effort to increase the effectiveness of its products and reduce their cost.
Increase Penetration of Major OEM Customers; Expand Customer Base. The
Company currently sells its products to a number of OEM customers including
Dell, Hughes, Kirch Group (BetaDigital), Micron, Packard Bell, Siemens/Nixdorf,
Sysorex and Telenor. 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. In addition, the Company attempts to locate its
technical, sales and marketing resources close to its OEM customers in order to
provide the highest level of service to its customers. 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 Gemplus, Intel and
Telenor. These relationships provide the Company with access to leading edge
technology, marketing and sales leverage and access to key customers and
accounts. The Company intends to continue to leverage these relationships and to
identify additional key industry players with which to form strategic
relationships. See "-- Collaborative Industry Relationships."
Support Standards Setting Organizations. The Company intends to continue to
participate in the standards setting activities for the industries it serves.
The Company is a founding member of the PCMCIA and the DVB Project and supports
the Common Data Security Access standard developed by Intel and adopted by
Netscape. The Company's products are compliant with the RSA public key
cryptographic system number 11 ("PKCS #11") standard. Through its participation
in standards setting organizations, the Company contributed to the adoption of
the DVB-CI specification as the standard by the PCMCIA. In addition, the Company
was instrumental in proposing and developing the conditional access module
adopted as part of the OpenCable specification for the U.S. cable television
market. The Company intends to maintain an active role in these and other
standards setting groups in order to continue to have its technologies adopted
as standards where appropriate and to keep apprised of technological
advancements as they are developed.
Acquire Complementary Technologies, Products and Companies. The Company
believes that opportunities exist to expand the range of conditional access and
data security products, and to expand its sales and marketing operations in key
markets by acquiring or licensing complementary technologies and products and by
acquiring companies engaged in complementary businesses. The Company has entered
into non-
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binding letters of intent with two companies regarding the acquisition of such
companies by the Company (see "Prospectus Summary -- Recent Developments"), and
intends to pursue additional acquisitions and similar opportunities in the
future.
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.
Chip-Level Integration. The Company has implemented a number of its core
products and technologies into custom silicon devices. These include the
SmartTransporter chip, the CIMax DVB-CI chip and a custom PCMCIA controller
based on technology licensed from Intel and optimized by the Company.
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.
Proprietary PC Card Cases. Each of the Company's proprietary PC Card cases
ensures that 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. In addition, the Company has
entered into technology licensing agreements with Gemplus and, more recently,
Schlumberger, two of the largest smart card manufacturers in the world, in order
to provide the Company with broader intellectual property rights in this area.
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:
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- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PRODUCT CATEGORY FEATURES
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
SWAPBOX PC CARD ADAPTERS - A peripheral with a PC Card slot that enables desktop PCs
(introduced in 1993) and workstations to accept all sizes of PC Cards (Types I,
II and III)
- Supports a wide variety of PC Card peripherals, including
Ethernet, fax/data modems, SCSI, ATA hard drives, flash
memory, GPS and Fortezza cards
- Available in wide variety of configurations (single and
dual slots, front and rear access, floppy/PC combination)
- Supports a wide variety of platforms (Win 3.X, 95, NT,
OS/2, DOS, Solaris, Unix) and architectures (ISA, PCI, SBus,
USB, EPP, SCSI)
- Compliant with the PCMCIA standard
- --------------------------------------------------------------------------------------------------
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 - A multi-function PC Card that can include smart card
MODULES read/write capabilities, MPEG2 descrambling, DVB
(introduced in 1996) 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 OpenCable standards
- --------------------------------------------------------------------------------------------------
SMARTOS UNIVERSAL SMART CARD - A chip and accompanying software which provides a
INTERFACE ARCHITECTURE WITH cost-effective universal smart card reader interface easily
SMARTTRANSPORTER CHIP (introduced integrated into a wide range of devices
in 1997) - Supports all ISO 7816 smart card protocols, as well as
synchronous and asynchronous smart cards
- Software upgradeable to support new smart card protocols,
functions and industry standards
- Includes dual smart card support, serial and parallel
interfaces, LCD and keypad controls
- --------------------------------------------------------------------------------------------------
CIMAX DVB-CI COMMON INTERFACE - The hardware extension of the Company's second generation
CHIP HARDWARE CONTROLLER common interface integration package (CI Pack+) that
(introduced in 1998) enables common interface driver software to directly
address two complete independent common interface modules
- Includes the necessary I/Os to interface the MPEG
Transport stream generated by the receiver demodulator and
to daisy chain it through two modules and back to the
demultiplexer
- Interfaces with major digital television microprocessors
- Includes a memory mode that allows the use of any of the
two common interface slots to read/write an 8-bit PC Card
memory card
</TABLE>
- - -------------------------- -
- --------------------------------------------------------------------------------
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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 commerce. Because of
its encryption capabilities, the reader is well suited for security
applications, particularly mobile computing security.
Currently, the Company is working with Microsoft's PC/SC Workgroup,
Netscape's Security Infrastructure group and Sun Microsystems to ensure that all
of the Company's smart card interface products support the new open
specifications for integrating smart cards with PCs, NCs and workstations. By
supporting a wide range of smart cards and complying with the open standards set
by the PC/SC Workgroup, the Company's smart card interface products provide
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' smart card interface technology with the
proprietary descrambling code of a digital content provider, the Company's
SwapAccess DVB-CAM provides a cost-effective means of controlling access to
digital broadcasts through the use of a PC Card. SwapAccess is an all-in-one PC
Card that utilizes a smart card to determine if a viewer has access to a given
content provider's service. If the viewer is authorized, SwapAccess descrambles
the signal for viewing.
SwapAccess is the world's first implementation of the DVB-CI standard. The
Company's DVB-CAM technology enables a variety of critical functions including
video-on-demand, pay-per-view, interactive video, home shopping, home banking
and games. Since SwapAccess can be used in any DVB-CI or NRSS-B compliant "open"
set-top box, it allows acceptance of a single solution for different set-top box
systems. The Company believes that the use of smart card technology combined
with the DVB-CI or NRSS-B standard will eliminate the need for multiple set-top
boxes in order for users to access a broad range of desired broadcast data.
SwapAccess has already been selected, directly and indirectly, by many companies
in Europe, including major content providers such as France Telecom, Telenor
(Norway Telecom) and The Kirch Group (BetaDigital); consumer electronics
companies such as Nokia, Panasonic, Galaxis, Philips and Toshiba; and
broadcasters such as BBC, ITV (UK), Channel 4 (UK), Granada (UK), Carlton (UK),
Telefonica (Spain) and SVT (Sweden). In February 1998, CableLabs, a research and
development consortium of cable television
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<PAGE> 39
system operators including most of the largest MSOs in the United States,
adopted a standard for a point of deployment module as part of the OpenCable
specification. The OpenCable standard is an extension of the NRSS-B standard.
SwapAccess is fully compliant with the NRSS-B and OpenCable standards as
currently proposed. The Company has been and remains active in the definition
and adoption of the NRSS-B and OpenCable standards, and intends to keep
SwapAccess compliant with such standards as they evolve. The Company believes
that similar standards may be adopted in certain Asian countries in the future.
SMARTOS SMART CARD INTERFACE ARCHITECTURE; SMARTTRANSPORTER CHIP
SmartOS utilizes the SmartTransporter chip and a unique firmware technology
to make it possible to easily integrate smart cards with a wide variety of PC
and stand-alone devices, thus allowing 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.
Additionally, the Company has demonstrated the flexibility, portability and
modularity of SmartOS by successfully porting it to a variety of platforms. For
example, the Company has ported SmartOS to the OS9 operating system. This has
permitted Motorola, which uses OS9 on several of its platforms, to implement
SmartOS in its Network Computer (NC) and set-top box reference designs.
Similarly, the Company is porting SmartOS to run fully native under Java. This
implementation is expected to be used on the Espresso JavaStations from SUN
Microsystems, as well as on other Java-based NC's from other vendors.
CIMAX
The CIMax controller is the hardware extension of the Company's second
generation common interface integration package (CI Pack+) that enables CI
Driver software to directly address two complete independent common interface
modules. The Company believes that CIMax offers a solution for digital
television manufacturers that want to quickly implement common interface. CIMax
includes the necessary I/Os to interface the MPEG Transport stream generated by
the receiver demodulator and to daisy chain it through two modules and back to
the demultiplexer. CIMax interfaces with major digital television
microprocessors and includes a memory mode that allows to use any of the two
common interface slots to read/write at 8-bit and PC Card memory card. This
features gives the receiver memory extension capability for software upgrades
and better performance.
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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 certain customers that purchased in excess of $300,000 of the
Company's security and access products during the year ended December 31, 1997.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
OEM PRODUCTS
PURCHASED
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Dell PC Card Adapters
Hughes PC Card Adapters
Kirch Group (BetaDigital) DVB Modules
Micron PC Card Adapters
Packard Bell PC Card Adapters
Siemens/Nixdorf PC Card Adapters; Smart Card Readers
Sysorex PC Card Adapters
Telenor DVB-CAM Modules
</TABLE>
- - ------------------------------------ -
- --------------------------------------------------------------------------------
In addition, the Company has recently entered into a development, supply
and marketing agreement with Hitachi for advanced dual and single slot PCMCIA
smart card readers. Sales to a relatively small number of customers historically
have accounted for a significant percentage of the Company's total sales. In
1997, sales to BetaDigital, a division of the Kirch Group, accounted for 45% of
total net sales and sales to the Company's top 10 customers accounted for 80% 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:
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 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.
ADI. ADI is a leading provider of Microsoft PC/SC-compliant security and
banking software for the German home banking market. As a result of the
Company's ability to support both market specific standards such as the German
Home Banking Computer Interface (HBIC) as well as open standards such as PC/SC,
the Company has been selected to work with, among others, ADI and Giesecke &
Devrient (a major German smart card vendor) to produce a complete, smart
card-based security solution for the German home banking market. The combined
solution, which the Company believes is the first major PC-based consumer
application for smart card readers, will be demonstrated at CeBIT in March 1998
and at a Microsoft-
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<PAGE> 41
sponsored event in April for the U.S. banking industry. Volume shipments in
Germany are anticipated to begin in late spring 1998.
Philips. The Company has developed a DVB-CI compliant conditional access
module ("CAM") incorporating Philips' CryptoWorks conditional access system
("CAS"). This enables Philips to provide their own CAS to open markets. As one
of the leading consumer electronics companies worldwide, Philips is making
available DVB-CI compliant set top boxes and CAMs, both through digital
entertainment providers and retail consumer electronics outlets.
Hitachi. The Company and Hitachi have entered into a development, supply
and marketing agreement for smart card readers. The Company will develop
advanced versions of its dual- and single-slot PCMCIA smart card readers.
Hitachi will distribute these products in Japan and the Company will distribute
them worldwide outside of Japan. Both companies have agreed to collaborate to
ensure that all key standards for security and electronic commerce are supported
in the initial and subsequent versions of the product.
Hughes Network Systems (HNS) has implemented the Company's DVB-CI host
controller chip, CIMaX, onto the motherboard of certain of its digital TV
set-top boxes. This permits HNS to provide a DVB-CI compliant slot in their
set-top boxes, making them suitable for deployment in Europe and the U.S.
Utilizing the CIMaX, HNS expects to be able to bring products to market quickly
and with assurance that they will be DVB-CI compliant.
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 December 31, 1997, the
Company had 22 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 connection with the Company's proposed acquisitions of Intermart and
ICS, the Company expects to strengthen its sales and marketing presence in Japan
and Singapore. Intermart has OEM relationships with Nikon, Fuji Film and other
major Japanese companies and has sales, marketing and engineering operations in
Japan and the United States. In addition, ICS is the Company's distribution
partner in Southeast Asia, and has business relationships and OEM customers
throughout the region. Thus, the Company believes that the acquisitions of
Intermart and ICS, if completed, would significantly enhance the Company's sales
and marketing presence in the Japanese and Southeast Asian markets. See
"Prospectus Summary -- Recent Developments" and "Risk Factors -- Risk Associated
with Potential Acquisitions."
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 December 31, 1997, the Company's backlog was approximately $9.7 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 six 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.
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COLLABORATIVE INDUSTRY RELATIONSHIPS
SCM Microsystems is party to collaborative arrangements with a number of
corporations and is a member of key industry consortia. The Company evaluates,
on an ongoing basis, potential strategic alliances and intends to continue to
pursue such relationships. The Company's future success will depend
significantly on the success of its current arrangements and its ability to
establish additional arrangements. There can be no assurance that these
arrangements will result in commercially successful products.
Gemplus. In March 1998, the Company and Gemplus, a leading smart card
manufacturer, reached an agreement to cooperate in several areas. The agreement
includes development by the Company of a USB-based, PC/SC compliant smart card
reader. Built on the Company's architecture, this reader will be interoperable
across multiple platforms, compatible with major standards and upgradeable to
support new standards as they emerge. The product will be targeted at broad
markets including home banking, electronic commerce and, more generally, secure
transactions on the Internet. The agreement also includes development by the
Company of a "B1/CT-API compatible," transparent serial smart card reader, based
on the Company's existing technology, to meet the needs of markets such as
health care and banking in Germany. The B1/CT-API is a leading security standard
in Germany. The companies have also entered into a manufacturing supply
agreement whereby the Company will manufacture and supply to Gemplus smart card
reader products including the PCMCIA Type II reader targeted at the mobile PC
market.
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. Intel and
the Company have agreed to jointly promote various industry standards applicable
to security products.
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 next generation 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,
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.
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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 $1.4
million, $2.4 million and $2.9 million for the years ended December 31, 1995,
1996 and 1997, respectively. As of December 31, 1997, the Company had 32
full-time employees engaged in research and development activities, including
software and hardware engineering, testing and quality assurance and technical
documentation. All of the Company's research and development activities occur in
France and Germany. The Company has in the past funded a portion of its research
and development activities with technology development revenues received from
OEM customers in connection with design and development of specific products.
The Company recognized $543,000, $1.6 million and $1.4 million in technology
development revenues in 1995, 1996 and 1997, respectively.
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. 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 December 31, 1997, the
Company had 10 full-time employees engaged in manufacturing activities. The
Company has a formal quality control program to satisfy its customers'
requirements for high quality and reliable products. To ensure that products
manufactured by others are consistent with its standards, the Company manages
all key aspects of the production process, including establishing product
specifications, selecting the components to be used to produce its products and
the suppliers of such components and negotiating the prices for such components.
In addition, the Company works with its suppliers to improve process control and
product design. The Company's quality control specialists conduct on-site
inspections of its suppliers, and the Company's products are tested by the
Company's contract manufacturers prior to shipment.
In connection with the Company's proposed acquisition of ICS, the Company
will acquire all of ICS's manufacturing facilities in Singapore. The Company
believes that ICS's engineering resources in Singapore, its familiarity with the
Company's product lines and its experience in marketing smart card solutions in
Southeast Asia are complementary to the Company's business. The Company also
believes that acquiring ICS will lower the cost of the Company's products and
hence enhance its competitiveness and improve gross margins. See "Prospectus
Summary -- Recent Developments" and "Risk Factors -- Risk Associated with
Acquisitions."
The Company relies upon a limited number of suppliers of several key
components of the Company's products. For example, the Company currently
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 ICS and
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<PAGE> 44
SwapSmart mechanical components exclusively from Stocko. The Company's reliance
on sole source suppliers involves several risks, including a potential inability
to obtain an adequate supply of required components, price increases, timely
delivery and component quality. Although to date the Company has been able to
purchase its requirements of such components, there can be no assurance that the
Company will be able to obtain its full requirements of such components in the
future or that prices of such components will not increase. In addition, there
can be no assurance that problems with respect to yield and quality of such
components and timeliness of deliveries will not occur. Disruption or
termination of the supply of these components could delay shipments of the
Company's products and could have a material adverse effect on the Company's
business and operating results. Such delays could also damage relationships with
current and prospective customers. In the past, due to the Company's quality
requirements, the Company has experienced delays in the shipments of its new
products principally due to an inability to qualify component parts from
third-party manufacturers and other suppliers, resulting in delay or loss of
product sales. These delays have not had a material adverse effect upon the
Company's business and operating results. However, there can be no assurance
that in the future any such delays would not have a material adverse effect upon
the Company's business and operating results.
COMPETITION
The market for digital data security and access control products is
intensely competitive and characterized by rapidly changing technology. The
Company believes that competition in this market is likely to intensify as a
result of increasing demand for security products. The Company currently
experiences competition from a number of sources, including: (i) ActionTec,
Carry Computer Engineering, Greystone and Litronic in PC Card adapters; (ii)
Gemplus, SmartDisk Corporation, Philips and Tritheim in smart card readers and
universal smart card reader interfaces; and (iii) Gemplus in DVB-CAM modules.
The Company also experiences indirect competition from certain of its customers
which currently offer alternative products or are expected to introduce
competitive products in the future. The Company may in the future face
competition from these and other parties that develop digital data security
products based upon approaches similar to or different from those employed by
the Company. In addition, there can be no assurance that the market for digital
information security and access control products will not ultimately be
dominated by approaches other than the approach marketed by the Company.
Many of the Company's current and potential competitors have significantly
greater financial, technical, marketing, purchasing and other resources than the
Company, and as a result, may be able to respond more quickly to new or emerging
technologies or standards and to changes in customer requirements, or to devote
greater resources to the development, promotion and sale of products, or to
deliver competitive products at a lower end user price. Current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to increase the ability of their products to
address the needs of the Company's prospective customers. Accordingly, it is
possible that new competitors or alliances among competitors may emerge and
rapidly acquire significant market share. Increased competition is likely to
result in price reductions, reduced operating margins and loss of market share,
any of which could have a material adverse effect on the Company's business and
operating results.
The Company believes that the principal competitive factors affecting the
market for digital data security products include: the extent to which products
support industry standards and provide interoperability; technical features;
ease of use; quality/reliability; level of security; strength of distribution
channels, and price. While the Company believes that it competes favorably with
respect to these factors, there can be no assurance that the Company will be
able to successfully compete as to these or other factors or that competitive
pressures faced by the Company will not materially and adversely affect its
business 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,
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<PAGE> 45
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 and SwapSmart trademarks are
registered in the United States and certain other countries and the Company has
other trademark applications allowed and pending in various countries. The
Company will continue to evaluate the registration of additional trademarks as
appropriate. The Company currently has four U.S. and one Japanese, one German,
one British and one French patents issued, and various U.S., German and other
patent applications pending, and exclusive licenses under various other U.S. and
foreign patents associated with its products. Furthermore, the Company has an
option 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 and operating results.
There has also been substantial litigation in the technology industry
regarding intellectual property rights, and litigation may be necessary to
protect the Company's proprietary technology. The Company has from time to time
received claims that it is infringing upon third parties' intellectual property
rights, and there can be no assurance that third parties will not in the future
claim infringement by the Company with respect to current or future products,
patents, trademarks or other proprietary rights. In addition, a third party has
alleged that the Company has infringed the third party's trademarks and engaged
in unfair competition. See "Business -- Legal Proceedings." The Company expects
that companies in the computer and digital information security market will
increasingly be subject to infringement claims as the number of products and
competitors in the Company's target markets grows. Any such claims or litigation
may be time-consuming and costly, cause product shipment delays, require the
Company to redesign its products or require the Company to enter into royalty or
licensing agreements, any of which could have a material adverse effect on the
Company's business and operating results. Despite the Company's efforts to
protect its proprietary rights, unauthorized parties may attempt to copy aspects
of the Company's products or to obtain and use information and software that the
Company regards as proprietary. In addition, the laws of some foreign countries
do not protect proprietary and intellectual property rights to as great an
extent as do the laws of the United States. There can be no assurance that the
Company's means of protecting its proprietary and intellectual property rights
will be adequate or that the Company's competitors will not independently
develop similar technology, duplicate the Company's products or design around
patents issued to the Company or other intellectual property rights of the
Company.
EMPLOYEES
As of December 31, 1997, SCM Microsystems had a total of 78 full-time
employees, of which 32 were engaged in engineering, research and development; 22
in sales and marketing; 10 in manufacturing; and 14 in general management and
administration. In addition, the Company had a total of 3 part-time employees as
of December 31, 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 1997, the Company paid
approximately $67,000 and $50,000 for rent pursuant to the Los Gatos Lease and
Los Gatos Sublease, respectively. The Los Gatos Lease and the Los Gatos Sublease
terminate on October 31, 1998 and July 31, 1999, 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 1997,
the Company paid approximately $62,000 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.
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<PAGE> 46
LEGAL PROCEEDINGS
The Company has been notified by Smith Corona Corporation ("Smith Corona")
that Smith Corona believes that the "SCM" in the Company's name, logo and a
certain product name infringe a trademark held by Smith Corona and that the
Company has engaged in unfair competition. The Company believes that it has
defenses to Smith Corona's claim and has so notified Smith Corona. In the event
that Smith Corona were to initiate legal proceedings against the Company with
respect to this matter, the Company would vigorously defend the action.
Defending any action can be costly and time consuming regardless of the outcome
and, as with any litigation matter, there can be no assurance that the outcome
of any such dispute would be favorable to the Company. An unfavorable outcome in
the matter could subject the Company to monetary damages and may result in the
Company having to change its name and logo, which would require the Company to
incur costs related thereto and may result in a loss of the goodwill associated
with its name and logo.
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<PAGE> 47
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company, and their ages as of
December 31, 1997, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert Schneider.................. 48 Chairman of the Board
Steven Humphreys.................. 36 President, Chief Executive Officer and
Director
Bernd Meier....................... 47 Chief Operations Officer and Director
Nicholas Efthymiou................ 34 Vice President, Worldwide Business Development
David Hale........................ 32 Vice President, Operations
Jean-Yves Le Roux................. 38 Vice President, Engineering
John Niedermaier.................. 41 Vice President, Finance and Chief Financial
Officer
Friedrich Bornikoel(1)............ 47 Director
Bruce Graham...................... 37 Director
Randall Lunn(2)................... 47 Director
Poh Chuan Ng(2)................... 36 Director
Andrew Vought(1)(2)............... 43 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, Worldwide 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.
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<PAGE> 48
John Niedermaier joined the Company in April 1997 as Vice President,
Finance and Chief Financial Officer. From November 1995 until March 1997, Mr.
Niedermaier was Vice President, Finance and Chief Financial Officer of Voysys
Corporation, a provider of telecommunications systems for small businesses, and
from April 1994 until November 1995, he was Director, Business Planning at Octel
Communications Corporation, a voice messaging company. From November 1989 until
March 1994, Mr. Niedermaier was Vice President, Corporate Controller of VMX,
Inc., a voice processing company, which merged with Octel in March 1994. Mr.
Niedermaier is a Certified Public Accountant and holds a B.S. degree from Wayne
State University.
Friedrich Bornikoel has served as a Director of the Company since September
1993. Mr. Bornikoel joined TVM Techno Venture Management GmbH, a venture capital
firm, in July 1987 and has been a Partner since 1990. Mr. Bornikoel is a
director of several privately held companies. Mr. Bornikoel holds a Masters
degree in Physics from the Technical University of Munich.
Bruce Graham has served as a Director of the Company since July 1995. Mr.
Graham has been a Partner of Bessemer Venture Partners, a venture capital firm,
since December 1996. From 1991 until December 1996, Mr. Graham was an Associate
and Vice President at Vertex Management, a venture capital firm. Mr. Graham is a
director of several privately held companies. Mr. Graham holds a B.S. degree in
Chemical Engineering from Princeton University and a M.B.A. degree from Stanford
University.
Randall Lunn has served as a Director of the Company since November 1993.
Mr. Lunn has been a Partner of TVM Techno Venture Management, L.P., a venture
capital firm, since May 1990. Mr. Lunn is a director of several privately held
companies. Mr. Lunn holds a B.A. degree, a B.S. degree in Engineering and a
M.B.A. degree from Dartmouth College.
Poh Chuan Ng has served as a Director of the Company since June 1995. Mr.
Ng is currently a Managing Director and Chairman of the Board of Global Team
Technology Pte. Ltd., a manufacturer's representative for computer products.
From September 1994 through May 1997, Mr. Ng served as Director, Business
Development at ICS, a contract manufacturing company and developer of
communications products. Prior to joining ICS, 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 is currently a Senior Vice President and Chief Financial Officer of
Virata Corporation, an ATM networking equipment company. From January 1995
through May 1996, Mr. Vought was a partner of Cheyenne Capital Corporation.
Prior to joining Cheyenne Capital Corporation, Mr. Vought was Vice President,
Chief Financial Officer and Secretary of MicroPower Systems, Inc., an analog and
mixed signal semiconductor company, from May 1990 until April 1994. 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.
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
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<PAGE> 49
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 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.
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<PAGE> 50
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 years ended December 31, 1996 and 1997 for the Company's
Chief Executive Officer and the Company's most highly compensated other
executive officers whose salary and bonus for 1997 exceeded $100,000
(collectively, the "Named Executive Officers").
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
-------------------- UNDERLYING COMPENSATION
NAME AND PRINCIPAL POSITION YEAR SALARY($) BONUS($) OPTIONS(#) ($)
--------------------------- ---- --------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C>
Robert Schneider............................. 1997 190,000 75,000 120,000 1,935(1)
Managing Director of German subsidiary 1996 154,800 84,415 50,577 1,935(1)
Steven Humphreys(3).......................... 1997 190,000 75,000 -- --
President and Chief Executive Officer 1996 76,064 17,258 276,570 30(1)
Bernd Meier.................................. 1997 190,000 75,000 120,000 1,935(1)
Chief Operations Officer and Managing 1996 154,800 125,807 201,026 1,935(1)
Director of German subsidiary
Nicholas Efthymiou........................... 1997 118,333 25,344 50,000 4,737(2)
Vice President, U.S. Sales and 1996 100,000 30,458 75,544 11,357(2)
Business Development
John Niedermaier(4).......................... 1997 108,750 20,164 80,000 --
Vice President, Finance and Chief Financial 1996 -- -- -- --
Officer
</TABLE>
- ---------------
(1) Represents payments of life insurance premiums.
(2) Represents payments of a housing and auto allowance of $4,707 and $11,327
for 1997 and 1996, respectively, and life insurance premiums of $30 for both
1997 and 1996.
(3) Mr. Humphreys began working at the Company in August 1996.
(4) Mr. Niedermaier began working at the Company in April, 1997.
Option Grants During 1997. The following table sets forth for each of the
Named Executive Officers certain information concerning stock options granted
during 1997.
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-------------------------------------------------- POTENTIAL REALIZABLE
PERCENT OF VALUE AT ASSUMED
TOTAL ANNUAL RATES OF
NUMBER OF OPTIONS STOCK PRICE
SECURITIES GRANTED TO EXERCISE APPRECIATION FOR
UNDERLYING EMPLOYEES PRICE OPTION TERM(2)
OPTIONS IN PER EXPIRATION ----------------------
NAME GRANTED 1997 SHARE($) DATE(1) 5%($) 10%($)
---- ---------- ---------- -------- ---------- ------- ---------
<S> <C> <C> <C> <C> <C> <C>
Robert Schneider........ 35,000 4.35 8.10 6/10/2007 178,500 450,450
85,000 10.57 9.50 8/11/2007 508,300 1,283,500
Steven Humphreys........ -- -- -- -- -- --
Bernd Meier............. 35,000 4.35 8.10 6/10/2007 178,500 450,450
85,000 10.57 9.50 8/11/2007 508,300 1,283,500
Nicholas Efthymiou...... 50,000 6.22 9.50 8/11/2007 299,000 755,000
John Niedermaier........ 80,000 9.94 5.72 4/4/2007 288,000 727,200
</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.
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<PAGE> 51
Year-End Option Values. The following table sets forth, for each of the
Named Executive Officers, the year-end value of unexercised options as of
December 31, 1997:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE(1) OF UNEXERCISED IN-THE-
OPTIONS AT YEAR-END(#): MONEY OPTIONS AT YEAR-END($):
NAME EXERCISABLE/UNEXERCISABLE(1) EXERCISABLE/UNEXERCISABLE(2)
---- ---------------------------- -------------------------------
<S> <C> <C>
Robert Schneider................... 0/120,000 0/1,789,000
Steven Humphreys................... 97,952/178,618 2,341,052/4,268,970
Bernd Meier........................ 0/120,000 0/1,789,000
Nicholas Efthymiou................. 0/50,000 0/725,000
John Niedermaier................... 0/80,000 0/1,462,400
</TABLE>
- ---------------
(1) 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, 1997. All other options are indicated as
"Unexercisable."
(2) Market value of underlying securities at year-end minus the exercise price.
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 804,500 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 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
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<PAGE> 52
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 commenced on February 1,
1998 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 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
50
<PAGE> 53
all of the Company's assets, each participant's right to purchase Common Stock
will be 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 December 31, 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 made an equity
investment of $2.0 million in the Company and, as of December 31, 1997,
beneficially owned approximately 3.5% of the Company's Common Stock.
In May 1997, the Company and Telenor entered into a development and supply
agreement. As part of this agreement, Telenor purchased 640,000 shares of
Preferred Stock for approximately $5.5 million, received 34,965 additional
shares of Preferred Stock in exchange for certain technology rights and received
a warrant to purchase an additional 194,930 shares of Preferred Stock for $8.58
per share. See "Business -- Collaborative Industry Relationships" and "Principal
and Selling Stockholders."
During 1995, 1996 and 1997, the Company purchased contract manufacturing
services totaling $3.5 million, $3.3 million and $3.4 million, respectively,
from ICS. Poh Chuan Ng, a director of the Company, served as Director, Business
Development for ICS from September 1994 through May 1997. The Company recently
entered into a non-binding letter of intent to acquire ICS. See "Prospectus
Summary -- Recent Developments."
51
<PAGE> 54
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 March 23, 1998 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 THE OWNED AFTER THE
OFFERING(1) OFFERING(1)
-------------------- SHARES --------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
------------------------ --------- ------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
(APM) AlpinvestInternational B.V.(2)... 784,128 7.0 400,000 384,128 3.1
Gooimeer 3
P.O. Box 5073
1410 AB Naarden, The Netherlands
Telenor Venture AS(3).................. 724,965 6.4 362,000 362,965 3.0
P.O. Box 6701, St. Olavs plass
N-0130 Oslo, Norway
TVM Techno Venture Management
GmbH(4).............................. 667,857 5.9 198,000 469,857 3.8
c/o Friedrich Bornikoel
Tolzerstrasse 12A
82031 Grunwald Germany
Robert Schneider(5).................... 615,944 5.5 100,000 515,944 4.2
c/o SCM Microsystems GmbH
Luitpoldstrasse 6
D-85276 Pfaffenhofen Germany
Gemplus................................ 600,000 5.3 250,000 350,000 2.9
Z.I. Athelia III-Voie Antiope
13705 La Ciotat Cedex 8, France
Bernd Meier(6)......................... 677,730 6.0 100,000 577,730 4.7
c/o SCM Microsystems GmbH
Luitpoldstrasse 6
D-85276 Pfaffenhofen Germany
Vertex Investment (II) Ltd.(7)......... 580,187 5.2 290,000 290,187 2.4
83, Science Park Drive
#01-01/02
Singapore 0511
Steven Humphreys(8).................... 276,570 2.5 50,000 226,570 1.9
John Niedermaier(9).................... 23,333 * 15,000 8,333 *
Nicholas Efthymiou(10)................. 204,591 1.8 50,000 154,591 1.3
Friedrich Bornikoel(11)................ 717,857 6.4 10,300 509,557 4.2
Bruce Graham(12)....................... 5,000 * -- 5,000 *
Randall Lunn(13)....................... 672,857 5.9 -- 474,857 3.9
Poh Chuan Ng(14)....................... 5,000 * -- 5,000 *
Andrew Vought(15)...................... 5,000 * -- 5,000 *
Other Selling Stockholders............. 174,700
All directors and executive officers as
a group (12 persons)(16)............. 2,473,191 22.0% 325,300 2,152,891 17.6
</TABLE>
- ------------------
* Less than one percent.
52
<PAGE> 55
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission. In computing the number of shares
beneficially owned by a person and the percentage ownership of that person,
shares of Common Stock subject to options held by that person that are
currently exercisable or exercisable but not necessarily vested within 60
days of April 30, 1998 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 Common Stock.
(3) Includes warrants to purchase 50,000 shares of Common Stock.
(4) Includes: (i) warrants to purchase 2,872 shares of Common Stock, (ii)
259,315 shares held by TVM Eurotech Ltd. and (iii) warrants to purchase
1,845 shares of Common 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) 32,010 shares held by Robert Schneider's wife, Ursula
Schneider, and (ii) options to purchase 8,750 shares and 250 shares of
Common Stock exercisable within 60 days of April 30, 1998 held by Robert
Schneider and Ursula Schneider, respectively.
(6) Includes: (i) 16,005 shares held by Bernd Meier's wife, Sonja Meier, (ii)
131,243 shares held in trust for Nicholas Efthymiou, and (iii) options to
purchase 8,750 shares and 250 shares of Common Stock exercisable within 60
days of April 30, 1998 held by Bernd Meier and Sonja Meier, respectively.
(7) Includes warrants to purchase 8,017 shares of Common Stock.
(8) Includes options to purchase 276,570 shares of Common Stock exercisable
within 60 days of April 30, 1998, 132,523 of which will be vested as of
such date and the remainder of which will be subject to repurchase by the
Company until vested.
(9) Includes options to purchase 23,333 shares of Common Stock exercisable
within 60 days of April 30, 1998.
(10) Includes 131,243 shares held by Bernd Meier in trust for the benefit of Mr.
Efthymiou.
(11) 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 20,000 shares of Common Stock exercisable within 60
days of April 30, 1998. 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 5,000 shares of Common Stock exercisable
within 60 days of April 30, 1998.
(13) 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 5,000 shares of Common Stock exercisable within 60 days of April
30, 1998. TVM Techno Venture Management provides certain advisory services
to (APM) AlpinvestInternational B.V. but disclaims beneficial ownership of
shares held by such entity.
(14) Includes options to purchase 5,000 shares of Common Stock exercisable
within 60 days of April 30, 1998.
(15) Includes: options to purchase 5,000 shares of Common Stock exercisable
within 60 days of April 30, 1998.
(16) Includes shares and exercisable options and warrants which may be deemed to
be beneficially owned by certain directors and executive officers. See
Notes 5, 6, 8, 9, 10, 11, 12, 13, 14 and 15 above.
53
<PAGE> 56
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 December 31, 1997, there were 10,714,978 shares of Common Stock
outstanding held of record by approximately 120 stockholders. Holders of Common
Stock are entitled to one vote per share on all matters to be voted upon by the
stockholders. 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. 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
10,000,000 shares of undesignated Preferred Stock are authorized, and no
shares are 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
As of December 31, 1997, the Company had outstanding warrants to purchase
an aggregate of 451,191 shares of Common Stock at a weighted average exercise
price of $12.62 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.
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
54
<PAGE> 57
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 is required to comply with the German
Code. The German Code regulates Public Offers, and requires companies seeking to
make a Public Offer to inform the German regulatory authorities and the public
of the offer, to provide certain disclosure to the target Company's
stockholders, to generally treat stockholders equally in an offer, and to comply
with certain other regulatory requirements. In addition, the German Code gives
broad authority to the German regulatory authorities to interpret the German
Code and to review and regulate specific Public Offers. Compliance with the
German Code could have the effect of delaying, deferring or preventing a tender
offer or takeover attempt that a stockholder might consider to be in that
stockholder's best interests, including attempts that might result in a premium
over the market price for the shares held by stockholders.
The Company licenses certain technology from a third party pursuant to a
license that is not transferable by the Company without the prior written
consent of the third party. This provision may prohibit the transfer of such
technology in a merger or consolidation of the Company with another company. As
a result, this provision may have the effect of discouraging or preventing an
acquisition of the Company.
Each of the foregoing may have the effect of preventing or rendering more
difficult or costly, the completion of a takeover transaction that stockholders
might view as being in their best interests.
REGISTRATION RIGHTS
Upon completion of this offering, the holders or their permitted
transferees ("Holders") of approximately 2.9 million 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 Common Stock is listed on the Nasdaq National Market under the symbol
"SCMM" and is listed on the Neuer Markt of the Frankfurt Stock Exchange under
the symbol "SMY".
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Company's Common Stock is American
Stock Transfer & Trust Company.
55
<PAGE> 58
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 12,244,062 shares outstanding (12,694,062 shares
if the Underwriters' over-allotment option is exercised in full) assuming no
further exercise of options or warrants outstanding as of March 25, 1998. Of
these shares, the 3,000,000 shares offered hereby (3,450,000 shares if the
Underwriters' over-allotment option is exercised in full), together with an
aggregate of 6,320,451 shares (comprising (i) shares sold in the Company's
initial public offering, (ii) shares sold into the public market subsequent to
the Company's public offering, and (iii) shares issued prior to the Company's
initial public offering that are eligible for unrestricted sale in the public
market) will be freely tradeable without restriction after the offering. Of the
remaining 2,923,610 shares (the "Restricted Shares"), 225,691 will be eligible
for sale immediately following the offering subject to compliance with the
volume and other restrictions of Rule 144 under the Securities Act of 1933, as
amended ("Rule 144"). Holders of the remaining 2,928,863 Restricted Shares have
signed lock-up agreements with the underwriters and therefore may not sell such
shares until expiration of the lock-up agreements 90 days after the date of this
prospectus. These locked-up shares will become eligible for sale into the public
market upon expiration of the lock-up agreements, subject in certain cases to
compliance with the volume and other restrictions of Rule 144. Upon completion
of this offering, the holders of approximately 2.9 million shares of Common
Stock will be entitled to certain rights with respect to the registration of
such shares under the Securities Act. See "Description of Capital
Stock -- Registration Rights."
56
<PAGE> 59
UNDERWRITING
Subject to the terms and conditions of an underwriting agreement (the "U.S.
Underwriting Agreement"), the Company and the Selling Stockholders have agreed
to sell to each of the underwriters named below (the "U.S. Underwriters"), and
each of the U.S. Underwriters, for whom Cowen & Company and Hambrecht & Quist
LLC and Wessels, Arnold & Henderson, L.L.C. are acting as representatives (the
"U.S. Representatives"), has severally agreed to purchase from the Company and
the Selling Stockholders, the respective number of shares of Common Stock set
forth opposite the name of such U.S. Underwriter below:
<TABLE>
<CAPTION>
NUMBER OF
U.S. UNDERWRITERS SHARES
----------------- -----------
<S> <C>
Cowen & Company.............................................
Hambrecht & Quist LLC.......................................
Wessels, Arnold & Henderson, L.L.C..........................
Total.............................................
===========
</TABLE>
Subject to the terms and conditions of an underwriting agreement (the
"International Underwriting Agreement"), the Company and the Selling
Stockholders have agreed to sell to the international managers named below (the
"International Managers"), and each of the International Managers, for whom
Cowen International L.P., Westdeutsche Landesbank Girozentrale and Hambrecht &
Quist LLC are acting as lead managers (the "Lead Managers"), has severally
agreed to purchase from the Company and the Selling Stockholders, the respective
number of shares of Common Stock set forth opposite the name of such
International Manager below:
<TABLE>
<CAPTION>
NUMBER OF
INTERNATIONAL MANAGERS SHARES
---------------------- -----------
<S> <C>
Cowen International L.P.....................................
Westdeutsche Landesbank Girozentrale........................
Hambrecht & Quist LLC.......................................
Total.............................................
===========
</TABLE>
The U.S. Underwriters and the International Managers, and the U.S.
Representatives and Lead Managers, are collectively referred to as the
"Underwriters" and "Representatives," respectively. The U.S. Underwriting
Agreement and the International Underwriting Agreement are collectively referred
to as the "Underwriting Agreements." The offering price and aggregate
underwriting discounts and commissions per share for the U.S. Offering and the
International Offering are identical. The completion of each offering is
contingent upon the completion of the other.
