<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): JUNE 30, 1999
SCM MICROSYSTEMS, INC.
- --------------------------------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 0-22689 77-0444317
- ------------------------------- ------------------------ ------------------
(STATE OR OTHER JURISDICTION OF (COMMISSION FILE NUMBER) (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
160 KNOWLES DRIVE
LOS GATOS, CALIFORNIA 95032
- --------------------------------------------------------------------------------
(ADDRESS, INCLUDING ZIP CODE, OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(408) 370-4888
NOT APPLICABLE
- --------------------------------------------------------------------------------
(FORMER NAME OR FORMER ADDRESS, IF CHANGED SINCE LAST REPORT)
<PAGE> 2
The undersigned Registrant hereby amends the following items, financial
statements, exhibits, or other portions of its Current Report on Form 8-K,
originally filed with the Securities and Exchange Commission on July 15, 1999
("the Form 8-K") as set forth in the pages attached hereto:
Item 7. Financial Statements and Exhibits.
The following financial statements of the business acquired are filed as
part of this report, where indicated.
(a) Financial Statements of Business Acquired:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report 3
Balance Sheets at December 31, 1997, 1998 and March 31, 1999 (unaudited) 4
Statements of Operations for the Years Ended December 31, 1997 and 1998
and three months ended March 31, 1998 and 1999 (unaudited) 5
Statements of Stockholders' Equity (Deficiency) for the Years Ended
December 31, 1997 and 1998 and three months ended
March 31,1999 (unaudited) 6
Statements of Cash Flows for the Years Ended December 31, 1997 and 1998
and three months ended March 31, 1998 and 1999 (unaudited) 7
Notes to Financial Statements 8
</TABLE>
(b) Pro forma Financial Information:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Unaudited Pro Forma Combined Condensed Statement of Operations
for the year ended December 31, 1998 19
Unaudited Pro Forma Combined Condensed Statement of Operations for
the six months ended June 30, 1999 20
Notes to Pro Forma Combined Condensed Financial Information 21
</TABLE>
<PAGE> 3
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Dazzle Multimedia, Inc.:
We have audited the accompanying balance sheets of Dazzle Multimedia, Inc. as of
December 31, 1997 and 1998, and the related statements of operations,
stockholders' equity (deficiency) and cash flows for the years then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these 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, such financial statements present fairly, in all material
respects, the financial position of Dazzle Multimedia, Inc. as of December 31,
1997 and 1998, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
San Jose, California
September 10, 1999
<PAGE> 4
DAZZLE MULTIMEDIA, INC.
BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------- --------
ASSETS 1997 1998 1999
------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and equivalents ............................................................... $ 712 $ 1,320 $ 851
Accounts receivable, net of reserve for doubtful accounts of none, $86
and $86, respectively ............................................................ 748 1,975 1,757
Inventory .......................................................................... 738 2,096 2,318
Prepaid expenses and other current assets .......................................... 51 90 190
------- -------- --------
Total current assets ...................................................... 2,249 5,481 5,116
Property and equipment, net .......................................................... 293 308 278
Deposits and other assets ............................................................ 179 86 193
------- -------- --------
Total assets ......................................................................... $ 2,721 $ 5,875 $ 5,587
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
Current liabilities:
Accounts payable ................................................................... $ 1,183 $ 2,621 $ 2,618
Secured borrowing facility from related party ...................................... -- 1,608 2,539
Accrued liabilities ................................................................ 255 1,278 1,071
Line of credit ..................................................................... -- 463 546
Note payable, related party ........................................................ -- 2,500 2,500
Notes payable to third parties ..................................................... 203 60 60
Notes payable to shareholders ...................................................... 12 2,318 2,193
Current portion of capitalized lease obligations ................................... 17 56 52
------- -------- --------
Total current liabilities ................................................. 1,670 10,904 11,579
Capitalized lease obligations ........................................................ 13 60 48
------- -------- --------
Total liabilities ......................................................... 1,683 10,964 11,627
------- -------- --------
Commitments and contingencies (Notes 3, 4 and 8)
Stockholders' equity (deficiency):
Convertible preferred stock; no par value; 7,000,000 shares authorized:
Series A convertible preferred stock; 3,000,000 shares designated, 2,368,333 and
2,368,333 shares issued and outstanding in 1998 and 1999, respectively ......... -- 3,553 3,553
Series B convertible preferred stock; 4,000,000 shares designated .............. -- -- --
Common stock, $0.001 par value, 40,000,000 shares authorized; 9,200,510, 7,467,281
and 7,467,281 shares issued and outstanding in 1997, 1998 and 1999, respectively.. 9 6 6
Additional paid-in capital ......................................................... 4,376 1,448 1,448
Notes receivable from shareholders ................................................. -- (6) (6)
Deferred stock compensation ........................................................ -- (15) (11)
Accumulated deficit ................................................................ (3,347) (10,075) (11,030)
------- -------- --------
Total stockholders' equity (deficiency) ................................... 1,038 (5,089) (6,040)
------- -------- --------
Total liabilities and stockholders' equity ........................................... $ 2,721 $ 5,875 $ 5,587
======= ======== ========
</TABLE>
See notes to financial statements.