The Underwriting Agreements provide that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock
offered hereby are subject to the approval of certain legal matters by their
counsel and to certain other conditions. The Underwriters are obligated to take
and pay for all of the shares of Common Stock offered hereby (other than those
covered by the Underwriters' over-allotment option described below) if any such
shares are taken.
The Underwriters propose to offer the shares of Common Stock in part
directly to the public at the public offering price set forth on the cover page
of this Prospectus and in part to certain securities dealers at such price less
a concession not in excess of $ per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share
to certain brokers and dealers. After the shares of Common Stock are released
for sale to the public, the offering price and other selling terms may from time
to time be varied by the Representatives.
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<PAGE> 60
Pursuant to the Agreement among U.S. Underwriters and International
Managers (the "Agreement Among"), each U.S. Underwriter has represented and
agreed that, with certain exceptions: (i) it is not purchasing any Shares (as
defined herein) for the account of anyone other than a United States or Canadian
Person (as defined herein) and (ii) it has not offered or sold, and will not
offer or sell, directly or indirectly, any Shares or distribute any prospectus
relating to the Shares outside the United States or Canada or to anyone other
than a United States or Canadian Person. Pursuant to the Agreement Among, each
International Manager has represented and agreed that, with certain exceptions:
(i) it is not purchasing any Shares for the account of any United States or
Canadian Person and (ii) it has not offered or sold, and will not offer or sell,
directly or indirectly, any Shares or distribute any prospectus relating to the
Shares in the United States or Canada or to any United States or Canadian
Person. With respect to any Underwriter that is both a U.S. Underwriter and an
International Manager, the foregoing representations and agreements (i) made by
it in its capacity as a U.S. Underwriter apply only to it in its capacity as a
U.S. Underwriter and (ii) made by it in its capacity as an International Manager
apply only to it in its capacity as an International Manager. The foregoing
limitations do not apply to stabilization transactions or to certain other
transactions specified in the Agreement Among. As used herein, "United States or
Canadian Person" means any national or resident of the United States or Canada,
or any corporation, pension, profit-sharing or other trust or other entity
organized under the laws of the United States or Canada or of any political
subdivision thereof (other than a branch located outside the United States and
Canada of any United States or Canadian Person), and includes any United States
or Canadian branch of a person who is otherwise not a United States or Canadian
Person. All shares of Common Stock to be purchased by the Underwriters under the
Underwriting Agreements are referred to herein as the "Shares."
Pursuant to the Agreement Among, sales may be made between the U.S.
Underwriters and the International Managers of such number of shares of Common
Stock as may be mutually agreed. The price of any shares so sold shall be the
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 450,000
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 above, bears to the total number of shares of Common Stock
offered in the Offering. The Underwriters may exercise such option only to cover
over-allotments made in connection with the sale of the shares of Common Stock
offered hereby.
The Company has agreed to indemnify the several Underwriters against
certain liabilities, including liabilities under the Securities Act, and to
contribute to payments the Underwriters may be required to make in respect
thereof.
The Company, the Company's officers and directors, the Selling Stockholders
and certain of the Company's other stockholders have agreed subject to certain
limited exceptions, not, directly or indirectly, to offer, sell, contract to
sell, or otherwise dispose of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock or any right to
acquire Common Stock for a period of 90 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 90-day period.
The Representatives have advised the Company that, pursuant to rules
promulgated by the Commission, certain persons participating in this offering
may engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with the offering. A "penalty bid" is an arrangement
permitting the
58
<PAGE> 61
Underwriters to reclaim the selling concession otherwise accruing to an
Underwriter or syndicate member in connection with the offering if the Common
Stock originally sold by such Underwriter or syndicate member is purchased by
the Underwriters in syndicate covering transactions, in stabilization
transactions or otherwise. The Underwriters have advised the Company that such
transactions may be effected on the Nasdaq National Market or otherwise and, if
commenced, may be discontinued at any time.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales in excess of 5% of the shares offered hereby to any
account over which they exercise discretionary authority.
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 the initial
public offering.
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, 1996 and 1997 and for each of the years in the three-year period
ended December 31, 1997 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.
59
<PAGE> 62
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.
60
<PAGE> 63
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditor's Report................................ F-2
Consolidated Balance Sheets as of December 31, 1996 and
1997...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1995, 1996 and 1997.......................... F-4
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1995, 1996 and 1997...... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1995, 1996 and 1997.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 64
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, 1996 and
1997, 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, 1997. 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, 1996 and 1997, and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ KPMG PEAT MARWICK LLP
Palo Alto, California
February 13, 1998
F-2
<PAGE> 65
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
------- -------
<S> <C> <C>
Current assets:
Cash and cash equivalents................................. $ 2,593 $25,552
Short-term investments.................................... -- 30,336
Accounts receivable, less allowance of $210 and $188 in
1996 and 1997, respectively............................ 5,237 6,607
Inventories............................................... 2,279 3,392
Prepaid expenses.......................................... 519 302
------- -------
Total current assets.............................. 10,628 66,189
Property and equipment, net................................. 818 1,162
Other assets, net........................................... 13 14
------- -------
$11,459 $67,365
======= =======
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Notes payable............................................. $ 5,896 $ 9
Related party debt........................................ 2,350 --
Accounts payable.......................................... 3,351 4,308
Accrued payroll and related expenses...................... 458 660
Other accrued expenses.................................... 360 611
Income taxes payable...................................... -- 305
------- -------
Total current liabilities......................... 12,415 5,893
------- -------
Commitments and contingencies
Redeemable convertible preferred stock; $0.001 par value;
6,000,000 and 10,000,000 shares authorized at December 31,
1996 and 1997, respectively; 1,211,914 and no shares
issued outstanding at December 31, 1996 and 1997,
respectively; (liquidation preference of $4,642 at
December 31, 1996)........................................ 5,068 --
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par value; 854,038 and
no shares issued and outstanding at December 31, 1996 and
1997, respectively........................................ 1 --
Common stock, $0.001 par value; 19,000,000 and 40,000,000
shares authorized at December 31, 1996 and 1997,
respectively; 1,280,414 and 10,714,978 shares issued and
outstanding at December 31, 1996 and 1997, respectively... 1 11
Additional paid-in capital.................................. 2,387 69,902
Deferred stock compensation................................. (224) (125)
Accumulated deficit......................................... (8,015) (7,714)
Cumulative translation adjustment........................... (174) (602)
------- -------
Total stockholders' equity (deficit).............. (6,024) 61,472
------- -------
$11,459 $67,365
======= =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 66
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Net sales................................................... $18,066 $21,520 $27,769
Cost of sales............................................... 15,771 14,880 17,524
------- ------- -------
Gross profit........................................... 2,295 6,640 10,245
------- ------- -------
Operating expenses:
Research and development.................................. 1,399 2,386 2,940
Sales and marketing....................................... 2,057 3,230 4,221
General and administrative................................ 1,439 2,004 2,494
Settlement of patent claim................................ -- -- 515
------- ------- -------
Total operating expenses............................... 4,895 7,620 10,170
------- ------- -------
Income (loss) from operations.......................... (2,600) (980) 75
Interest income (expense), net.............................. (337) (304) 866
Foreign currency transaction gains.......................... 11 174 467
------- ------- -------
Income (loss) before income taxes...................... (2,926) (1,110) 1,408
Provision for income taxes.................................. -- -- 305
------- ------- -------
Net income (loss)...................................... (2,926) (1,110) 1,103
Accretion on redeemable convertible preferred stock......... (139) (287) (802)
------- ------- -------
Net income (loss) applicable to common stockholders.... $(3,065) $(1,397) $ 301
======= ======= =======
Earnings (loss) per share information:
Basic net income (loss) per share...................... $ (2.39) $ (1.09) $ 0.08
======= ======= =======
Diluted net income (loss) per share.................... $ (2.39) $ (1.09) $ 0.06
======= ======= =======
Shares used to compute basic net income (loss) per
share................................................ 1,280 1,280 3,819
======= ======= =======
Shares used to compute diluted net income (loss) per
share................................................ 1,280 1,280 5,015
======= ======= =======
Pro forma information:
Net income applicable to common stockholders...... $ 1,103
=======
Pro forma diluted net income per share............ $ 0.14
=======
Shares used to compute pro forma diluted net
income per share................................ 7,649
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 67
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
CONVERTIBLE
PREFERRED
STOCK -- SERIES A COMMON STOCK ADDITIONAL DEFERRED CUMULATIVE
----------------- ------------------ PAID-IN STOCK ACCUMULATED TRANSLATION
SHARES AMOUNT SHARES AMOUNT CAPITAL COMPENSATION DEFICIT ADJUSTMENT
-------- ------ ---------- ------ ---------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances as of December 31,
1994......................... 854,038 $ 1 1,280,414 $ 1 $ 1,761 $ -- $(3,553) $(238)
Redeemable convertible
preferred stock, Series B
additional paid-in
capital.................... -- -- -- -- 249 -- -- --
Foreign currency translation
adjustment................. -- -- -- -- -- -- -- 84
Net loss..................... -- -- -- -- -- -- (2,926) --
Accretion on redeemable
convertible preferred
stock, Series B............ -- -- -- -- -- -- (139) --
-------- --- ---------- --- ------- ----- ------- -----
Balances as of December 31,
1995......................... 854,038 1 1,280,414 1 2,010 -- (6,618) (154)
Deferred compensation related
to grants of stock
options.................... -- -- -- -- 377 (377) -- --
Amortization of deferred
stock compensation......... -- -- -- -- -- 153 -- --
Foreign currency translation
adjustment................. -- -- -- -- -- -- -- (20)
Net loss..................... -- -- -- -- -- -- (1,110) --
Accretion on redeemable
convertible preferred
stock, Series B............ -- -- -- -- -- -- (287) --
-------- --- ---------- --- ------- ----- ------- -----
Balances as of December 31,
1996......................... 854,038 1 1,280,414 1 2,387 (224) (8,015) (174)
Issuance of common stock upon
exercise of options and
warrants................... -- -- 680,531 1 58 -- -- --
Common stock warrants issued
in settlement of patent
claim...................... -- -- -- -- 453 -- -- --
Sale of common stock, net of
issuance costs............. -- -- 3,955,500 4 45,361 -- -- --
Accretion on redeemable
convertible preferred
stock, prior to
conversion................. -- -- -- -- -- -- (802) --
Conversion of convertible
preferred stock, Series A,
to common stock............ (854,038) (1) 854,038 1 -- -- -- --
Conversion of redeemable
convertible preferred
stock, Series B through F,
to common stock............ -- -- 3,944,495 4 21,643 -- -- --
Amortization of deferred
stock compensation......... -- -- -- -- -- 99 -- --
Foreign currency translation
adjustment................. -- -- -- -- -- -- -- (428)
Net income................... -- -- -- -- -- -- 1,103 --
-------- --- ---------- --- ------- ----- ------- -----
Balances as of December 31,
1997......................... -- $-- 10,714,978 $11 $69,902 $(125) $(7,714) $(602)
======== === ========== === ======= ===== ======= =====
<CAPTION>
TOTAL
STOCKHOLDERS'
EQUITY (DEFICIT)
----------------
<S> <C>
Balances as of December 31,
1994......................... $(2,028)
Redeemable convertible
preferred stock, Series B
additional paid-in
capital.................... 249
Foreign currency translation
adjustment................. 84
Net loss..................... (2,926)
Accretion on redeemable
convertible preferred
stock, Series B............ (139)
-------
Balances as of December 31,
1995......................... (4,760)
Deferred compensation related
to grants of stock
options.................... --
Amortization of deferred
stock compensation......... 153
Foreign currency translation
adjustment................. (20)
Net loss..................... (1,110)
Accretion on redeemable
convertible preferred
stock, Series B............ (287)
-------
Balances as of December 31,
1996......................... (6,024)
Issuance of common stock upon
exercise of options and
warrants................... 59
Common stock warrants issued
in settlement of patent
claim...................... 453
Sale of common stock, net of
issuance costs............. 45,365
Accretion on redeemable
convertible preferred
stock, prior to
conversion................. (802)
Conversion of convertible
preferred stock, Series A,
to common stock............ --
Conversion of redeemable
convertible preferred
stock, Series B through F,
to common stock............ 21,647
Amortization of deferred
stock compensation......... 99
Foreign currency translation
adjustment................. (428)
Net income................... 1,103
-------
Balances as of December 31,
1997......................... $61,472
=======
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 68
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ IN THOUSANDS)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------------
1995 1996 1997
------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $(2,926) $(1,110) $ 1,103
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization.......................... 135 445 563
Interest on subordinated stockholder loans converted to
equity............................................... 242 -- --
Amortization of deferred stock compensation............ -- 153 99
Non-cash charges from issuance of warrants............. -- -- 453
Changes in operating assets and liabilities:
Accounts receivable.................................. (2,816) (991) (1,798)
Inventories.......................................... (800) (75) (1,341)
Prepaid expenses..................................... (99) (582) (54)
Accounts payable..................................... 1,983 370 1,279
Accrued expenses..................................... 390 116 574
Income taxes payable................................. -- -- 305
------- ------- --------
Net cash provided by (used in) operating
activities...................................... (3,891) (1,674) 1,183
------- ------- --------
Cash flows used in investing activities:
Capital expenditures...................................... (524) (643) (802)
Purchases of short-term investments....................... -- -- (30,336)
------- ------- --------
Net cash used in investing activities............. (524) (643) (31,138)
------- ------- --------
Cash flows from financing activities:
Proceeds from notes payable............................... 1,253 5,011 380
Payments on notes payable and long-term debt.............. (59) (1,531) (3,664)
Proceeds from long-term debt.............................. 1,509 -- --
Proceeds from issuance of redeemable preferred stock...... -- -- 11,437
Proceeds from issuance of equity, net..................... 2,441 -- 45,424
Proceeds from line of credit.............................. -- 1,000 --
------- ------- --------
Net cash provided by financing activities......... 5,144 4,480 53,577
------- ------- --------
Effect of exchange rates on cash............................ (60) (309) (663)
------- ------- --------
Net increase in cash........................................ 669 1,854 22,959
Cash and cash equivalents at beginning of period............ 70 739 2,593
------- ------- --------
Cash and cash equivalents at end of period.................. $ 739 $ 2,593 $ 25,552
======= ======= ========
Supplemental disclosures of cash flow information:
Cash paid during the period -- interest................... $ 191 $ 313 $ 105
======= ======= ========
Noncash financing activities:
Interest accretion on redeemable convertible preferred
stock................................................ $ -- $ 287 $ 802
======= ======= ========
Conversion of related party and non-related party debt
into redeemable convertible preferred stock.......... $ 2,301 $ -- $ 4,330
======= ======= ========
Conversion of redeemable convertible preferred stock
into common stock.................................... $ -- $ -- $ 21,647
======= ======= ========
Conversion of convertible preferred stock into common
stock................................................ $ -- $ -- $ 1,622
======= ======= ========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 69
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1995, 1996 AND 1997
1. NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
SCM Microsystems designs, develops and sells standards-compliant hardware,
firmware and software products and technologies used in smart card and other
token-based network security and conditional access systems. The Company
currently sells its products to a number of OEM customers. The Company maintains
its U.S. headquarters in California and maintains its international headquarters
in Germany.
During 1994, the Company began emphasizing security and access products.
The Company made the final shipment of PCMCIA peripheral products in the quarter
ended March 31, 1997, completing its exit from this business.
Reincorporation
From inception in 1990 until December 1996, the Company was incorporated in
Germany. During 1993, the Company formed a U.S. subsidiary which is incorporated
in Delaware.
In December 1996, the Company incorporated a holding company in the state
of Delaware and entered into a stock exchange agreement with the stockholders of
the German corporation. The Board of Directors approved an exchange of one share
in the German corporation for 6.4021 shares in the new Delaware corporation
which effected a 6.4021 for 1 stock split of common and preferred stock. The
Certificate of Incorporation of the Delaware corporation authorizes 19,000,000
shares of common stock at $0.001 par value per share and 6,000,000 shares of
preferred stock at $0.001 par value per share. The accompanying consolidated
financial statements have been retroactively restated to give effect to the
reincorporation and stock split.
Initial Public Offering of Common Stock
In October 1997, the Company completed an offering of its capital stock
pursuant to a Registration Statement on Form S-1 ("IPO"), whereby the Company
sold 3,755,500 shares of Common Stock to the public at a price of $13.00 per
share. The net proceeds to the Company from the IPO were $43,722,000.
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.
Cash Equivalents and Short-term Investments
The Company considers all highly liquid debt securities with a remaining
maturity of three months or less at the date of acquisition to be cash
equivalents. Short-term investments are stated at amortized cost which
approximates fair market value.
F-7
<PAGE> 70
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial Instruments and Concentration of Credit Risk
The carrying value of the Company's financial instruments, including cash
and cash equivalents, short-term investments, accounts receivable and accounts
payable, approximates their fair market value due to the short maturities of
these instruments. Financial instruments that potentially expose the Company to
a concentration of credit risk principally consist of cash and cash equivalents,
short-term investments and accounts receivable.
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.
Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company evaluates its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets or intangibles may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
an asset. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the assets
exceeds the fair value of the assets. Assets to be disposed of are reported at
the lower of the carrying amount or fair value less costs to sell.
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 uses the intrinsic value-based method to account for all of its
employee stock-based compensation plans.
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.
F-8
<PAGE> 71
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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' equity (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 except for exchange
gains and losses stemming from intercompany transactions that are not expected
to be settled in the foreseeable future. In 1997 substantially all of the
foreign currency transaction gains of $467,000 relate to intercompany sales from
the German subsidiary to its U.S. affiliates. Included in the cumulative
translation adjustment account as of December 31, 1997 is approximately $310,000
of exchange losses on an intercompany loan from the U.S. parent company to the
German subsidiary that is not intended to be settled in the foreseeable future.
Earnings Per Share
On October 1, 1997, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 128, Earnings Per Share (EPS). In accordance with SFAS No.
128, basic EPS is computed using the weighted average number of common shares
outstanding during the period. Diluted EPS is computed using the weighted
average number of common and dilutive common equivalent shares outstanding
during the period. Dilutive common equivalent shares consist of common stock
issuable upon exercise of stock options and warrants using the treasury stock
method. The following is a reconciliation of the shares used in the computation
of basic and diluted EPS for the year ended December 31, 1997 (in thousands
except for per share amounts):
<TABLE>
<S> <C>
Basic EPS -- weighted average number of common shares
outstanding............................................... 3,819
Effect of dilutive common equivalent shares:
Series A convertible preferred stock prior to conversion
into common stock...................................... 655
Stock options outstanding................................. 400
Stock warrants outstanding................................ 141
-----
Diluted EPS -- weighted average number of common shares and
common equivalent shares outstanding...................... 5,015
=====
</TABLE>
Excluded from the computation of diluted EPS for the year ended December
31, 1997 are the common equivalent shares resulting from the assumed conversion
of the redeemable convertible preferred stock, because their effects were
antidilutive prior to their conversion into common stock on October 7, 1997. Had
the redeemable convertible preferred stock, converted into common stock on
January 1, 1997, or their respective dates of issuance if later, the diluted EPS
for the year ended December 31, 1997 would have been $0.14 per share based on
net income of $1,103,000 and a weighted-average number of common shares and
common equivalent shares outstanding of 7,649,000.
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
F-9
<PAGE> 72
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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. CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
The fair value of investments included in cash equivalents and short-term
investments as of December 31, 1997 is as follows (in thousands):
<TABLE>
<S> <C>
Commercial Paper........................................... $31,244
Certificates of Deposit.................................... 8,699
Corporate Bonds............................................ 4,002
Corporate Notes............................................ 2,611
Treasury Notes............................................. 900
Municipal Obligations...................................... 2,899
-------
$50,355
=======
Amounts included in:
Cash and cash equivalents................................ $20,019
Short-term investments................................... 30,336
-------
$50,355
=======
</TABLE>
The contractual maturities of available-for-sale debt securities included
in short term investments as of December 31, 1997, is as follows (in thousands):
<TABLE>
<S> <C>
Due within one year........................................ $28,937
Due after one year through two years....................... 1,399
-------
$30,336
=======
</TABLE>
3. BALANCE SHEET COMPONENTS
A summary of balance sheet components is as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------ ------
<S> <C> <C>
Inventories:
Raw materials.................................... $1,615 $1,704
Finished goods................................... 664 1,688
------ ------
$2,279 $3,392
====== ======
Property and equipment:
Furniture, fixtures, and office equipment........ $1,070 $1,541
Purchased software............................... 204 366
------ ------
1,274 1,907
Less accumulated depreciation.................... 456 745
------ ------
$ 818 $1,162
====== ======
</TABLE>
F-10
<PAGE> 73
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. NOTES PAYABLE AND RELATED PARTY DEBT
Notes payable consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------ ----
<S> <C> <C>
Nonconvertible loans................................. $2,580 $--
Convertible notes payable, Series C.................. 1,959 --
Line of credit....................................... 1,000 --
Notes payable to banks............................... 357 9
------ ---
$5,896 $ 9
====== ===
</TABLE>
Related party debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------ ----
<S> <C> <C>
Convertible notes payable Series C -- related
party.............................................. $ 627 $--
Convertible notes payable Series D -- related
party.............................................. 1,654 --
Stockholder loans.................................... 69 --
------ ---
$2,350 $--
====== ===
</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 provided 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 outstanding balance on these loans
was $2,580,000 as of December 31, 1996.
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. In November 1997, the Company repaid the
outstanding balance of these loans and, in December 1997, the lender exercised
the warrant.
Lines of Credit
The Company has revolving lines of credit with three banks in Germany
providing total borrowings of up to DM 4.5 million (approximately U.S. $2.5
million at December 31, 1997). One of these lines for DM 1.5 million expires on
March 31, 1998 and the remaining two expire on September 30, 1998. The German
lines of credit bear interest at rates ranging from 7.0% to 8.75%. Borrowings
under the German lines of credit are unsecured. The Company also has a U.S. $3.0
million line of credit which is secured by all assets of the Company, bears
interest at the bank's prime rate (8.5% as of December 31, 1997), and expires in
May 1999. At December 31, 1997, no amounts were outstanding under any of the
Company's lines of credit.
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. Under terms of the Series
B preferred stock agreement, all outstanding shares of Series B preferred stock
were converted into common stock on a one-for-one basis at the time of the
Company's IPO.
F-11
<PAGE> 74
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 required interest of 4% per annum and was
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. Under terms of the Series C preferred stock
agreement, all outstanding shares of Series C preferred stock were converted
into common stock on a one-for-one basis at the time of the Company's IPO.
Convertible Notes Payable, Series D
In December 1996, the Company's German subsidiary entered into a loan
agreement with stockholders for a total of DM 3,179,000 of which DM 2,564,000
was tendered at December 31, 1996. Under the agreement, the debt automatically
converts to common stock in the event of certain events including an IPO of
equity securities. The loan required no interest and was convertible into
377,580 shares of Series D preferred stock. 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. Under terms of the Series D
preferred stock agreement, all outstanding shares of Series D preferred stock
were converted into common stock on a one-for-one basis at the time of the
Company's IPO.
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. These warrants remain outstanding as of December
31, 1997.
5. STOCKHOLDERS' EQUITY (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
had 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 gross proceeds of $2,221,000 and 463,285 shares
of Series E redeemable convertible preferred stock for gross proceeds of
$2,650,000. In April 1997, the Company issued 849,790 shares of Series F
redeemable convertible preferred stock for gross proceeds of $6,991,000.
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.
Each share of Series A, B, C, D, E and F Convertible Preferred Stock
outstanding was converted into one share of Common Stock upon the completion of
the Company's IPO. The holders of Series A, B, C, D, E and F Convertible
Preferred Stock had voting rights equal to Common Stock on an if-converted
basis.
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. These warrants remain outstanding as of December
31, 1997.
F-12
<PAGE> 75
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
EMPLOYEE STOCK PLANS
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 24 month
offering period. As of December 31, 1997 no shares were issued under this plan.
Stock Options
In October 1995, the Company authorized the issuance of options to acquire
376,443 shares of Common Stock. 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.
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. Options granted under the 1997 Plan generally vest over a
four-year period, 25% vesting on the first anniversary date of the date of grant
and 1/48th vesting each additional month thereafter, and are generally
exercisable for a term of 10 years after issuance. 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 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 their initial election as a Director, 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.
F-13
<PAGE> 76
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Stock option activity during the periods indicated is as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
----------------------
WEIGHTED
SHARES AVERAGE
AVAILABLE NUMBER OF PRICE
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................................... (839,500) 839,500 9.29
Options canceled.................................. -- (3,125) 0.10
Options exercised................................. -- (613,907) 0.10
-------- ---------
Balance as of December 31, 1997..................... 210,500 1,156,185 $6.78
======== =========
</TABLE>
As of December 31, 1996 and 1997, 480,414 and 149,566, respectively,
options were fully vested and exercisable, respectively. All such options have
an exercise price of $0.10 per share.
The Company uses the intrinsic value-based method to account for its
employee stock-based compensation plans. 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 years ended December 31, 1996
and 1997, the Company amortized approximately $153,000 and $99,000,
respectively, of the deferred stock compensation reflecting the commencement of
vesting from the date of employment.
F-14
<PAGE> 77
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 net income
(loss), and net income (loss) per share would have been changed to the pro forma
amounts indicated below (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1995 1996 1997
------- ------- -----
<S> <C> <C> <C>
Net income (loss):
As reported........................................... $(3,065) $(1,397) $ 301
Pro forma............................................. (3,065) (1,397) (299)
Earnings (loss) per share:
As reported:
Basic net income (loss) per share.................. $ (2.39) $ (1.09) $0.08
Diluted net income (loss) per share................ (2.39) (1.09) 0.06
Pro forma diluted net income per share............. 0.14
Pro forma:
Basic net loss per share........................... $ (2.39) $ (1.09) $(0.08)
Diluted net loss per share......................... (2.39) (1.09) (0.08)
Pro forma diluted net income per share............. 0.07
</TABLE>
The per share weighted-average fair value of stock options granted during
1995, 1996 and 1997 was $0.02, $0.54 and $6.69, respectively, on the date of
grant using the minimum value method prior to the IPO and the Black-Scholes
option pricing model after the IPO 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; 1997 -- expected
dividend yield 0.0%, risk-free interest rate of 6.24%, volatility at 100%, and
expected life of 4 years.
6. GEOGRAPHIC INFORMATION
Information regarding operations in different geographic regions is as
follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Net sales to unaffiliated customers:
Europe.............................................. $ 8,848 $11,289 $19,079
United States....................................... 9,218 10,231 8,690
------- ------- -------
$18,066 $21,520 $27,769
======= ======= =======
Transfers between geographic areas (eliminated in
consolidation):
Europe.............................................. $ 8,608 $ 6,241 $ 6,342
United States....................................... -- -- 1,040
------- ------- -------
$ 8,608 $ 6,241 $ 7,382
======= ======= =======
Income (loss) from operations:
Europe.............................................. $ (907) $(1,144) $ 2,562
United States....................................... (1,693) 164 (2,487)
------- ------- -------
$(2,600) $ (980) $ 75
======= ======= =======
Identifiable assets:
Europe.............................................. $ 4,168 $ 6,912 $11,101
United States....................................... 3,975 4,547 56,264
------- ------- -------
$ 8,143 $11,459 $67,365
======= ======= =======
</TABLE>
F-15
<PAGE> 78
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
7. INCOME TAXES
The domestic and foreign components of net income (loss) before income
taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Domestic.............................................. $(1,693) $ 133 $(1,214)
Foreign............................................... (1,233) (1,243) 2,622
------- ------- -------
Net income (loss)........................... $(2,926) $(1,110) $ 1,408
======= ======= =======
</TABLE>
Actual tax expense for the year ended December 31, 1995 and 1996 differs
from expected tax expense due to the recognition of valuation allowances for
deferred tax assets. Tax expense for the year ended December 31, 1997 results
principally from tax liabilities associated with foreign operations of the
Company and minimum state income taxes.
The Company has a deferred tax asset as of December 31, 1996 and 1997, of
approximately $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.
As of December 31, 1997, SCM Microsystems GmbH had German net operating
loss carryforwards of approximately $1,400,000, 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 $3,300,000 and $1,600,000 for federal and California income tax
purposes, respectively. The federal net operating loss carryforwards will expire
in the years 2009 through 2011, and the California net operating loss
carryforwards will expire in the years 1999 through 2001.
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.
Another ownership change resulted from the Company's IPO. The limitation exceeds
the amount of net operating loss carryforwards as of October 6, 1997. Any unused
annual limitations may be carried forward to increase the limitations in
subsequent years.
8. 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 $343,000, $467,000,
and $491,000 in 1995, 1996, 1997, respectively.
F-16
<PAGE> 79
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Future minimum lease payments under noncancelable operating leases are as
follows as of December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
YEARS ENDING
DECEMBER 31,
------------
<S> <C>
1998........................................................ $ 487
1999........................................................ 315
2000........................................................ 212
2001........................................................ 124
2002 and thereafter......................................... 131
------
Total minimum lease payments...................... $1,269
======
</TABLE>
9. RELATED PARTY TRANSACTIONS
The Company purchased inventory under terms and conditions that are
believed to be substantially equivalent to those negotiated by independent
parties totaling $3,478,000, $3,294,000 and $3,379,000 in 1995, 1996 and 1997,
respectively, from a contract manufacturing company who is a stockholder in the
Company. A director of the Company also served as a member of management of the
contract manufacturing company. Included in accounts payable are amounts owed
this stockholder of $396,000 and $1,058,000 as of December 31, 1996 and 1997,
respectively.
In May 1997, the Company entered into a development and supply agreement
with a shareholder. Revenues under this agreement in 1997 were $2,692,000, and
the amount owed the Company as of December 31, 1997 by the shareholder was
$336,000.
10. 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,
1997, and the amount due from these customers as of December 31, 1997, follows
(accounts receivable in thousands):
<TABLE>
<CAPTION>
ACCOUNTS
1995 1996 1997 RECEIVABLE
---- ---- ---- ----------
<S> <C> <C> <C> <C>
Customer 1......................................... -- 11% 45% $3,221
Customer 2......................................... -- 12% -- --
Customer 3......................................... 17% -- -- --
Customer 4......................................... 16% -- -- --
</TABLE>
During 1995, 1996 and 1997, net sales of PCMCIA peripheral products
amounted to 30.7%, 22.7% and 0.6%, respectively, of sales. As discussed in Note
1, the Company made the final shipment of such products in the first quarter of
1997, completing its exit from this business.
11. LEGAL PROCEEDINGS
The Company was notified by Smith Corona Corporation ("Smith Corona") that
Smith Corona believes that the "SCM" in the Company's name, logo and a certain
product name infringe a trademark held by Smith Corona and that the Company has
engaged in unfair competition. The Company believes that it has defenses to
Smith Corona's claim and has so notified Smith Corona. In the event that Smith
Corona were to initiate legal proceedings against the Company with respect to
this matter, the Company would vigorously defend the action. Defending any
action can be costly and time consuming regardless of the outcome and, as with
any litigation matter, there can be no assurance that the outcome of any such
dispute would be favorable to the Company. An unfavorable outcome in the matter
could subject the Company to monetary damages and may
F-17
<PAGE> 80
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
result in the Company having to change its name and logo, which would require
the Company to incur costs related thereto and may result in a loss of the
goodwill associated with its name and logo. Although it is reasonably possible
that the Company may incur expenses upon resolution of this matter, the Company
currently is unable to estimate the amount of these expenses, if any, or the
range of such amounts.
In April 1997, Gemplus served the Company with a complaint alleging that
certain of the Company's products infringe certain claims of a French patent
held by Gemplus. In September 1997, the Company entered into a license agreement
and memorandum of understanding, and settled this dispute, with Gemplus. In
connection with these transactions, the Company sold 200,000 shares of Common
Stock to Gemplus for net proceeds of $1,643,000. Additionally, the Company
issued warrants to Gemplus to purchase up to 200,000 shares of Common Stock at
an exercise price of $13.00 per share and up to 200,000 shares of Common Stock
at an exercise price of $14.00 per share. The fair value of these warrants
approximated $453,000 and such cost, along with related legal fees of
approximately $62,000, was charged to operations as patent claim settlement
expense in the third quarter of 1997. Such warrants remain outstanding at
December 31, 1997.
F-18
<PAGE> 81
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.
PAGE 30
The Data Security "Patchwork"
DESCRIPTION:
These graphics depict numerous icons representing laptop computers,
servers, firewalls and clouds (representing the internet and other
networks), each with a caption identifying the particular icon, and
all of which are tied to each other by solid, connecting lines.
TEXT
Information Sources and Types of Users Seeking Access
Websites and other information sources which include applets
and push technologies.
Enterprise websites and limited network access sought by
external users such as customers and vendors.
Full network access sought by mobile and remote employees.
PAGE 33
Securing Digital Video Broadcasts
DESCRIPTION:
These graphics depict a satellite receiving a television signal, the
forwarding of the signal to a set-top box containing a smart card
and the continuation of the signal to a television.
TEXT
The text describes the process depicted by the graphics.
1. Set-top box receives DVB signal
2. Set-top box transfers MPEG2 data to
Conditional Access Model ("CAM")
3. CAM checks Smart Card for authorization to view broadcast
4. If card is accepted, CAM descrambles MPEG2 data
5. Set-top box decodes MPEG2 data and provides output for
standard TVs and VCRs.
Enables services such as:
-- Video-on-Demand
-- Home Banking
-- Pay-Per-View
-- Interactive Video and Games
-- Home Shopping
INSIDE BACK COVER
DESCRIPTION:
Lap top personal computer, palm-top computer, computer key board, desk
top personal computer, SmartOS logo and four smart cards labeled:
"memory," "cryptographic," "microprocessor" and "any other."
TEXT Extensible smart card interface Architecture Ensures Flexibility.
Industry Standards & Operating Systems. 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> 82
======================================================
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 ON 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
Price Range of Common Stock........... 16
Capitalization........................ 17
Selected Consolidated Financial
Data................................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 27
Management............................ 45
Certain Transactions.................. 51
Principal and Selling Stockholders.... 52
Description of Capital Stock.......... 54
Shares Eligible for Future Sale....... 56
Underwriting.......................... 57
Legal Matters......................... 59
Experts............................... 59
Additional Information................ 60
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
======================================================
======================================================
3,000,000 SHARES
LOGO
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
COWEN & COMPANY
HAMBRECHT & QUIST
WESSELS, ARNOLD & HENDERSON
, 1998
======================================================
<PAGE> 83
[Alternate Page for International Prospectus]
INFORMATION CONTAINED HEREIN IS
SUBJECT TO COMPLETION OR AMENDMENT.
PROSPECTUS (Subject to Completion)
March 25, 1998
3,000,000 SHARES
LOGO
COMMON STOCK
---------------------------
Of the 3,000,000 shares of Common Stock offered, 1,500,000 shares are being
offered hereby in an International Offering outside the United States and Canada
(the "International Offering") and 1,500,000 shares are being offered in a
concurrent offering in the United States and Canada (the "U.S. Offering"),
subject to transfers of shares between the International Underwriters and U.S.
Underwriters (collectively, the "Underwriters"). The public offering price and
the aggregate underwriting discount per share are identical for both offerings.
The closing of the International Offering and U.S. Offering are conditioned upon
each other. See "Underwriting."
Of the 3,000,000 shares of Common Stock offered, 1,000,000 shares are being
sold by SCM Microsystems, Inc. (the "Company") and 2,000,000 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.
The Common Stock is listed on the Nasdaq National Market under the symbol
"SCMM" and on the Neuer Markt of the Frankfurt Stock Exchange under the symbol
"SMY." On March 24, 1998, the last reported sales prices of shares of the Common
Stock on the Nasdaq National Market and the Neuer Market of the Frankfurt Stock
Exchange were $67.25 and DM127.50 per share, respectively.
---------------------------
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 6 OF THIS PROSPECTUS.
---------------------------
THIS INTERNATIONAL PROSPECTUS IS INTENDED FOR USE ONLY IN CONNECTION WITH OFFERS
AND SALES OF THE COMMON STOCK OUTSIDE THE UNITED STATES AND CANADA AND IS NOT TO
BE SENT OR GIVEN TO ANY PERSON WITHIN THE UNITED STATES OR CANADA. THE COMMON
STOCK OFFERED HEREBY IS NOT BEING REGISTERED UNDER THE U.S. SECURITIES ACT OF
1933 FOR THE PURPOSES OF SALES OUTSIDE THE UNITED STATES.
================================================================================
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 $750,000, 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 450,000
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 April , 1998.
---------------------------
COWEN INTERNATIONAL L.P.
WESTDEUTSCHE LANDESBANK
GIROZENTRALE
HAMBRECHT & QUIST
, 1998
<PAGE> 84
[Alternate Page for International Prospectus]
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY, ANY OF THE UNDERWRITERS OR BY ANY OTHER
PERSON. THIS PROSPECTUS DOES NOT CONSTITUTE ON 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
Price Range of Common Stock........... 16
Capitalization........................ 17
Selected Consolidated Financial
Data................................ 18
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 27
Management............................ 45
Certain Transactions.................. 51
Principal and Selling Stockholders.... 52
Description of Capital Stock.......... 54
Shares Eligible for Future Sale....... 56
Underwriting.......................... 57
Legal Matters......................... 59
Experts............................... 59
Additional Information................ 60
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
======================================================
======================================================
3,000,000 SHARES
LOGO
COMMON STOCK
---------------------------
PROSPECTUS
---------------------------
COWEN INTERNATIONAL L.P.
WESTDEUTSCHE LANDESBANK GIROZENTRALE
HAMBRECHT & QUIST
, 1998
======================================================
<PAGE> 85
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 and the NASD filing fee.
<TABLE>
<CAPTION>
AMOUNT
TO BE PAID
----------
<S> <C>
SEC registration fee........................................ $ 64,946
NASD filing fee............................................. 22,515
Nasdaq National Market listing fee.......................... 15,000
Printing expenses........................................... 125,000
Legal fees and expenses..................................... 200,000
Accounting fees and expenses................................ 150,000
Directors' and officers' liability insurance................ 75,000
Transfer agent and registrar fees........................... 10,000
Miscellaneous............................................... 87,539
--------
Total............................................. $750,000
========
</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> 86
Reference is made to the following documents filed as exhibits to this
Registration Statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<CAPTION>
EXHIBIT
DOCUMENT NUMBER
-------- -------
<S> <C>
Form of U.S. Underwriting Agreement......................... 1.1
Form of International Underwriting Agreement................ 1.2
Fourth Amended and Restated Certificate of Incorporation.... 3.1
Bylaws, as amended.......................................... 3.3
Form of Indemnification Agreement entered into by the
Registrant with each of its directors and executive
officers.................................................. 10.1
</TABLE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The Registrant has recently issued and sold the following unregistered
securities:
(i) From January 1, 1994 through March 6, 1998 the Registrant issued
and sold 3,944,495 shares of Preferred Stock at purchase prices ranging
from $3.83 to $8.58 for aggregate consideration of approximately
$21,290,570;
(ii) From January 1, 1994 through March 6, 1998 the Registrant issued
and sold 586,296 shares of Common Stock to employees and consultants at an
exercise price of $0.10 for aggregate consideration of approximately
$59,000;
(iii) From January 1, 1994 through March 6, 1998, the Registrant
issued warrants to purchase up to 784,121 shares of Common Stock at
exercise prices ranging from $5.72 to $14.00 per share in connection with
the issuance of a portion of the Preferred Stock described in (i) above,
certain loan arrangements and a settlement with a third party; and
(iv) Concurrently with the Company's initial public offering in
October 1997, the Registrant has issued and sold 200,000 shares of Common
Stock at $9.00 per share.
The issuances referred to in paragraphs (i), (iii) and (iv) were deemed
exempt from registration under the Securities Act in reliance upon Section 4(2)
thereof. The recipients of securities in each such transaction represented their
intentions to acquire the securities for investment only and not with a view to
or for sale in connection with any distribution thereof and appropriate legends
were affixed to the share certificates issued in such transactions. All
recipients had adequate access, through their relationships with the Registrant,
to information about the Registrant. The issuances of Common Stock described in
paragraph (ii) above were deemed exempt from registration under the Securities
Act in reliance upon Rule 701 promulgated under the Securities Act.
II-2
<PAGE> 87
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- -----------
<C> <S>
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- ------------------------------------------------------------
<C> <S>
1.1 Form of U.S. Underwriting Agreement.
1.2 Form of International Underwriting Agreement.
3.1* Fourth Amended and Restated Certificate of Incorporation.
3.2* 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* Form of Director and Officer Indemnification Agreement.
9.2* 1997 Stock Plan.
10.1* 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** Revolving Credit Loan and Security Agreement, dated
September 26, 1997, between Registrant and Comerica Bank.
10.8* Line of Credit, dated October 23, 1996, between Registrant
and Deutsche Bank.
10.9* Line of Credit, dated December 3, 1996, between Registrant
and BHF Bank.
10.10* Line of Credit, dated November 11, 1996, between Registrant
and Stadtsparkasse Munchen.
10.11* Lease, dated September 29, 1994, between Registrant and Los
Gatos Business Park.
10.12* Sublease Agreement, dated December 17, 1996, between
Intermart Systems, Inc. and Registrant.
10.13* Lease, dated September 30, 1994, between Registrant and
Olbrich Franz.
10.14* Amended and Restated Stockholders' Agreement, dated April
11, 1997, between Registrant and certain investors.
10.15* Form of Employment Agreement between SCM GmbH and Messrs.
Schneider and Meier.
10.16* Employment Agreement, dated May 15, 1995, between Registrant
and Jean-Yves Le Roux.
10.17*+ Commitment Instrument, dated August 7, 1996, among France
Telecom, Matra Communication, Registrant and Matra MHS.
10.18*+ Teaming Agreement, dated October 6, 1995, between
Temic/Matra MHS, Matra Communication and Registrant.
10.19*+ Development Agreement, dated March 6, 1997, between Intel
Corporation and Registrant.
10.20*+ Technology Development and License Agreement, dated
September 27, 1996, between Registrant and Sun Microsystems,
Inc.
10.21* Cooperation Contract, dated March 25, 1996, between
Registrant and Stocko Metallwarenfabriken Henkels and Sohn
GmbH & Co.
10.22*+ Development and Supply Agreement, dated October 9, 1996,
between BetaDigital Gesellschaft fur digitale Fernsehdienste
mbH and Registrant.
10.23* Framework Contract, dated December 23, 1996, between Siemens
Nixdorf Informationssysteme AG and Registrant.
</TABLE>
II-3
<PAGE> 88
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- ------------------------------------------------------------
<C> <S>
10.24* B-1 License and Know-How Contract, dated September 4, 1996,
between Deutsche Telekom AG and Registrant, as amended.
10.25* Technology Option Agreement, dated January 31, 1997, between
Wolfgang Neifer and Registrant.
10.26*+ Development and Supply Agreement, dated May 15, 1997,
between Telenor Conax and Registrant.
10.27*+ Manufacturer's Sales Representative Agreement, dated
December 8, 1994, between Registrant and AGM.
10.28* License Agreement, dated September 5, 1997, between the
Registrant and Gemplus.
10.29* Warrant Issuance and Common Stock Agreement, dated September
5, 1997, between the Registrant and Gemplus.
10.30* Common Stock Purchase Warrant dated September 5, 1997,
issued to Gemplus.
10.31* Common Stock Purchase Warrant dated September 5, 1997,
issued to Gemplus.
10.32* Waiver and Amendment to Amended and Restated Stockholders'
Agreement dated September 5, 1997.
11.1 Statement of computation of earnings per share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP, Independent Certified
Public Accountants .
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
24.1 Power of Attorney (included on page II-6).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Filed previously as an exhibit to the Company's Registration Statement on
Form S-1 (SEC Registration No. 333-29073).
** Filed previously as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997 (See File No. 000-22689).
+ Certain information in these exhibits has been omitted pursuant to a
confidential treatment request under 17 C.F.R. Section Section 200.80(b)(4),
200.83 and 230.46.
II-4
<PAGE> 89
(b) FINANCIAL STATEMENT SCHEDULES
Schedule II -- Valuation and Qualifying Accounts
The following financial statement schedule should be read in conjunction
with the consolidated financial statements and the notes thereto.
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
BALANCE AT BALANCE AT
BEGINNING OF END OF
CLASSIFICATION PERIOD ADDITIONS DEDUCTION PERIOD
-------------- ------------ --------- ----------- ----------
<S> <C> <C> <C> <C>
Allowance for returns and doubtful accounts
Year ended December 31, 1995....................... 28 65 -- 93
Year ended December 31, 1996....................... 93 159 42 210
Year ended December 31, 1997....................... 210 54 76 188
Warranty accrual
Year ended December 31, 1995....................... -- 84 -- 84
Year ended December 31, 1996....................... 84 19 -- 103
Year ended December 31, 1997....................... 103 40 42 101
</TABLE>
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 Delaware General 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-5
<PAGE> 90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused 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 24th day of March, 1998.
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
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ STEVEN HUMPHREYS President and Chief March 24, 1998
- ----------------------------------------------------- Executive Officer (Principal
Steven Humphreys Executive Officer) and
Director
/s/ JOHN NIEDERMAIER* Vice President, Finance and March 24, 1998
- ----------------------------------------------------- Chief Financial Officer
John Niedermaier (Principal Financial and
Accounting Officer)
Chairman of the Board , 1998
- -----------------------------------------------------
Robert Schneider
/s/ BERND MEIER* Chief Operations Officer and March 24, 1998
- ----------------------------------------------------- Director
Bernd Meier
Director , 1998
- -----------------------------------------------------
Friedrich Bornikoel
/s/ BRUCE GRAHAM* Director March 24, 1998
- -----------------------------------------------------
Bruce Graham
/s/ RANDALL LUNN* Director March 24, 1998
- -----------------------------------------------------
Randall Lunn
Director 1998
- -----------------------------------------------------
Poh Chuan Ng
/s/ ANDREW VOUGHT* Director March 24, 1998
- -----------------------------------------------------
Andrew Vought
*By: /s/ STEVEN HUMPHREYS
---------------------------------------
Steven Humphreys
Attorney-in-Fact
</TABLE>
II-6
<PAGE> 91
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- ------------------------------------------------------------
<C> <S>
1.1 Form of U.S. Underwriting Agreement.
1.2 Form of International Underwriting Agreement.
3.1* Fourth Amended and Restated Certificate of Incorporation.
3.2* 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* Form of Director and Officer Indemnification Agreement.
9.2* 1997 Stock Plan.
10.1* 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** Revolving Credit Loan and Security Agreement, dated
September 26, 1997, between Registrant and Comerica Bank.
10.8* Line of Credit, dated October 23, 1996, between Registrant
and Deutsche Bank.
10.9* Line of Credit, dated December 3, 1996, between Registrant
and BHF Bank.
10.10* Line of Credit, dated November 11, 1996, between Registrant
and Stadtsparkasse Munchen.
10.11* Lease, dated September 29, 1994, between Registrant and Los
Gatos Business Park.
10.12* Sublease Agreement, dated December 17, 1996, between
Intermart Systems, Inc. and Registrant.
10.13* Lease, dated September 30, 1994, between Registrant and
Olbrich Franz.
10.14* Amended and Restated Stockholders' Agreement, dated April
11, 1997, between Registrant and certain investors.
10.15* Form of Employment Agreement between SCM GmbH and Messrs.
Schneider and Meier.
10.16* Employment Agreement, dated May 15, 1995, between Registrant
and Jean-Yves Le Roux.
10.17*+ Commitment Instrument, dated August 7, 1996, among France
Telecom, Matra Communication, Registrant and Matra MHS.
10.18*+ Teaming Agreement, dated October 6, 1995, between
Temic/Matra MHS, Matra Communication and Registrant.
10.19*+ Development Agreement, dated March 6, 1997, between Intel
Corporation and Registrant.
10.20*+ Technology Development and License Agreement, dated
September 27, 1996, between Registrant and Sun Microsystems,
Inc.
10.21* Cooperation Contract, dated March 25, 1996, between
Registrant and Stocko Metallwarenfabriken Henkels and Sohn
GmbH & Co.
10.22*+ Development and Supply Agreement, dated October 9, 1996,
between BetaDigital Gesellschaft fur digitale Fernsehdienste
mbH and Registrant.
10.23* Framework Contract, dated December 23, 1996, between Siemens
Nixdorf Informationssysteme AG and Registrant.
10.24* B-1 License and Know-How Contract, dated September 4, 1996,
between Deutsche Telekom AG and Registrant, as amended.
</TABLE>
<PAGE> 92
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
- ----------- ------------------------------------------------------------
<C> <S>
10.25* Technology Option Agreement, dated January 31, 1997, between
Wolfgang Neifer and Registrant.
10.26*+ Development and Supply Agreement, dated May 15, 1997,
between Telenor Conax and Registrant.
10.27*+ Manufacturer's Sales Representative Agreement, dated
December 8, 1994, between Registrant and AGM.
10.28* License Agreement, dated September 5, 1997, between the
Registrant and Gemplus.
10.29* Warrant Issuance and Common Stock Agreement, dated September
5, 1997, between the Registrant and Gemplus.
10.30* Common Stock Purchase Warrant dated September 5, 1997,
issued to Gemplus.
10.31* Common Stock Purchase Warrant dated September 5, 1997,
issued to Gemplus.
10.32* Waiver and Amendment to Amended and Restated Stockholders'
Agreement dated September 5, 1997.
11.1 Statement of computation of earnings per share.
21.1 Subsidiaries of the Registrant.
23.1 Consent of KPMG Peat Marwick LLP, Independent Certified
Public Accountants .
23.2 Consent of Wilson Sonsini Goodrich & Rosati, Professional
Corporation (included in Exhibit 5.1).
24.1 Power of Attorney (included on page II-6).
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Filed previously as an exhibit to the Company's Registration Statement on
Form S-1 (SEC Registration No. 333-29073).
** Filed previously as an exhibit to the Company's Quarterly Report on Form
10-Q for the quarter ended September 30, 1997 (See File No. 000-22689).
*** To be filed by amendment.
+ Certain information in these exhibits has been omitted pursuant to a
confidential treatment request under 17 C.F.R. Section Section 200.80(b)(4),
200.83 and 230.46.
<PAGE> 1
Exhibit 1.1
1,500,000 Shares
SCM MICROSYSTEMS, INC.
Common Stock
U.S. UNDERWRITING AGREEMENT
April __, 1998
COWEN & COMPANY
HAMBRECHT & QUIST LLC
WESSELS, ARNOLD & HENDERSON, L.L.C.
As Representatives of the several U.S. Underwriters
c/o Cowen & Company
Financial Square
New York,
New York 10005
Dear Sirs:
1 Introductory. SCM Microsystems, Inc., a Delaware corporation (the
"Company"), and the selling stockholders named in Schedule B hereto (the
"Selling Stockholders") propose to sell, pursuant to the terms of this
Agreement, to the several U.S. Underwriters named in Schedule A hereto
(the "U.S. Underwriters," or, each, a "U.S. Underwriter"), an aggregate
of 1,500,000 shares of Common Stock, $0.001 par value per share (the
"Common Stock"), of the Company. The aggregate of 1,500,000 shares so
proposed to be sold is hereinafter referred to as the "Firm Stock." The
Company also proposes to sell to the U.S. Underwriters and the
International Managers (as hereinafter defined), upon the terms and
conditions set forth in Section 3 hereof, up to an additional 450,000
shares of Common Stock (the "Optional Stock"). The Firm Stock and the
Optional Stock are hereinafter collectively referred to as the "Stock."
Cowen & Company ("Cowen"), Hambrecht & Quist LLC and Wessels, Arnold &
Henderson, L.L.C. are acting as representatives of the several U.S.
Underwriters and in such capacity are hereinafter referred to as the
"Representatives."
It is understood by all parties that the Company and the Selling
Stockholders are concurrently entering into an agreement dated the date
hereof (the "International Underwriting Agreement") providing for the
sale by the Company and the Selling Stockholders of an aggregate of
1,500,000 shares of Common Stock (the "International Stock") through
arrangements with certain international managers outside the United
States and Canada (the "International Managers"), for whom Cowen
International L.P., Westdeutsche Landesbank Girozentrale and Hambrecht &
Quist LLC are acting as lead managers (the "Lead Managers"). The U.S.
Underwriters and the International Managers simultaneously are entering
into an agreement among the U.S. and International underwriting
syndicates (the "Agreement Among U.S. Underwriters and International
Managers") which provides for, among other things, the transfer of
shares of Stock, between the two syndicates. Two forms of
1
<PAGE> 2
prospectus are to be used in connection with the offer and sale of
shares of Common Stock contemplated by the foregoing, one relating to
the Stock and the other relating to the International Stock. Except as
used in the first paragraph hereof and in Section 8 herein, and except
as the context may otherwise require, references herein to the Stock
shall include all the shares of Common Stock which may be sold pursuant
to both this Agreement and the International Underwriting Agreement, and
references herein to any prospectus whether in preliminary or final
form, and whether as amended or supplemented, shall include the U.S. and
the International versions thereof; provided, however, that any such
references shall not be deemed to be references to the prospectus
prepared in the German language in connection with the listing of shares
of Stock on the Neuer Markt of the Frankfurt Stock Exchange. The German
language prospectus included in the Application for Admission (as
defined in the International Underwriting Agreement) and the final form
of the German language prospectus are collectively referred to as the
"German Prospectus."
2a. Representations and Warranties of the Company. The Company hereby
represents and warrants to, and agrees with, the several U.S.
Underwriters that:
(a) A registration statement on Form S-1 (File No. 333-47635) in the
form in which it became or becomes effective and also in such
form as it may be when any post-effective amendment thereto
shall become effective with respect to the Stock, including any
pre- effective prospectuses included as part of the registration
statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the
Securities Act of 1933, as amended (the "Securities Act"), and
the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission")
promulgated thereunder, copies of which have heretofore been
delivered to you, has been prepared by the Company in conformity
with the requirements of the Securities Act and has been filed
with the Commission under the Securities Act; one or more
amendments to such registration statement, including in each
case an amended pre-effective prospectus, copies of which
amendments have heretofore been delivered to you, have been so
prepared and filed. If it is contemplated, at the time this
Agreement is executed, that a post-effective amendment to the
registration statement will be filed and must be declared
effective before the offering of the Stock may commence, the
term "Registration Statement" as used in this Agreement means
the registration statement as amended by said post-effective
amendment. The term "Registration Statement" as used in this
Agreement shall also include any registration statement relating
to the Stock that is filed and becomes effective pursuant to
Rule 462(b) under the Securities Act. The term "Prospectus" as
used in this Agreement means the prospectus in the form included
in the Registration Statement, or, (A) if the prospectus
included in the Registration Statement omits information in
reliance on Rule 430A under the Securities Act and such
information is included in a prospectus filed with the
Commission pursuant to Rule 424(b) under the Securities Act, the
term "Prospectus" as used in this Agreement means the prospectus
in the form included in the Registration Statement as
supplemented by the addition of the Rule 430A information
contained in the prospectus filed with the Commission pursuant
to Rule 424(b) and (B) if prospectuses that meet the
requirements of Section 10(a) of the Securities Act are
delivered pursuant to Rule 434 under the Securities Act, then
(i) the term "Prospectus" as used in this Agreement means the
"prospectus subject to completion" (as such term is defined in
Rule 434(g) under the Securities Act) as supplemented by (a) the
addition of Rule 430A information or other information contained
in the form of prospectus delivered pursuant to Rule 434(b)(2)
under the Securities Act or (b) the information contained in the
term sheets described in Rule 434(b)(3) under the Securities
Act, and (ii) the date of such prospectuses shall be deemed
2
<PAGE> 3
to be the date of the term sheets. The term "Pre-effective
Prospectus" as used in this Agreement means the prospectus
subject to completion dated March __, 1998, and as such
prospectus shall have been amended from time to time prior to
the date of the Prospectus.
(b) The Commission has not issued or, to the Company's knowledge,
threatened to issue any order preventing or suspending the use
of any Pre-effective Prospectus, and, at its date of issue, each
Pre-effective Prospectus complied in all material respects with
the applicable provisions of the Securities Act, except that the
outside front cover and back cover pages of the International
version omitted certain captions and legends that are required
in the U.S. prospectus, and did not contain any untrue statement
of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading, other than any noncompliance or
untrue statement or omission in a Pre-effective Prospectus that
has been corrected in the Prospectus; and, when the Registration
Statement becomes effective and at all times subsequent thereto
up to and including each of the Closing Dates (as hereinafter
defined), the Registration Statement and the Prospectus and any
amendments or supplements thereto contained and will contain all
material statements and information required to be included
therein by the Securities Act, except that the outside front
cover and back cover pages of the International version omitted
certain captions and legends that are required in the U.S.
prospectus, and complied and will comply in all material
respects with the applicable provisions of the Securities Act,
except that the outside front cover and back cover pages of the
International version omitted certain captions and legends that
are required in the U.S. prospectus, and neither the
Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, contained or will contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading; provided, however, that the
foregoing representations and warranties shall not apply to
information contained in or omitted from any Pre-effective
Prospectus or the Registration Statement or the Prospectus or
any such amendment or supplement thereto in reliance upon, and
in conformity with, written information furnished to the Company
by the Representatives on behalf of the several U.S.
Underwriters, directly or through you, specifically for use in
the preparation thereof. With respect to the preceding sentence,
the Company acknowledges that the only information furnished in
writing by the Representatives on behalf of the several U.S.
Underwriters for use in the Pre-effective Prospectus, the
Registration Statement and the Prospectus is the paragraph with
respect to stabilization on the inside front cover page of the
Prospectus and the statements contained under the caption
"Underwriting" in the Prospectus.
(c) The Registration Statement is effective under the Securities Act
and no stop order suspending effectiveness of the Registration
Statement or suspending or preventing the use of the Prospectus
has been issued and no proceedings for that purpose have been
instituted or, to the Company's knowledge, are threatened under
the Securities Act; any required filing of the Prospectus and
any amendment or supplement thereto pursuant to Rule 424(b) of
the Rules and Regulations has been or will be made in the manner
and within the time period required by Rule 424(b).
(d) There is no document, contract or other agreement of a character
required to be described in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration
Statement which is not described or filed as required by the
Securities Act or the Rules and
3
<PAGE> 4
Regulations. Each agreement described in the Registration
Statement and the Prospectus or listed in the Exhibits to the
Registration Statement is in full force and effect and is valid
and enforceable by and against the Company or its subsidiaries
in accordance with its terms, except to the extent that rights
to indemnity and contribution hereunder may be limited by
applicable bankruptcy, insolvency and other similar laws
affecting conditions, rights and rules of law governing specific
performance, injunctive relief and other equitable remedies and
except to the extent that the enforceability of certain
indemnification provisions of certain registration rights
agreements entered into by the Company may be limited by
principles of public policy. Neither the Company nor any
subsidiary is in default in the observance or performance of any
material term or obligation to be performed by it under any such
agreement, and no event has occurred which, with notice or lapse
of time or both, would constitute such a default, in any such
case which default or event would have a material adverse effect
on the Company and its subsidiaries taken as a whole. No default
exists, and, to the knowledge of the Company, no event has
occurred which, with notice or lapse of time or both would
constitute a default, in the due performance and observance of
any term, covenant or condition, by the Company or any of its
subsidiaries of any other agreement or instrument to which the
Company or any of its subsidiaries is a party or by which any of
them or their respective properties or businesses may be bound
or affected, in any case which default or event could reasonably
be expected to have a material adverse effect on the operations
of the Company and its subsidiaries considered as a whole.
(e) None of the Company or its subsidiaries is in violation of any
franchise, license, permit, judgment, decree, order, statute or
rule or regulation, which could reasonably be expected to have a
material adverse effect on the operations of the Company and its
subsidiaries considered as a whole, or any term or provision of
its certificate of incorporation or by-laws.
(f) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except
as set forth or contemplated in the Prospectus, neither the
Company nor any of its subsidiaries has incurred any material
liabilities or obligations, direct or contingent, nor entered
into any transactions not in the ordinary course of business,
and there has not been any material adverse change in the
condition (financial or otherwise), properties, business,
management, net worth or results of operations of the Company
and its subsidiaries considered as a whole, or any change in the
capital stock, short-term or long-term debt of the Company and
its subsidiaries considered as a whole, except for issuances of
Common Stock pursuant to the Company's 1997 Stock Plan, 1997
Employee Stock Purchase Plan, 1997 Director Option Plan, 1997
Stock Option Plan for French Employees and the 1997 Employee
Stock Purchase Plan for Non-U.S. Employees (collectively, the
"1997 Plans").
(g) The financial statements, together with the related notes and
schedules, set forth in the Prospectus and elsewhere in the
Registration Statement fairly present the financial position and
the results of operations and changes in financial position of
the Company and its consolidated subsidiaries at the respective
dates or for the respective periods therein specified. Such
statements and related notes and schedules have been prepared in
accordance with generally accepted accounting principles applied
on a consistent basis except as may be set forth in the
Prospectus. The summary and selected financial and statistical
data set forth in the Prospectus under the captions "Summary
Consolidated Financial Data," "Selected Consolidated Financial
Data," "Management's Discussion and
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<PAGE> 5
Analysis of Financial Condition and Results of Operations --
Results of Operations" and "-- Quarterly Results of Operations"
fairly present, on the basis stated in the Registration
Statement, the information set forth therein as of the
respective dates and for the respective periods specified, and
such data have been presented on a basis consistent with the
financial statements so set forth in the Prospectus and other
financial information.
(h) To the Company's knowledge, KPMG Peat Marwick LLP, who have
expressed their opinions on the audited financial statements and
related schedules included in the Registration Statement and the
Prospectus are independent public accountants as required by the
Securities Act and the Rules and Regulations.
(i) The Company and each of its subsidiaries have been duly
organized and are validly existing and in good standing as
corporations under the laws of their respective jurisdictions of
organization, with power and authority (corporate and other) to
own or lease their properties and to conduct their businesses as
described in the Registration Statement and the Prospectus; each
of the Company and its subsidiaries is in possession of and
operating in compliance with all franchises, grants,
authorizations, licenses, permits, easements, consents,
certificates and orders required for the conduct of its
business, all of which are valid and in full force and effect,
except where the failure to possess or comply would not have a
material adverse effect on the Company and its subsidiaries
considered as a whole; and each of the Company and its
subsidiaries is duly qualified to do business and in good
standing as a foreign corporation in all other jurisdictions
where its ownership or leasing of properties or the conduct of
its businesses requires such qualification, except where failure
to so qualify would not have a material adverse effect on the
Company and its subsidiaries considered as a whole. No public
regulatory or governmental consent, approval, authorization,
order, registration, qualification, license or permit contains a
materially burdensome restriction not adequately disclosed in
the Registration Statement and the Prospectus. The Company owns
or controls, directly or indirectly, only the corporations,
associations or other entities named in Schedule C hereto.
(j) The Company's authorized and outstanding capital stock is on the
date hereof, and will be on the Closing Dates, as set forth
under the heading "Capitalization" in the Prospectus; the
outstanding shares of Common Stock of the Company conform to the
description thereof in the Prospectus and have been duly
authorized and validly issued and are fully paid and
nonassessable; and have been issued in compliance with all
federal and state securities laws and were not issued in
violation of or subject to any pre-emptive rights or similar
rights to subscribe for or purchase securities. Except as
disclosed in or contemplated by the Prospectus and the
consolidated financial statements of the Company and related
notes thereto included in the Prospectus, the Company does not
have outstanding any options or warrants to purchase, or any
pre-emptive rights or other rights to subscribe for or to
purchase any securities or obligations convertible into, or any
contracts or commitments to issue or sell, shares of its capital
stock or any such options, rights, convertible securities or
obligations, except for options granted subsequent to the date
of information provided in the Prospectus pursuant to the
Company's employee and stock option plans as disclosed in the
Prospectus. The description of the Company's stock option and
other stock plans or arrangements, and the options or other
rights granted or exercised thereunder, as set forth in the
Prospectus, accurately and fairly presents the information
required to be shown with respect to such plans, arrangements,
options and rights. All outstanding shares of capital stock of
each subsidiary have been duly authorized and validly issued,
and are fully paid and
5
<PAGE> 6
nonassessable and are owned directly by the Company or by
another wholly owned subsidiary of the Company free and clear of
any liens, encumbrances, equities or claims.
(k) The Stock to be issued and sold by the Company to the U.S.
Underwriters hereunder and the International Stock to be issued
and sold by the Company to the International Managers under the
International Underwriting Agreement has been duly and validly
authorized and, when issued and delivered against payment
therefor as provided herein and therein, will be duly and
validly issued, fully paid and nonassessable and free of any
pre-emptive or similar rights and will conform to the
description thereof in the Prospectus, and the U.S. Underwriters
and the International Managers will receive good title to the
Stock and the International Stock, respectively, free and clear
of all liens, security interests, pledges, charges, claims and
encumbrances.
(l) Except as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of
its subsidiaries is a party or of which any property of the
Company or any subsidiary is subject, which, if determined
adversely to the Company or any such subsidiary, could
individually or in the aggregate be reasonably expected to (i)
prevent or adversely affect the transactions contemplated by
this Agreement, (ii) suspend the effectiveness of the
Registration Statement, (iii) prevent or suspend the use of the
Pre-effective Prospectus in any jurisdiction or (iv) result in a
material adverse change in the condition (financial or
otherwise), properties, business, management, net worth or
results of operations of the Company and its subsidiaries
considered as a whole and the Company is not aware of any valid
basis for any such legal or governmental proceeding; and, to the
Company's knowledge, no such proceedings are threatened or
contemplated against the Company or any subsidiary by
governmental authorities or others. Neither the Company nor any
subsidiary is a party nor is subject to the provisions of any
material injunction, judgment, decree or order of any court,
regulatory body or other governmental agency or body. The
description of the Company's litigation under the heading "Legal
Proceedings" in the Prospectus is true and correct and complies
with the Rules and Regulations and no other suit or proceeding
before any court or governmental authority known to the Company
is required to be disclosed in the Prospectus that is not so
disclosed.
(m) The execution, delivery and performance of this Agreement and
the International Underwriting Agreement and the consummation of
the transactions herein and therein contemplated (A) will not
result in any violation of the provisions of the certificate of
incorporation, by-laws or other organizational documents of the
Company or its subsidiaries, or any law, order, rule or
regulation of any court or governmental agency or body having
jurisdiction over the Company or its subsidiaries or any of
their respective properties or assets, and (B) will not conflict
with or result in a breach or violation of any of the terms or
provision of or constitute a default under any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its subsidiaries is a
party or by which it or any of their respective properties is or
may be bound nor will such delivery and performance result in
the creation of a security interest, lien, encumbrance, charge
or claim, except where such conflict, breach or violation would
not have a material adverse effect on the Company and its
subsidiaries considered as a whole.
(n) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution,
delivery and performance of this Agreement and the International
Underwriting Agreement by the Company or its subsidiaries and
the
6
<PAGE> 7
consummation of the transactions contemplated hereby and thereby
(including the issuance, sale and delivery of the Stock), except
such as may be required by the National Association of
Securities Dealers, Inc. (the "NASD"), the NASDAQ National
Market, the Neuer Markt of the Frankfurt Stock Exchange or under
the Securities Act or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or the securities or "Blue Sky"
laws of any jurisdiction, the German Stock Exchange Act, Stock
Exchange Regulation, Admission Regulation of the Neuer Markt and
the German Sales Prospectus Act in connection with the purchase
and distribution of the Stock by the U.S. Underwriters and the
International Stock by the International Managers.
(o) The Company has the full corporate power and authority to enter
into this Agreement and the International Underwriting Agreement
and to perform its obligations hereunder and thereunder
(including to issue, sell and deliver the Stock and the
International Stock), and this Agreement and the International
Underwriting Agreement have each been duly and validly
authorized, executed and delivered by the Company and each
constitutes a valid and binding obligation of the Company,
enforceable against the Company in accordance with their
respective terms, except to the extent that rights to indemnity
and contribution hereunder may be limited by U.S. or foreign
federal or state securities laws or the public policy underlying
such laws and except as may be limited by applicable bankruptcy,
insolvency and other similar laws affecting conditions, rights
and rules of law governing specific performance, injunctive
relief and other equitable remedies.
(p) The Company and its subsidiaries are in all material respects in
compliance with, and conduct their respective businesses in
conformity with, all applicable federal, state, local and
foreign laws, rules and regulations or any court or governmental
agency or body; and to the knowledge of the Company, otherwise
than as set forth in the Registration Statement and the
Prospectus, no prospective change in any of such federal or
state laws, rules or regulations has been adopted which, when
made effective, could reasonably be expected to have a material
adverse effect on the operations of the Company and its
subsidiaries considered as a whole.
(q) The Company and its subsidiaries have filed all necessary
federal, state, local and foreign income, payroll, franchise and
other tax returns and have paid all taxes shown as due thereon
or with respect to any of their properties, and there is no tax
deficiency that has been or to the knowledge of the Company is
reasonably likely to be, asserted against the Company or any of
its subsidiaries or any of their respective properties or assets
that would materially and adversely affect the financial
position, business or operations of the Company and its
subsidiaries considered as a whole.
(r) No person or entity has the right to require registration of
shares of Common Stock or other securities of the Company
because of the filing or effectiveness of the Registration
Statement or otherwise, except for persons and entities who have
expressly waived such right or who have been given proper notice
and have failed to exercise such right within the time or times
required under the terms and conditions of such right.
(s) Neither the Company nor any of its officers, directors or
affiliates has taken or will take, directly or indirectly, any
action designed or intended to stabilize or manipulate the price
of the Common Stock in violation of Regulation M of the Exchange
Act, or which caused or resulted in, or which might in the
future reasonably be expected to cause or result in,
7
<PAGE> 8
stabilization or manipulation of the price of the Common Stock
in violation of Regulation M of the Exchange Act.
(t) Each of the Company and its subsidiaries owns, or possesses
adequate and enforceable rights, either as owner or licensee, to
use all patents, trademarks (including "SwapBox(TM),"
"SwapSmart(TM)," "SwapAcces(TM)," "SmartOS(TM)," "Smart
Transporter(TM)" and CIMax(TM)" ), trademark registrations,
service marks, service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets, know-how and
other similar rights described in the Prospectus as being owned
or licensed by them and except as described in the Prospectus
the Company is not aware of any claim to the contrary or any
challenge by any other person to the rights of the Company and
its subsidiaries with respect to the foregoing. To the knowledge
of the Company, the Company's business as now conducted and as
proposed to be conducted does not and will not infringe or
conflict with in any material respect any patents, trademarks,
service marks, trade name, copyright, trade secrets, know- how,
licenses or other intellectual property or franchise right of
any person. Except as described in the Prospectus, no claim has
been made against the Company alleging the infringement by the
Company of any patent, trademark, service mark, trade name,
copyright, trade secret, know-how, license in or other
intellectual property right or franchise right of any person.
(u) The Company is not involved in any labor dispute nor, to the
knowledge of the Company, is any such dispute threatened. Except
as described in the Prospectus, the Company is not aware that
(A) any executive, key employee or significant group of
employees of the Company or any subsidiary plans to terminate
employment with the Company or any such subsidiary or (B) any
such executive or key employee is subject to any noncompete,
nondisclosure, confidentiality, employment, consulting or
similar agreement that would be violated by the present or
proposed business activities of the Company and its
subsidiaries. Neither the Company nor any subsidiary has or
expects to have any liability for any prohibited transaction or
funding deficiency or any complete or partial withdrawal
liability with respect to any pension, profit sharing or other
plan which is subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), to which the Company or any
subsidiary makes or ever has made a contribution and in which
any employee of the Company or any subsidiary is or has ever
been a participant. With respect to such plans, the Company and
each subsidiary is in compliance in all material respects with
all applicable provisions of ERISA.
(v) No transaction has occurred, and no relationship, direct or
indirect, exists, between or among the Company or its
subsidiaries, on the one hand, and any of its stockholders,
officers, directors, customers or suppliers of the Company or
its subsidiaries or any affiliate or affiliates of any such
stockholder, officer, director, customer or supplier, on the
other hand, that is required to be described and is not so
described in the Prospectus.
(w) The Company and its subsidiaries have, and the Company and its
subsidiaries as of the Closing Dates will have, good and
marketable title to all personal property owned by them which is
material to the business of the Company or of its subsidiaries,
in each case free and clear of all liens, encumbrances and
defects except such as are described in the Prospectus or such
as would not have a material adverse effect on the Company and
its subsidiaries considered as a whole; and any real property
and buildings held under lease by the Company and its
subsidiaries are, or will be as of each of the Closing Dates,
held by them under valid, subsisting and enforceable leases with
such exceptions as would not have a material adverse
8
<PAGE> 9
effect on the Company and its subsidiaries considered as a
whole, in each case except as described in or contemplated by
the Prospectus.
(x) The Company and its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and
risks and in such amounts as are customary in the businesses in
which they are engaged or propose to engage after giving effect
to the transactions described in the Prospectus; and neither the
Company nor any subsidiary of the Company has any reason to
believe that it will not be able to renew any of its existing
insurance coverages as and when such coverage expires or to
obtain similar coverage from similar insurers as may be
necessary to continue their business at a cost that would not
have a material adverse effect on the Company and its
subsidiaries considered as a whole, except as described in or
contemplated by the Prospectus.
(y) Other than as contemplated by this Agreement and the
International Underwriting Agreement, there is no broker, finder
or other party that is entitled to receive from the Company any
brokerage or finder's fee or other fee or commission as a result
of any of the transactions contemplated by this Agreement or the
International Underwriting Agreement.
(z) The Stock has been duly authorized for (i) quotation on the
National Association of Securities Dealers Automated Quotation
("NASDAQ") National Market System, subject to official Notice of
Issuance, and (ii) listing on the Neuer Markt of the Frankfurt
Stock Exchange.
(aa) The books, records and accounts of the Company and its
subsidiaries accurately and fairly reflect, in all material
respects, the transactions in, and dispositions of, the assets,
and the results of operation, of the Company and its
subsidiaries. The Company and each of its subsidiaries maintains
a system of internal accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in
accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability
for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization;
and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(bb) To the Company's knowledge, neither the Company nor any of its
subsidiaries nor any employee or agent of the Company or any of
its subsidiaries has made any payment of funds of the Company or
any of its subsidiaries or received or retained any funds in
violation of any law, rule or regulation, which payment, receipt
or retention of funds is of a character required to be disclosed
in the Prospectus.
(cc) Neither the Company nor any of its subsidiaries is or, after
application of the net proceeds of this offering as described
under the caption "Use of Proceeds" in the Prospectus, will
become an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment
Company Act of 1940, as amended.
(dd) Neither the Company nor any of its subsidiaries, nor any
director, officer, agent, employee or other person associated
with or acting on behalf of the Company or any of its
subsidiaries, has used any corporate funds for any unlawful
contribution, gift, entertainment
9
<PAGE> 10
or other unlawful expense relating to political activity; made
any direct or indirect unlawful payment to any foreign or
domestic government official or employee from corporate funds;
or has violated or is in violation of any provision of the
Foreign Corrupt Practices Act of 1977.
2b. Representations and Warranties and Agreements of the Selling
Stockholders. Each Selling Stockholder represents and warrants to, and
agrees with, the several U.S. Underwriters that such Selling
Stockholder:
(a) Now has, and on the Closing Date will have, valid and marketable
title to the Stock and the International Stock to be sold by
such Selling Stockholder, free and clear of any lien, claim,
security interest or other encumbrance, including, without
limitation, any restriction on transfer, and has full right,
power and authority to enter into this Agreement, the Power of
Attorney and the Custody Agreement (each as hereinafter
defined).
(b) Now has, and on the Closing Date will have, upon delivery of and
payment for each share of Stock hereunder and the International
Stock under the International Underwriting Agreement, full
right, power and authority, and approval required by law to
sell, transfer, assign and deliver the Stock being sold by such
Selling Stockholder hereunder and the International Stock being
sold by such Selling Stockholder under the International
Underwriting Agreement, and each of the several U.S.
Underwriters will acquire valid and marketable title to all of
the Stock being sold to the U.S. Underwriters by such Selling
Stockholder and each of the several International Managers will
acquire valid and marketable title to all of the International
Stock being sold to the International Managers by such Selling
Stockholder, in each case, free and clear of any liens,
encumbrances, equities claims, restrictions on transfer or other
defects whatsoever.
(c) For a period of 90 days after the date of this Agreement,
without the consent of Cowen, such Selling Stockholder will not
offer, sell, assign, transfer, encumber, contract to sell, grant
an option to purchase or otherwise dispose of any Stock or
securities convertible into or exchangeable for Stock,
including, without limitation Stock which may be deemed to be
beneficially owned by such Selling Shareholder in accordance
with the Rules and Regulations, except for the Stock being sold
hereunder and the International Stock being sold under the
International Underwriting Agreement.
(d) Has duly executed and delivered a power of attorney, in
substantially the form heretofore delivered by the
Representatives (the "Power of Attorney"), appointing Steven
Humphreys and John Neidermaier and each of them, as
attorney-in-fact (the "Attorneys-in-fact") with authority to
execute and deliver this Agreement and the International
Underwriting Agreement on behalf of such Selling Stockholder, to
authorize the delivery of the shares of Stock to be sold by such
Selling Stockholder hereunder and the shares of International
Stock to be sold by such Selling Stockholder under the
International Underwriting Agreement and otherwise to act on
behalf of such Selling Stockholder in connection with the
transactions contemplated by this Agreement and the
International Underwriting Agreement.
(e) Has duly executed and delivered a custody agreement, in
substantially the form heretofore delivered by the
Representatives (the "Custody Agreement"), with American Stock
Transfer & Trust Company, as custodian (the "Custodian"),
pursuant to which certificates in negotiable form for the shares
of Stock and International Stock to be sold by such Selling
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<PAGE> 11
Stockholder hereunder have been placed in custody for delivery
under this Agreement and the International Underwriting
Agreement.
(f) Has, by execution and delivery of each of this Agreement, the
International Underwriting Agreement, the Power of Attorney and
the Custody Agreement, created valid and binding obligations of
such Selling Stockholder, enforceable against such Selling
Stockholder in accordance with its terms, except to the extent
that rights to indemnity and contribution hereunder may be
limited by U.S. or foreign federal laws, state securities laws
or the public policy underlying such laws and except as may be
limited by applicable bankruptcy, insolvency and other similar
laws affecting conditions, rights and rules of law governing
specific performance, injunctive relief and other equitable
remedies and except to the extent that the irrevocability of the
Power of Attorney and Custody Agreement and the enforcement of
the arbitration provisions therein may be limited by German law.
(g) The performance of this Agreement, the International
Underwriting Agreement, the Custody Agreement and the Power of
Attorney, and the consummation of the transactions contemplated
hereby and thereby will not result in a breach or violation by
such Selling Stockholder of any of the terms or provisions of,
or constitute a default by such Selling Stockholder under, any
material indenture, mortgage, deed of trust, trust (constructive
or other), loan agreement, lease, franchise, license or other
agreement or instrument to which such Selling Stockholder is a
party or by which such Selling Stockholder or any of its
properties is bound, or any judgement of any court or
governmental agency or body applicable to such Selling
Stockholder or any of its properties, or to such Selling
Stockholder's knowledge, any statute, decree, order, rule or
regulation of any court or governmental agency or body
applicable to such Selling Stockholder or any of its properties,
except to the extent that the irrevocability of the Power of
Attorney and Custody Agreement and the enforcement of certain
arbitration provisions may be limited by German law.