<PAGE> 5
DAZZLE MULTIMEDIA, INC.
STATEMENTS OF OPERATIONS
(In thousands)
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- --------------------
1997 1998 1998 1999
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues .......................... $ 1,798 $ 9,289 $ 1,226 $ 2,674
Cost of sales ..................... 1,476 7,736 1,004 2,004
------- ------- ------- -------
Gross profit ...................... 322 1,553 222 670
------- ------- ------- -------
Operating expenses:
Research and development ........ 877 1,619 283 378
Sales and marketing ............. 1,453 3,725 619 669
General and administrative ...... 787 2,717 553 384
------- ------- ------- -------
Total operating expenses .. 3,117 8,061 1,455 1,431
------- ------- ------- -------
Loss from operations .............. (2,795) (6,508) (1,233) (761)
Interest expense .................. (36) (234) (4) (196)
Other income ...................... 42 14 20 2
------- ------- ------- -------
Net loss .......................... $(2,789) $(6,728) $(1,217) $ (955)
======= ======= ======= =======
</TABLE>
See notes to financial statements.
<PAGE> 6
DAZZLE MULTIMEDIA, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
CONVERTIBLE NOTES DEFERRED
PREFERRED STOCK COMMON STOCK ADDITIONAL RECEIVABLE STOCK
---------------------- ----------------------- PAID-IN FROM COMPEN-
SHARES AMOUNT SHARES AMOUNT CAPITAL STOCKHOLDERS SATION
---------- ------- ---------- ------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balances, January 1, 1997 ...... -- $ -- 2,660,000 $ 3 $ 436 $ -- $ --
Issuance of common stock ....... 6,540,510 6 3,940
Net loss .......................
---------- ------- ---------- ------- ------- ------- -------
Balances, December 31, 1997 .... 9,200,510 9 4,376 -- --
Exchange of common stock for
preferred stock .............. 2,035,000 3,053 (2,035,000) (3) (3,050)
Exercise of common stock
options ...................... 65,000 -- 14
Issuance of common stock as
payment for services
rendered ..................... 161,271 -- 40
Issuance of common stock ....... 75,500 -- 16 (12)
Issuance of Series A convertible
preferred stock for services
rendered ..................... 200,000 300
Issuance of Series A convertible
preferred stock as repayment
of note payable .............. 133,333 200
Compensatory stock
arrangements ................. 52 (26)
Amortization of deferred stock
compensation ................. 11
Repayment of notes receivable
from shareholders ............ 6
Net loss .......................
---------- ------- ---------- ------- ------- ------- -------
Balances, December 31, 1998 .... 2,368,333 3,553 7,467,281 6 1,448 (6) (15)
Amortization of deferred
stock compensation* .......... 4
Net loss* ......................
---------- ------- ---------- ------- ------- ------- -------
Balances, March 31, 1999* ...... 2,368,333 $ 3,553 7,467,281 $ 6 $ 1,448 $ (6) $ (11)
========== ======= ========== ======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
TOTAL
STOCKHOLDERS'
ACCUMULATED EQUITY
DEFICIT (DEFICIENCY)
----------- -------------
<S> <C> <C>
Balances, January 1, 1997 ...... $ (558) $ (119)
Issuance of common stock ....... 3,946
Net loss ....................... (2,789) (2,789)
-------- -------
Balances, December 31, 1997 .... (3,347) 1,038
Exchange of common stock for
preferred stock .............. --
Exercise of common stock
options ...................... 14
Issuance of common stock as
payment for services
rendered ..................... 40
Issuance of common stock ....... 4
Issuance of Series A convertible
preferred stock for services
rendered ..................... 300
Issuance of Series A convertible
preferred stock as repayment
of note payable .............. 200
Compensatory stock
arrangements ................. 26
Amortization of deferred stock
compensation ................. 11
Repayment of notes receivable
from shareholders ............ 6
Net loss ....................... (6,728) (6,728)
-------- -------
Balances, December 31, 1998 .... (10,075) (5,089)
Amortization of deferred
stock compensation* .......... 4
Net loss* ...................... (955) (955)
-------- -------
Balances, March 31, 1999* ...... $(11,030) $(6,040)
======== =======
</TABLE>
(* Unaudited)
See notes to financial statements.