Each Selling Stockholder agrees that the shares of Stock and
International Stock represented by the certificates held in
custody under the Custody Agreement are for the benefit of and
coupled with and subject to the interests of the U.S.
Underwriters, the International Managers, the Selling
Stockholders, and the Company hereunder, and that the
arrangement for such custody and the appointment of the
Attorneys-in-fact are irrevocable, except to the extent that the
irrevocability of the Power of Attorney and Custody Agreement
may be limited by German law; that the obligations of such
Selling Stockholder hereunder shall not be terminated by
operation of law, whether by the death or incapacity of such
Selling Stockholder, or any other event, that if such Selling
Stockholder should die or become incapacitated or any other
event occurs, before the delivery of the Stock hereunder and the
International Stock under the International Underwriting
Agreement, certificates for the Stock and International Stock to
be sold by such Selling Stockholder shall be delivered on behalf
of such Selling Stockholder in accordance with the terms and
conditions of this Agreement, the International Underwriting
Agreement and the Custody Agreement, and action taken by the
Attorneys- in-fact or any of them under the Power of Attorney
shall be as valid as if such death, incapacity, or other event
had not occurred, whether or not the Custodian, the Attorneys-
in-fact or any of them shall have notice of such death,
incapacity or other event.
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3 Purchase by, and Sale and Delivery to, U.S. Underwriters--Closing Dates.
The Company and the Selling Stockholders agree, severally and not
jointly, to sell to the U.S. Underwriters the Firm Stock with the number
of shares to be sold by the Company and each Selling Stockholder being
the number of shares set forth opposite its or his name in Schedule B,
and on the basis of the representations, warranties, covenants and
agreements herein contained, but subject to the terms and conditions
herein set forth, the U.S. Underwriters agree, severally and not
jointly, to purchase the Firm Stock from the Company and the Selling
Stockholders, the number of shares of Firm Stock to be purchased by each
U.S. Underwriter being set opposite its name in Schedule A, subject to
adjustment in accordance with Section 12 hereof. The number of shares of
Stock to be purchased by each U.S. Underwriter from each Selling
Stockholder hereunder shall bear the same proportion to the total number
of shares of Stock to be purchased by such U.S. Underwriter hereunder as
the number of shares of Stock being sold by each Selling Stockholder
bears to the total number of shares of Stock being sold by all Selling
Stockholders, subject to adjustment by the Representatives to eliminate
fractions.
The purchase price per share to be paid by the U.S. Underwriters to the
Company and the Selling Stockholders will be the price per share set
forth in the "Per Share" row of the table on the cover page of the
Prospectus under the heading "Proceeds to Company" and "Proceeds to
Selling Stockholders," respectively (the "Purchase Price").
The Company and the Selling Stockholders will deliver the Firm Stock to
the Representatives for the respective accounts of the several U.S.
Underwriters (in the form of definitive certificates, issued in such
names and in such denominations as Cowen may direct by notice in writing
to the Company and the Selling Stockholders given at or prior to 12:00
Noon, New York Time, on the second full business day preceding the First
Closing Date (as defined below) or, if no such direction is received, in
the names of the respective U.S. Underwriters or in such other names as
Cowen may designate (solely for the purpose of administrative
convenience) and in such denominations as Cowen may determine), against
payment of the aggregate Purchase Price therefore by wire transfer in
immediately available funds (same day funds), to the Company and
American Stock Transfer & Trust Company, as Custodian for the Selling
Stockholders, all at the offices of Wilson Sonsini Goodrich & Rosati,
650 Page Mill Road, Palo Alto, California 94304. The time and date of
the delivery and closing shall be at 10:00 A.M., New York Time, on April
__, 1998. The time and date of such payment and delivery are herein
referred to as the "First Closing Date". The First Closing Date and the
location of delivery of, and the form of payment for, the Firm Stock may
be varied by agreement among the Company, Cowen and the Selling
Stockholders. The First Closing Date may be postponed pursuant to the
provisions of Section 12.
The Company and the Selling Stockholders shall make the certificates for
the Stock available to the Representatives for examination on behalf of
the U.S. Underwriters not later than 10:00 A.M., New York time, on the
business day preceding the First Closing Date at the offices of Cowen &
Company, Financial Square, New York, New York 10005.
It is understood that Cowen or the other Representatives, individually
and not as Representatives of the several U.S. Underwriters, may (but
shall not be obligated to) make payment to the Company or to the Selling
Stockholders on behalf of any U.S. Underwriter or U.S. Underwriters, for
the Stock to be purchased by such U.S. Underwriter or U.S. Underwriters.
Any such payment by Cowen or other Representatives shall not relieve
such U.S. Underwriter or U.S. Underwriters from any of its or their
other obligations hereunder.
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The several U.S. Underwriters agree to make a public offering of the
Firm Stock at the public offering price set forth on the cover page of
the Prospectus as soon after the effectiveness of the Registration
Statement as in their judgment is advisable. The Representatives shall
promptly advise the Company and the Selling Stockholders of the making
of the public offering.
For the purpose of covering any over-allotments in connection with the
distribution and sale of the Firm Stock as contemplated by the
Prospectus, the Company hereby grants to the U.S. Underwriters and the
International Managers an option to purchase, severally and not jointly,
up to an aggregate of 450,000 shares of Optional Stock. The price per
share to be paid for the Optional Stock shall be the Purchase Price. The
option granted hereby may be exercised as to all or any part of the
Optional Stock at any time, and from time to time, not more than thirty
(30) days subsequent to the effective date of this Agreement. No
Optional Stock shall be sold and delivered unless the Firm Stock
previously has been, or simultaneously is, sold and delivered. The right
to purchase the Optional Stock or any portion thereof may be surrendered
and terminated at any time upon notice by the U.S. Underwriters and the
International Managers to the Company.
The option granted hereby may be exercised by the U.S. Underwriters and
the International Managers by giving written notice from Cowen to the
Company setting forth the number of shares of the Optional Stock to be
purchased by them and the date and time for delivery of and payment for
the Optional Stock. Each date and time for delivery of and payment for
the Optional Stock (which may be the First Closing Date, but not
earlier) is herein called an "Option Closing Date" and shall in no event
be earlier than two (2) business days nor later than ten (10) business
days after written notice is given. (The Option Closing Date and the
First Closing Date are herein called the "Closing Dates".) Optional
Stock shall be purchased for the account of each U.S. Underwriter and or
International Manager, as the case may be, in the same proportion as the
number of shares of Firm Stock set forth opposite such U.S.
Underwriter's and/or International Managers name in Schedule A hereto or
Schedule A to the International Underwriting Agreement, as the case may
be, bears to the total number of shares of Firm Stock (subject to
adjustment by the U.S. Underwriters to eliminate odd lots). Upon
exercise of the option of the U.S. Underwriters and International
Managers, the Company agrees to sell to the U.S. Underwriters and the
International Managers the number of shares of Optional Stock set forth
in the written notice of exercise and the U.S. Underwriters and
International Managers agree, severally and not jointly and subject to
the terms and conditions herein set forth, to purchase the number of
such shares determined as aforesaid.
The Company will deliver the Optional Stock to the U.S. Underwriters and
the International Managers (in the form of definitive certificates,
issued in such names and in such denominations as Cowen may direct by
notice in writing to the Company given at or prior to 12:00 Noon, New
York Time, on the second full business day preceding the Option Closing
Date or, if no such direction is received, in the names of the
respective U.S. Underwriters and International Managers or in such other
names as Cowen may designate (solely for the purpose of administrative
convenience) and in such denominations as Cowen may determine), against
payment of the aggregate Purchase Price therefor by wire transfer in
immediately available funds (same day funds), to the Company, all at the
offices of Wilson Sonsini Goodrich & Rosati, 650 Page Mill Road, Palo
Alto, California 94304. The Company shall make the certificates for the
Optional Stock available to the U.S. Underwriters and the International
Managers for examination not later than 10:00 A.M., New York Time, on
the business day preceding the Option Closing Date at the offices of
Cowen & Company, Financial Square, New York, New York 10005. The Option
Closing Date and the location of delivery of, and the form of payment
for, the Option Stock may be varied by agreement
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<PAGE> 14
between the Company and Cowen. The Option Closing Date may be postponed
pursuant to the provisions of Section 12.
4 Covenants and Agreements of the Company. The Company covenants and
agrees with the several U.S. Underwriters that:
(a) The Company will (i) if the Company and the Representatives have
determined not to proceed pursuant to Rule 430A of the Rules and
Regulations, use its best efforts to cause the Registration
Statement to become effective, (ii) if the Company and the
Representatives have determined to proceed pursuant to Rule 430A
of the Rules and Regulations, use its best efforts to comply
with the provisions of and make all requisite filings with the
Commission pursuant to Rule 430A and Rule 424 of the Rules and
Regulations and (iii) if the Company and the Representatives
have determined to deliver Prospectuses pursuant to Rule 434 of
the Rules and Regulations, to use its best efforts to comply
with all the applicable provisions thereof. The Company will
advise the Representatives promptly as to the time at which the
Registration Statement becomes effective, will advise the
Representatives promptly of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration
Statement or of the institution of any proceedings for that
purpose, and will use its best efforts to prevent the issuance
of any such stop order and to obtain as soon as possible the
lifting thereof, if issued. The Company will advise the
Representatives promptly of the receipt of any comments of the
Commission or any request by the Commission for any amendment of
or supplement to the Registration Statement or the Prospectus or
for additional information and will not at any time file any
amendment to the Registration Statement or supplement to the
Prospectus which shall not previously have been submitted to the
Representatives a reasonable time prior to the proposed filing
thereof or, unless such filing is required by applicable law, to
which the Representatives shall reasonably object in writing or
which is not in compliance with the Securities Act and the Rules
and Regulations.
(b) The Company will prepare and file with the Commission, promptly
upon the request of the Representatives, any amendments or
supplements to the Registration Statement or the Prospectus
which in the reasonable opinion of the Representatives may be
necessary to enable the several U.S. Underwriters to continue
the distribution of the Stock and the several International
Managers to continue the distribution of the International Stock
and will use its best efforts to cause the same to become
effective as promptly as possible.
(c) If, at any time after the effective date of the Registration
Statement when a prospectus relating to the Stock is required to
be delivered under the Securities Act, any event relating to or
affecting the Company or any of its subsidiaries occurs as a
result of which the Prospectus or any other prospectus as then
in effect would contain any untrue statement of a material fact,
or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which
they were made, not misleading, or if it is necessary at any
time to amend the Prospectus to comply with the Securities Act,
the Company will promptly notify the Representatives thereof and
will prepare an amended or supplemented prospectus which will
correct such statement or omission; and in case any U.S.
Underwriter is required to deliver a prospectus relating to the
Stock nine (9) months or more after the effective date of the
Registration Statement, the Company upon the request of the
Representatives and at the expense of such U.S. Underwriter will
prepare promptly
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<PAGE> 15
such prospectus or prospectuses as may be necessary to permit
compliance with the requirements of Section 10(a)(3) of the
Securities Act.
(d) The Company will deliver to each of the Representatives, at or
before the Closing Dates, one signed copy of the Registration
Statement, as originally filed with the Commission, and one
signed copy of all amendments thereto including all financial
statements and exhibits thereto and will deliver to the
Representatives such number of unsigned copies of the
Registration Statement, including such financial statements but
without exhibits, and all amendments thereto, as the
Representatives may reasonably request. The Company will deliver
or mail to or upon the order the Representatives, from time to
time until the effective date of the Registration Statement, as
many copies of the Pre-effective Prospectus as the
Representatives may reasonably request. The Company will deliver
or mail to or upon the order of the Representatives on the date
of the public offering, and thereafter from time to time during
the period when delivery of a prospectus relating to the Stock
is required under the Securities Act, as many copies of the
Prospectus, in final form or as thereafter amended or
supplemented as the Representatives may reasonably request;
provided, however, that the expense of the preparation and
delivery of any prospectus required for use nine (9) months or
more after the effective date of the Registration Statement
shall be borne by the U.S. Underwriters required to deliver such
prospectus.
(e) The Company will make generally available to its stockholders as
soon as practicable, but not later than fifteen (15) months
after the effective date of the Registration Statement, an
earnings statement which will be in reasonable detail (but which
need not be audited) and which will comply with Section 11(a) of
the Securities Act, covering a period of at least twelve (12)
months beginning after the "effective date" (as defined in Rule
158 under the Securities Act) of the Registration Statement.
(f) The Company will cooperate with the Representatives to enable
the Stock to be registered or qualified for offering and sale by
the U.S. Underwriters and by dealers under the securities laws
of such jurisdictions as the Representatives may designate and
at the request of the Representatives will make such
applications and furnish such consents to service of process or
other documents as may be required of it as the issuer of the
Stock for that purpose; provided, however, that the Company
shall not be required to qualify to do business or to file a
general consent (other than that arising out of the offering or
sale of the Stock) to service of process in any such
jurisdiction where it is not now so subject. The Company will,
from time to time, prepare and file such statements and reports
as are or may be required of it as the issuer of the Stock to
continue such qualifications in effect for so long a period as
the Representatives may reasonably request for the distribution
of the Stock. The Company will advise the Representatives
promptly after the Company becomes aware of the suspension of
the qualifications or registration of (or any such exception
relating to) the Common Stock of the Company for offering, sale
or trading in any jurisdiction or of any initiation or threat of
any proceeding for any such purpose, and in the event of the
issuance of any orders suspending such qualifications,
registration or exception, the Company will, with the
cooperation of the Representatives use its best efforts to
obtain the withdrawal thereof.
(g) The Company will furnish to its stockholders annual reports
containing financial statements certified by independent public
accountants.
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<PAGE> 16
(h) The Company will maintain a transfer agent and registrar for its
Common Stock.
(i) The Company will not offer, sell, assign, transfer, encumber,
contract to sell, register for sale, grant an option to purchase
or otherwise dispose of, other than by operation of law, gifts,
pledges or dispositions by estate representatives, any shares of
Common Stock or securities convertible into or exercisable or
exchangeable for Common Stock (including, without limitation,
Common Stock of the Company which may be deemed to be
beneficially owned by the Company in accordance with the Rules
and Regulations) during the 180 days following the date of this
Agreement, other than (i) the Company's sale of Common Stock
hereunder, (ii) issuances of Common Stock, stock options, stock
purchase rights or other similar rights issued pursuant to the
1997 Plans as described in the Prospectus, and (iii) any Common
Stock or preferred stock issued by the Company in any
transaction of the type described in Rule 145 under the
Securities Act or otherwise issued by the Company in exchange
for technology or other non-cash assets of any third party.
(j) The Company will apply the net proceeds from the sale of the
Stock as set forth in the description under "Use of Proceeds" in
the Prospectus.
(k) The Company will supply the Representatives with copies of all
correspondence to and from, and all documents issued to and by,
the Commission in connection with the registration of the Stock
under the Securities Act and the respective German authorities
in connection with the listing on the Neuer Markt of the
Frankfurt Stock Exchange in connection with the offer and sale
of the International Stock pursuant to the International
Underwriting Agreement.
(l) Prior to the First Closing Date the Company will furnish to the
Representatives, as soon as they have been prepared, copies of
any unaudited interim consolidated financial statements of the
Company and its subsidiaries for any periods subsequent to the
periods covered by the financial statements appearing in the
Registration Statement and the Prospectus.
(m) Prior to the Closing Dates the Company will issue no press
release or other public communications directly or indirectly
and hold no press conference with respect to the Company (other
than customary product related sales and marketing
communications) or any of its subsidiaries, the financial
condition, results of operations, business, prospects, assets or
liabilities of the Company or any of its subsidiaries, or the
offering of the Stock, without Cowen's prior written consent,
which shall not be unreasonably withheld.
(n) During the period of five (5) years hereafter, the Company will
furnish to the Representatives, and upon request of the
Representatives, to each of the Underwriters: (i) as soon as
practicable after the end of each fiscal year, copies of the
Annual Report of the Company containing the balance sheet of the
Company as of the close of such fiscal year and statements of
income, stockholders' equity and cash flows for the year then
ended and the opinion thereon of the Company's independent
public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form
10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other
report filed by the Company on a non-confidential basis with the
Commission, or the NASD or any securities exchange; (iii) as
soon as available, copies of any report or communication of the
Company mailed generally to holders of its Common Stock; and
(iv) from time to time such other information concerning the
Company as you may reasonably request.
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<PAGE> 17
5 Payment of Expenses.
(a) The Company will pay (directly or by reimbursement) all costs,
fees and expenses incurred in connection with the performance of
the obligations of the Company and of the Selling Stockholders
under this Agreement and the International Underwriting
Agreement and in connection with the transactions contemplated
hereby, including but not limited to (i) all expenses and taxes
incident to the issuance and delivery of the Stock to the
Representatives; (ii) all expenses incident to the registration
of the Stock and the International Stock under the Securities
Act; (iii) the costs of preparing stock certificates (including
printing and engraving costs); (iv) all fees and expenses of the
registrar and transfer agent of the Stock and the International
Stock; (v) all necessary issue, transfer and other taxes in
connection with the issuance and sale of the Stock to the U.S.
Underwriters; (vi) fees and expenses of the Company's counsel
and the Company's independent accountants; (vii) all costs and
expenses incurred by the Company in connection with the
preparation, printing, filing, shipping and distribution of the
Registration Statement, each Pre-effective Prospectus and the
Prospectus (including all exhibits and financial statements) and
all amendments and supplements provided for herein, (viii) all
costs and expenses incurred in connection with the shipping and
distribution of the Selling Stockholders' Power of Attorney, the
Custody Agreement, the "Agreement Among U.S. Underwriters and
International Managers" between the Representatives and Lead
Managers, the "Agreement Among U.S. Underwriters" between the
Representatives and the U.S. Underwriters, the Master Selected
Dealers' Agreement, the U.S. Underwriters' Questionnaire and the
Blue Sky memoranda (including with respect to such Blue Sky
memoranda related fees and expenses of counsel to the
Underwriters) and this Agreement; (ix) all filing fees,
attorneys' fees and expenses incurred by the Company or the U.S.
Underwriters in connection with exemptions from the qualifying
or registering (or obtaining qualification or registration of)
all or any part of the Stock for offer and sale and
determination of its eligibility for investment under the Blue
Sky or other securities laws of such jurisdictions as the
Representatives may designate; (x) all fees and expenses paid or
incurred in connection with filings made with the NASD and the
Neuer Markt of the Frankfurt Stock Exchange; and (xi) all other
costs and expenses incurred by the Company and the Selling
Stockholders incident to the performance of their obligations
hereunder which are not otherwise specifically provided for in
this Section.
(b) In addition to their other obligations under Section 6(a)
hereof, the Company and the Selling Stockholders agree that, as
an interim measure during the pendency of any claim, action,
investigation, inquiry or other proceeding arising out of or
based upon (i) any statement or omission or any alleged
statement or omission by the Company or the Selling Stockholders
or (ii) any breach or inaccuracy in their representations and
warranties contained in this Agreement, they will reimburse each
U.S. Underwriter on a quarterly basis for all reasonable legal
or other expenses incurred in connection with investigating or
defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial
determination as to the propriety and enforceability of the
Company's and each Selling Stockholder's obligation to reimburse
each U.S. Underwriter for such expenses and the possibility that
such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper,
each U.S. Underwriter shall promptly return it to the Company or
such Selling Stockholder, as the case may be, together with
interest, compounded daily, determined on the basis of the prime
rate (or other commercial lending rate for borrowers of the
highest credit standing) announced from time to time by
Citibank,
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<PAGE> 18
N.A., New York, New York (the "Prime Rate"). Any such interim
reimbursement payments which are not made to a U.S. Underwriter
in a timely manner as provided below shall bear interest at the
Prime Rate from the due date for such reimbursement. This
expense reimbursement agreement will be in addition to any other
liability which the Company or any Selling Stockholder may
otherwise have. The request for reimbursement will be sent to
the Company with a copy to each Selling Stockholder.
(c) In addition to its other obligations under Section 6(b) hereof,
each U.S. Underwriter severally agrees that, as an interim
measure during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission,
described in Section 6(b) hereof which relates to information
furnished to the Company pursuant to Section 6(c) hereof, it
will reimburse the Company (and, to the extent applicable, each
officer, director, controlling person or Selling Stockholder) on
a quarterly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such
claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the U.S. Underwriters'
obligation to reimburse the Company (and, to the extent
applicable, each officer, director, controlling person or
Selling Stockholder) for such expenses and the possibility that
such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper,
the Company (and, to the extent applicable, each officer,
director, controlling person or Selling Stockholder) shall
promptly return it to the U.S. Underwriters together with
interest, compounded daily, determined on the basis of the Prime
Rate. Any such interim reimbursement payments which are not made
to the Company within thirty (30) days of a request for
reimbursement shall bear interest at the Prime Rate from the
date of such request. This indemnity agreement will be in
addition to any liability which such U.S. Underwriter may
otherwise have.
(d) It is agreed that any controversy arising out of the operation
of the interim reimbursement arrangements set forth in paragraph
(b) and/or (c) of this Section 5, including the amounts of any
requested reimbursement payments and the method of determining
such amounts, shall be settled by arbitration conducted under
the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to
the Code of Arbitration Procedure of the NASD. Any such
arbitration must be commenced by service of a written demand for
arbitration or written notice of intention to arbitrate, therein
electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an
arbitration tribunal in such demand or notice, then the party
responding to said demand or notice is authorized to do so. Such
an arbitration would be limited to the operation of the interim
reimbursement provisions contained in paragraph (b) and/or (c)
of this Section 5 and would not resolve the ultimate propriety
or enforceability of the obligation to reimburse expenses which
is created by the provisions of Section 6.
6 Indemnification and Contribution.
(a) The Company and SCM Microsystems GmbH jointly and severally
agree to indemnify and hold harmless each U.S. Underwriter and
each person, if any, who controls such U.S. Underwriter within
the meaning of the Securities Act and the respective officers,
directors, partners, employees, representatives and agents of
each of such U.S. Underwriter
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(collectively, the "Underwriter Indemnified Parties" and, each,
an "Underwriter Indemnified Party"), against any losses, claims,
damages, liabilities or expenses (including the reasonable cost
of investigating and defending against any claims therefor and
counsel fees incurred in connection therewith), joint or
several, which may be based upon the Securities Act, or any
other statute or at common law, (i) on the ground or alleged
ground that any Pre-effective Prospectus, the Registration
Statement or the Prospectus (or any Pre-effective Prospectus,
the Registration Statement or the Prospectus as from time to
time amended or supplemented) includes or allegedly includes an
untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under
which they were made, not misleading, unless such statement or
omission was made in reliance upon, and in conformity with,
written information furnished to the Company by any U.S.
Underwriter, directly or through the Representatives,
specifically for use in the preparation thereof and provided
that the foregoing indemnity agreement with respect to any
Pre-effective Prospectus shall not inure to the benefit of any
U.S. Underwriter from whom the person asserting any such losses,
claims, damages or liabilities purchased Stock, or any person
controlling such U.S. Underwriter, if a copy of the Prospectus
(as then amended or supplemented if the Company shall have
furnished any amendments or supplements thereto) was not sent or
given by or on behalf of such U.S. Underwriter to such person,
if required by law so to have been delivered, at or prior to the
written confirmation of the sale of the Stock to such person,
and the Prospectus (as so amended or supplemented) would have
cured the defect giving rise to such losses, claims, damages or
liabilities, unless such failure to deliver the Prospectus (as
so amended or supplemented) resulted from the Company's failure
to perform its obligations pursuant to Section 4(c) above or
(ii) for any act or failure to act or any alleged act or failure
to act by any U.S. Underwriter in connection with, or relating
in any manner to, the Stock or the offering contemplated hereby,
and which is included as part of or referred to in any loss,
claim, damage, liability or expense arising out of or based upon
matters covered by clause (i) above (provided that the Company
shall not be liable under this clause (ii) to the extent that it
is determined in a final judgment by a court of competent
jurisdiction that such loss, claim, damage, or liability or
expense resulted directly from any such acts or failures to act
undertaken or omitted to be taken by such U.S. Underwriter
through its gross negligence or willful misconduct). The Company
will be entitled to participate at its own expense in the
defense or, if it so elects, to assume the defense of any suit
brought to enforce any such liability, but if the Company elects
to assume the defense, such defense shall be conducted by
counsel chosen by it and reasonably acceptable to the U.S.
Underwriters. In the event the Company elects to assume the
defense of any such suit and retain such counsel, any
Underwriter Indemnified Parties, defendant or defendants in the
suit, may retain additional counsel but shall bear the fees and
expenses of such counsel unless (i) the Company shall have
specifically authorized the retaining of such counsel or (ii)
the parties to such suit include both any such Underwriter
Indemnified Party and the Company, and such Underwriter
Indemnified Parties have been advised by counsel to the U.S.
Underwriters that one or more legal defenses may be available to
it or them which may not be available to the Company, in which
case the Company shall not be entitled to assume the defense of
such suit without the written consent of the Underwriter
Indemnified Parties party to such suit notwithstanding its
obligation to bear the fees and expenses of such counsel. In
circumstances where the Company does not assume the defense of a
suit for which indemnification is sought by one or more
Underwriter Indemnified Parties, the Company will be obligated
to bear the fees and expenses of only one firm on behalf of all
Underwriter Indemnified Parties (plus local counsel, if, in the
judgment of the primary
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counsel to the Underwriter Indemnified Parties use of such local
counsel is necessary). This indemnity agreement is not exclusive
and will be in addition to any liability which the Company might
otherwise have and shall not limit any rights or remedies which
may otherwise be available at law or in equity to each
Underwriter Indemnified Party.
(b) Each Selling Stockholder severally and not jointly agrees to
indemnify and hold harmless each Underwriter Indemnified Party
against any losses, claims, damages, liabilities or expenses
(including, unless such Selling Stockholder elects to assume the
defense, the reasonable cost of investigating and defending
against any claims therefor and counsel fees incurred in
connection therewith), joint or several, which may be based upon
the Securities Act, or any other statute or at common law, on
the ground or alleged ground that any Pre-Effective Prospectus,
the Registration Statement or the Prospectus (or any
Pre-Effective Prospectus, the Registration Statement or the
Prospectus, as from time to time amended and supplemented)
includes an untrue statement of a material fact or omits to
state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the
circumstances under which they were made, not misleading, unless
such statement or omission was made in reliance upon, and in
conformity with, written information furnished to the Company by
any U.S. Underwriter, directly or through the Representatives
specifically for use in the preparation thereof; provided
however that with respect to any untrue statement or omission or
alleged untrue statement or omission made in any Pre-Effective
Prospectus, the indemnity agreement contained in this subsection
(b) shall not inure to the benefit of any Underwriter
Indemnified Party from whom the person asserting any such
losses, claims, damages or liabilities purchased the shares of
Stock concerned to the extent that any such loss, claim, damage
or liability of such Underwriter Indemnified Party results from
the fact that a copy of the Prospectus was not sent or given to
such person at or prior to the written confirmation of the sale
of such shares of Stock, as required by the Securities Act, and
if the untrue statement or omission concerned has been corrected
in the Prospectus. Such Selling Stockholder shall be entitled to
participate at his own expense in the defense, or, if he so
elects, to assume the defense of any suit brought to enforce any
such liability, but, if such Selling Stockholder elects to
assume the defense, such defense shall be conducted by counsel
chosen by him. In the event that any Selling Stockholder elects
to assume the defense of any such suit and retain such counsel,
the Underwriter Indemnified Parties, defendant or defendants in
the suit, may retain additional counsel but shall bear the fees
and expenses of such counsel unless (i) such Selling Stockholder
shall have specifically authorized the retaining of such counsel
or (ii) the parties to such suit include both such Underwriter
Indemnified Parties and such Selling Stockholder and such
Underwriter Indemnified Parties have been advised by counsel
that one or more legal defenses may be available to it or them
which may not be available to such Selling Stockholder, in which
case such Selling Stockholder shall not be entitled to assume
the defense of such suit notwithstanding its obligation to bear
the fees and expenses of such counsel. This indemnity agreement
is not exclusive and will be in addition to any liability which
such Selling Stockholder might otherwise have and shall not
limit any rights or remedies which may otherwise be available at
law or in equity to each Underwriter Indemnified Party. The
Company and the Selling Stockholders may agree, as among
themselves and without limiting the rights of the U.S.
Underwriters under this Agreement, as to their respective
amounts of such liability for which they each shall be
responsible.
Notwithstanding any other provision of this Agreement or the
International Underwriting Agreement, the liability of each
Selling Stockholder to the U.S. Underwriters and
20
<PAGE> 21
International Managers under this Agreement, the International
Underwriting Agreement or otherwise shall be limited to an
amount equal to the proceeds paid to such Selling Stockholder in
the initial public offering.
(c) Each U.S. Underwriter severally and not jointly agrees to
indemnify and hold harmless the Company, each of its directors,
each of its officers who have signed the Registration Statement
and each person, if any, who controls the Company within the
meaning of the Securities Act (collectively, the "Company
Indemnified Parties") and each Selling Stockholder (the "Selling
Stockholder Indemnified Parties") against any losses, claims,
damages, liabilities or expenses (including, unless the U.S.
Underwriter or U.S. Underwriters elect to assume the defense,
the reasonable cost of investigating and defending against any
claims therefor and counsel fees incurred in connection
therewith), joint or several, which arise out of or are based in
whole or in part upon the Securities Act, the Exchange Act or
any other federal, state, local or foreign statute or
regulation, or at common law, on the ground or alleged ground
that any Pre-effective Prospectus, the Registration Statement or
the Prospectus (or any Pre-effective Prospectus, the
Registration Statement or the Prospectus, as from time to time
amended and supplemented) includes an untrue statement of a
material fact or omits to state a material fact required to be
stated therein or necessary in order to make the statements
therein, in light of the circumstances in which they were made,
not misleading, but only insofar as any such statement or
omission was made in reliance upon, and in conformity with,
written information furnished to the Company by such U.S.
Underwriter, directly or through the Representatives,
specifically for use in the preparation thereof. Such U.S.
Underwriter shall be entitled to participate at its own expense
in the defense, or, if it so elects, to assume the defense of
any suit brought to enforce any such liability, but, if such
U.S. Underwriter elects to assume the defense, such defense
shall be conducted by counsel chosen by it. In the event that
any U.S. Underwriter elects to assume the defense of any such
suit and retain such counsel, the Company Indemnified Parties or
Selling Stockholders Indemnified Parties and any other U.S.
Underwriter or U.S. Underwriters or controlling person or
persons, defendant or defendants in the suit, shall bear the
fees and expenses of any additional counsel retained by them,
respectively. The U.S. Underwriter against whom indemnity may be
sought shall not be liable to indemnify any person for any
settlement of any such claim effected without such U.S.
Underwriter's consent. This indemnity agreement is not exclusive
and will be in addition to any liability which such U.S.
Underwriter might otherwise have and shall not limit any rights
or remedies which may otherwise be available at law or in equity
to any Company Indemnified Party or Selling Stockholder
Indemnified Party.
(d) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified
party under subsection (a), (b) or (c) above in respect of any
losses, claims, damages, liabilities or expenses (or actions in
respect thereof) referred to herein, then each indemnifying
party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Stockholders on the one
hand and the U.S. Underwriters on the other from the offering of
the Stock. If, however, the allocation provided by the
immediately preceding sentence is not permitted by applicable
law, then each indemnifying party shall contribute to such
amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative
benefits but also the relative fault of the Company and the
Selling Stockholders on the one
21
<PAGE> 22
hand and the U.S. Underwriters on the other in connection with
the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses (or actions in respect
thereof), as well as any other relevant equitable
considerations. The relative benefits received by the Company
and the Selling Stockholders on the one hand and the U.S.
Underwriters on the other shall be deemed to be in the same
proportion as the total net proceeds from the offering (before
deducting expenses) received by the Company and the Selling
Stockholders bear to the total underwriting discounts and
commissions received by the U.S. Underwriters, in each case as
set forth in the table on the cover page of the Prospectus. The
relative fault shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a
material fact relates to information supplied by the Company,
the Selling Stockholders or the U.S. Underwriters and the
parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The Company, the Selling Stockholders and the U.S. Underwriters
agree that it would not be just and equitable if contribution
were determined by pro rata allocation (even if the U.S.
Underwriters were treated as one entity for such purpose) or by
any other method of allocation which does not take account of
the equitable considerations referred to above. The amount paid
or payable by an indemnified party as a result of the losses,
claims, damages, liabilities or expenses (or actions in respect
thereof) referred to above shall be deemed to include any legal
or other expenses reasonably incurred by such indemnified party
in connection with investigating, defending, settling or
compromising any such claim. Notwithstanding the provisions of
this subsection (d), no U.S. Underwriter shall be required to
contribute any amount in excess of the amount by which the total
price at which the shares of the Stock underwritten by it and
distributed to the public were offered to the public exceeds the
amount of any damages which such U.S. Underwriter has otherwise
been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. The U.S.
Underwriters' obligations to contribute are several in
proportion to their respective underwriting obligations and not
joint. No person guilty of fraudulent misrepresentation (within
the meaning of Section 11(f) of the Securities Act) shall be
entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation.
(e) Promptly after receipt by an indemnified party under subsection
(a), (b) or (c) above of notice of the commencement of any
action, such indemnified party shall, if a claim in respect
thereof is to be made against the indemnifying party under such
subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission to so notify the
indemnifying party shall not relieve the indemnifying party from
any liability that it may have to any indemnified party except
to the extent that any such delay results in the loss of the
ability to assert any affirmative or negative defense the loss
of which is materially prejudicial to the disposition of this
matter.
7 Survival of Indemnities, Representations, Warranties, etc. The
respective indemnities, covenants, agreements, representations,
warranties and other statements of the Company and its subsidiaries, the
Selling Stockholders and the several U.S. Underwriters, as set forth in
this Agreement or made by them respectively, pursuant to this Agreement,
shall remain in full force and effect, regardless of any investigation
made by or on behalf of any U.S. Underwriter, the Selling Stockholders,
the Company or any of its officers or directors or any controlling
person, and shall survive delivery of and payment for the Stock until
all applicable statutes of limitation have expired.
22
<PAGE> 23
8 Conditions of U.S. Underwriters' Obligations. The respective obligations
of the several U.S. Underwriters hereunder shall be subject to the
accuracy, at and (except as otherwise stated herein) as of the date
hereof and at and as of each of the Closing Dates, of the
representations and warranties made herein by the Company and the
Selling Stockholders to compliance at and as of each of the Closing
Dates by the Company and the Selling Stockholders with their covenants
and agreements herein contained and other provisions hereof to be
satisfied at or prior to each of the Closing Dates, and to the following
additional conditions:
(a) The Registration Statement shall have become effective and no
stop order suspending the effectiveness thereof shall have been
issued and no proceedings for that purpose shall have been
initiated or, to the knowledge of the Company or the
Representatives, shall be threatened by the Commission, and any
request for additional information on the part of the Commission
(to be included in the Registration Statement or the Prospectus
or otherwise) shall have been complied with to the reasonable
satisfaction of the Representatives. Any filings of the
Prospectus, or any supplement thereto, required pursuant to Rule
424(b) or Rule 434 of the Rules and Regulations, shall have been
made in the manner and within the time period required by Rule
424(b) and Rule 434 of the Rules and Regulations, as the case
may be.
(b) The Representatives shall have been satisfied that there shall
not have occurred any change prior to each of the Closing Dates,
in the condition (financial or otherwise), properties, business,
management, net worth or results of operations of the Company
and its subsidiaries considered as a whole, or any change in the
capital stock, short-term or long-term debt of the Company and
its subsidiaries considered as a whole, such that (i) the
Registration Statement or the Prospectus, or any amendment or
supplement thereto, contains an untrue statement of fact which,
in the reasonable opinion of the Representatives, is material,
or omits to state a fact which, in the reasonable opinion of the
Representatives, is required to be stated therein or is
necessary to make the statements therein not misleading or (ii)
it is impracticable in the reasonable judgment of the
Representatives to proceed with the public offering or purchase
the Stock as contemplated hereby.
(c) The Representatives shall be satisfied that no legal or
governmental action, suit or proceeding affecting the Company
which is material and adverse to the Company or which affects or
may affect the Company's or the Selling Stockholders' ability to
perform their respective obligations under this Agreement shall
have been instituted or threatened and there shall have occurred
no material adverse development in any existing such action,
suit or proceeding.
(d) At the time of execution of this Agreement, the Representatives
shall have received from KPMG Peat Marwick LLP, independent
certified public accountants, a letter, dated the date hereof,
in form and substance satisfactory to the U.S. Underwriters to
the effect set forth in Exhibit I hereto.
(e) The Representatives shall have received from KPMG Peat Marwick
LLP, independent certified public accountants, letters, dated
each of the Closing Dates, to the effect that such accountants
reaffirm, as of each of the Closing Dates, and as though made on
each of the Closing Dates, the statements made in the letter
furnished by such accountants pursuant to paragraph (d) of this
Section 8.
23
<PAGE> 24
(f) The Representatives shall have received (i) from Wilson Sonsini
Goodrich & Rosati, Professional Corporation, United States
securities counsel for the Company; (ii) from Oppenhoff &
Radler, German counsel for the Company; and (iii) from the Law
Offices of Robert Sabath, Esq., intellectual property counsel to
the Company, an opinion, dated each of the Closing Date, to the
effect set forth in Exhibits II, III and IV hereto,
respectively.
(g) The Representatives shall have received from Rogers & Wells,
counsel for the U.S. Underwriters, their opinion dated each of
the Closing Dates with respect to the incorporation of the
Company, the validity of the Stock, the Registration Statement
and the Prospectus and such other related matters as it may
reasonably request, and the Company shall have furnished to such
counsel such documents as they may request for the purpose of
enabling them to pass upon such matters.
(h) The Representatives shall have received from
_____________________, counsel for the Selling Stockholders, an
opinion dated the Closing Date, to the effect set forth in
Exhibit V.
(i) The Representatives shall have received a certificate or
certificates, dated each of the Closing Dates, of the chief
executive officer or the President and the chief financial or
accounting officer of the Company to the effect that:
(i) No stop order suspending the effectiveness of the
Registration Statement has been issued, and, to the
knowledge of the signers, no proceedings for that
purpose have been instituted or are pending or
contemplated under the Securities Act;
(ii) Neither any Pre-effective Prospectus, as of its date,
nor the Registration Statement or the Application for
Admission nor the Prospectus or the German Prospectus,
nor any amendment or supplement thereto, as of the time
when the Registration Statement or the Application for
Admission, as the case may be, became effective and at
all times subsequent thereto up to the delivery of such
certificate, contained any untrue statement of a
material fact or omitted to state any material fact
required to be stated therein or necessary to make the
statements therein, in light of the circumstances under
which they were made, not misleading;
(iii) The representations and warranties of the Company in
this Agreement are true and correct at and as of each of
the Closing Dates, and the Company has complied with all
the agreements and performed or satisfied all the
conditions on its part to be performed or satisfied at
or prior to the Closing Dates; provided, however, that
the representation contained in clause (ii) of paragraph
2(a)(z) hereof need not be true as of a Closing Date;
and
(iv) Since the respective dates as of which information is
given in the Registration Statement, the Prospectus and
the German Prospectus, and except as disclosed in or
contemplated by the Prospectus, (i) there has not been
any material adverse change or a development involving a
material adverse change in the condition (financial or
otherwise), properties, business, management, net worth
or results of operations of the Company and its
subsidiaries considered as a whole; (ii) the business
and operations conducted by the Company and its
subsidiaries have not sustained a loss by strike, fire,
flood, accident or other calamity (whether or not
24
<PAGE> 25
insured) of such a character as to interfere materially
with the conduct of the business and operations of the
Company and its subsidiaries considered as a whole;
(iii) no legal or governmental action, suit or
proceeding is pending or to the knowledge of the signers
threatened against the Company which is material to the
Company, whether or not arising from transactions in the
ordinary course of business, or which may materially and
adversely affect the transactions contemplated by this
Agreement; (iv) since such dates and except as so
disclosed, the Company has not incurred any material
liability or obligation, direct, contingent or indirect,
made any change in its capital stock (except pursuant to
the 1997 Plans), made any material change in its
short-term or funded debt or repurchased or otherwise
acquired any of the Company's capital stock; and (v) the
Company has not declared or paid any dividend, or made
any other distribution, upon its outstanding capital
stock payable to stockholders of record on a date prior
to the Closing Date.
(j) The Selling Stockholders shall have furnished to the
Representatives certificates as to the accuracy, at and as of
each of the Closing Dates, of the representations and warranties
made herein by them and as to compliance at and as of each of
the Closing Dates by them with their covenants and agreements
herein contained and other provisions hereof to be satisfied at
or prior to each of the Closing Dates, and as to satisfaction of
the other conditions to the obligations of the U.S. Underwriters
hereunder.
(k) Cowen shall have received the written agreements, substantially
in the form of Exhibit VI hereto, of the officers, directors and
certain holders of Common Stock that each will not offer, sell,
assign, transfer, encumber, contract to sell, register for sale,
grant an option to purchase or otherwise dispose of, other than
by operation of law, gifts, pledges or dispositions by estate
representatives, any shares of Common Stock (including, without
limitation, Common Stock which may be deemed to be beneficially
owned by such officer, director or holder in accordance with the
Rules and Regulations) during the 90 days following the date of
the final Prospectus except as provided therein.
(l) The Nasdaq National Market shall have approved the Stock for
listing, subject only to official notice of issuance.
(m) The Closing under the International Underwriting Agreement shall
have occurred concurrently with the Closing hereunder on the
Closing Date.
All opinions, certificates, letters and other documents will be in
compliance with the provisions hereunder only if they are reasonably
satisfactory in form and substance to the Representatives. The Company
will furnish to the Representatives conformed copies of such opinions,
certificates, letters and other documents as the Representatives shall
reasonably request. If any of the conditions hereinabove provided for in
this Section shall not have been satisfied when and as required by this
Agreement, this Agreement may be terminated by the Representatives by
notifying the Company of such termination in writing or by telegram at
or prior to each of the Closing Dates, but Cowen, on behalf of the
Representatives, shall be entitled to waive any of such conditions.
9 Effective Date. This Agreement shall become effective immediately as to
Sections 5, 6, 7, 9, 10, 11, 13, 14, 15, 16 and 17 and, as to all other
provisions, at 11:00 a.m. New York City time on the first full business
day following the effectiveness of the Registration Statement or at such
earlier
25
<PAGE> 26
time after the Registration Statement becomes effective as the
Representatives may determine on and by notice to the Company or by
release of any of the Stock for sale to the public. For the purposes of
this Section 9, the Stock shall be deemed to have been so released upon
the release for publication of any newspaper advertisement relating to
the Stock or upon the release by you of notices (i) advising U.S.
Underwriters that the shares of Stock are released for public offering
or (ii) offering the Stock for sale to securities dealers, whichever may
occur first.
10 Termination. This Agreement (except for the provisions of Section 5) may
be terminated by the Company at any time before it becomes effective in
accordance with Section 9 by notice to the Representatives and may be
terminated by the Representatives at any time before it becomes
effective in accordance with Section 9 by notice to the Company. In the
event of any termination of this Agreement under this or any other
provision of this Agreement, there shall be no liability of any party to
this Agreement to any other party, other than as provided in Sections 5,
6 and 11 and other than as provided in Section 12 as to the liability of
defaulting U.S. Underwriters.
This Agreement may be terminated after it becomes effective by the
Representatives by notice to the Company (i) if at or prior to the First
Closing Date trading in securities on any of the New York Stock Exchange
or the Nasdaq National Market System shall have been suspended (other
than any short term suspension of trading pursuant to any "circuit
breaker" provisions of the New York Stock Exchange) or minimum or
maximum prices shall have been established on any such exchange or
market, or a banking moratorium shall have been declared by New York or
United States authorities; (ii) trading of any securities of the Company
shall have been suspended on any exchange or in any over-the-counter
market; (iii) if at or prior to the First Closing Date there shall have
been (A) an outbreak or escalation of hostilities between the United
States and any foreign power or of any other insurrection or armed
conflict involving the United States or (B) any material change in
financial markets or any calamity or crisis which, in the reasonable
judgment of the Representatives, makes it impractical or inadvisable to
offer or sell the Stock on the terms contemplated by the Prospectus;
(iv) if there shall have been any material adverse development or
prospective material adverse development involving particularly the
business or properties or securities of the Company or any of its
subsidiaries or the transactions contemplated by this Agreement, which,
in the reasonable judgment of the Representatives, makes it
impracticable or inadvisable to offer or deliver the Stock on the terms
contemplated by the Prospectus; (v) if there shall be any litigation or
proceeding, pending or threatened, which, in the reasonable judgment of
the Representatives, makes it impracticable or inadvisable to offer or
deliver the on the terms contemplated by the Prospectus; or (vi) if
there shall have occurred any of the events specified in the immediately
preceding clauses (i) - (v) together with any other such event that
makes it, in the reasonable judgment of the Representatives, impractical
or inadvisable to offer or deliver the Stock on the terms contemplated
by the Prospectus.
11 Reimbursement of U.S. Underwriters. Notwithstanding any other provisions
hereof, if this Agreement shall not become effective by reason of any
election of the Company or the Selling Stockholder pursuant to the first
paragraph of Section 10 or shall be terminated by the Representatives
under Section 8 (excluding Section 8(g)) or Section 10, the Company will
bear and pay the expenses specified in Section 5 hereof and, in addition
to their obligations pursuant to Section 6 hereof, the Company will
reimburse the reasonable out-of-pocket expenses of the several U.S.
Underwriters (including reasonable fees and disbursements of counsel for
the U.S. Underwriters) incurred in connection with this Agreement and
the proposed purchase of the Stock, and promptly upon demand the Company
will pay such amounts to you as Representatives.
26
<PAGE> 27
12 Substitution of U.S. Underwriters. If any U.S. Underwriter or U.S.
Underwriters shall default in its or their obligations to purchase
shares of Stock hereunder and the aggregate number of shares which such
defaulting U.S. Underwriter or U.S. Underwriters agreed but failed to
purchase does not exceed ten percent (10%) of the total number of shares
underwritten, the other U.S. Underwriters shall be obligated severally,
in proportion to their respective commitments hereunder, to purchase the
shares which such defaulting U.S. Underwriter or U.S. Underwriters
agreed but failed to purchase. If any U.S. Underwriter or U.S.
Underwriters shall so default and the aggregate number of shares with
respect to which such default or defaults occur is more than ten percent
(10%) of the total number of shares underwritten and arrangements
satisfactory to the Representatives and the Company for the purchase of
such shares by other persons are not made within forty-eight (48) hours
after such default, this Agreement shall terminate.
If the remaining U.S. Underwriters or substituted U.S. Underwriters are
required hereby or agree to take up all or part of the shares of Stock
of a defaulting U.S. Underwriter or U.S. Underwriters as provided in
this Section 12, (i) the Company and the Selling Stockholders shall have
the right to postpone the Closing Dates for a period of not more than
five (5) full business days in order that the Company may effect
whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus or in any other documents or arrangements,
and the Company agrees promptly to file any amendments to the
Registration Statement or supplements to the Prospectus which may
thereby be made necessary, and (ii) the respective numbers of shares to
be purchased by the remaining U.S. Underwriters or substituted U.S.
Underwriters shall be taken as the basis of their underwriting
obligation for all purposes of this Agreement. Nothing herein contained
shall relieve any defaulting U.S. Underwriter of its liability to the
Company, the Selling Stockholders or the other U.S. Underwriters for
damages occasioned by its default hereunder. Any termination of this
Agreement pursuant to this Section 12 shall be without liability on the
part of any non-defaulting U.S. Underwriter, the Selling Stockholders or
the Company, except for expenses to be paid or reimbursed pursuant to
Section 5 and except for the provisions of Section 6.
13 Notices. All communications hereunder shall be in writing and, if sent
to the U.S. Underwriters shall be mailed, delivered or facsimilied and
confirmed to you, as their Representatives c/o Cowen & Company at
Financial Square, New York. New York 10005 except that notices given to
a U.S. Underwriter pursuant to Section 6 hereof shall be sent to such
U.S. Underwriter at the address furnished by the Representatives or, if
sent to the Company, shall be mailed, delivered or facsimilied and
confirmed c/o SCM Microsystems, Inc., 131 Albright Way, Los Gatos,
California 95030, Attention: President.
14 Successors. This Agreement shall inure to the benefit of and be binding
upon the several U.S. Underwriters, the Company and the Selling
Stockholders and their respective successors and legal representatives.
Nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any person other than the persons mentioned in the
preceding sentence any legal or equitable right, remedy or claim under
or in respect of this Agreement, or any provisions hereby contained,
this Agreement and all conditions and provisions hereof being intended
to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person; except that the representations,
warranties, covenants, agreements and indemnities of the Company and the
Selling Stockholders contained in this Agreement shall also be for the
benefit of the person or persons, if any, who control any U.S.
Underwriter or U.S. Underwriters within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act, and the indemnities of
the several U.S. Underwriters shall also be for the benefit of each
director of the Company, each of its officers who
27
<PAGE> 28
has signed the Registration Statement and the person or persons, if any,
who control the Company within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act.
15 Applicable Law. This Agreement shall be governed by and construed in
accordance with the substantive laws of the State of New York.
16 Authority of the Representatives. In connection with this Agreement, you
will act for and on behalf of the several U.S. Underwriters, and any
action taken under this Agreement by Cowen, as Representative, will be
binding on all the U.S. Underwriters; and any action taken under this
Agreement by any of the Attorneys-in-fact will be binding on all the
Selling Stockholders.
17 Partial Unenforceability. The invalidity or unenforceability of any
Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision
hereof. If any Section, paragraph or provision of this Agreement is for
any reason determined to be invalid or unenforceable, there shall be
deemed to be made such minor changes (and only such minor changes) as
are necessary to make it valid and enforceable.
18 General. This Agreement constitutes the entire agreement of the parties
to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with
respect to the subject matter hereof.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in
this Agreement are for the convenience of the parties only and will not
affect the construction or interpretation of this Agreement. This
Agreement may be amended or modified, and the observance of any term of
this Agreement may be waived, only by a writing signed by the party or
parties to this Agreement directly affected by such amendment,
modification or waiver.
19 Counterparts. This Agreement may be signed in two (2) or more
counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument.
28
<PAGE> 29
If the foregoing correctly sets forth our understanding, please indicate your
acceptance thereof in the space provided below for that purpose, whereupon this
letter and your acceptance shall constitute a binding agreement between us.
Very truly yours,
SCM MICROSYSTEMS, INC.
By:___________________________________
Name:
Title:
Accepted and delivered in SELLING STOCKHOLDERS
Palo Alto, California as of LISTED IN SCHEDULE B
the date first above written.
COWEN & COMPANY By:___________________________
HAMBRECHT & QUIST LLC
WESSELS, ARNOLD & HENDERSON L.L.C.
Acting on their own behalf
and as Representatives of the several By:___________________________
U.S. Underwriters referred to in the Attorney-in-fact
foregoing Agreement.
By: COWEN & COMPANY
By: Cowen Incorporated,
its general partner
By:___________________________
Name:
Title:
For purposes of agreeing to the indemnification provisions set forth in Section
6 of this agreement:
SCM MICROSYSTEMS GmbH
By: ___________________________
29
<PAGE> 30
Name:
Title:
30
<PAGE> 31
SCHEDULE A
U.S. UNDERWRITERS
<TABLE>
<CAPTION>
Number of Number of
Firm Shares Optional Shares
to be to be
Name Purchased Purchased
- ---- --------- ---------
<S> <C> <C>
Cowen & Company...........................................
Hambrecht & Quist LLC ....................................
Wessels, Arnold & Henderson...............................
Total 1,500,000
=========
</TABLE>
<PAGE> 32
SCHEDULE B
SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
Number of Shares of
Firm Stock
to be
Name Purchased
- ---- ---------
<S> <C>
[TO COME]
---------
Total 2,000,000
=========
</TABLE>
<PAGE> 33
SCHEDULE C
SUBSIDIARIES
SCM Microsystems GmbH, a German entity
SCM Microsystems (U.S.) Inc., a Delaware corporation
<PAGE> 34
SCHEDULE D
LIST OF PARTIES EXECUTING LOCK-UP AGREEMENTS
Index Securities S.A.
Algoquin Trust S.A.
Alpinvest International B.V.
Peter Andersson
Banque SCS Alliance S.A.
Martin Bast
British Bank of the Middle East
Bulk Partners AS
Daniel Case
CERN Pension Fund
Cook & Cie S.A.
Albert Covo
Claus Dieckell
Friedrich Dieckell
Mona Doss
Natalie Eiden
Faisal Finance (Jersey) Ltd.
E. A. Favre
Fidulex Management Inc.
P. Finklestein
Fondation Galba
The Forum Finance Group
Genevest Consulting Group S.A.
The Gifford Fund
Jay M. Haft
David Hale
Dieter Haas
Hambrecht & Quist California
Hoegh Invest ACS
Steven Humphreys
Nick Efthymiou
Intel Corporation
Intellicard
ITOHU Corporation
Detlef Jenett
KBL Founder Ventures S.C.A.
Per Knudsen
L.B. Finance SA
Christian Lang
Ronald Lautenschlager
Jean Yves Le Roux
John A. Lynch
Edward C. Macbeth
Franz Maier
Keith Marsden
<PAGE> 35
Torsten Mayuranz
Bernd Meier
Sonja Meier
Merifin Capital N.V.
Mirabaud & Cie
Murdoch & Company
John G. Niedermaier
Nippon Investment & Founders
William Ogdon
Isaiah Okoth
Jaochim Grafzu Ortenbum
Ken O. Pelton
Jack H. Peterson
ppon PICTET & Cie
Reiner Prummer
Marianne Puhr
Thomas Rachor
Joshua Rafner
Sylvia D. Reul
Helga Rinke
Michael Sack
Jeff Saper
Beatrice Schneider
Robert Schneider
Ursual Schneider
Ken Siegel
Swiss Bank Corporation
Societe Financiere Mirelis S.A.
Lembit Soobik
Jochem Solja
Andreas Straub
Andrea Taylor
Telenor
TVM Eurotech Limited Partnership
Union Bank of Switzerland
Siegfried Vater
Vertex
Candida von Braun
Emmeram von Braun
Luitpold von Braun
Andy Vought
Andreas Wolf
WS Investments 97A
Zweite Beteilgump
<PAGE> 36
EXHIBIT I
[Form of Accountant's Letter]
The Accountants shall confirm that they are independent accountants to the
Company within the meaning of the Securities Act and the Rules, that the
response to Item 10 of the Registration Statement is correct insofar as it
relates to them and stating that:
a. in their opinion the audited financial
statements and financial statement schedules included in the
Registration Statement and the Prospectus and reported on by them
comply as to form in all material respects with the applicable
accounting requirements of the Securities Act and the Rules and
Regulations;
b. on the basis of a reading of the amounts
included in the Registration Statement and the Prospectus under
the headings "Summary Consolidated Financial Data" and "Selected
Consolidated Financial Data," carrying out certain procedures
(but not an examination in accordance with generally accepted
auditing standards) which would not necessarily reveal matters of
significance with respect to the comments set forth in such
letter, a reading of the minutes of the meetings of the
stockholders and directors of the Company, and inquiries of
certain officials of the Company who have responsibility for
financial and accounting matters of the Company as to
transactions and events subsequent to the date of the latest
audited financial statements, except as disclosed in the
Registration Statement and the Prospectus, nothing came to their
attention which caused them to believe that:
(1) the amounts in "Summary Consolidated
Financial Data," and "Selected Consolidated Financial
Data" included in the Registration Statement and the
Prospectus do not agree with the corresponding amounts
in the audited or unaudited financial statements from
which such amounts were derived; or
(2) with respect to the Company, there were, at
a specified date not more than five business days prior
to the date of the letter, any change in the capital
stock of the Company, increase in the long-term debt of
the Company or any decreases in net income or in
stockholders' equity in the Company, as compared with
the amounts shown on the Company's audited balance sheet
for the fiscal year ended December 31, 1997 included in
the Registration Statement; and
c. they have performed certain other procedures as
may be permitted under generally acceptable auditing standards as
a result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the
general accounting records of the Company) set forth in the
Registration Statement and the Prospectus and reasonably
specified by the Representatives agrees with the accounting
records of the Company; and
d. based upon the procedures set forth in clauses
(ii) and (iii) above and a reading of the amounts included in the
Registration Statement under the headings "Summary Consolidated
Financial Data" and "Selected Consolidated Financial Data"
included in the Registration Statement and Prospectus and a
reading of the financial
<PAGE> 37
statements, from which certain of such data were derived, nothing
has come to their attention that gives them reason to believe
that the "Selected Consolidated Financial Data" included in the
Registration Statement and Prospectus do not comply as to the
form in all material respects with the applicable accounting
requirements of the Securities Act and the Rules or that the
information set forth therein is not fairly stated in relation to
the financial statements included in the Registration Statement
or Prospectus from which certain of such data were derived are
not in conformity with generally accepted accounting principles
applied on a basis substantially consistent with that of the
audited financial statements included in the Registration
Statement and Prospectus.
2
<PAGE> 38
Exhibit II
[Form of Opinion of Wilson Sonsini Goodrich & Rosati]
1. The Company and each of the corporations set forth in Exhibit A
hereto (the "US Subsidiary") have been duly incorporated and are validly
existing and in good standing as corporations under the laws of their respective
jurisdictions of incorporation, are duly qualified to do business and are in
good standing as foreign corporations in California which, to such counsel's
knowledge, is the only jurisdiction in which the location of the properties
owned or leased by it or in which the character of the business conducted by it
makes such qualification necessary, and have all corporate power necessary to
own or hold their respective properties and conduct their businesses as
described in the Prospectus;
2. The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and nonassessable
and all of the Shares to be issued and sold by the Company to the U.S.
Underwriters pursuant to the Underwriting Agreement and to the International
Managers pursuant to the International Underwriting Agreement have been duly and
validly authorized and, when issued and delivered against payment therefor as
provided for in the Underwriting Agreement or the International Underwriting
Agreement, as the case may be, shall be duly and validly issued, fully paid and
non-assessable and, to our knowledge, free of any pre-emptive or similar rights;
3. Other than as described in the Prospectus, to our knowledge, there
are no pre-emptive or other rights to subscribe for or to purchase, nor any
restriction upon the voting or transfer of, any of the Shares pursuant to the
Company's Certificate of Incorporation or By-Laws or pursuant to any agreement
or other instrument known to us;
4. Except as disclosed in the Prospectus, to our knowledge, there are no
legal or governmental proceedings pending to which the Company or the US
Subsidiary is a party or of which any property or assets of the Company or the
US Subsidiary is the subject which, if determined adversely to the Company or
the US Subsidiary, could, individually or in the aggregate, reasonably be
expected to have a material adverse effect on the Company and its subsidiaries
taken as a whole; and, to our knowledge, no such proceedings are threatened or
contemplated by governmental authorities or other third parties;
5. The Company has full corporate power and authority to enter into the
Underwriting Agreement and the International Underwriting Agreement and to
perform its obligations thereunder (including to issue, sell and deliver the
Shares), and each of the Underwriting Agreement and the International
Underwriting Agreement has been duly and validly authorized, executed and
delivered by the Company and is a valid and binding obligation of the Company,
enforceable against it in accordance with their respective terms.
6. The execution, delivery and performance of the Underwriting Agreement
and the International Underwriting Agreement by the Company and the consummation
of the transactions contemplated by the Underwriting Agreement and the
International Underwriting Agreement by the Company will not result in a breach
or violation of (A) any of the terms or provisions of or constitute a default
under any indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument that is filed as an exhibit to the Registration Statement, (B) the
Certificate of Incorporation or By-laws, or (C) any law, order, rule or
regulation of any U.S. court or U.S. governmental agency or body having
jurisdiction over the Company or the US Subsidiary or any of their properties or
result in the creation of a lien;
<PAGE> 39
7. No consent, approval, authorization or order of any U.S. court or
U.S. governmental agency or body is required for the consummation by the Company
of the transactions contemplated by the Underwriting Agreement or the
International Underwriting Agreement, except such as may be required by the
National Association of Securities Dealers, Inc. (the "NASD"), the NASDAQ
National Market, the Neuer Markt of the Frankfurt Stock Exchange or under the
Securities Act or the Exchange Act or the securities or "Blue Sky" laws of any
U.S. or foreign jurisdiction in connection with the purchase and distribution of
the Shares by the U.S. Underwriters or the International Managers;
8. The Registration Statement was declared effective under the
Securities Act as of April __, 1998, the Prospectus was filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations on April __,
1998, and no stop order suspending the effectiveness of the Registration
Statement has been issued and to our knowledge no proceeding for that purpose is
pending or threatened by the Commission;
9. The Registration Statement and the Prospectus and any amendments or
supplements thereto (other than the financial statements and the notes thereto
and the schedules and other financial and statistical data included in the
Registration Statement or the Prospectus as to which we express no opinion)
comply as to form in all respects with the requirements of the Securities Act
and the Rules and Regulations, and to our knowledge, there are no contracts or
documents of a character required to be filed as exhibits to the Registration
Statement which are not filed as required;
10. Other than as described in the Prospectus and to our knowledge,
there are no contracts, agreements or understandings between the Company and any
person granting such person the right (other than rights which have been waived
or satisfied) to require the Company to file a registration statement under the
Securities Act with respect to any securities of the Company owned or to be
owned by such person or to require the Company to include such securities in the
securities registered pursuant to this Registration Statement or in any
securities being registered pursuant to any other registration statement filed
by the Company under the Securities Act;
11. The descriptions in the Registration Statement and the Prospectus
under the captions "Risk Factors -- Concentration of Stock Ownership;
Anti-Takeover Provisions," Risk Factors -- Shares Eligible for Future Sale,"
Description of Common Stock" and "Shares Eligible for Future Sale," solely to
the extent they reflect matters of federal law arising under the laws of the
United States or of the Delaware General Corporation Law or legal conclusions
relating to such laws, accurately summarize and fairly present the legal and
regulatory matters described therein; and
12. The Company is not nor will it be immediately after receiving the
proceeds from the sale of the Shares, an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in the
Investment Company Act of 1940, as amended.
In addition, although we have not undertaken, except as otherwise
indicated herein, to determine independently, and do not assume any
responsibility for, the accuracy or completeness of the statements in the
Registration Statement, we have participated in conferences with officers and
other representatives of the Company, at which conferences representatives of
the Representatives, counsel to the Underwriters and representatives of the
independent certified public accountants of the Company were present, and at
which conferences the contents of the Registration Statement and Prospectus and
related matters were discussed, and based upon the foregoing nothing has come to
our attention that has caused us to believe that the Registration Statement at
the time the Registration Statement became effective, or the Prospectus, as of
its date and as of the date hereof, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that any
2
<PAGE> 40
amendment or supplement to the Prospectus, as of its respective date, and as of
the date hereof, contained any untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading (it being
understood that we express no belief with respect to the financial statements
and the notes thereto and the schedules and other financial and statistical data
included in the Registration Statement or the Prospectus).
3
<PAGE> 41
Exhibit III
[Form of Opinion of Issuer's German Counsel and Intellectual Property Counsel]
1. SCM Microsystems GmbH, a limited liability company (the "Subsidiary")
is duly incorporated and duly registered with the commercial register at the
local court in Neuburg on der Donau under No. HRB 90556 and is validly existing
as a limited liability company under the laws of Germany and is duly qualified
to do business in accordance with the objectives of the Subsidiary set forth in
its articles of association, and has all power and authority (corporate and
other) necessary to own or hold its properties and conduct its business in
accordance with its articles of association. The objective of the Subsidiary
pursuant to its articles of association is to develop, produce and market
electronic parts of microsystems, electronic and electric instruments, data
terminals and data processing equipment as well as to trade all related
products. The Subsidiary is also authorized to conduct all activities which are
appropriate to serve these objectives. In particular the Subsidiary is
authorized to establish, acquire or hold interest in enterprises of identical or
similar kind and to grant or acquire licenses;
2. The Subsidiary has an authorized, issued and outstanding share
capital in the nominal amount of DM 522,700 (consisting of 33 shares with
different nominal amounts). To the best of our knowledge after reasonable
investigations all of the issued shares of capital stock of the Subsidiary have
been duly and validly authorized and issued and are to the best of our knowledge
fully paid, non-assessable and are owned by SCM Microsystems Inc., a Delaware
corporation, to the best of our knowledge free and clear of all liens,
encumbrances, equities or claims;
3. Other than as described in the Prospectus after reasonable
investigations (i.e., due inquiry of the management of the Subsidiary) there are
no pre-emptive or other rights to subscribe for or to purchase, nor any
restriction upon the voting or transfer of, any of the capital stock of the
Subsidiary pursuant to the Subsidiary's organizational documents or pursuant to
any agreement or other instrument know to us providing for such rights or
restrictions;
4. Except as disclosed in the Prospectus after reasonable investigations
(i.e., due inquiry of the management of the Subsidiary), to our knowledge, there
are no legal or governmental proceedings pending to which the Subsidiary is a
party or of which any property or assets of the Subsidiary is the subject which,
if determined adversely to the Subsidiary, could individually or in the
aggregate have a material adverse effect on the Subsidiary and, to our
knowledge, no such proceedings are threatened or contemplated by governmental
authorities or other third parties;
5. The statements in the Prospectus under the heading "Risk Factors -
Proprietary Technology and Intellectual Property" and "Business - Proprietary
Technology and Intellectual Property," insofar as such statements constitute
summary descriptions of the legal matters, documents or proceedings referred to
therein, fairly represent the information called for with respect to such legal
matters, documents or proceedings and such statements do not omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading;
6. To such counsel's knowledge, the Subsidiary owns or possesses all
patents, trademarks, trademark registrations, service marks, service mark
registrations, trade names, copyrights, licenses, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and rights described in the Prospectus as
being owned by it or necessary for the conduct of its business; and to such
counsel's knowledge, except as described in the Prospectus, the
<PAGE> 42
Subsidiary has not received any notice of infringement of or conflict with and
such counsel knows of no infringement of or conflict with asserted rights of
others with respect to any such patents, trademarks, service marks or other
proprietary information or materials which could result in any material adverse
effect on the Subsidiary and to the knowledge of such counsel there is no
infringement or violation by others of any of the Subsidiary's patents,
licenses, trade secrets, trademarks, service marks or other proprietary
information or materials which in the judgment of such counsel could materially
affect the use thereof by the Subsidiary;
7. The patents have been licensed to the Subsidiary as described in the
Prospectus, and such licenses are valid, binding and enforceable; and the
Subsidiary has rights to the products and technology covered thereby as
described in the Prospectus;
8. The Subsidiary has full corporate power and authority to enter into
the Underwriting Agreement and the International Underwriting Agreement and to
perform its obligations thereunder, and the Underwriting Agreement and the
International Underwriting Agreement have each been duly and validly authorized,
executed and delivered by the Subsidiary;
9. The execution, delivery and performance of the Underwriting Agreement
and the International Underwriting Agreement and the consummation of the
transactions contemplated by the Underwriting Agreement and the International
Underwriting Agreement by the Subsidiary will not result in a breach or
violation of any of (A) the terms or provisions of or constitute a default under
any indenture, mortgage, deed of trust note agreement or other agreement or
instrument known to us after reasonable investigations (i.e., due inquiry of the
management of the Subsidiary) to which the Subsidiary is a party or by which any
of its properties is or may be bound, (B) the organizational documents of the
Subsidiary, or (C) any law, order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Subsidiary known to us
or any of its properties nor will such execution, delivery and performance
result in the creation of a lien;
10. No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the Subsidiary
of the transactions contemplated by the Underwriting Agreement or the
International Underwriting Agreement other than the approval of the German
authorities pursuant to the German Stock Exchange Act (Borsengesctz), the German
Sale Prospectus Act "Verkaufsprospektgsctz", the Stock Exchange Regulation
("Borscnordnung") and the Rules and Regulations of the New Market "(Regelwerk
Neuer Markt").
11. The Prospectus used in connection with the application to list the
Stock on the Neuer Markt of the Frankfurt Stock Exchange and any amendments or
supplements thereto comply as to form in all respects with the requirements of
German law and the Frankfurt Stock Exchange.
12. The Stock has been approved for listing on the Neuer Markt of the
Frankfurt Stock Exchange.
2
<PAGE> 43
Exhibit IV
[Form of Intellectual Property Counsel Opinion]
1. The statements in the Prospectus under the heading "Risk Factors -
Proprietary Technology and Intellectual Property" and "Business - Proprietary
Technology and Intellectual Property," insofar as such statements constitute
summary descriptions of the legal matters, documents or proceedings referred to
therein, fairly present the information called for with respect to such legal
matters, documents or proceedings and such statements do not omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading;
2. To such counsel's knowledge, the Company owns or possesses all
patents, trademarks, trademark registrations, service marks, service mark
registrations, trade names, copyrights, licenses, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and rights described in the Prospectus as
being owned by it or necessary for the conduct of its business; and to such
counsel's knowledge, except as described in the Prospectus, the Company has not
received any notice of infringement of or conflict with and such counsel knows
of no infringement of or conflict with asserted rights of others with respect to
any such patents, trademarks, service marks or other proprietary information or
materials which could result in any material adverse effect on the Company and
to the knowledge of such counsel there is no infringement or violation by others
of any of the Company's patents, licenses, trade secrets, trademarks, service
marks or other proprietary information or materials which in the judgment of
such counsel could materially affect the use thereof by the Company; and
3. The patents have been licensed to the Company as described in the
Prospectus, and such licenses are valid, binding and enforceable; and the
Company has rights to the products and technology covered thereby as described
in the Prospectus;
<PAGE> 44
Exhibit V
[Form of Opinion of Selling Stockholders' Counsel]
1. [Corporate Selling Stockholder] Each of ______, ________ and ______
has full corporate power and authority to enter into the Underwriting Agreement,
the International Underwriting Agreement, the Custody Agreement and the Power of
Attorney and to perform its obligations thereunder (including to issue, sell and
deliver the Shares), and each of the Underwriting Agreement, the International
Underwriting Agreement, the Custody Agreement and the Power of Attorney has been
duly and validly authorized, executed and delivered by the Company and is a
valid and binding obligation of ________, _________ and ______, enforceable
against it in accordance with their respective terms.
2. [Individual Selling Stockholder] The Underwriting Agreement, the
International Underwriting Agreement, the Custody Agreement, the Power of
Attorney and the Lock-Up Agreement to be executed by the Selling Stockholders
each have been duly and validly executed and delivered by or on behalf of each
Selling Stockholder.
3. The Underwriting Agreement, the International Underwriting Agreement,
the Custody Agreement, the Power of Attorney and the Lock-Up Agreement executed
and delivered by the Selling Stockholders each contains a valid choice of New
York law.
4. [Individual Selling Stockholder - To our knowledge after reasonable
investigations,] each of the Selling Stockholders has full legal right and power
to enter into the Underwriting Agreement and the International Underwriting
Agreement and to sell, transfer and deliver in the manner provided in the
Underwriting Agreement and the International Underwriting Agreement the Shares
to be sold by the Selling Stockholders.
5. Each of the Selling Stockholders is the record owner of and has
marketable title to the Shares to be sold by such Selling Stockholder.
6. All of the Selling Stockholders' rights in the Shares to be sold by
such Selling Stockholder, have been transferred to the Underwriters who have
severally purchased such Shares, free and clear of adverse claims, assuming that
the Underwriters purchased the same in good faith without notice of any adverse
claims.
7. The transfer and sale by the Selling Stockholders of the Shares to be
sold by the Selling Stockholders as contemplated in the Underwriting Agreement
and the International Underwriting Agreement will not violate any agreement,
judgment, decree, order, statute, rule or regulation which the Selling
Stockholders are a party or by which either Selling Stockholder is bound or
subject.
8. To our knowledge, no consent, approval, authorization, license,
certificate, permit or order of any court, governmental or regulatory agency,
authority or body or financial institution is required in connection with the
performance of the Underwriting Agreement or the International Underwriting
Agreement by such Selling Stockholder or the consummation of the transactions
contemplated therein, including the delivery and sale of the Shares to be
delivered and sold by such Selling Stockholder, except such as have been
obtained and except such as may be required under state securities or blue sky
laws in
<PAGE> 45
connection with the purchase and distribution of the Shares by the several
Underwriters and the provisions of German law including the German Stock
Exchange Act (Borsengesetz), the German Stock Exchange Regulation
(Borsenordnung), the Rules and Regulations for the New Market (Regelwerk Neuer
Markt) and the Sales Prospectus Act (Verkaufsprospektgesetz).
<PAGE> 46
Exhibit VI
[Form of Lock-Up Agreement]
-----------------------
Print Stockholder Name
SCM MICROSYSTEMS, INC.
LOCK-UP AGREEMENT
Cowen & Company
Hambrecht & Quist LLC
Wessels, Arnold & Henderson, L.L.C.
As representatives of the
several Underwriters
c/o Cowen & Company
Financial Square
New York, New York 10005
Re: SCM Microsystems, Inc.
Ladies and Gentlemen:
In order to induce Cowen & Company ("Cowen"), Hambrecht & Quist LLC and Wessels,
Arnold & Henderson (together, the "Representatives"), to enter into a certain
underwriting agreement with SCM Microsystems, Inc., a Delaware corporation (the
"Company"), with respect to the public offering of shares of the Company's
Common Stock, par value $ 0.001 per share ("Common Stock"), the undersigned
hereby agrees that for a period of 90 days following the date of the final
prospectus filed by the Company with the Securities and Exchange Commission in
connection with such public offering, the undersigned will not, without the
prior written consent of Cowen, directly or indirectly, (i) offer, sell, assign,
transfer, encumber, pledge, contract to sell, grant an option to purchase or
otherwise dispose of, other than by operation of law, any shares of Common Stock
(including, without limitation, Common Stock which may be deemed to be
beneficially owned by the undersigned in accordance with the rules and
regulations promulgated under the Securities Act of 1933, as the same may be
amended or supplemented from time to time (such shares, the "Beneficially Owned
Shares") or (ii) enter into any swap or similar agreement that transfers, in
whole or in part, the economic risk of ownership of the Common Stock, whether
any such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise.
Notwithstanding the foregoing, this Lock-Up Agreement (the "Agreement") shall
not apply to shares of the Company's Common Stock acquired on the open market
and that shares so acquired may be sold or otherwise disposed of without regard
to this Agreement.
Notwithstanding the foregoing, if the undersigned is an individual, he or she
may transfer any Shares either during his or her lifetime or on death by will or
intestacy to his or her immediate family or to a trust the beneficiaries of
which are exclusively the undersigned and/or a member of his or her immediate
family or to a charitable organization; provided, however, that in any such case
it shall be a condition to the transfer
3
<PAGE> 47
that the transferee execute an agreement stating that the transferee is
receiving and holding the Shares transferred subject to the provisions of this
Agreement, and there shall be no further transfer of such Shares except in
accordance with this Agreement. For purposes of this Agreement, "immediate
family" shall mean spouse, lineal descendant, father, mother, brother or sister
of the transferor and "charitable organization" shall mean an organization
described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended.
Notwithstanding the foregoing, if the undersigned is a partnership, the
partnership may transfer any Shares to a partner of such partnership or a
retired partner of such partnership who retires after the date hereof, or to the
estate of any such partner or retired partner, and any partner who is an
individual may transfer such Shares by gift, will or intestate succession to his
or her spouse or lineal descendants or ancestors; and if the undersigned is a
corporation, the corporation may transfer such Shares to any stockholder or
subsidiary of such corporation and any stockholder who is an individual may
transfer Shares by gift, will or intestate succession to his or her immediate
family or to a charitable organization; provided, however, that in any such
case, it shall be a condition to the transfer that the transferee execute an
agreement stating that the transferee is receiving and holding the Shares
subject to the provisions of this Agreement, and there shall be no further
transfer of such Shares except in accordance with this Agreement.
The undersigned agrees that the provisions of this Agreement shall be binding
also upon the successors, assigns, heirs and personal representatives of the
undersigned. The undersigned agrees and consents to the placing of legends
and/or the entry of stop transfer instructions with the Company's transfer agent
against the transfer of any shares of Common Stock or Beneficially Owned Shares
held by the undersigned except in compliance with this Agreement.
It is understood that, if the Underwriting Agreement does not become effective,
or if the Underwriting Agreement (other than the provisions thereof which
survive termination) shall terminate or be terminated prior to payment for and
delivery of the Shares, you will release us from our obligations under this
Agreement.
This Agreement shall terminate and be of no further force or effect in the event
that the offering contemplated by the Underwriting Agreement is not completed on
or before August 31, 1998.
Very truly yours,
------------------------------------
(Signature)
------------------------------------
(Title)
------------------------------------
(Date)
4
<PAGE> 1
EXHIBIT 1.2
1,500,000 Shares
SCM MICROSYSTEMS, INC.
Common Stock
INTERNATIONAL UNDERWRITING AGREEMENT
April __, 1998
COWEN INTERNATIONAL L.P.
WESTDEUTSCHE LANDESBANK GIROZENTRALE
HAMBRECHT & QUIST LLC
As Lead Managers of the several International Managers
c/o Cowen International L.P.
One Angel Court
London EC2R 7HJ
U.K.
Dear Sirs:
1 Introductory. SCM Microsystems, Inc., a Delaware corporation (the
"Company"), and the selling stockholders named in Schedule B hereto (the
"Selling Stockholders") propose to sell, pursuant to the terms of this
Agreement, to the several International Managers named in Schedule A
hereto (the "International Managers," or, each, an "International
Manager"), an aggregate of 1,500,000 shares of Common Stock, $0.001 par
value per share (the "Common Stock"), of the Company. The aggregate of
1,500,000 shares so proposed to be sold is hereinafter referred to as
the "Firm Stock." The Company also proposes to sell to the International
Managers and the U.S. Underwriters (as hereinafter defined), upon the
terms and conditions set forth in Section 3 hereof, up to an additional
450,000 shares of Common Stock (the "Optional Stock"). The Firm Stock
and the Optional Stock are hereinafter collectively referred to as the
"Stock." Cowen International L.P. ("Cowen"), Westdeutsche Landesbank
Girozentrale ("West LB") and Hambrecht & Quist LLC are acting as Lead
Managers of the several International Managers and in such capacity are
hereinafter referred to as the "Lead Managers."
It is understood by all parties that the Company and the Selling
Stockholders are concurrently entering into an agreement dated the date
hereof (the "U.S. Underwriting Agreement") providing for the sale by the
Company and the Selling Stockholders of an aggregate of 1,500,000 shares
of Common Stock (the "U.S. Stock") through arrangements with certain
U.S. Underwriters in the United States and Canada (the "U.S.
Underwriters"), for whom Cowen & Company, Hambrecht & Quist LLC and
Wessels, Arnold and Henderson are acting as Representatives (the
"Representatives"). The International Managers and the U.S. Underwriters
simultaneously are entering into an agreement among the International
and U.S. underwriting syndicates (the "Agreement Among U.S. Underwriters
and International Managers") which provides for, among
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<PAGE> 2
other things, the transfer of shares of Common Stock between the two
syndicates. Two forms of prospectus are to be used in connection with
the offer and sale of shares of Common Stock contemplated by the
foregoing, one relating to the Stock and the other relating to the U.S.