<PAGE> 7
DAZZLE MULTIMEDIA, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
-------------------- --------------------
1997 1998 1998 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss .............................................. $(2,789) $(6,728) $(1,217) $ (955)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization ....................... 51 120 25 35
Services paid for by issuing notes payable .......... -- 128 -- --
Services paid for by issuing stock .................. -- 340 -- --
Stock-based compensation expense .................... -- 37 -- 4
Loss on write-off of fixed assets ................... -- 6 -- --
Changes in assets and liabilities:
Accounts receivable ............................... (747) (1,228) (148) 218
Inventories ....................................... (923) (1,357) (535) (347)
Prepaid expenses and other current assets ......... (51) 1 (52) (100)
Deposits and other assets ......................... (177) 93 55 (107)
Accounts payable .................................. 1,591 1,438 685 (3)
Accrued liabilities ............................... 255 1,023 (19) (207)
------- ------- ------- -------
Net cash used in operating activities ........ (2,790) (6,127) (1,206) (1,462)
------- ------- ------- -------
Cash flows from investing activities -
Purchase of equipment ................................. (237) (8) (49) (5)
------- ------- ------- -------
Cash flows from financing activities:
Borrowings under line of credit ....................... -- 1,312 195 83
Repayments on line of credit .......................... -- (849) -- --
Proceeds from notes payable issued to shareholders .... -- 2,198 1,438 931
Debt repayments ....................................... -- (50) (2) (16)
Proceeds from related party borrowings ................ -- 4,108 -- --
Proceeds from notes payable issued to third parties ... 245 -- 12 --
Proceeds from exercise of stock options ............... -- 14 -- --
Proceeds from issuance of common stock ................ 3,475 4 2 --
Cash received for notes receivable from shareholders... -- 6 -- --
------- ------- ------- -------
Net cash provided by financing activities .... 3,720 6,743 1,645 998
------- ------- ------- -------
Net increase in cash and equivalents .................... 693 608 390 469
Cash and equivalents, beginning of period ............... 19 712 712 1,320
------- ------- ------- -------
Cash and equivalents, end of period ..................... $ 712 $ 1,320 $ 1,102 $ 851
======= ======= ======= =======
Supplemental cash flow information - cash paid
for interest .......................................... $ 36 $ 54 $ 5 $ 13
======= ======= ======= =======
Noncash investing and financing activities:
Acquisition of equipment under capital lease .......... $ -- $ 132 $ -- $ --
======= ======= ======= =======
Exchange of notes, advances and accrued interest
for convertible preferred stock ..................... $ -- $ 200 $ -- $ --
======= ======= ======= =======
Repayment of note payable with inventory .............. $ -- $ -- $ -- $ 125
======= ======= ======= =======
</TABLE>
See notes to financial statements.
<PAGE> 8
DAZZLE MULTIMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1998
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization - The Company was formed in May 1996 with the name L.A.Vision.
The Company changed its name to Dazzle Multimedia in November 1997. Dazzle
Multimedia is headquartered in Fremont, California, and designs,
manufactures and markets innovative and affordable video compression
products for the PC market.
Use of Estimates - The preparation of 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 disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Concentration of Credit Risk - Financial instruments that potentially
subject the Company to concentration of credit risk consist of trade
receivables. The Company does not require collateral or other security to
support accounts receivable and maintains reserves for potential credit
losses.
Cash and Equivalents - The Company considers all highly liquid investments
with an original maturity of ninety days or less to be cash equivalents.
Property and Equipment - Property and equipment are stated at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of three to five years. Leasehold improvements and assets
acquired under capital lease are amortized over the shorter of the lease
term or the useful lives of the improvement.