Stock. Except as used in the first paragraph hereof and in Section 8
herein, and except as the context may otherwise require, references
herein to the Stock shall include all the shares of Common Stock which
may be sold pursuant to both this Agreement and the U.S. Underwriting
Agreement, and references herein to any prospectus whether in
preliminary or final form, and whether as amended or supplemented, shall
include the U.S. and the International versions thereof; provided,
however, that any such references shall not be deemed to be references
to the prospectus prepared in the German language in connection with the
listing of shares of Stock on the Neuer Markt of the Frankfurt Stock
Exchange. The German language prospectus included in the Application for
Admission (as hereinafter defined) and the final form of the German
language prospectus are collectively referred to as the "German
Prospectus."
2a. Representations and Warranties of the Company. The Company hereby
represents and warrants to, and agrees with, the several International
Managers that:
(a) A registration statement on Form S-1 (File No. 333-47635) in the
form in which it became or becomes effective and also in such
form as it may be when any post-effective amendment thereto
shall become effective with respect to the Stock, including any
pre- effective prospectuses included as part of the registration
statement as originally filed or as part of any amendment or
supplement thereto, or filed pursuant to Rule 424 under the
Securities Act of 1933, as amended (the "Securities Act"), and
the rules and regulations (the "Rules and Regulations") of the
Securities and Exchange Commission (the "Commission")
promulgated thereunder, copies of which have heretofore been
delivered to you, has been prepared by the Company in conformity
with the requirements of the Securities Act and has been filed
with the Commission under the Securities Act; one or more
amendments to such registration statement, including in each
case an amended pre-effective prospectus, copies of which
amendments have heretofore been delivered to you, have been so
prepared and filed. If it is contemplated, at the time this
Agreement is executed, that a post-effective amendment to the
registration statement will be filed and must be declared
effective before the offering of the Stock may commence, the
term "Registration Statement" as used in this Agreement means
the registration statement as amended by said post-effective
amendment. The term "Registration Statement" as used in this
Agreement shall also include any registration statement relating
to the Stock that is filed and becomes effective pursuant to
Rule 462(b) under the Securities Act. The term "Prospectus" as
used in this Agreement means the prospectus in the form included
in the Registration Statement, or, (A) if the prospectus
included in the Registration Statement omits information in
reliance on Rule 430A under the Securities Act and such
information is included in a prospectus filed with the
Commission pursuant to Rule 424(b) under the Securities Act, the
term "Prospectus" as used in this Agreement means the prospectus
in the form included in the Registration Statement as
supplemented by the addition of the Rule 430A information
contained in the prospectus filed with the Commission pursuant
to Rule 424(b) and (B) if prospectuses that meet the
requirements of Section 10(a) of the Securities Act are
delivered pursuant to Rule 434 under the Securities Act, then
(i) the term "Prospectus" as used in this Agreement means the
"prospectus subject to completion" (as such term is defined in
Rule 434(g) under the Securities Act) as supplemented by (a) the
addition of Rule 430A information or other information contained
in the form of prospectus delivered pursuant to Rule 434(b)(2)
under the Securities Act or (b) the information contained in the
term sheets described in Rule
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<PAGE> 3
434(b)(3) under the Securities Act, and (ii) the date of such
prospectuses shall be deemed to be the date of the term sheets.
The term "Pre-effective Prospectus" as used in this Agreement
means the prospectus subject to completion dated March __, 1998,
and as such prospectus shall have been amended from time to time
prior to the date of the Prospectus.
(b) The Commission has not issued or, to the Company's knowledge,
threatened to issue any order preventing or suspending the use
of any Pre-effective Prospectus, and, at its date of issue, each
Pre-effective Prospectus complied in all material respects with
the applicable provisions of the Securities Act, except that the
outside front cover and back cover pages of the International
version omitted certain captions and legends that are required
in the U.S. prospectus, and did not contain any untrue statement
of a material fact or omit to state any material fact required
to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading, other than any noncompliance,
untrue statement or omission in a Pre-effective Prospectus that
has been corrected in the Prospectus; and, when the Registration
Statement becomes effective and at all times subsequent thereto
up to and including each of the Closing Dates (as hereinafter
defined), the Registration Statement and the Prospectus and any
amendments or supplements thereto contained and will contain all
material statements and information required to be included
therein by the Securities Act, except that the outside front
cover and back cover pages of the International version omitted
certain captions and legends that are required in the U.S.
prospectus, and complied and will comply in all material
respects with the applicable provisions of the Securities Act,
except that the outside front cover and back cover pages of the
International version omitted certain captions and legends that
are required in the U.S. prospectus, and neither the
Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, contained or will contain any untrue
statement of a material fact or omit to state any material fact
required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which
they were made, not misleading; provided, however, that the
foregoing representations and warranties shall not apply to
information contained in or omitted from any Pre-effective
Prospectus or the Registration Statement or the Prospectus or
any such amendment or supplement thereto in reliance upon, and
in conformity with, written information furnished to the Company
by the Lead Managers on behalf of the several International
Managers, directly or through you, specifically for use in the
preparation thereof. With respect to the preceding sentence, the
Company acknowledges that the only information furnished in
writing by the Lead Managers on behalf of the several
International Managers for use in the Pre- effective Prospectus,
the Registration Statement and the Prospectus is the paragraph
with respect to stabilization on the inside front cover page of
the Prospectus and the statements contained under the caption
"Underwriting" in the Prospectus.
(c) The Registration Statement is effective under the Securities Act
and no stop order suspending effectiveness of the Registration
Statement or suspending or preventing the use of the Prospectus
has been issued and no proceedings for that purpose have been
instituted or, to the Company's knowledge, are threatened under
the Securities Act; any required filing of the Prospectus and
any amendment or supplement thereto pursuant to Rule 424(b) of
the Rules and Regulations has been or will be made in the manner
and within the time period required by Rule 424(b).
(d) There is no document, contract or other agreement of a character
required to be described in the Registration Statement or
Prospectus or to be filed as an exhibit to the Registration
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<PAGE> 4
Statement which is not described or filed as required by the
Securities Act or the Rules and Regulations. Each agreement
described in the Registration Statement and the Prospectus or
listed in the Exhibits to the Registration Statement is in full
force and effect and is valid and enforceable by and against the
Company or its subsidiaries in accordance with its terms, except
to the extent that rights to indemnity and contribution
hereunder may be limited by applicable bankruptcy, insolvency
and other similar laws affecting conditions, rights and rules of
law governing specific performance, injunctive relief and other
equitable remedies and except to the extent that the
enforceability of certain indemnification provisions of certain
registration rights agreements entered into by the Company may
be limited by principles of public policy. Neither the Company
nor any subsidiary is in default in the observance or
performance of any material term or obligation to be performed
by it under any such agreement, and no event has occurred which,
with notice or lapse of time or both, would constitute such a
default, in any such case which default or event would have a
material adverse effect on the Company and its subsidiaries
taken as a whole. No default exists, and, to the knowledge of
the Company, no event has occurred which, with notice or lapse
of time or both would constitute a default, in the due
performance and observance of any term, covenant or condition,
by the Company or any of its subsidiaries of any other agreement
or instrument to which the Company or any of its subsidiaries is
a party or by which any of them or their respective properties
or businesses may be bound or affected, in any case which
default or event could reasonably be expected to have a material
adverse effect on the operations of the Company and its
subsidiaries considered as a whole.
(e) None of the Company or its subsidiaries is in violation of any
franchise, license, permit, judgment, decree, order, statute or
rule or regulation, which could reasonably be expected to have a
material adverse effect on the operations of the Company and its
subsidiaries considered as a whole, or any term or provision of
its certificate of incorporation or by-laws.
(f) Subsequent to the respective dates as of which information is
given in the Registration Statement and Prospectus, and except
as set forth or contemplated in the Prospectus, neither the
Company nor any of its subsidiaries has incurred any material
liabilities or obligations, direct or contingent, nor entered
into any transactions not in the ordinary course of business,
and there has not been any material adverse change in the
condition (financial or otherwise), properties, business,
management, net worth or results of operations of the Company
and its subsidiaries considered as a whole, or any change in the
capital stock, short-term or long-term debt of the Company and
its subsidiaries considered as a whole, except for issuances of
Common Stock pursuant to the Company's 1997 Stock Plan, 1997
Employee Stock Purchase Plan, 1997 Director Option Plan, 1997
Stock Option Plan for French Employees and the 1997 Employee
Stock Purchase Plan for Non-U.S. Employees (collectively, the
"1997 Plans").
(g) The financial statements, together with the related notes and
schedules, set forth in the Prospectus and elsewhere in the
Registration Statement fairly present the financial position and
the results of operations and changes in financial position of
the Company and its consolidated subsidiaries at the respective
dates or for the respective periods therein specified. Such
statements and related notes and schedules have been prepared in
accordance with generally accepted accounting principles applied
on a consistent basis except as may be set forth in the
Prospectus. The summary and selected financial and statistical
data set forth in the Prospectus under the captions "Summary
Consolidated
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<PAGE> 5
Financial Data," "Selected Consolidated Financial Data,"
"Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Results of Operations" and "--
Quarterly Results of Operations" fairly present, on the basis
stated in the Registration Statement, the information set forth
therein as of the respective dates and for the respective
periods specified, and such data have been presented on a basis
consistent with the financial statements so set forth in the
Prospectus and other financial information.
(h) To the Company's knowledge, KPMG Peat Marwick LLP, who have
expressed their opinions on the audited financial statements and
related schedules included in the Registration Statement and the
Prospectus are independent public accountants as required by the
Securities Act and the Rules and Regulations.
(i) The Company and each of its subsidiaries have been duly
organized and are validly existing and in good standing as
corporations under the laws of their respective jurisdictions of
organization, with power and authority (corporate and other) to
own or lease their properties and to conduct their businesses as
described in the Registration Statement and the Prospectus; each
of the Company and its subsidiaries is in possession of and
operating in compliance with all franchises, grants,
authorizations, licenses, permits, easements, consents,
certificates and orders required for the conduct of its
business, all of which are valid and in full force and effect,
except where the failure to possess or comply would not have a
material adverse effect on the Company and its subsidiaries
considered as a whole; and each of the Company and its
subsidiaries is duly qualified to do business and in good
standing as a foreign corporation in all other jurisdictions
where its ownership or leasing of properties or the conduct of
its businesses requires such qualification, except where failure
to so qualify would not have a material adverse effect on the
Company and its subsidiaries considered as a whole. No public
regulatory or governmental consent, approval, authorization,
order, registration, qualification, license or permit contains a
materially burdensome restriction not adequately disclosed in
the Registration Statement and the Prospectus. The Company owns
or controls, directly or indirectly, only the corporations,
associations or other entities named in Schedule C hereto.
(j) The Company's authorized and outstanding capital stock is on the
date hereof, and will be on the Closing Dates, as set forth
under the heading "Capitalization" in the Prospectus; the
outstanding shares of Common Stock of the Company conform to the
description thereof in the Prospectus and have been duly
authorized and validly issued and are fully paid and
nonassessable; and have been issued in compliance with all
federal and state securities laws and were not issued in
violation of or subject to any pre-emptive rights or similar
rights to subscribe for or purchase securities. Except as
disclosed in or contemplated by the Prospectus and the
consolidated financial statements of the Company and related
notes thereto included in the Prospectus, the Company does not
have outstanding any options or warrants to purchase, or any
pre-emptive rights or other rights to subscribe for or to
purchase any securities or obligations convertible into, or any
contracts or commitments to issue or sell, shares of its capital
stock or any such options, rights, convertible securities or
obligations, except for options granted subsequent to the date
of information provided in the Prospectus pursuant to the
Company's employee and stock option plans as disclosed in the
Prospectus. The description of the Company's stock option and
other stock plans or arrangements, and the options or other
rights granted or exercised thereunder, as set forth in the
Prospectus, accurately and fairly presents the information
required to be shown with respect to such plans, arrangements,
options and rights. All outstanding shares of capital
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<PAGE> 6
stock of each subsidiary have been duly authorized and validly
issued, and are fully paid and nonassessable and are owned
directly by the Company or by another wholly owned subsidiary of
the Company free and clear of any liens, encumbrances, equities
or claims.
(k) The Stock to be issued and sold by the Company to the
International Managers hereunder and the U.S Stock to be issued
and sold by the Company to the U.S. Underwriters under the U.S.
Underwriting Agreement has been duly and validly authorized and,
when issued and delivered against payment therefor as provided
herein and therein, will be duly and validly issued, fully paid
and nonassessable and free of any pre-emptive or similar rights
and will conform to the description thereof in the Prospectus,
and the International Managers and the U.S. Underwriters will
receive good title to the Stock and the U.S. Stock,
respectively, free and clear of all liens, security interests,
pledges, charges, claims and encumbrances.
(l) Except as set forth in the Prospectus, there are no legal or
governmental proceedings pending to which the Company or any of
its subsidiaries is a party or of which any property of the
Company or any subsidiary is subject, which, if determined
adversely to the Company or any such subsidiary, could
individually or in the aggregate be reasonably expected to (i)
prevent or adversely affect the transactions contemplated by
this Agreement, (ii) suspend the effectiveness of the
Registration Statement, (iii) prevent or suspend the use of the
Pre-effective Prospectus in any jurisdiction or (iv) result in a
material adverse change in the condition (financial or
otherwise), properties, business, management, net worth or
results of operations of the Company and its subsidiaries
considered as a whole and the Company is not aware of any valid
basis for any such legal or governmental proceeding; and, to the
Company's knowledge, no such proceedings are threatened or
contemplated against the Company or any subsidiary by
governmental authorities or others. Neither the Company nor any
subsidiary is a party nor is subject to the provisions of any
material injunction, judgment, decree or order of any court,
regulatory body or other governmental agency or body. The
description of the Company's litigation under the heading "Legal
Proceedings" in the Prospectus is true and correct and complies
with the Rules and Regulations and no other suit or proceeding
before any court or governmental authority known to the Company
is required to be disclosed in the Prospectus that is not so
disclosed.
(m) The execution, delivery and performance of this Agreement and
the U.S. Underwriting Agreement and the consummation of the
transactions herein and therein contemplated (A) will not result
in any violation of the provisions of the certificate of
incorporation, by-laws or other organizational documents of the
Company or its subsidiaries, or any law, order, rule or
regulation of any court or governmental agency or body having
jurisdiction over the Company or its subsidiaries or any of
their respective properties or assets, and (B) will not conflict
with or result in a breach or violation of any of the terms or
provision of or constitute a default under any indenture,
mortgage, deed of trust, loan agreement or other agreement or
instrument to which the Company or any of its subsidiaries is a
party or by which it or any of their respective properties is or
may be bound nor will such delivery and performance result in
the creation of a security interest, lien, encumbrance, charge
or claim, except where such conflict, breach or violation would
not have a material adverse effect on the Company and its
subsidiaries considered as a whole.
(n) No consent, approval, authorization or order of any court or
governmental agency or body is required for the execution,
delivery and performance of this Agreement and the U.S.
Underwriting Agreement by the Company or its subsidiaries and
the consummation of the
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<PAGE> 7
transactions contemplated hereby and thereby (including the
issuance, sale and delivery of the Stock), except such as may be
required by the National Association of Securities Dealers, Inc.
(the "NASD"), the NASDAQ National Market, the Neuer Markt of the
Frankfurt Stock Exchange or under the Securities Act or the
Securities Exchange Act of 1934, as amended (the "Exchange
Act"), or the securities or "Blue Sky" laws of any jurisdiction,
the German Stock Exchange Act, Stock Exchange Regulations,
Admission Regulation of the Neuer Markt and the German Sales
Prospectus Act in connection with the purchase and distribution
of the Stock by the International Managers and the U.S. Stock by
the U.S. Underwriters.
(o) The Company has the full corporate power and authority to enter
into this Agreement and the U.S. Underwriting Agreement and to
perform its obligations hereunder and thereunder (including to
issue, sell and deliver the Stock and the U.S. Stock), and this
Agreement and the U.S. Underwriting Agreement have each been
duly and validly authorized, executed and delivered by the
Company and each constitutes a valid and binding obligation of
the Company, enforceable against the Company in accordance with
their respective terms, except to the extent that rights to
indemnity and contribution hereunder may be limited by U.S. or
foreign federal or state securities laws or the public policy
underlying such laws and except as may be limited by applicable
bankruptcy, insolvency and other similar laws affecting
conditions, rights and rules of law governing specific
performance, injunctive relief and other equitable remedies.
(p) The Company and its subsidiaries are in all material respects in
compliance with, and conduct their respective businesses in
conformity with, all applicable federal, state, local and
foreign laws, rules and regulations or any court or governmental
agency or body; and to the knowledge of the Company, otherwise
than as set forth in the Registration Statement and the
Prospectus, no prospective change in any of such federal or
state laws, rules or regulations has been adopted which, when
made effective, could reasonably be expected to have a material
adverse effect on the operations of the Company and its
subsidiaries considered as a whole.
(q) The Company and its subsidiaries have filed all necessary
federal, state, local and foreign income, payroll, franchise and
other tax returns and have paid all taxes shown as due thereon
or with respect to any of their properties, and there is no tax
deficiency that has been or to the knowledge of the Company is
reasonably likely to be, asserted against the Company or any of
its subsidiaries or any of their respective properties or assets
that would materially and adversely affect the financial
position, business or operations of the Company and its
subsidiaries considered as a whole.
(r) No person or entity has the right to require registration of
shares of Common Stock or other securities of the Company
because of the filing or effectiveness of the Registration
Statement or otherwise, except for persons and entities who have
expressly waived such right or who have been given proper notice
and have failed to exercise such right within the time or times
required under the terms and conditions of such right.
(s) Neither the Company nor any of its officers, directors or
affiliates has taken or will take, directly or indirectly, any
action designed or intended to stabilize or manipulate the price
of the Common Stock in violation of Regulation M of the Exchange
Act, or which caused or resulted in, or which might in the
future reasonably be expected to cause or result in,
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<PAGE> 8
stabilization or manipulation of the price of the Common Stock
in violation of Regulation M of the Exchange Act.
(t) Each of the Company and its subsidiaries owns, or possesses
adequate and enforceable rights, either as owner or licensee, to
use all patents, trademarks (including "SwapBox(TM),"
"SwapSmart(TM)," "SwapAcces(TM)," "SmartOS(TM)," "Smart
Transporter(TM)" and CIMax(TM)" ), trademark registrations,
service marks, service mark registrations, trade names,
copyrights, licenses, inventions, trade secrets, know-how and
other similar rights described in the Prospectus as being owned
or licensed by them and except as described in the Prospectus
the Company is not aware of any claim to the contrary or any
challenge by any other person to the rights of the Company and
its subsidiaries with respect to the foregoing. To the knowledge
of the Company, the Company's business as now conducted and as
proposed to be conducted does not and will not infringe or
conflict with in any material respect any patents, trademarks,
service marks, trade name, copyright, trade secrets, know- how,
licenses or other intellectual property or franchise right of
any person. Except as described in the Prospectus, no claim has
been made against the Company alleging the infringement by the
Company of any patent, trademark, service mark, trade name,
copyright, trade secret, know-how, license in or other
intellectual property right or franchise right of any person.
(u) The Company is not involved in any labor dispute nor, to the
knowledge of the Company, is any such dispute threatened. Except
as described in the Prospectus, the Company is not aware that
(A) any executive, key employee or significant group of
employees of the Company or any subsidiary plans to terminate
employment with the Company or any such subsidiary or (B) any
such executive or key employee is subject to any noncompete,
nondisclosure, confidentiality, employment, consulting or
similar agreement that would be violated by the present or
proposed business activities of the Company and its
subsidiaries. Neither the Company nor any subsidiary has or
expects to have any liability for any prohibited transaction or
funding deficiency or any complete or partial withdrawal
liability with respect to any pension, profit sharing or other
plan which is subject to the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), to which the Company or any
subsidiary makes or ever has made a contribution and in which
any employee of the Company or any subsidiary is or has ever
been a participant. With respect to such plans, the Company and
each subsidiary is in compliance in all material respects with
all applicable provisions of ERISA.
(v) No transaction has occurred, and no relationship, direct or
indirect, exists, between or among the Company or its
subsidiaries, on the one hand, and any of its stockholders,
officers, directors, customers or suppliers of the Company or
its subsidiaries or any affiliate or affiliates of any such
stockholder, officer, director, customer or supplier, on the
other hand, that is required to be described and is not so
described in the Prospectus.
(w) The Company and its subsidiaries have, and the Company and its
subsidiaries as of the Closing Dates will have, good and
marketable title to all personal property owned by them which is
material to the business of the Company or of its subsidiaries,
in each case free and clear of all liens, encumbrances and
defects except such as are described in the Prospectus or such
as would not have a material adverse effect on the Company and
its subsidiaries considered as a whole; and any real property
and buildings held under lease by the Company and its
subsidiaries are, or will be as of each of the Closing Dates,
held by them under valid, subsisting and enforceable leases with
such exceptions as would not have a material adverse
8
<PAGE> 9
effect on the Company and its subsidiaries considered as a
whole, in each case except as described in or contemplated by
the Prospectus.
(x) The Company and its subsidiaries are insured by insurers of
recognized financial responsibility against such losses and
risks and in such amounts as are customary in the businesses in
which they are engaged or propose to engage after giving effect
to the transactions described in the Prospectus; and neither the
Company nor any subsidiary of the Company has any reason to
believe that it will not be able to renew any of its existing
insurance coverages as and when such coverage expires or to
obtain similar coverage from similar insurers as may be
necessary to continue their business at a cost that would not
have a material adverse effect on the Company and its
subsidiaries considered as a whole, except as described in or
contemplated by the Prospectus.
(y) Other than as contemplated by this Agreement and the U.S.
Underwriting Agreement, there is no broker, finder or other
party that is entitled to receive from the Company any brokerage
or finder's fee or other fee or commission as a result of any of
the transactions contemplated by this Agreement or the U.S.
Underwriting Agreement.
(z) The Stock has been duly authorized for (i) quotation on the
National Association of Securities Dealers Automated Quotation
("NASDAQ") National Market System, subject to official Notice of
Issuance, and (ii) listing on the Neuer Markt of the Frankfurt
Stock Exchange.
(aa) The books, records and accounts of the Company and its
subsidiaries accurately and fairly reflect, in all material
respects, the transactions in, and dispositions of, the assets,
and the results of operation, of the Company and its
subsidiaries. The Company and each of its subsidiaries maintains
a system of internal accounting controls sufficient to provide
reasonable assurances that (i) transactions are executed in
accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit
preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability
for assets; (iii) access to assets is permitted only in
accordance with management's general or specific authorization;
and (iv) the recorded accountability for assets is compared with
existing assets at reasonable intervals and appropriate action
is taken with respect to any differences.
(bb) To the Company's knowledge, neither the Company nor any of its
subsidiaries nor any employee or agent of the Company or any of
its subsidiaries has made any payment of funds of the Company or
any of its subsidiaries or received or retained any funds in
violation of any law, rule or regulation, which payment, receipt
or retention of funds is of a character required to be disclosed
in the Prospectus.
(cc) Neither the Company nor any of its subsidiaries is or, after
application of the net proceeds of this offering as described
under the caption "Use of Proceeds" in the Prospectus, will
become an "investment company" or an entity "controlled" by an
"investment company" as such terms are defined in the Investment
Company Act of 1940, as amended.
(dd) Neither the Company nor any of its subsidiaries, nor any
director, officer, agent, employee or other person associated
with or acting on behalf of the Company or any of its
subsidiaries, has used any corporate funds for any unlawful
contribution, gift, entertainment
9
<PAGE> 10
or other unlawful expense relating to political activity; made
any direct or indirect unlawful payment to any foreign or
domestic government official or employee from corporate funds;
or has violated or is in violation of any provision of the
Foreign Corrupt Practices Act of 1977.
(ee) An application for admission of the Stock, including the German
Prospectus and all required exhibits, (i) for listing on the
regulated market ("Geregelter Markt") of the Frankfurt Stock
Exchange ("FSE") to be submitted to the Admissions Committee of
the FSE, and (ii) to the "Neuer Markt" of the FSE to be
submitted to the Executive Board of the Deutsche Borse AG, the
operator of the "Neuer Markt", copies of which have heretofore
been delivered to you (both of which applications hereinafter
referred to as the "Application for Admission") have been
prepared and, as of the date of the Application for Admission,
complied in all material respects with the applicable provisions
of the German Securities Act ("BorsG"), the Regulations on
Admissions to the Stock Exchange ("BorsZulVO"), the Regulations
of the FSE ("BorsO"), and the rules and regulations of the Neuer
Markt segment of the FSE (such provisions, rules and regulations
are hereinafter collectively referred to as the "Applicable
Rules").
(ff) At its date of filing, the Application for Admission, together
with all exhibits, amendments and supplements thereto complied
in all material respects with the Applicable Rules and did not
contain any untrue statement of a material fact or omit to state
any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the
circumstances under which they were made, not misleading and
contained all material statements and information required to be
included therein by the Applicable Rules. Neither the German
Prospectus, nor any amendment or supplement thereto, contained
or will contain any untrue statement of a material fact or omit
to state any material fact required to be stated therein or
necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading.
(gg) There is no document, contract or other agreement of a character
required to be described in the Application for Admission or the
German Prospectus or to be filed as an exhibit to the
Application for Admission which is not described or filed as
required by the Applicable Rules. Each agreement described in
the Application for Admission and the German Prospectus or
listed in the exhibits to the Application for Admission is in
full force and effect and is valid and enforceable by and
against the Company or its subsidiaries in accordance with its
terms, except to the extent that rights to indemnity and
contribution hereunder may be limited by applicable bankruptcy,
insolvency and other similar laws affecting conditions, rights
and rules of law governing specific performance, injunctive
relief and other equitable remedies and except to the extent
that the enforceability of certain indemnification provisions of
certain registration rights agreements entered into by the
Company may be limited by principles of public policy. Neither
the Company nor any subsidiary is in default in the observance
or performance of any material term or obligation to be
performed by it under any such agreement, and no event has
occurred which, with notice or lapse of time or both, would
constitute such a default, in any such case which default or
event would have a material adverse effect on the Company and
its subsidiaries taken as a whole. No default exists, and, to
the knowledge of the Company, no event has occurred which, with
notice or lapse of time or both would constitute a default, in
the due performance and observance of any term, covenant or
condition, by the Company or any of its subsidiaries of any
other agreement or instrument to which the Company or any of its
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<PAGE> 11
subsidiaries is a party or by which any of them or their
respective properties or businesses may be bound or affected, in
any case which default or event could reasonably be expected to
have a material adverse effect on the operations of the Company
and its subsidiaries considered as a whole.
(hh) Subsequent to the respective dates as of which information is
given in the Application for Admission and the German
Prospectus, and except as set forth or contemplated in the
German Prospectus, neither the Company nor any of its
subsidiaries has incurred any material liabilities or
obligations, direct or contingent, nor entered into any
transactions not in the ordinary course of business, and there
has not been any material adverse change in the condition
(financial or otherwise), properties, business, management, net
worth or results of operations of the Company and its
subsidiaries considered as a whole, or any change in the capital
stock, short-term or long-term debt of the Company and its
subsidiaries considered as a whole, except for issuances of
Common Stock pursuant to the 1997 Plans.
(ii) The financial statements, together with the related notes and
schedules, set forth in the German Prospectus and elsewhere in
the Application for Admission fairly present the financial
position and the results of operations and changes in financial
position of the Company and its consolidated subsidiaries at the
respective dates or for the respective periods therein
specified. Such statements and related notes and schedules have
been prepared in accordance with generally accepted accounting
principles in the U.S. applied on a consistent basis except as
may be set forth in the Prospectus. The summary and selected
financial and statistical data set forth in the German
Prospectus under the captions "Summary Consolidated Financial
Data," "Selected Consolidated Financial Data," "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations" and "-- Quarterly Results
of Operations" fairly present, on the basis stated in the
Application for Admission, the information set forth therein as
at the respective dates and for the respective periods
specified, and such data has been presented on a basis
consistent with the financial statements so set forth in the
German Prospectus and other financial information.
(jj) The Company and each of its subsidiaries have been duly
organized and are validly existing and in good standing as
corporations under the laws of their respective jurisdictions of
organization, with power and authority (corporate and other) to
own or lease their properties and to conduct their businesses as
described in the Application for Admission and the German
Prospectus; each of the Company and its subsidiaries is in
possession of and is operating in compliance with all material
franchises, grants, authorizations, licenses, permits,
easements, consents, certificates and orders required for the
conduct of its business, all of which are valid and in full
force and effect; and each of the Company and its subsidiaries
is duly qualified to do business and is in good standing as a
foreign corporation in all other jurisdictions where its
ownership or leasing of properties or the conduct of its
businesses requires such qualification, except where failure to
so qualify would not have a material adverse effect on the
Company and its subsidiaries considered as a whole. The Company
has and each of its subsidiaries have all requisite power and
authority, and all necessary consents, approvals,
authorizations, orders, registrations, qualifications, licenses
and permits of and from all public regulatory or governmental
agencies and bodies to own, lease and operate its properties and
conduct its business as now being conducted and as described in
the Application for Admission and the German Prospectus, and no
such consent, approval, authorization, order, registration,
qualification, license or permit contains
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<PAGE> 12
a materially burdensome restriction not adequately disclosed in
the Application for Admission and the German Prospectus.
(kk) The Company's authorized and outstanding capital stock is on the
date hereof, and will be on the Closing Dates, as set forth
under the heading "Capitalization" in the German Prospectus; the
outstanding shares of Common Stock of the Company conform to the
description thereof in the German Prospectus. Except as
disclosed in and or contemplated by the German Prospectus and
the consolidated financial statements of the Company and related
notes thereto included in the German Prospectus, the Company
does not have outstanding any options or warrants to purchase,
or any preemptive rights or other rights to subscribe for or to
purchase any securities or obligations convertible into, or any
contracts or commitments to issue or sell, shares of its capital
stock or any such options, rights, convertible securities or
obligations, except for options granted subsequent to the date
of information provided in the German Prospectus pursuant to the
Company's 1997 Plans as disclosed in the German Prospectus. The
description of the Company's stock option and other stock plans
or arrangements, and the options or other rights granted or
exercised thereunder, as set forth in the German Prospectus,
accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and
rights.
(ll) The Stock to be issued and sold by the Company to the
International Managers hereunder will conform to the description
thereof in the German Prospectus.
(mm) Except as set forth in the German Prospectus, there are no legal
or governmental proceedings pending to which the Company or any
of its subsidiaries is a party or of which any property of the
Company or any subsidiary is subject, which, if determined
adversely to the Company or any such subsidiary, could
individually or in the aggregate be reasonably expected to (i)
prevent or adversely affect the transactions contemplated by
this Agreement, (ii) suspend the effectiveness of the
Application for Admission, or (iii) result in a material adverse
change in the condition (financial or otherwise), properties,
business, management, net worth or results of operations of the
Company and its subsidiaries considered as a whole and the
Company is not aware of any valid basis for any such legal or
governmental proceeding; and, to the Company's knowledge, no
such proceedings are threatened or contemplated against the
Company or any subsidiary by governmental authorities or others.
Neither the Company nor any subsidiary is a party nor subject to
the provisions of any material injunction, judgment, decree or
order of any court, regulatory body or other governmental agency
or body. The description of the Company's litigation under the
heading "Legal Proceedings" in the German Prospectus is true and
correct and no other suit or proceeding before any court or
governmental authority known to the Company is required to be
disclosed in the Application for Admission or the German
Prospectus that is not so disclosed.
2b. Representations and Warranties and Agreements of the Selling
Stockholders. Each Selling Stockholder represents and warrants to, and
agrees with, the several International Managers that such Selling
Stockholder:
(a) Now has, and on the Closing Date will have, valid and marketable
title to the Stock and the U.S. Stock to be sold by such Selling
Stockholder, free and clear of any lien, claim, security
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<PAGE> 13
interest or other encumbrance, including, without limitation,
any restriction on transfer, and has full right, power and
authority to enter into this Agreement, the Power of Attorney
and the Custody Agreement (each as hereinafter defined).
(b) Now has, and on the Closing Date will have, upon delivery of and
payment for each share of Stock hereunder and U.S. Stock under
the U.S. Underwriting Agreement, full right, power and
authority, and approval required by law to sell, transfer,
assign and deliver the Stock being sold by such Selling
Stockholder hereunder and the U.S. Stock being sold by such
Selling Stockholder under the U.S. Underwriting Agreement, and
each of the several International Managers will acquire valid
and marketable title to all of the Stock being sold to the
International Managers by such Selling Stockholder and each of
the several U.S Underwriters will acquire valid and marketable
title to all of the U.S. Stock being sold to the U.S
Underwriters by such Selling Stockholder, in each case, free and
clear of any liens, encumbrances, equities claims, restrictions
on transfer or other defects whatsoever.
(c) For a period of 90 days after the date of this Agreement,
without the consent of Cowen & Company, such Selling Stockholder
will not offer, sell, assign, transfer, encumber, contract to
sell, grant an option to purchase or otherwise dispose of any
Stock or securities convertible into or exchangeable for Stock,
including, without limitation Stock which may be deemed to be
beneficially owned by such Selling Shareholder in accordance
with the Rules and Regulations, except for the Stock being sold
hereunder and the U.S. Stock being sold under the U.S.
Underwriting Agreement.
(d) Has duly executed and delivered a power of attorney, in
substantially the form heretofore delivered by the Lead Managers
(the "Power of Attorney"), appointing Steven Humphreys and John
Neidermaier and each of them, as attorney-in-fact (the
"Attorneys-in-fact"), with authority to execute and deliver this
Agreement and the U.S. Underwriting Agreement on behalf of such
Selling Stockholder, to authorize the delivery of the shares of
Stock to be sold by such Selling Stockholder hereunder and the
shares of U.S. Stock being sold by such Selling Stockholder
under the U.S. Underwriting Agreement and otherwise to act on
behalf of such Selling Stockholder in connection with the
transactions contemplated by this Agreement and the U.S.
Underwriting Agreement.
(e) Has duly executed and delivered a custody agreement, in
substantially the form heretofore delivered by the Lead Managers
( the "Custody Agreement"), with American Stock Transfer & Trust
Company, as custodian (the "Custodian"), pursuant to which
certificates in negotiable form for the shares of Stock and the
U.S. Stock to be sold by such Selling Stockholder hereunder and
under the U.S. Underwriting Agreement have been placed in
custody for delivery under this Agreement and the U.S.
Underwriting Agreement.
(f) Has, by execution and delivery of each of this Agreement, the
U.S. Underwriting Agreement, the Power of Attorney and the
Custody Agreement, created valid and binding obligations of such
Selling Stockholder, enforceable against such Selling
Stockholder in accordance with its terms, except to the extent
that rights to indemnity and contribution hereunder may be
limited by U.S. or foreign federal laws, state securities laws
or the public policy underlying such laws and except as may be
limited by applicable bankruptcy, insolvency and other similar
laws affecting conditions, rights and rules of law governing
specific performance, injunctive relief and other equitable
remedies and except to the extent
13
<PAGE> 14
that the irrevocability of the Power of Attorney and Custody
Agreement and the enforcement of the arbitration provisions
contained therein may be limited by German law.
(g) The performance of this Agreement, the U.S. Underwriting
Agreement, the Custody Agreement and the Power of Attorney, and
the consummation of the transactions contemplated hereby and
thereby will not result in a breach or violation by such Selling
Stockholder of any of the terms or provisions of, or constitute
a default by such Selling Stockholder under, any material
indenture, mortgage, deed of trust, trust (constructive or
other), loan agreement, lease, franchise, license or other
agreement or instrument to which such Selling Stockholder is a
party or by which such Selling Stockholder or any of its
properties is bound, or any judgement of any court or
governmental agency or body applicable to such Selling
Stockholder or any of its properties, or to such Selling
Stockholder's knowledge, any statute, decree, order, rule or
regulation of any court or governmental agency or body
applicable to such Selling Stockholder or any of its properties,
except to the extent that the irrevocability of the Power of
Attorney and Custody Agreement and the enforcement of certain
arbitration provisions may be limited by German law.
Each Selling Stockholder agrees that the shares of Stock and
U.S. Stock represented by the certificates held in custody under
the Custody Agreement are for the benefit of and coupled with
and subject to the interests of the International Managers, the
U.S. Underwriters, the Selling Stockholders, and the Company
hereunder, and that the arrangement for such custody and the
appointment of the Attorneys-in-fact are irrevocable, except to
the extent that the irrevocability of the Power of Attorney and
Custody Agreement may be limited by German law; that the
obligations of such Selling Stockholder hereunder shall not be
terminated by operation of law, whether by the death or
incapacity of such Selling Stockholder, or any other event, that
if such Selling Stockholder should die or become incapacitated
or any other event occurs, before the delivery of the Stock
hereunder and the U.S. Stock under the U.S. Underwriting
Agreement, certificates for the Stock and the U.S. Stock to be
sold by such Selling Stockholder shall be delivered on behalf of
such Selling Stockholder in accordance with the terms and
conditions of this Agreement, the U.S. Underwriting Agreement
and the Custody Agreement, and action taken by the
Attorneys-in-fact or any of them under the Power of Attorney
shall be as valid as if such death, incapacity, or other event
had not occurred, whether or not the Custodian, the
Attorneys-in-fact or any of them shall have notice of such
death, incapacity or other event.
3 Purchase by, and Sale and Delivery to, International Managers--Closing
Dates. The Company and the Selling Stockholders agree, severally and not
jointly, to sell to the International Managers the Firm Stock with the
number of shares to be sold by the Company and each Selling Stockholder
being the number of shares set forth opposite its or his name in
Schedule B, and on the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms and
conditions herein set forth, the International Managers agree, severally
and not jointly, to purchase the Firm Stock from the Company and the
Selling Stockholders, with the number of shares of Firm Stock to be
purchased by each International Manager being set opposite its name in
Schedule A, subject to adjustment in accordance with Section 12 hereof.
The number of shares of Stock to be purchased by each International
Manager from each Selling Stockholder hereunder shall bear the same
proportion to the total number of shares of Stock to be purchased by
such International Manager hereunder as the number of shares of Stock
being sold by each Selling Stockholder bears
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<PAGE> 15
to the total number of shares of Stock being sold by all Selling
Stockholders, subject to adjustment by the Lead Managers to eliminate
fractions.
The purchase price per share to be paid by the International Managers to
the Company and the Selling Stockholders will be the price per share set
forth in the "Per Share" row of the table on the cover page of the
Prospectus under the heading "Proceeds to Company" and "Proceeds to
Selling Stockholders," respectively (the "Purchase Price").
The Company and the Selling Stockholders will deliver the Firm Stock to
the Lead Managers for the respective accounts of the several
International Managers (in the form of definitive certificates, issued
in such names and in such denominations as Cowen may direct by notice in
writing to the Company and the Selling Stockholders given at or prior to
12:00 Noon, New York Time, on the second full business day preceding the
First Closing Date (as defined below) or, if no such direction is
received, in the names of the respective International Managers or in
such other names as Cowen may designate (solely for the purpose of
administrative convenience) and in such denominations as Cowen may
determine), against payment of the aggregate Purchase Price therefore by
wire transfer in immediately available funds (same day funds), to the
Company and American Stock Transfer & Trust Company, as Custodian for
the Selling Stockholders, all at the offices of Wilson Sonsini Goodrich
& Rosati, 650 Page Mill Road, Palo Alto, California 94304. The time and
date of the delivery and closing shall be at 10:00 A.M., New York Time,
on April __, 1997. The time and date of such payment and delivery are
herein referred to as the "First Closing Date". The First Closing Date
and the location of delivery of, and the form of payment for, the Firm
Stock may be varied by agreement among the Company, Cowen and the
Selling Stockholders. The First Closing Date may be postponed pursuant
to the provisions of Section 12.
The Company and the Selling Stockholders shall make the certificates for
the Stock available to the Lead Managers for examination on behalf of
the International Managers not later than 10:00 A.M., New York time, on
the business day preceding the First Closing Date at the offices of
Cowen & Company, Financial Square, New York, New York 10005.
It is understood that the Lead Managers, individually and not as Lead
Managers of the several International Managers, may (but shall not be
obligated to) make payment to the Company or to the Selling Stockholders
on behalf of any International Manager or International Managers, for
the Stock to be purchased by such International Manager or International
Managers. Any such payment by a Lead Manager shall not relieve such
International Manager or International Managers from any of its or their
other obligations hereunder.
The several International Managers agree to make a public offering of
the Stock at the public offering price set forth on the cover page of
the Prospectus as soon after the effectiveness of the Registration
Statement or the Application for Admission as in their judgment is
advisable. The Lead Managers shall promptly advise the Company and the
Selling Stockholders of the making of the public offering.
For the purpose of covering any over-allotments in connection with the
distribution and sale of the Firm Stock as contemplated by the
Prospectus, the Company hereby grants to the International Managers and
the U.S. Underwriters an option to purchase, severally and not jointly,
up to an aggregate of 450,000 shares of Optional Stock. The price per
share to be paid for the Optional Stock shall be the Purchase Price. The
option granted hereby may be exercised as to all or any part of the
Optional Stock at any time, and from time to time, not more than thirty
(30) days subsequent to the
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<PAGE> 16
effective date of this Agreement. No Optional Stock shall be sold and
delivered unless the Firm Stock previously has been, or simultaneously
is, sold and delivered. The right to purchase the Optional Stock or any
portion thereof may be surrendered and terminated at any time upon
notice by the International Managers and the U.S. Underwriters to the
Company.
The option granted hereby may be exercised by the International Managers
and the U.S. Underwriters by giving written notice from Cowen to the
Company setting forth the number of shares of the Optional Stock to be
purchased by them and the date and time for delivery of and payment for
the Optional Stock. Each date and time for delivery of and payment for
the Optional Stock (which may be the First Closing Date, but not
earlier) is herein called an "Option Closing Date" and shall in no event
be earlier than two (2) business days nor later than ten (10) business
days after written notice is given. (The Option Closing Date and the
First Closing Date are herein called the "Closing Dates".) Optional
Stock shall be purchased for the account of each International Manager
and or U.S. Underwriter, as the case may be, in the same proportion as
the number of shares of Firm Stock set forth opposite such International
Manager's or U.S. Underwriter's name in Schedule A hereto or Schedule A
to the International Underwriting Agreement, as the case may be, bears
to the total number of shares of Firm Stock (subject to adjustment by
the International Managers to eliminate odd lots). Upon exercise of the
option of the International Managers and the U.S. Underwriters, the
Company agrees to sell to the International Managers and the U.S.
Underwriters the number of shares of Optional Stock set forth in the
written notice of exercise and the International Managers and the U.S.
Underwriters agree, severally and not jointly and subject to the terms
and conditions herein set forth, to purchase the number of such shares
determined as aforesaid.
The Company will deliver the Optional Stock to the International
Managers and the U.S. Underwriters (in the form of definitive
certificates, issued in such names and in such denominations as Cowen
may direct by notice in writing to the Company given at or prior to
12:00 Noon, New York Time, on the second full business day preceding the
Option Closing Date or, if no such direction is received, in the names
of the respective U.S. Underwriters and International Managers or in
such other names as Cowen may designate (solely for the purpose of
administrative convenience) and in such denominations as Cowen may
determine), against payment of the aggregate Purchase Price therefor by
wire transfer in immediately available funds (same day funds), to the
Company, all at the offices of Wilson Sonsini Goodrich & Rosati, 650
Page Mill Road, Palo Alto, California 94304. The Company shall make the
certificates for the Optional Stock available to the U.S. Underwriters
and the International Managers for examination not later than 10:00
A.M., New York Time, on the business day preceding the Option Closing
Date at the offices of Cowen & Company, Financial Square, New York, New
York 10005. The Option Closing Date and the location of delivery of, and
the form of payment for, the Option Stock may be varied by agreement
between the Company and Cowen. The Option Closing Date may be postponed
pursuant to the provisions of Section 12.
4 Covenants and Agreements of the Company. The Company covenants and
agrees with the several International Managers that:
(a) The Company will (i) if the Company and the Lead Managers have
determined not to proceed pursuant to Rule 430A of the Rules and
Regulations, use its best
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<PAGE> 17
efforts to cause the Registration Statement to become effective,
(ii) if the Company and the Lead Managers have determined to
proceed pursuant to Rule 430A of the Rules and Regulations, use
its best efforts to comply with the provisions of and make all
requisite filings with the Commission pursuant to Rule 430A and
Rule 424 of the Rules and Regulations and (iii) if the Company
and the Lead Managers have determined to deliver Prospectuses
pursuant to Rule 434 of the Rules and Regulations, to use its
best efforts to comply with all the applicable provisions
thereof. The Company will advise the Lead Managers promptly as
to the time at which the Registration Statement becomes
effective, will advise the Lead Managers promptly of the
issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or of the
institution of any proceedings for that purpose, and will use
its best efforts to prevent the issuance of any such stop order
and to obtain as soon as possible the lifting thereof, if
issued. The Company will advise the Lead Managers promptly of
the receipt of any comments of the Commission or any request by
the Commission for any amendment of or supplement to the
Registration Statement or the Prospectus or for additional
information and will not at any time file any amendment to the
Registration Statement or supplement to the Prospectus which
shall not previously have been submitted to the Lead Managers a
reasonable time prior to the proposed filing thereof or, unless
such filing is required by applicable law, to which the Lead
Managers shall reasonably object in writing or which is not in
compliance with the Securities Act and the Rules and
Regulations.
(b) The Company will prepare and file with the Commission, promptly
upon the request of the Lead Managers, any amendments or
supplements to the Registration Statement or the Prospectus
which in the reasonable opinion of the Lead Managers may be
necessary to enable the several International Managers to
continue the distribution of the Stock and the several U.S.
Underwriters to continue the distribution of the U.S. Stock and
will use its best efforts to cause the same to become effective
as promptly as possible.
(c) If, at any time after the effective date of the Registration
Statement when a prospectus relating to the Stock is required to
be delivered under the Securities Act, any event relating to or
affecting the Company or any of its subsidiaries occurs as a
result of which the Prospectus or any other prospectus as then
in effect would contain any untrue statement of a material fact,
or omit to state any material fact necessary to make the
statements therein, in light of the circumstances under which
they were made, not misleading, or if it is necessary at any
time to amend the Prospectus to comply with the Securities Act,
the Company will promptly notify the Lead Managers thereof and
will prepare an amended or supplemented prospectus which will
correct such statement or omission; and in case any
International Manager is required to deliver a prospectus
relating to the Stock nine (9) months or more after the
effective date of the Registration Statement, the Company upon
the request of the Lead Managers and at the expense of such
International Manager will prepare promptly such prospectus or
prospectuses as may be necessary to permit compliance with the
requirements of Section 10(a)(3) of the Securities Act.
(d) The Company will deliver to each of the Lead Managers, at or
before the Closing Dates, one signed copy of the Registration
Statement, as originally filed with the Commission, and one
signed copy of all amendments thereto including all financial
statements and exhibits thereto and will deliver to the Lead
Managers (i) such number of unsigned copies of the Registration
Statement, including such financial statements but without
exhibits, and all amendments thereto, and (ii) such number of
copies of the Application for Admission and the German
Prospectus, as the Lead Managers may reasonably request. The
Company will deliver or mail to or upon the order the Lead
Managers, from time to time until the effective
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<PAGE> 18
date of the Registration Statement, as many copies of the
Pre-effective Prospectus as the Lead Managers may reasonably
request. The Company will deliver or mail to or upon the order
of the Lead Managers on the date of the public offering, and
thereafter from time to time during the period when delivery of
a prospectus relating to the Stock is required under the
Securities Act, as many copies of the Prospectus, in final form
or as thereafter amended or supplemented as the Lead Managers
may reasonably request; provided, however, that the expense of
the preparation and delivery of any prospectus required for use
nine (9) months or more after the effective date of the
Registration Statement shall be borne by the International
Managers required to deliver such prospectus.
(e) The Company will use its best efforts to cause, and provide all
information, documentation, and other materials (whether
contained or to be provided in the German Prospectus or
otherwise) to the FSE and the Lead Managers as may be required
or appropriate for, the Application for Admission to become and
remain effective.
(f) The Company will make generally available to its stockholders as
soon as practicable, but not later than fifteen (15) months
after the effective date of the Registration Statement, an
earnings statement which will be in reasonable detail (but which
need not be audited) and which will comply with Section 11(a) of
the Securities Act, covering a period of at least twelve (12)
months beginning after the "effective date" (as defined in Rule
158 under the Securities Act) of the Registration Statement.
(g) The Company will cooperate with the Lead Managers to enable the
Stock to be registered or qualified for offering and sale by the
International Managers and by dealers under the securities laws
of such jurisdictions as the Lead Managers may designate and at
the request of the Lead Managers will make such applications and
furnish such consents to service of process or other documents
as may be required of it as the issuer of the Stock for that
purpose; provided, however, that the Company shall not be
required to qualify to do business or to file a general consent
(other than that arising out of the offering or sale of the
Stock) to service of process in any such jurisdiction where it
is not now so subject. The Company will, from time to time,
prepare and file such statements and reports as are or may be
required of it as the issuer of the Stock to continue such
qualifications in effect for so long a period as the Lead
Managers may reasonably request for the distribution of the
Stock. The Company will advise the Lead Managers promptly after
the Company becomes aware of the suspension of the
qualifications or registration of (or any such exception
relating to) the Common Stock of the Company for offering, sale
or trading in any jurisdiction or of any initiation or threat of
any proceeding for any such purpose, and in the event of the
issuance of any orders suspending such qualifications,
registration or exception, the Company will, with the
cooperation of the Lead Managers use its best efforts to obtain
the withdrawal thereof.
(h) The Company will furnish to its stockholders annual reports
containing financial statements certified by independent public
accountants.
(i) The Company will maintain a transfer agent and registrar for its
Common Stock.
(j) The Company will not offer, sell, assign, transfer, encumber,
contract to sell, register for sale, grant an option to purchase
or otherwise dispose of, other than by operation of law, gifts,
pledges or dispositions by estate representatives, any shares of
Common Stock or
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<PAGE> 19
securities convertible into or exercisable or exchangeable for
Common Stock (including, without limitation, Common Stock of the
Company which may be deemed to be beneficially owned by the
Company in accordance with the Rules and Regulations) during the
90 days following the date of this Agreement, other than (i) the
Company's sale of Common Stock hereunder, (ii) issuances of
Common Stock, stock options, stock purchase rights or other
similar rights issued pursuant to the 1997 Plans as described in
the Prospectus, and (iii) any Common Stock or preferred stock
issued by the Company in any transaction of the type described
in Rule 145 under the Securities Act or otherwise issued by the
Company in exchange for technology or other non-cash assets of
any third party.
(k) The Company will apply the net proceeds from the sale of the
Stock as set forth in the description under "Use of Proceeds" in
the Prospectus.
(l) The Company will supply the Lead Managers with copies of all
correspondence to and from, and all documents issued to and by,
the Commission in connection with the registration of the Stock
under the Securities Act and the respective German authorities
in connection with the listing on the Neuer Markt of the
Frankfurt Stock Exchange in connection with the offer and sale
of the Stock pursuant to this Agreement.
(m) Prior to the First Closing Date the Company will furnish to the
Lead Managers, as soon as they have been prepared, copies of any
unaudited interim consolidated financial statements of the
Company and its subsidiaries for any periods subsequent to the
periods covered by the financial statements appearing in the
Registration Statement and the Prospectus.
(n) Prior to the Closing Dates the Company will issue no press
release or other public communications directly or indirectly
and hold no press conference with respect to the Company (other
than customary product related sales and marketing
communications) or any of its subsidiaries, the financial
condition, results of operations, business, prospects, assets or
liabilities of the Company or any of its subsidiaries, or the
offering of the Stock, without Cowen's prior written consent,
which shall not be unreasonably withheld.
(o) During the period of five (5) years hereafter, the Company will
furnish to the Lead Managers, and upon request of the Lead
Managers, to each of the International Managers: (i) as soon as
practicable after the end of each fiscal year, copies of the
Annual Report of the Company containing the balance sheet of the
Company as of the close of such fiscal year and statements of
income, stockholders' equity and cash flows for the year then
ended and the opinion thereon of the Company's independent
public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form
10-K, Quarterly Report on Form 10-Q, Report on Form 8-K or other
report filed by the Company on a non-confidential basis with the
Commission, or the NASD or any securities exchange; (iii) as
soon as available, copies of any report or communication of the
Company mailed generally to holders of its Common Stock; and
(iv) from time to time such other information concerning the
Company as you may reasonably request.
(p) The Company will comply with the German Code for Mergers and
Acquisitions ("Ubernahmekodex") as long as such compliance is
required.
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<PAGE> 20
(q) The Company will maintain a Securities Caretaker ("Betreuer") as
long as shares of its Common Stock are listed at the Neuer Markt
of the FSE and maintenance of a Betreuer is required.
(r) The Selling Stockholders will comply with the holding
requirements for their Stock established by the FSE for
securities listed at the Neuer Markt.
5 Payment of Expenses.
(a) The Company will pay (directly or by reimbursement) all costs,
fees and expenses incurred in connection with the performance of
the obligations of the Company and of the Selling Stockholders
under this Agreement and the U.S. Underwriting Agreement and in
connection with the transactions contemplated hereby, including
but not limited to (i) all expenses and taxes incident to the
issuance and delivery of the Stock to the Lead Managers; (ii)
all expenses incident to the registration of the Stock and the
U.S. Stock under the Securities Act; (iii) the costs of
preparing stock certificates (including printing and engraving
costs); (iv) all fees and expenses of the registrar and transfer
agent of the Stock and the U.S. Stock; (v) all necessary issue,
transfer and other taxes in connection with the issuance and
sale of the Stock to the International Managers or the execution
of this Agreement; (vi) fees and expenses of the Company's
counsel and the Company's independent accountants; (vii) all
costs and expenses incurred in connection with the preparation,
printing, filing, shipping and distribution of the Registration
Statement, each Pre-effective Prospectus and the Prospectus
(including all exhibits and financial statements) and all
amendments and supplements provided for herein, (viii) all costs
and expenses incurred in connection with the shipping and
distribution of the Selling Stockholders' Power of Attorney, the
Custody Agreement, the "Agreement Among U.S. Underwriters and
International Managers" between the Lead Managers and the
Representatives, the "Agreement Among U.S. Underwriters" between
the Representatives and the U.S. Underwriters, the Master
Selected Dealers' Agreement, the U.S. Underwriters'
Questionnaire and the Blue Sky memoranda (including with respect
to such Blue Sky memoranda related fees and expenses of counsel
to the Underwriters) and this Agreement; (ix) all filing fees,
attorneys' fees and expenses incurred by the Company or the U.S.
Underwriters in connection with exemptions from the qualifying
or registering (or obtaining qualification or registration of)
all or any part of the Stock for offer and sale and
determination of its eligibility for investment under the Blue
Sky or other securities laws of such jurisdictions as the
Representatives may designate; (x) all fees and expenses paid or
incurred in connection with filings made with the NASD and the
listing of the Stock on the Neuer Markt of the FSE; and (xi) all
other costs and expenses incurred by the Company and the Selling
Stockholders incident to the performance of their obligations
hereunder which are not otherwise specifically provided for in
this Section.
(b) In addition to their other obligations under Section 6(a)
hereof, the Company and the Selling Stockholders agree that, as
an interim measure during the pendency of any claim, action,
investigation, inquiry or other proceeding arising out of or
based upon (i) any statement or omission or any alleged
statement or omission by the Company or the Selling Stockholders
or (ii) any breach or inaccuracy in their representations and
warranties contained in this Agreement, they will reimburse each
International Manager on a quarterly basis for all reasonable
legal or other expenses incurred in connection with
investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the
absence of a judicial determination as to the propriety and
enforceability of the Company's
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<PAGE> 21
and each Selling Stockholder's obligation to reimburse each
International Manager for such expenses and the possibility that
such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper,
each International Manager shall promptly return it to the
Company or such Selling Stockholder, as the case may be,
together with interest, compounded daily, determined on the
basis of the prime rate (or other commercial lending rate for
borrowers of the highest credit standing) announced from time to
time by Citibank, N.A., New York, New York (the "Prime Rate").
Any such interim reimbursement payments which are not made to an
International Manager in a timely manner as provided below shall
bear interest at the Prime Rate from the due date for such
reimbursement. This expense reimbursement agreement will be in
addition to any other liability which the Company or any Selling
Stockholder may otherwise have. The request for reimbursement
will be sent to the Company with a copy to each Selling
Stockholder.
(c) In addition to its other obligations under Section 6(b) hereof,
each International Manager severally agrees that, as an interim
measure during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any
statement or omission, or any alleged statement or omission,
described in Section 6(b) hereof which relates to information
furnished to the Company pursuant to Section 6(c) hereof, it
will reimburse the Company (and, to the extent applicable, each
officer, director, controlling person or Selling Stockholder) on
a quarterly basis for all reasonable legal or other expenses
incurred in connection with investigating or defending any such
claim, action, investigation, inquiry or other proceeding,
notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the International Managers'
obligation to reimburse the Company (and, to the extent
applicable, each officer, director, controlling person or
Selling Stockholder) for such expenses and the possibility that
such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any such
interim reimbursement payment is so held to have been improper,
the Company (and, to the extent applicable, each officer,
director, controlling person or Selling Stockholder) shall
promptly return it to the International Managers together with
interest, compounded daily, determined on the basis of the Prime
Rate. Any such interim reimbursement payments which are not made
to the Company within thirty (30) days of a request for
reimbursement shall bear interest at the Prime Rate from the
date of such request. This indemnity agreement will be in
addition to any liability which such International Manager may
otherwise have.
(d) It is agreed that any controversy arising out of the operation
of the interim reimbursement arrangements set forth in paragraph
(b) and/or (c) of this Section 5, including the amounts of any
requested reimbursement payments and the method of determining
such amounts, shall be settled by arbitration conducted under
the provisions of the Constitution and Rules of the Board of
Governors of the New York Stock Exchange, Inc. or pursuant to
the Code of Arbitration Procedure of the NASD. Any such
arbitration must be commenced by service of a written demand for
arbitration or written notice of intention to arbitrate, therein
electing the arbitration tribunal. In the event the party
demanding arbitration does not make such designation of an
arbitration tribunal in such demand or notice, then the party
responding to said demand or notice is authorized to do so. Such
an arbitration would be limited to the operation of the interim
reimbursement provisions contained in paragraph (b) and/or (c)
of this Section 5 and would not resolve the ultimate propriety
or enforceability of the obligation to reimburse expenses which
is created by the provisions of Section 6.
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<PAGE> 22
6 Indemnification and Contribution.
(a) The Company and SCM Microsystems GmbH jointly and severally
agree to indemnify and hold harmless each International Manager
and each person, if any, who controls such International Manager
within the meaning of the Securities Act and the respective
officers, directors, partners, employees, representatives and
agents of each of such International Manager (collectively, the
"Manager Indemnified Parties" and, each, a "Manager Indemnified
Party"), against any losses, claims, damages, liabilities or
expenses (including the reasonable cost of investigating and
defending against any claims therefor and counsel fees incurred
in connection therewith), joint or several, which may be based
upon the Securities Act, or any Federal, state or foreign
statute, regulation or at common law, (i) on the ground or
alleged ground that any Pre-effective Prospectus, the
Registration Statement, the Application for Admission, the
Prospectus or the German Prospectus (or any Pre-effective
Prospectus, the Registration Statement, the Application for
Admission, the Prospectus or the German Prospectus as from time
to time amended or supplemented) includes or allegedly includes
an untrue statement of a material fact or omits to state a
material fact required to be stated therein or necessary in
order to make the statements therein, in light of the
circumstances under which they were made, not misleading, unless
such statement or omission was made in reliance upon, and in
conformity with, written information furnished to the Company by
any International Manager, directly or through the Lead
Managers, specifically for use in the preparation thereof and
provided that the foregoing indemnity agreement with respect to
any Pre-effective Prospectus shall not inure to the benefit of
any International Manager from whom the person asserting any
such losses, claims, damages or liabilities purchased Stock, or
any person controlling such International Manager, if a copy of
the Prospectus (as then amended or supplemented if the Company
shall have furnished any amendments or supplements thereto) was
not sent or given by or on behalf of such International Manager
to such person, if required by law so to have been delivered, at
or prior to the written confirmation of the sale of the Stock to
such person, and the Prospectus (as so amended or supplemented)
would have cured the defect giving rise to such losses, claims,
damages or liabilities, unless such failure to deliver the
Prospectus (as so amended or supplemented) resulted from the
Company's failure to perform its obligations pursuant to Section
4(c) above or (ii) for any act or failure to act or any alleged
act or failure to act by any International Manager in connection
with, or relating in any manner to, the Stock or the offering
contemplated hereby, and which is included as part of or
referred to in any loss, claim, damage, liability or expense
arising out of or based upon matters covered by clause (i) above
(provided that the Company shall not be liable under this clause
(ii) to the extent that it is determined in a final judgment by
a court of competent jurisdiction that such loss, claim, damage,
or liability or expense resulted directly from any such acts or
failures to act undertaken or omitted to be taken by such
International Manager through its gross negligence or willful
misconduct). The Company will be entitled to participate at its
own expense in the defense or, if it so elects, to assume the
defense of any suit brought to enforce any such liability, but
if the Company elects to assume the defense, such defense shall
be conducted by counsel chosen by it and reasonably acceptable
to the International Managers. In the event the Company elects
to assume the defense of any such suit and retain such counsel,
any Manager Indemnified Parties, defendant or defendants in the
suit, may retain additional counsel but shall bear the fees and
expenses of such counsel unless (i) the Company shall have
specifically authorized the retaining of such counsel or (ii)
the parties to such suit include both any such Manager
Indemnified Party and the Company, and such Manager Indemnified
Parties have been advised by counsel to the International
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<PAGE> 23
Managers that one or more legal defenses may be available to it
or them which may not be available to the Company, in which case
the Company shall not be entitled to assume the defense of such
suit without the written consent of the Manager Indemnified
Parties party to such suit notwithstanding its obligation to
bear the fees and expenses of such counsel. In circumstances
where the Company does not assume the defense of a suit for
which indemnification is sought by one or more Manager
Indemnified Parties, the Company will be obligated to bear the
fees and expenses of only one firm on behalf of all Manager
Indemnified Parties (plus local counsel, if, in the judgment of
the primary counsel to the Manager Indemnified Parties use of
such local counsel is necessary). This indemnity agreement is
not exclusive and will be in addition to any liability which the
Company might otherwise have and shall not limit any rights or
remedies which may otherwise be available at law or in equity to
each Manager Indemnified Party.
(b) Each Selling Stockholder severally and not jointly agrees to
indemnify and hold harmless each Manager Indemnified Party
against any losses, claims, damages, liabilities or expenses
(including, unless such Selling Stockholder elects to assume the
defense, the reasonable cost of investigating and defending
against any claims therefor and counsel fees incurred in
connection therewith), joint or several, which may be based upon
the Securities Act, or any Federal, state or foreign statute,
regulation or at common law, on the ground or alleged ground
that any Pre-Effective Prospectus, the Registration Statement,
the Application for Admission, the Prospectus or the German
Prospectus (or any Pre-Effective Prospectus, the Registration
Statement, the Application for Admission, the Prospectus or the
German Prospectus, as from time to time amended and
supplemented) includes an untrue statement of a material fact or
omits to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading,
unless such statement or omission was made in reliance upon, and
in conformity with, written information furnished to the Company
by any International Manager, directly or through the Lead
Managers specifically for use in the preparation thereof;
provided however that with respect to any untrue statement or
omission or alleged untrue statement or omission made in any
Pre-Effective Prospectus, the indemnity agreement contained in
this subsection (b) shall not inure to the benefit of any
Manager Indemnified Party from whom the person asserting any
such losses, claims, damages or liabilities purchased the shares
of Stock concerned to the extent that any such loss, claim,
damage or liability of such Manager Indemnified Party results
from the fact that a copy of the Prospectus was not sent or
given to such person at or prior to the written confirmation of
the sale of such shares of Stock, as required by the Securities
Act, and if the untrue statement or omission concerned has been
corrected in the Prospectus. Such Selling Stockholder shall be
entitled to participate at his own expense in the defense, or,
if he so elects, to assume the defense of any suit brought to
enforce any such liability, but, if such Selling Stockholder
elects to assume the defense, such defense shall be conducted by
counsel chosen by him. In the event that any Selling Stockholder
elects to assume the defense of any such suit and retain such
counsel, the Manager Indemnified Parties, defendant or
defendants in the suit, may retain additional counsel but shall
bear the fees and expenses of such counsel unless (i) such
Selling Stockholder shall have specifically authorized the
retaining of such counsel or (ii) the parties to such suit
include both such Manager Indemnified Parties and such Selling
Stockholder and such Manager Indemnified Parties have been
advised by counsel that one or more legal defenses may be
available to it or them which may not be available to such
Selling Stockholder, in which case such Selling Stockholder
shall not be entitled to assume the defense of such suit
notwithstanding
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<PAGE> 24
its obligation to bear the fees and expenses of such counsel.
This indemnity agreement is not exclusive and will be in
addition to any liability which such Selling Stockholder might
otherwise have and shall not limit any rights or remedies which
may otherwise be available at law or in equity to each Manager
Indemnified Party. The Company and the Selling Stockholders may
agree, as among themselves and without limiting the rights of
the International Managers under this Agreement, as to their
respective amounts of such liability for which they each shall
be responsible.
Notwithstanding any other provision of this Agreement or the
U.S. Underwriting Agreement, the liability of each Selling
Stockholder to the International Managers and U.S. Underwriters
under this Agreement, the U.S. Underwriting Agreement or
otherwise shall be limited to an amount equal to the proceeds
paid to such Selling Stockholder in the initial public offering.
(c) Each International Manager severally and not jointly agrees to
indemnify and hold harmless the Company, each of its directors,
each of its officers who have signed the Registration Statement
and each person, if any, who controls the Company within the
meaning of the Securities Act (collectively, the "Company
Indemnified Parties") and each Selling Stockholder (the "Selling
Stockholder Indemnified Parties") against any losses, claims,
damages, liabilities or expenses (including, unless the
International Manager or International Managers elect to assume
the defense, the reasonable cost of investigating and defending
against any claims therefor and counsel fees incurred in
connection therewith), joint or several, which arise out of or
are based in whole or in part upon the Securities Act, the
Exchange Act or any other federal, state, local or foreign
statute or regulation, or at common law, on the ground or
alleged ground that any Pre-effective Prospectus, the
Registration Statement, the Application for Admission, the
Prospectus or the German Prospectus (or any Pre-effective
Prospectus, the Registration Statement, the Application for
Admission, the Prospectus or the German Prospectus, as from time
to time amended and supplemented) includes an untrue statement
of a material fact or omits to state a material fact required to
be stated therein or necessary in order to make the statements
therein, in light of the circumstances in which they were made,
not misleading, but only insofar as any such statement or
omission was made in reliance upon, and in conformity with,
written information furnished to the Company by such
International Manager, directly or through the Lead Managers,
specifically for use in the preparation thereof. Such
International Manager shall be entitled to participate at its
own expense in the defense, or, if it so elects, to assume the
defense of any suit brought to enforce any such liability, but,
if such International Manager elects to assume the defense, such
defense shall be conducted by counsel chosen by it. In the event
that any International Manager elects to assume the defense of
any such suit and retain such counsel, the Company Indemnified
Parties or Selling Stockholders Indemnified Parties and any
other International Manager or International Managers or
controlling person or persons, defendant or defendants in the
suit, shall bear the fees and expenses of any additional counsel
retained by them, respectively. The International Manager
against whom indemnity may be sought shall not be liable to
indemnify any person for any settlement of any such claim
effected without such International Manager's consent. This
indemnity agreement is not exclusive and will be in addition to
any liability which such International Manager might otherwise
have and shall not limit any rights or remedies which may
otherwise be available at law or in equity to any Company
Indemnified Party or Selling Stockholder Indemnified Party.
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<PAGE> 25
(d) If the indemnification provided for in this Section 6 is
unavailable or insufficient to hold harmless an indemnified
party under subsection (a), (b) or (c) above in respect of any
losses, claims, damages, liabilities or expenses (or actions in
respect thereof) referred to herein, then each indemnifying
party shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) in such
proportion as is appropriate to reflect the relative benefits
received by the Company and the Selling Stockholders on the one
hand and the International Managers on the other from the
offering of the Stock. If, however, the allocation provided by
the immediately preceding sentence is not permitted by
applicable law, then each indemnifying party shall contribute to
such amount paid or payable by such indemnified party in such
proportion as is appropriate to reflect not only such relative
benefits but also the relative fault of the Company and the
Selling Stockholders on the one hand and the International
Managers on the other in connection with the statements or
omissions which resulted in such losses, claims, damages,
liabilities or expenses (or actions in respect thereof), as well
as any other relevant equitable considerations. The relative
benefits received by the Company and the Selling Stockholders on
the one hand and the International Managers on the other shall
be deemed to be in the same proportion as the total net proceeds
from the offering (before deducting expenses) received by the
Company and the Selling Stockholders bear to the total
underwriting discounts and commissions received by the
International Managers, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault shall be
determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to
information supplied by the Company, the Selling Stockholders or
the International Managers and the parties' relative intent,
knowledge, access to information and opportunity to correct or
prevent such statement or omission. The Company, the Selling
Stockholders and the International Managers agree that it would
not be just and equitable if contribution were determined by pro
rata allocation (even if the International Managers were treated
as one entity for such purpose) or by any other method of
allocation which does not take account of the equitable
considerations referred to above. The amount paid or payable by
an indemnified party as a result of the losses, claims, damages,
liabilities or expenses (or actions in respect thereof) referred
to above shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with
investigating, defending, settling or compromising any such
claim. Notwithstanding the provisions of this subsection (d), no
International Manager shall be required to contribute any amount
in excess of the amount by which the total price at which the
shares of the Stock underwritten by it and distributed to the
public were offered to the public exceeds the amount of any
damages which such International Manager has otherwise been
required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. The International
Managers' obligations to contribute are several in proportion to
their respective underwriting obligations and not joint. No
person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act or the equivalent
legal provision under German law) shall be entitled to
contribution from any person who was not guilty of such
fraudulent misrepresentation.
(e) Promptly after receipt by an indemnified party under subsection
(a), (b) or (c) above of notice of the commencement of any
action, such indemnified party shall, if a claim in respect
thereof is to be made against the indemnifying party under such
subsection, notify the indemnifying party in writing of the
commencement thereof; but the omission to so notify the
indemnifying party shall not relieve the indemnifying party from
any liability that
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<PAGE> 26
it may have to any indemnified party except to the extent that
any such delay results in the loss of the ability to assert any
affirmative or negative defense the loss of which is materially
prejudicial to the disposition of this matter.
7 Survival of Indemnities, Representations, Warranties, etc. The
respective indemnities, covenants, agreements, representations,
warranties and other statements of the Company and its subsidiaries, the
Selling Stockholders and the several International Managers, as set
forth in this Agreement or made by them respectively, pursuant to this
Agreement, shall remain in full force and effect, regardless of any
investigation made by or on behalf of any International Manager, the
Selling Stockholders, the Company or any of its officers or directors or
any controlling person, and shall survive delivery of and payment for
the Stock until all applicable statutes of limitation have expired.
8 Conditions of International Managers Obligations. The respective
obligations of the several International Managers hereunder shall be
subject to the accuracy, at and (except as otherwise stated herein) as
of the date hereof and at and as of each of the Closing Dates, of the
representations and warranties made herein by the Company and the
Selling Stockholders to compliance at and as of each of the Closing
Dates by the Company and the Selling Stockholders with their covenants
and agreements herein contained and other provisions hereof to be
satisfied at or prior to each of the Closing Dates, and to the following
additional conditions:
(a) The Registration Statement and the Application for Admission
shall have become effective and no stop order suspending the
effectiveness thereof shall have been issued and no proceedings
for that purpose shall have been initiated or, to the knowledge
of the Company or the Lead Managers, shall be threatened by the
Commission, and any request for additional information on the
part of the Commission (to be included in the Registration
Statement or the Prospectus or otherwise) shall have been
complied with to the reasonable satisfaction of the Lead
Managers. Any filings of the Prospectus, or any supplement
thereto, required pursuant to Rule 424(b) or Rule 434 of the
Rules and Regulations, shall have been made in the manner and
within the time period required by Rule 424(b) and Rule 434 of
the Rules and Regulations, as the case may be.
(b) The Lead Managers shall have been satisfied that there shall not
have occurred any change prior to each of the Closing Dates, in
the condition (financial or otherwise), properties, business,
management, net worth or results of operations of the Company
and its subsidiaries considered as a whole, or any change in the
capital stock, short-term or long-term debt of the Company and
its subsidiaries considered as a whole, such that (i) the
Registration Statement or the Prospectus, or any amendment or
supplement thereto, contains an untrue statement of fact which,
in the reasonable opinion of the Lead Managers, is material, or
omits to state a fact which, in the reasonable opinion of the
Lead Managers, is required to be stated therein or is necessary
to make the statements therein not misleading or (ii) it is
impracticable in the reasonable judgment of the Lead Managers to
proceed with the public offering or purchase the Stock as
contemplated hereby.
(c) The Lead Managers shall be satisfied that no legal or
governmental action, suit or proceeding affecting the Company
which is material and adverse to the Company or which affects or
may affect the Company's or the Selling Stockholders' ability to
perform their respective obligations under this Agreement shall
have been instituted or threatened and there shall have occurred
no material adverse development in any existing such action,
suit or proceeding.
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<PAGE> 27
(d) At the time of execution of this Agreement, the Lead Managers
shall have received from KPMG Peat Marwick LLP, independent
certified public accountants, a letter, dated the date hereof,
in form and substance satisfactory to the International Managers
to the effect set forth in Exhibit I hereto.
(e) The Lead Managers shall have received from KPMG Peat Marwick
LLP, independent certified public accountants, letters, dated
each of the Closing Dates, to the effect that such accountants
reaffirm, as of each of the Closing Dates, and as though made on
each of the Closing Dates, the statements made in the letter
furnished by such accountants pursuant to paragraph (d) of this
Section 8.
(f) The Lead Managers shall have received (i) from Wilson Sonsini
Goodrich & Rosati, Professional Corporation, United States
securities counsel for the Company; (ii) from Oppenhoff &
Radler, German counsel for the Company; and (iii) from the Law
Offices of Robert Sabath, Esq., intellectual property counsel to
the Company, an opinion, dated each of the Closing Date, to the
effect set forth in Exhibits II, III and IV hereto,
respectively.
(g) The Lead Managers shall have received from Rogers & Wells,
counsel for the International Managers, their opinion dated each
of the Closing Dates with respect to the incorporation of the
Company, the validity of the Stock, the Registration Statement
and the Prospectus and such other related matters as it may
reasonably request, and the Company shall have furnished to such
counsel such documents as they may request for the purpose of
enabling them to pass upon such matters.
(h) The Lead Managers shall have received from _________________,
counsel for the Selling Stockholders, an opinion dated the
Closing Date, to the effect set forth in Exhibit V.
(i) The Lead Managers shall have received a certificate or
certificates, dated each of the Closing Dates, of the chief
executive officer or the President and the chief financial or
accounting officer of the Company to the effect that:
(i) No stop order suspending the effectiveness of the
Registration Statement has been issued, and, to the
knowledge of the signers, no proceedings for that
purpose have been instituted or are pending or
contemplated under the Securities Act;
(ii) Neither any Pre-effective Prospectus, as of its date,
nor the Registration Statement or the Application for
Admission nor the Prospectus or the German Prospectus,
nor any amendment or supplement thereto, as of the time
when the Registration Statement or the Application for
Admission, as the case may be, became effective and at
all times subsequent thereto up to the delivery of such
certificate, contained any untrue statement of a
material fact or omitted to state any material fact
required to be stated therein or necessary to make the
statements therein, in light of the circumstances under
which they were made, not misleading;
(iii) The representations and warranties of the Company in
this Agreement are true and correct at and as of each of
the Closing Dates, and the Company has complied with all
the agreements and performed or satisfied all the
conditions on its part to be performed or satisfied at
or prior to the Closing Dates; provided, however, that
the
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<PAGE> 28
representation contained in clause (ii) of paragraph
2(a)(z) hereof need not be true as of a Closing Date;
and
(iv) Since the respective dates as of which information is
given in the Registration Statement, the Prospectus and
the German Prospectus, and except as disclosed in or
contemplated by the Prospectus, (i) there has not been
any material adverse change or a development involving a
material adverse change in the condition (financial or
otherwise), properties, business, management, net worth
or results of operations of the Company and its
subsidiaries considered as a whole; (ii) the business
and operations conducted by the Company and its
subsidiaries have not sustained a loss by strike, fire,
flood, accident or other calamity (whether or not
insured) of such a character as to interfere materially
with the conduct of the business and operations of the
Company and its subsidiaries considered as a whole;
(iii) no legal or governmental action, suit or
proceeding is pending or to the knowledge of the signers
threatened against the Company which is material to the
Company, whether or not arising from transactions in the
ordinary course of business, or which may materially and
adversely affect the transactions contemplated by this
Agreement; (iv) since such dates and except as so
disclosed, the Company has not incurred any material
liability or obligation, direct, contingent or indirect,
made any change in its capital stock (except pursuant to
the 1997 Plans), made any material change in its
short-term or funded debt or repurchased or otherwise
acquired any of the Company's capital stock; and (v) the
Company has not declared or paid any dividend, or made
any other distribution, upon its outstanding capital
stock payable to stockholders of record on a date prior
to the Closing Date.
(j) The Selling Stockholders shall have furnished to the Lead
Managers certificates as to the accuracy, at and as of each of
the Closing Dates, of the representations and warranties made
herein by them and as to compliance at and as of each of the
Closing Dates by them with their covenants and agreements herein
contained and other provisions hereof to be satisfied at or
prior to each of the Closing Dates, and as to satisfaction of
the other conditions to the obligations of the International
Managers hereunder.
(k) Cowen & Company shall have received, on behalf of the several
International Managers, the written agreements, substantially in
the form of Exhibit VI hereto, of the officers, directors and
certain holders of Common Stock that each will not offer, sell,
assign, transfer, encumber, contract to sell, register for sale,
grant an option to purchase or otherwise dispose of, other than
by operation of law, gifts, pledges or dispositions by estate
representatives, any shares of Common Stock (including, without
limitation, Common Stock which may be deemed to be beneficially
owned by such officer, director or holder in accordance with the
Rules and Regulations) during the 90 days following the date of
the final Prospectus except as provided therein.
(l) The Closing under the U.S. Underwriting Agreement shall have
occurred concurrently with the Closing hereunder on the Closing
Date.
All opinions, certificates, letters and other documents will be in
compliance with the provisions hereunder only if they are reasonably
satisfactory in form and substance to the Lead Managers. The Company
will furnish to the Lead Managers conformed copies of such opinions,
certificates, letters
28
<PAGE> 29
and other documents as the Lead Managers shall reasonably request. If
any of the conditions hereinabove provided for in this Section shall not
have been satisfied when and as required by this Agreement, this
Agreement may be terminated by the Lead Managers by notifying the
Company of such termination in writing or by telegram at or prior to
each of the Closing Dates, but Cowen, following consultation with West
LB, on behalf of the Lead Managers, shall be entitled to waive any of
such conditions.