Inventories - Inventories are valued at the lower of cost (first-in,
first-out method) or market and consist primarily of finished goods.
Revenue Recognition - The Company recognizes revenue, net of estimated
returns and allowances, upon shipment of a product and when no significant
obligations remain and collectibility is probable. Certain of the Company's
sale are made to customers under agreements permitting rights of return for
stock balancing.
Income Taxes - Deferred tax liabilities are recognized for future taxable
amounts, and deferred tax assets are recognized for future deductions, net
of a valuation allowance to reduce net deferred tax assets to amounts that
are more likely than not to be realized.
Stock-Based Compensation - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board (APB) Opinion No. 25, Accounting for Stock Issued to
Employees.
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
<PAGE> 9
DAZZLE MULTIMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1998 (CONTINUED)
asset to future net cash flows expected to be generated by the 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.
Recently Issued Accounting Standards - In June 1997, the Financial
Accounting Standards Board (FASB) issued Statement of Financial Accounting
Standards (SFAS) No. 130, Reporting Comprehensive Income, which requires an
enterprise to report, by major components and as a single total, the change
in the Company's net assets during the period from nonowner sources. The
Company adopted SFAS No. 130 in fiscal 1998. For all periods presented,
comprehensive loss was equal to the Company's net loss.
In March 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued SOP 98-1, Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use. SOP
98-1 provides guidance for an enterprise on accounting for the costs of
computer software developed or obtained for internal use. SOP 98-1 is
effective for the Company in fiscal 2000. The Company anticipates that
accounting for transactions under SOP 98-1 will not have a material impact
on its financial position or results of operations.
Statement of Financial Accounting Standards No. 133, Accounting for
Derivative Instruments and Hedging Activities, establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging
activities. Under SFAS No. 133, certain contracts that were not formerly
considered derivatives may now meet the definition of a derivative. As
amended in June 1999 by SFAS No. 137, this statement is effective for all
fiscal quarters of all fiscal years beginning after June 15, 2000. The
Company has not yet evaluated the impact of this statement.
Unaudited Interim Financial Information - The interim financial information
as of March 31, 1999 and for the three months ended March 31, 1998 and 1999
is unaudited and has been prepared on the same basis as the audited
financial statements. In the opinion of management, such unaudited
financial information includes all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the interim
information. Operating results for the three months ended March 31, 1999
are not necessarily indicative of the results that may be expected for the
year ended December 31, 1999.
Reclassifications - Certain reclassifications have been made to the 1997
financial statement presentation to conform to the 1998 presentation.
<PAGE> 10
DAZZLE MULTIMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1998 (CONTINUED)
2. PROPERTY AND EQUIPMENT, NET
Property and equipment are comprised of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1998
----- -----
<S> <C> <C>
Property and equipment, at cost:
Computers and software .................... $ 162 $ 210
Office equipment, furniture and fixtures .. 120 162
Production and engineering equipment ...... 66 99
Leasehold improvements .................... -- 10
----- -----
Total ....................................... 348 481
Accumulated depreciation .................... (55) (173)
----- -----
Property and equipment, net ................. $ 293 $ 308
===== =====
</TABLE>
Included in property and equipment at December 31, 1997 and 1998 are leased
assets with a net book value of $37,000 and $125,000, respectively.
3. CONVERTIBLE NOTES PAYABLE AND SECURED TRADE FACILITY FROM RELATED PARTY
In December 1998 the Company issued a secured convertible promissory note
(the "Note") of $2.5 million SCM Microsystems (SCM). The Note earns
interest at a fixed rate of 10% per annum.
Together with the Note SCM also extended a secured borrowing facility (the
"Facility") of $4.0 million to the Company. At December 31, 1998 $1.6
million was outstanding under the Facility. The outstanding balance under
the Facility will earn interest at a fixed rate of 10% per annum. The
outstanding amount under the Facility is payable on June 30, 1999. (See
Note 13)
The principal outstanding under the Note and the outstanding balance under
the Facility and any accrued but unpaid interest thereunder is convertible
at the option of the holder at any time. The Note and Facility is
convertible into: (i) Series A preferred stock if additional Series A
preferred stock is issued after the date of the agreement at the price of
the securities then in effect; (ii) Series B preferred stock if additional
Series B preferred stock is issued after the date of the agreement at the
price of the securities then in effect; or (iii) Series B preferred stock
at a conversion price of $2.00 per share.
The Note is mandatorily convertible upon the closing of an equity financing
that results in gross cash proceeds to the Company of at least $5.0
million.
The Company also granted a warrant to purchase common stock to SCM. The
warrant is exercisable only if the Note and Facility are not repaid when
due (June 30, 1999) and gives SCM the right to purchase common stock in the
Company at an exercise price of $0.01 per share. The number of shares that
may be purchased is the number of shares necessary for SCM to control 51%
of the Company's voting common stock after including the shares of the
Company owned or to be owned by SCM after the conversion of the Note and
the Facility and all interest accrued thereunder. The warrant will expire
upon the earlier of (i) payment of all obligations under the Note with cash
unless waived by SCM;
<PAGE> 11
DAZZLE MULTIMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1998 (CONTINUED)
(ii) the optional conversion of the Note; or (iii) the mandatory conversion
of the Note upon the closing of an equity financing of at least $5.0
million. (See Note 13)
The Note and Facility are mandatorily convertible upon the exercise of the
warrant.
Both the Note and the Facility are subordinated to the line of credit.
(See Note 5)
4. NOTES PAYABLE TO STOCKHOLDERS
In 1998, the Company issued convertible promissory notes with an aggregate
value of $1,574,000 to stockholders of the Company. These notes earn
interest at a fixed rate of 10% per annum, and are payable in full on June
30, 2000. The notes are convertible at the option of the holders at any
time prior to the maturity date into shares of a Series of the Company's
preferred stock issued at the close of the Company's next financing
yielding gross proceeds to the Company of at least $2.0 million. (See Note
13)
In 1998, the Company also issued five convertible promissory notes with an
aggregate face value of $735,000 to stockholders of the Company. These
notes earn interest at a fixed rate of 10% per annum and are payable in
full on June 30, 1999. The notes are automatically convertible prior to the
maturity date into shares of a Series of the Company's preferred stock
issued at the close of the Company's next subsequent financing yielding
gross proceeds to the Company of at least $2.0 million.
The notes payable to stockholders are subordinated to the line of credit
(see Note 5) and the Note and Facility from the related party (see Note 3).
During June 1999, the maturity date of these notes were extended to June
30, 2000.
5. LINE OF CREDIT
The Company has a revolving line of credit from a bank which provides for
borrowings up to $600,000 through April 15, 1999. (See Note 13) Borrowings
under the line bear interest at the bank's prime rate (7.75% at December
31, 1998) plus 2% per annum and are collateralized by substantially all of
the Company's assets. As of December 31, 1998 the Company had $463,000
outstanding on the line of credit. The line of credit was repaid during
April 1999. (See Note 13)
6. INCOME TAXES
As of December 31, 1997 and 1998, the Company had deferred tax assets of
approximately $1,394,000 and $4,223,000, respectively, relating primarily
to net operating loss carryforwards.
No tax benefit has been recorded through December 31, 1998 because of the
history of operating losses. A valuation allowance is provided when it is
more likely than not that some portion of the deferred tax asset will not
be realized. The Company established a 100% valuation allowance at December
31, 1997 and 1998 due to the uncertainty of realizing future tax benefits
from its net operating loss carryforwards and other deferred tax assets.
<PAGE> 12
DAZZLE MULTIMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1998 (CONTINUED)
At December 31, 1998, the Company had net operating loss ("NOL")
carryforwards and business credit carryforwards of approximately $7,514,000
and $27,000, respectively, for federal income tax purposes. State net
operating losses totaled $6,950,000 at December 31, 1998. These
carryforwards begin to expire in 2003 for state and 2012 for federal
purposes.
Internal Revenue Code Section 382 and similar California rules place a
limitation on the amount of taxable income which can be offset by NOL
carryforwards after a change in control (generally greater than 50% change
in ownership). Due to these provisions, utilization of the NOL and tax
credit carryforwards may be limited.
7. STOCKHOLDERS' EQUITY (DEFICIENCY)
Stock Split
During 1997, the Company had a four for one stock split. All common stock
share and per share information has been restated to reflect the stock
split.
Convertible Preferred Stock and Warrants
In fiscal 1998, 200,000 shares of Series A preferred stock valued at
$300,000 were issued to a consultant in payment for consulting services
rendered. The Company also issued 133,333 shares of Series A preferred
stock to a vendor in repayment of a note payable of $200,000.