9 Effective Date. This Agreement shall become effective immediately as to
Sections 5, 6, 7, 9, 10, 11, 13, 14, 15, 16 and 17 and, as to all other
provisions, at 11:00 a.m. New York City time on the first full business
day following the effectiveness of the Registration Statement or at such
earlier time after the Registration Statement becomes effective as the
Lead Managers may determine on and by notice to the Company or by
release of any of the Stock for sale to the public. For the purposes of
this Section 9, the Stock shall be deemed to have been so released upon
the release for publication of any newspaper advertisement relating to
the Stock or upon the release by you of notices (i) advising
International Managers that the shares of Stock are released for public
offering or (ii) offering the Stock for sale to securities dealers,
whichever may occur first.
10 Termination. This Agreement (except for the provisions of Section 5) may
be terminated by the Company at any time before it becomes effective in
accordance with Section 9 by notice to the Lead Managers and may be
terminated by the Lead Managers at any time before it becomes effective
in accordance with Section 9 by notice to the Company. In the event of
any termination of this Agreement under this or any other provision of
this Agreement, there shall be no liability of any party to this
Agreement to any other party, other than as provided in Sections 5, 6
and 11 and other than as provided in Section 12 as to the liability of
defaulting International Managers.
This Agreement may be terminated after it becomes effective by the Lead
Managers by notice to the Company (i) if at or prior to the First
Closing Date trading in securities on any of the New York Stock Exchange
or the Nasdaq National Market System shall have been suspended (other
than any short term suspension of trading pursuant to any "circuit
breaker" provisions of the New York Stock Exchange) or minimum or
maximum prices shall have been established on any such exchange or
market, or a banking moratorium shall have been declared by New York or
United States authorities; (ii) trading of any securities of the Company
shall have been suspended on any U.S. or foreign exchange or in any U.S.
or foreign over-the-counter market; (iii) if at or prior to the First
Closing Date there shall have been (A) an outbreak or escalation of
hostilities between the United States and any foreign power or of any
other insurrection or armed conflict involving the United States or (B)
any material change in financial markets or any calamity or crisis
which, in the reasonable judgment of the Lead Managers, makes it
impractical or inadvisable to offer or sell the Stock on the terms
contemplated by the Prospectus; (iv) if there shall have been any
material adverse development or prospective material adverse development
involving particularly the business or properties or securities of the
Company or any of its subsidiaries or the transactions contemplated by
this Agreement, which, in the reasonable judgment of the Lead Managers,
makes it impracticable or inadvisable to offer or deliver the Stock on
the terms contemplated by the Prospectus; (v) if there shall be any
litigation or proceeding, pending or threatened, which, in the
reasonable judgment of the Lead Managers, makes it impracticable or
inadvisable to offer or deliver the on the terms contemplated by the
Prospectus; or (vi) if there shall have occurred any of the events
specified in the immediately preceding clauses (i) - (v) together with
any other such event that makes it, in the reasonable
judgment of the Lead Managers, impractical or inadvisable to offer or
deliver the Stock on the terms contemplated by the Prospectus.
29
<PAGE> 30
11 Reimbursement of International Managers. Notwithstanding any other
provisions hereof, if this Agreement shall not become effective by
reason of any election of the Company or the Selling Stockholder
pursuant to the first paragraph of Section 10 or shall be terminated by
the Lead Managers under Section 8 (excluding Section 8(g)) or Section
10, the Company will bear and pay the expenses specified in Section 5
hereof and, in addition to their obligations pursuant to Section 6
hereof, the Company will reimburse the reasonable out-of-pocket expenses
of the several International Managers (including reasonable fees and
disbursements of counsel for the International Managers) incurred in
connection with this Agreement and the proposed purchase of the Stock,
and promptly upon demand the Company will pay such amounts to you as
Lead Managers.
12 Substitution of International Managers. If any International Manager or
International Managers shall default in its or their obligations to
purchase shares of Stock hereunder and the aggregate number of shares
which such defaulting International Manager or International Managers
agreed but failed to purchase does not exceed ten percent (10%) of the
total number of shares underwritten, the other International Managers
shall be obligated severally, in proportion to their respective
commitments hereunder, to purchase the shares which such defaulting
International Manager or International Managers agreed but failed to
purchase. If any International Manager or International Managers shall
so default and the aggregate number of shares with respect to which such
default or defaults occur is more than ten percent (10%) of the total
number of shares underwritten and arrangements satisfactory to the Lead
Managers and the Company for the purchase of such shares by other
persons are not made within forty-eight (48) hours after such default,
this Agreement shall terminate.
If the remaining International Managers or substituted International
Managers are required hereby or agree to take up all or part of the
shares of Stock of a defaulting International Manager or International
Managers as provided in this Section 12, (i) the Company and the Selling
Stockholders shall have the right to postpone the Closing Dates for a
period of not more than five (5) full business days in order that the
Company may effect whatever changes may thereby be made necessary in the
Registration Statement or the Prospectus or in any other documents or
arrangements, and the Company agrees promptly to file any amendments to
the Registration Statement or supplements to the Prospectus which may
thereby be made necessary, and (ii) the respective numbers of shares to
be purchased by the remaining International Managers or substituted
International Managers shall be taken as the basis of their underwriting
obligation for all purposes of this Agreement. Nothing herein contained
shall relieve any defaulting International Manager of its liability to
the Company, the Selling Stockholders or the other International
Managers for damages occasioned by its default hereunder. Any
termination of this Agreement pursuant to this Section 12 shall be
without liability on the part of any non-defaulting International
Manager, the Selling Stockholders or the Company, except for expenses to
be paid or reimbursed pursuant to Section 5 and except for the
provisions of Section 6.
13 Notices. All communications hereunder shall be in writing and, if sent
to the International Managers shall be mailed, delivered or facsimilied
and confirmed to you, as their Lead Managers c/o Cowen & Company at
Financial Square, New York. New York 10005 except that notices given to
an International Manager pursuant to Section 6 hereof shall be sent to
such International Manager at the address furnished by the Lead Managers
or, if sent to the Company, shall be mailed, delivered or facsimilied
and confirmed c/o SCM Microsystems, Inc., 131 Albright Way, Los Gatos,
California 95030, Attention: President.
30
<PAGE> 31
14 Successors. This Agreement shall inure to the benefit of and be binding
upon the several International Managers, the Company and the Selling
Stockholders and their respective successors and legal representatives.
Nothing expressed or mentioned in this Agreement is intended or shall be
construed to give any person other than the persons mentioned in the
preceding sentence any legal or equitable right, remedy or claim under
or in respect of this Agreement, or any provisions hereby contained,
this Agreement and all conditions and provisions hereof being intended
to be and being for the sole and exclusive benefit of such persons and
for the benefit of no other person; except that the representations,
warranties, covenants, agreements and indemnities of the Company and the
Selling Stockholders contained in this Agreement shall also be for the
benefit of the person or persons, if any, who control any International
Manager or International Managers within the meaning of Section 15 of
the Securities Act or Section 20 of the Exchange Act, and the
indemnities of the several International Managers shall also be for the
benefit of each director of the Company, each of its officers who has
signed the Registration Statement and the person or persons, if any, who
control the Company within the meaning of Section 15 of the Securities
Act or Section 20 of the Exchange Act.
15 Applicable Law. This Agreement shall be governed by and construed in
accordance with the substantive laws of the State of New York.
16 Authority of Lead Managers. In connection with this Agreement, you will
act for and on behalf of the several International Managers, and any
action taken under this Agreement by Cowen, as Lead Manager, after
consultation with West LB, will be binding on all the International
Managers; and any action taken under this Agreement by any of the
Attorneys-in-fact will be binding on all the Selling Stockholders.
17 Partial Unenforceability. The invalidity or unenforceability of any
Section, paragraph or provision of this Agreement shall not affect the
validity or enforceability of any other Section, paragraph or provision
hereof. If any Section, paragraph or provision of this Agreement is for
any reason determined to be invalid or unenforceable, there shall be
deemed to be made such minor changes (and only such minor changes) as
are necessary to make it valid and enforceable.
18 General. This Agreement constitutes the entire agreement of the parties
to this Agreement and supersedes all prior written or oral and all
contemporaneous oral agreements, understandings and negotiations with
respect to the subject matter hereof.
In this Agreement, the masculine, feminine and neuter genders and the
singular and the plural include one another. The section headings in
this Agreement are for the convenience of the parties only and will not
affect the construction or interpretation of this Agreement. This
Agreement may be amended or modified, and the observance of any term of
this Agreement may be waived, only by a writing signed by the party or
parties to this Agreement directly affected by such amendment,
modification or waiver.
19 Counterparts. This Agreement may be signed in two (2) or more
counterparts, each of which shall be an original, with the same effect
as if the signatures thereto and hereto were upon the same instrument.
31
<PAGE> 32
If the foregoing correctly sets forth our understanding, please indicate your
acceptance thereof in the space provided below for that purpose, whereupon this
letter and your acceptance shall constitute a binding agreement between us.
Very truly yours,
SCM MICROSYSTEMS, INC.
By:__________________________________
Name:
Title:
Accepted and delivered in SELLING STOCKHOLDERS
Palo Alto, California as of LISTED IN SCHEDULE B
the date first above written.
COWEN INTERNATIONAL L.P. By:_____________________
WESTDEUTSCHE LANDESBANK GIROZENTRALE
HAMBRECHT & QUIST LLC
Acting on their own behalf
and as Lead Managers of the several By:_____________________
International Managers referred to in the
Attorney-in-fact
foregoing Agreement.
By: COWEN INTERNATIONAL L.P.
By:_____________________________
Its general partner
By:_____________________________
Name:
Title:
For purposes of agreeing to the indemnification provisions set forth in Section
6 of this agreement:
SCM MICROSYSTEMS GmbH
By: _____________________________
32
<PAGE> 33
Name:
Title:
33
<PAGE> 34
SCHEDULE A
INTERNATIONAL MANAGERS
<TABLE>
<CAPTION>
Number of
Firm Shares
to be
Name Purchased
- ---- ---------
<S> <C>
Cowen International L.P. .................................
Westdeutsche Landesbank Girozentrale .....................
Hambrecht & Quist LLC.....................................
Total 1,500,000
=========
</TABLE>
<PAGE> 35
SCHEDULE B
SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
Number of
Shares of Common Stock
to be
Name Purchased
- ---- ---------
<S> <C>
[TO COME] . ........................................
...........................................
---------
Total 2,000,000
</TABLE> =========
<PAGE> 36
SCHEDULE C
SUBSIDIARIES
SCM Microsystems GmbH, a German entity
SCM Microsystems (U.S.) Inc., a Delaware corporation
<PAGE> 37
SCHEDULE D
LIST OF PARTIES EXECUTING LOCK-UP AGREEMENTS
Index Securities S.A.
Algoquin Trust S.A.
Alpinvest International B.V.
Peter Andersson
Banque SCS Alliance S.A.
Martin Bast
British Bank of the Middle East
Bulk Partners AS
Daniel Case
CERN Pension Fund
Cook & Cie S.A.
Albert Covo
Claus Dieckell
Friedrich Dieckell
Mona Doss
Natalie Eiden
Faisal Finance (Jersey) Ltd.
E. A. Favre
Fidulex Management Inc.
P. Finklestein
Fondation Galba
The Forum Finance Group
Genevest Consulting Group S.A.
The Gifford Fund
Jay M. Haft
David Hale
Dieter Haas
Hambrecht & Quist California
Hoegh Invest ACS
Steven Humphreys
Nick Efthymiou
Intel Corporation
Intellicard
ITOHU Corporation
Detlef Jenett
KBL Founder Ventures S.C.A.
Per Knudsen
L.B. Finance SA
Christian Lang
Ronald Lautenschlager
Jean Yves Le Roux
John A. Lynch
Edward C. Macbeth
Franz Maier
Keith Marsden
<PAGE> 38
Torsten Mayuranz
Bernd Meier
Sonja Meier
Merifin Capital N.V.
Mirabaud & Cie
Murdoch & Company
John G. Niedermaier
Nippon Investment & Founders
William Ogdon
Isaiah Okoth
Jaochim Grafzu Ortenbum
Ken O. Pelton
Jack H. Peterson
ppon PICTET & Cie
Reiner Prummer
Marianne Puhr
Thomas Rachor
Joshua Rafner
Sylvia D. Reul
Helga Rinke
Michael Sack
Jeff Saper
Beatrice Schneider
Robert Schneider
Ursual Schneider
Ken Siegel
Swiss Bank Corporation
Societe Financiere Mirelis S.A.
Lembit Soobik
Jochem Solja
Andreas Straub
Andrea Taylor
Telenor
TVM Eurotech Limited Partnership
Union Bank of Switzerland
Siegfried Vater
Vertex
Candida von Braun
Emmeram von Braun
Luitpold von Braun
Andy Vought
Andreas Wolf
WS Investments 97A
Zweite Beteiligungs Gesellschaft
<PAGE> 39
EXHIBIT I
[Form of Accountant's Letter]
The Accountants shall confirm that they are independent accountants to the
Company within the meaning of the Securities Act and the Rules, that the
response to Item 10 of the Registration Statement is correct insofar as it
relates to them and stating that:
a. in their opinion the audited financial
statements and financial statement schedules included in the
Registration Statement and the Prospectus and reported on by them
comply as to form in all material respects with the applicable
accounting requirements of the Securities Act and the Rules and
Regulations;
b. on the basis of a reading of the amounts
included in the Registration Statement and the Prospectus under
the headings "Summary Consolidated Financial Data" and "Selected
Consolidated Financial Data," carrying out certain procedures
(but not an examination in accordance with generally accepted
auditing standards) which would not necessarily reveal matters of
significance with respect to the comments set forth in such
letter, a reading of the minutes of the meetings of the
stockholders and directors of the Company, and inquiries of
certain officials of the Company who have responsibility for
financial and accounting matters of the Company as to
transactions and events subsequent to the date of the latest
audited financial statements, except as disclosed in the
Registration Statement and the Prospectus, nothing came to their
attention which caused them to believe that:
(1) the amounts in "Summary Consolidated
Financial Data," and "Selected Consolidated Financial
Data" included in the Registration Statement and the
Prospectus do not agree with the corresponding amounts in
the audited or unaudited financial statements from which
such amounts were derived; or
(2) with respect to the Company, there were,
at a specified date not more than five business days prior
to the date of the letter, any change in the capital stock
of the Company, increase in the long-term debt of the
Company or any decreases in net income or in stockholders'
equity in the Company, as compared with the amounts shown
on the Company's audited balance sheet for the fiscal year
ended December 31, 1997 included in the Registration
Statement; and
c. they have performed certain other procedures as
may be permitted under generally acceptable auditing standards as
a result of which they determined that certain information of an
accounting, financial or statistical nature (which is limited to
accounting, financial or statistical information derived from the
general accounting records of the Company) set forth in the
Registration Statement and the Prospectus and reasonably
specified by the Representatives agrees with the accounting
records of the Company; and
d. based upon the procedures set forth in clauses
(ii) and (iii) above and a reading of the amounts included in the
Registration Statement under the headings "Summary Consolidated
Financial Data" and "Selected Consolidated Financial Data"
included in the Registration Statement and Prospectus and a
reading of the financial
<PAGE> 40
statements, from which certain of such data were derived,
nothing has come to their attention that gives them reason to
believe that the "Selected Consolidated Financial Data" included
in the Registration Statement and Prospectus do not comply as to
the form in all material respects with the applicable accounting
requirements of the Securities Act and the Rules or that the
information set forth therein is not fairly stated in relation
to the financial statements included in the Registration
Statement or Prospectus from which certain of such data were
derived are not in conformity with generally accepted accounting
principles applied on a basis substantially consistent with that
of the audited financial statements included in the Registration
Statement and Prospectus.
<PAGE> 41
Exhibit II
[Form of Opinion of Wilson Sonsini Goodrich & Rosati]
1. The Company and each of the corporations set forth in Exhibit A
hereto (the "US Subsidiary") have been duly incorporated and are validly
existing and in good standing as corporations under the laws of their respective
jurisdictions of incorporation, are duly qualified to do business and are in
good standing as foreign corporations in California which, to such counsel's
knowledge, is the only jurisdiction in which the location of the properties
owned or leased by it or in which the character of the business conducted by it
makes such qualification necessary, and have all corporate power necessary to
own or hold their respective properties and conduct their businesses as
described in the Prospectus;
2. The Company has an authorized capitalization as set forth in the
Prospectus, and all of the issued shares of capital stock of the Company have
been duly and validly authorized and issued, are fully paid and nonassessable
and all of the Shares to be issued and sold by the Company to the U.S.
Underwriters pursuant to the Underwriting Agreement and to the International
Managers pursuant to the International Underwriting Agreement have been duly and
validly authorized and, when issued and delivered against payment therefor as
provided for in the Underwriting Agreement or the International Underwriting
Agreement, as the case may be, shall be duly and validly issued, fully paid and
non-assessable and, to our knowledge, free of any pre-emptive or similar rights;
3. Other than as described in the Prospectus, to our knowledge, there
are no pre-emptive or other rights to subscribe for or to purchase, nor any
restriction upon the voting or transfer of, any of the Shares pursuant to the
Company's Certificate of Incorporation or By-Laws or pursuant to any agreement
or other instrument known to us;
4. Except as disclosed in the Prospectus, to our knowledge, there are no
legal or governmental proceedings pending to which the Company or the US
Subsidiary is a party or of which any property or assets of the Company or the
US Subsidiary is the subject which, if determined adversely to the Company or
the US Subsidiary, could, individually or in the aggregate, reasonably be
expected to have a material adverse effect on the Company and its subsidiaries
taken as a whole; and, to our knowledge, no such proceedings are threatened or
contemplated by governmental authorities or other third parties;
5. The Company has full corporate power and authority to enter into the
Underwriting Agreement and the International Underwriting Agreement and to
perform its obligations thereunder (including to issue, sell and deliver the
Shares), and each of the Underwriting Agreement and the International
Underwriting Agreement has been duly and validly authorized, executed and
delivered by the Company and is a valid and binding obligation of the Company,
enforceable against it in accordance with their respective terms.
6. The execution, delivery and performance of the Underwriting Agreement
and the International Underwriting Agreement by the Company and the consummation
of the transactions contemplated by the Underwriting Agreement and the
International Underwriting Agreement by the Company will not result in a breach
or violation of (A) any of the terms or provisions of or constitute a default
under any indenture, mortgage, deed of trust, loan agreement or other agreement
or instrument that is filed as an exhibit to the Registration Statement, (B) the
Certificate of Incorporation or By-laws, or (C) any law, order, rule or
regulation of any U.S. court or U.S. governmental agency or body having
jurisdiction over the Company or the US Subsidiary or any of their properties or
result in the creation of a lien;
<PAGE> 42
7. No consent, approval, authorization or order of any U.S. court or
U.S. governmental agency or body is required for the consummation by the Company
of the transactions contemplated by the Underwriting Agreement or the
International Underwriting Agreement, except such as may be required by the
National Association of Securities Dealers, Inc. (the "NASD"), the NASDAQ
National Market, the Neuer Markt of the Frankfurt Stock Exchange or under the
Securities Act or the Exchange Act or the securities or "Blue Sky" laws of any
U.S. or foreign jurisdiction in connection with the purchase and distribution of
the Shares by the U.S. Underwriters or the International Managers;
8. The Registration Statement was declared effective under the
Securities Act as of April __, 1998, the Prospectus was filed with the
Commission pursuant to Rule 424(b) of the Rules and Regulations on April __,
1998, and no stop order suspending the effectiveness of the Registration
Statement has been issued and to our knowledge no proceeding for that purpose is
pending or threatened by the Commission;
9. The Registration Statement and the Prospectus and any amendments or
supplements thereto (other than the financial statements and the notes thereto
and the schedules and other financial and statistical data included in the
Registration Statement or the Prospectus as to which we express no opinion)
comply as to form in all respects with the requirements of the Securities Act
and the Rules and Regulations and, to our knowledge, there are no contracts or
documents of a character required to be filed as exhibits to the Registration
Statement which are not filed as required;
10. Other than as described in the Prospectus and to our knowledge,
there are no contracts, agreements or understandings between the Company and any
person granting such person the right (other than rights which have been waived
or satisfied) to require the Company to file a registration statement under the
Securities Act with respect to any securities of the Company owned or to be
owned by such person or to require the Company to include such securities in the
securities registered pursuant to this Registration Statement or in any
securities being registered pursuant to any other registration statement filed
by the Company under the Securities Act;
11. The descriptions in the Registration Statement and the Prospectus
under the captions "Risk Factors -- Concentration of Stock Ownership;
Anti-Takeover Provisions," Risk Factors -- Shares Eligible for Future Sale,"
Description of Common Stock" and "Shares Eligible for Future Sale," solely to
the extent they reflect matters of federal law arising under the laws of the
United States or of the Delaware General Corporation Law or legal conclusions
relating to such laws, accurately summarize and fairly present the legal and
regulatory matters described therein; and
12. The Company is not nor will it be immediately after receiving the
proceeds from the sale of the Shares, an "investment company" or an entity
"controlled" by an "investment company" as such terms are defined in the
Investment Company Act of 1940, as amended.
In addition, although we have not undertaken, except as otherwise
indicated herein, to determine independently, and do not assume any
responsibility for, the accuracy or completeness of the statements in the
Registration Statement, we have participated in conferences with officers and
other representatives of the Company, at which conferences representatives of
the Representatives, counsel to the Underwriters and representatives of the
independent certified public accountants of the Company were present, and at
which conferences the contents of the Registration Statement and Prospectus and
related matters were discussed, and based upon the foregoing nothing has come to
our attention that has caused us to believe that the Registration Statement at
the time the Registration Statement became effective, or the Prospectus, as of
its date and as of the date hereof, contained an untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading or that any
<PAGE> 43
amendment or supplement to the Prospectus, as of its respective date, and as of
the date hereof, contained any untrue statement of a material fact or omitted to
state a material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading (it being
understood that we express no belief with respect to the financial statements
and the notes thereto and the schedules and other financial and statistical data
included in the Registration Statement or the Prospectus).
<PAGE> 44
Exhibit III
[Form of Opinion of Issuer's German Counsel and Intellectual Property Counsel]
1. SCM Microsystems GmbH, a limited liability company (the "Subsidiary")
is duly incorporated and duly registered with the commercial register at the
local court in Neuburg an der Donau under No. HRB 90556 and is validly existing
as a limited liability company under the laws of Germany and is duly qualified
to do business in accordance with the objectives of the Subsidiary set forth in
its articles of association, and has all power and authority (corporate and
other) necessary to own or hold its properties and conduct its business in
accordance with its articles of association. The objective of the Subsidiary
pursuant to its articles of association is to develop, produce and market
electronic parts of microsystems, electronic and electric instruments, data
terminals and data processing equipment as well as to trade all related
products. The Subsidiary is also authorized to conduct all activities which are
appropriate to serve these objectives. In particular the Subsidiary is
authorized to establish, acquire or hold interest in enterprises of identical or
similar kind and to grant or acquire licenses;
2. The Subsidiary has an authorized, issued and outstanding share
capital in the nominal amount of DM 522,700 (consisting of 33 shares with
different nominal amounts). To the best of our knowledge after reasonable
investigations all of the issued shares of capital stock of the Subsidiary have
been duly and validly authorized and issued and are to the best of our knowledge
fully paid, non-assessable and are owned by SCM Microsystems Inc., a Delaware
corporation, to the best of our knowledge free and clear of all liens,
encumbrances, equities or claims;
3. Other than as described in the Prospectus after reasonable
investigations (i.e., due inquiry of the management of the Subsidiary) there are
no pre-emptive or other rights to subscribe for or to purchase, nor any
restriction upon the voting or transfer of, any of the capital stock of the
Subsidiary pursuant to the Subsidiary's organizational documents or pursuant to
any agreement or other instrument known to us providing for such rights or
restrictions;
4. Except as disclosed in the Prospectus after reasonable investigations
(i.e., due inquiry of the management of the Subsidiary), to our knowledge, there
are no legal or governmental proceedings pending to which the Subsidiary is a
party or of which any property or assets of the Subsidiary is the subject which,
if determined adversely to the Subsidiary, could individually or in the
aggregate have a material adverse effect on the Subsidiary and, to our
knowledge, no such proceedings are threatened or contemplated by governmental
authorities or other third parties;
5. The statements in the Prospectus under the heading "Risk Factors -
Proprietary Technology and Intellectual Property" and "Business - Proprietary
Technology and Intellectual Property," insofar as such statements constitute
summary descriptions of the legal matters, documents or proceedings referred to
therein, fairly represent the information called for with respect to such legal
matters, documents or proceedings and such statements do not omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading;
6. To such counsel's knowledge, the Subsidiary owns or possesses all
patents, trademarks, trademark registrations, service marks, service mark
registrations, trade names, copyrights, licenses, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and rights described in the Prospectus as
being owned by it or necessary for the conduct of its business; and to such
counsel's knowledge, except as described in the Prospectus, the
<PAGE> 45
Subsidiary has not received any notice of infringement of or conflict with and
such counsel knows of no infringement of or conflict with asserted rights of
others with respect to any such patents, trademarks, service marks or other
proprietary information or materials which could result in any material adverse
effect on the Subsidiary and to the knowledge of such counsel there is no
infringement or violation by others of any of the Subsidiary's patents,
licenses, trade secrets, trademarks, service marks or other proprietary
information or materials which in the judgment of such counsel could materially
affect the use thereof by the Subsidiary;
7. The patents have been licensed to the Subsidiary as described in the
Prospectus, and such licenses are valid, binding and enforceable; and the
Subsidiary has rights to the products and technology covered thereby as
described in the Prospectus;
8. The Subsidiary has full corporate power and authority to enter into
the Underwriting Agreement and the International Underwriting Agreement and to
perform its obligations thereunder, and the Underwriting Agreement and the
International Underwriting Agreement have each been duly and validly authorized,
executed and delivered by the Subsidiary;
9. The execution, delivery and performance of the Underwriting Agreement
and the International Underwriting Agreement and the consummation of the
transactions contemplated by the Underwriting Agreement and the International
Underwriting Agreement by the Subsidiary will not result in a breach or
violation of any of (A) the terms or provisions of or constitute a default under
any indenture, mortgage, deed of trust note agreement or other agreement or
instrument known to us after reasonable investigations (i.e., due inquiry of the
management of the Subsidiary) to which the Subsidiary is a party or by which any
of its properties is or may be bound, (B) the organizational documents of the
Subsidiary, or (C) any law, order, rule or regulation of any court or
governmental agency or body having jurisdiction over the Subsidiary known to us
or any of its properties nor will such execution, delivery and performance
result in the creation of a lien;
10. No consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation by the Subsidiary
of the transactions contemplated by the Underwriting Agreement or the
International Underwriting Agreement other than the approval of the German
authorities pursuant to the German Stock Exchange Act (Borsengesetz), the German
Sale Prospectus Act "Verkaufsprospektgesetz", the Stock Exchange Regulation
("Borsenordnung") and the Rules and Regulations of the New Market "(Regelwerk
Neuer Markt").
11. The Prospectus used in connection with the application to list the
Stock on the Neuer Markt of the Frankfurt Stock Exchange and any amendments or
supplements thereto comply as to form in all respects with the requirements of
German law and the Frankfurt Stock Exchange.
12. The Stock has been approved for listing on the Neuer Markt of the
Frankfurt Stock Exchange.
<PAGE> 46
Exhibit IV
[Form of Intellectual Property Counsel Opinion]
1. The statements in the Prospectus under the heading "Risk Factors -
Proprietary Technology and Intellectual Property" and "Business - Proprietary
Technology and Intellectual Property," insofar as such statements constitute
summary descriptions of the legal matters, documents or proceedings referred to
therein, fairly present the information called for with respect to such legal
matters, documents or proceedings and such statements do not omit to state any
material fact required to be stated therein or necessary to make the statements
therein not misleading;
2. To such counsel's knowledge, the Company owns or possesses all
patents, trademarks, trademark registrations, service marks, service mark
registrations, trade names, copyrights, licenses, know-how (including trade
secrets and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures) and rights described in the Prospectus as
being owned by it or necessary for the conduct of its business; and to such
counsel's knowledge, except as described in the Prospectus, the Company has not
received any notice of infringement of or conflict with and such counsel knows
of no infringement of or conflict with asserted rights of others with respect to
any such patents, trademarks, service marks or other proprietary information or
materials which could result in any material adverse effect on the Company and
to the knowledge of such counsel there is no infringement or violation by others
of any of the Company's patents, licenses, trade secrets, trademarks, service
marks or other proprietary information or materials which in the judgment of
such counsel could materially affect the use thereof by the Company; and
3. The patents have been licensed to the Company as described in the
Prospectus, and such licenses are valid, binding and enforceable; and the
Company has rights to the products and technology covered thereby as described
in the Prospectus.
<PAGE> 47
Exhibit V
[Form of Opinion of Selling Stockholders' Counsel]
1. [Corporate Selling Stockholder] Each of ______, ________ and ______
has full corporate power and authority to enter into the Underwriting Agreement,
the International Underwriting Agreement, the Custody Agreement and the Power of
Attorney and to perform its obligations thereunder (including to issue, sell and
deliver the Shares), and each of the Underwriting Agreement, the International
Underwriting Agreement, the Custody Agreement and the Power of Attorney has been
duly and validly authorized, executed and delivered by the Company and is a
valid and binding obligation of ________, _________ and ______, enforceable
against it in accordance with their respective terms.
2. [Individual Selling Stockholder] The Underwriting Agreement, the
International Underwriting Agreement, the Custody Agreement, the Power of
Attorney and the Lock-Up Agreement to be executed by the Selling Stockholders
each have been duly and validly executed and delivered by or on behalf of each
Selling Stockholder.
3. The Underwriting Agreement, the International Underwriting Agreement,
the Custody Agreement, the Power of Attorney and the Lock-Up Agreement executed
and delivered by the Selling Stockholders each contains a valid choice of New
York law.
4. [Individual Selling Stockholder - To our knowledge after reasonable
investigations,] each of the Selling Stockholders has full legal right and power
to enter into the Underwriting Agreement and the International Underwriting
Agreement and to sell, transfer and deliver in the manner provided in the
Underwriting Agreement and the International Underwriting Agreement the Shares
to be sold by the Selling Stockholders.
5. Each of the Selling Stockholders is the record owner of and has
marketable title to the Shares to be sold by such Selling Stockholder.
6. All of the Selling Stockholders' rights in the Shares to be sold by
such Selling Stockholder, have been transferred to the Underwriters who have
severally purchased such Shares, free and clear of adverse claims, assuming that
the Underwriters purchased the same in good faith without notice of any adverse
claims.
7. The transfer and sale by the Selling Stockholders of the Shares to be
sold by the Selling Stockholders as contemplated in the Underwriting Agreement
and the International Underwriting Agreement will not violate any agreement,
judgment, decree, order, statute, rule or regulation which, to our knowledge,
the Selling Stockholders are a party or by which either Selling Stockholder is
bound or subject.
8. To our knowledge, no consent, approval, authorization, license,
certificate, permit or order of any court, governmental or regulatory agency,
authority or body or financial institution is required in connection with the
performance of the Underwriting Agreement or the International Underwriting
Agreement by such Selling Stockholder or the consummation of the transactions
contemplated therein, including the delivery and sale of the Shares to be
delivered and sold by such Selling Stockholder, except such as have been
obtained and except such as may be required under state securities or blue sky
laws in connection with the purchase and distribution of the Shares by the
several Underwriters and the provisions
<PAGE> 48
of German law including the German Stock Exchange Act (Borsengesetz), the German
Stock Exchange Regulation (Borsenordnung), the Rules and Regulations for the New
Market (Regelwerk Neuer Markt) and the Sales Prospectus Act
(Verkaufsprospektgesetz).
<PAGE> 49
Exhibit VI
[Form of Lock-Up Agreement]
-----------------------
Print Stockholder Name
SCM MICROSYSTEMS, INC.
LOCK-UP AGREEMENT
Cowen & Company
Hambrecht & Quist LLC
Wessels, Arnold & Henderson, L.L.C.
As representatives of the
several Underwriters
c/o Cowen & Company
Financial Square
New York, New York 10005
Re: SCM Microsystems, Inc.
Ladies and Gentlemen:
In order to induce Cowen & Company ("Cowen"), Hambrecht & Quist LLC and Wessels,
Arnold & Henderson, L.L.C. (together, the "Representatives"), to enter into a
certain underwriting agreement with SCM Microsystems, Inc., a Delaware
corporation (the "Company"), with respect to the public offering of shares of
the Company's Common Stock, par value $ 0.001 per share ("Common Stock"), the
undersigned hereby agrees that for a period of 90 days following the date of the
final prospectus filed by the Company with the Securities and Exchange
Commission in connection with such public offering, the undersigned will not,
without the prior written consent of Cowen, directly or indirectly, (i) offer,
sell, assign, transfer, encumber, pledge, contract to sell, grant an option to
purchase or otherwise dispose of, other than by operation of law, any shares of
Common Stock (including, without limitation, Common Stock which may be deemed to
be beneficially owned by the undersigned in accordance with the rules and
regulations promulgated under the Securities Act of 1933, as the same may be
amended or supplemented from time to time (such shares, the "Beneficially Owned
Shares") or (ii) enter into any swap or similar agreement that transfers, in
whole or in part, the economic risk of ownership of the Common Stock, whether
any such transaction described in clause (i) or (ii) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise.
Notwithstanding the foregoing, this Lock-Up Agreement (the "Agreement") shall
not apply to shares of the Company's Common Stock acquired on the open market
and that shares so acquired may be sold or otherwise disposed of without regard
to this Agreement.
Notwithstanding the foregoing, if the undersigned is an individual, he or she
may transfer any Shares either during his or her lifetime or on death by will or
intestacy to his or her immediate family or to a trust the beneficiaries of
which are exclusively the undersigned and/or a member of his or her immediate
family or to a charitable organization; provided, however, that in any such case
it shall be a condition to the transfer
<PAGE> 50
that the transferee execute an agreement stating that the transferee is
receiving and holding the Shares transferred subject to the provisions of this
Agreement, and there shall be no further transfer of such Shares except in
accordance with this Agreement. For purposes of this Agreement, "immediate
family" shall mean spouse, lineal descendant, father, mother, brother or sister
of the transferor and "charitable organization" shall mean an organization
described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended.
Notwithstanding the foregoing, if the undersigned is a partnership, the
partnership may transfer any Shares to a partner of such partnership or a
retired partner of such partnership who retires after the date hereof, or to the
estate of any such partner or retired partner, and any partner who is an
individual may transfer such Shares by gift, will or intestate succession to his
or her spouse or lineal descendants or ancestors; and if the undersigned is a
corporation, the corporation may transfer such Shares to any stockholder or
subsidiary of such corporation and any stockholder who is an individual may
transfer Shares by gift, will or intestate succession to his or her immediate
family or to a charitable organization; provided, however, that in any such
case, it shall be a condition to the transfer that the transferee execute an
agreement stating that the transferee is receiving and holding the Shares
subject to the provisions of this Agreement, and there shall be no further
transfer of such Shares except in accordance with this Agreement.
The undersigned agrees that the provisions of this Agreement shall be binding
also upon the successors, assigns, heirs and personal representatives of the
undersigned. The undersigned agrees and consents to the placing of legends
and/or the entry of stop transfer instructions with the Company's transfer agent
against the transfer of any shares of Common Stock or Beneficially Owned Shares
held by the undersigned except in compliance with this Agreement.
It is understood that, if the Underwriting Agreement does not become effective,
or if the Underwriting Agreement (other than the provisions thereof which
survive termination) shall terminate or be terminated prior to payment for and
delivery of the Shares, you will release us from our obligations under this
Agreement.
This Agreement shall terminate and be of no further force or effect in the event
that the offering contemplated by the Underwriting Agreement is not completed on
or before August 31, 1998.
-------------------------------
Very truly yours,
-------------------------------
(Signature)
-------------------------------
(Title)
-------------------------------
(Date)
<PAGE> 1
EXHIBIT 5.1
OPINION OF WILSON SONSINI GOODRICH & ROSATI
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
650 Page Mill Road
Palo Alto, California 94304-1050
Telephone 650-493-9300 Facsimile 650-493-6811
March 24, 1998
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 March 24, 1998 (the
"Registration Statement"), in connection with the registration under the
Securities Act of 1933, as amended, of up to 3,450,000 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
issue, 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,
/s/ WILSON SONSINI GOODRICH & ROSATI
WILSON SONSINI GOODRICH & ROSATI
Professional Corporation
<PAGE> 1
EXHIBIT 11.1
SCM Microsystems, Inc. and Subsidiaries
Statement Regarding Computation of Net Income (Loss) Per Share
(in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1995 1996 1997
-------- --------- -------
<S> <C> <C> <C>
Basic earnings per share:
Net income (loss) applicable to
common stockholders $(3,065) $(1,397) $ 301
======= ======= ======
Basic net income (loss) per share $ (2.39) $ (1.09) $ 0.08
======= ======= ======
Weighted average common shares
outstanding 1,280 1,280 3,819
======= ======= ======
Diluted earnings per share:
Net income (loss) applicable to
common stockholders $(3,065) $(1,397) $ 301
======= ======= ======
Diluted net income (loss) per share $ (2.39) $ (1.09) $ 0.06
======= ======= ======
Shares used:
Weighted average common shares
outstanding 1,280 1,280 3,819
Series A convertible preferred stock -- -- 655
Stock options outstanding -- -- 400
Stock warrants outstanding -- -- 141
------- ------- ------
1,280 1,280 5,015
======= ======= ======
Pro forma information:
Net income applicable to common
stockholders $1,103
======
Pro forma diluted net income per share $ 0.14
======
Shares used:
Weighted average common shares outstanding 3,819
Series A convertible preferred stock 655
Stock options outstanding 400
Stock warrants outstanding 141
Redeemable convertible preferred stock(1) 2,634
------
7,649
======
</TABLE>
(1) Gives effect to the conversion of the redeemable convertible preferred
stock, Series B through F, into common stock on January 1, 1997, or their
respective dates of issuance if later.
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF REGISTRANT
SCM Microsystems GmbH, a wholly owned subsidiary of Registrant, is a
corporation organized under the laws of Germany.
SCM Microsystems (U.S.) Inc., a wholly owned subsidiary of Registrant, is
a Delaware corporation.
<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 February 13, 1998, included the
related financial statement schedule as of December 31, 1997, and for each of
the years in the three-year period ended December 31, 1997, 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
Mountain View, California
March 25, 1998
<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 YEAR
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 DEC-31-1997
<CASH> 2,593 25,552
<SECURITIES> 0 30,336<F1>
<RECEIVABLES> 5,447 6,795
<ALLOWANCES> 210 188
<INVENTORY> 2,279 3,392
<CURRENT-ASSETS> 10,628 66,189
<PP&E> 1,274 1,907
<DEPRECIATION> 456 745
<TOTAL-ASSETS> 11,459 67,365
<CURRENT-LIABILITIES> 12,415 5,893
<BONDS> 0 0
5,068 0
1 0
<COMMON> 1 11
<OTHER-SE> (6,026) 61,472
<TOTAL-LIABILITY-AND-EQUITY> 11,459 67,365
<SALES> 21,520 27,769
<TOTAL-REVENUES> 21,520 27,769
<CGS> 14,880 17,524
<TOTAL-COSTS> 14,880 17,524
<OTHER-EXPENSES> 7,620 10,170
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> (304) 866<F2>
<INCOME-PRETAX> (1,110) 1,408
<INCOME-TAX> 0 305
<INCOME-CONTINUING> (1,110) 1,103
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,110) 1,103
<EPS-PRIMARY> (1.09) 0.08<F3>
<EPS-DILUTED> (1.09) 0.06<F4>
<FN>
<F1>For purposes of this Exhibit, Securities means Short-Term Investments.
<F2>For purposes of this Exhibit, Interest-Expense means Interest-Income
(Expense), Net.
<F3>For purposes of this Exhibit, Primary earnings per share means Basic
earnings per share.
<F4>For purposes of this Exhibit, Pro Forma Diluted net income per share is
0.14 for the year ended December 31, 1997.
</FN>
</TABLE>