Significant terms of the Series A redeemable convertible preferred stock
are as follows:
- At the option of the holder, each share of preferred stock is
convertible into one share of common stock. Shares automatically convert
into common stock upon the earlier of (a) completion of a public
offering with aggregate proceeds greater than $7,500,000 at not less
than $6.00 per share or (b) upon the consent of more than 50% of the
holders of the preferred stock.
- Series A convertible preferred stockholders are entitled to annual
noncumulative cash dividends of $0.12, per share when and if declared by
the Board of Directors.
- In the event of any liquidation of the Company (which includes the
acquisition of the Company by another entity), the holders of Series A
preferred stock have a liquidation preference over common stock of $1.50
per share plus all declared but unpaid dividends. The remaining assets
of the Company would then be distributed among the holders of the common
stock pro rata based on the number of shares held by each.
- The holders of each share of preferred stock shall have the rights to
one vote for each share of common stock into which such preferred stock
could then be converted.
During 1997, the Company issued an option to a stockholder to purchase
50,000 shares of Series A preferred stock at an exercise price of $1.50 per
share, as part of a financing transaction. The option value was
insignificant and expires on January 15, 2000.
<PAGE> 13
DAZZLE MULTIMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1998 (CONTINUED)
Share Exchange
In 1998, the Company exchanged 2,035,000 shares of Series A preferred stock
for 2,035,000 shares of common stock issued in 1997 to outside investors.
This exchange was completed to fulfill an obligation to provide the
exchanging shareholders with a senior security. As no senior security was
available when the cash proceeds from the investors were received, common
stock was temporarily issued in 1997 as an intermediate security.
Common Stock Reserved for Future Issuance
At December 31, 1998, the Company has reserved the following shares of
common stock for issuance in connection with:
<TABLE>
<S> <C>
Conversion of Series A preferred stock ... 2,035,000
Warrants issued and outstanding .......... 60,000
Options issued and outstanding ........... 3,316,534
Options available under stock option plans 1,073,700
---------
Total .................................... 6,485,234
=========
</TABLE>
Common Stock
During 1998, the Company issued 161,271 shares of common stock with a value
of $0.25 per share to consultants, vendors and manufacturers in repayment
for goods or services.
Additionally, in July 1998 the Company sold 50,000 shares of common stock
at $0.25 per share to a Director of the Company. The Director signed a
promissory note as consideration for the stock. The Company has the right
to repurchase 25,000 shares at $0.25 per share, lapsing over a four year
period. At December 31, 1998, 25,000 shares were subject to repurchase.
Stock Option Plans
During April 1997, the Board of Directors approved the 1997 Stock Option
Plan (the "1997 Plan"). Under the 1997 Plan, the Company was authorized to
issue options to purchase up to 30% of the outstanding common stock of the
Company. As of December 31, 1997, 1,390,234 shares were outstanding under
the 1997 Plan.
During March 1998, the Board approved the 1998 Stock Option Plan (the "1998
Plan"). At this time, the 1997 Plan was terminated.
Under the Company's 1998 Plan, a total of 3,000,000 nonstatutory and
incentive common stock options are authorized for issuance. Nonstatutory
stock options may be granted to employees, outside directors and
consultants, and incentive stock options may only be granted to employees.
The Plans provide for the granting of incentive stock options at not less
than 100% of the fair market value of the underlying stock at the grant
date. Nonstatutory stock options may be granted at not less than 85% of the
fair market value of the underlying stock at the date of grant. Options
granted to employees generally vest over four years and expire ten years
from the date of the grant.
<PAGE> 14
DAZZLE MULTIMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1998 (CONTINUED)
Options and Warrants Granted to Nonemployees
In fiscal 1998, the Company granted 232,000 options to nonemployees for
services performed and to be performed. In connection with these awards,
the Company recognized $11,000 in stock-based compensation expense during
1998. These options vest over three to four years and have a term of ten
years, and 101,983 options remain unvested at December 31, 1998.
In connection with the revolving line of credit (see Note 5), in fiscal
1998, the Company issued warrants to purchase 25,000 shares of Series B
preferred stock at an exercise price of $2.00 per share. The fair value of
these warrants of $26,000 was recognized as interest expense through
December 31, 1998.
In connection with the signing of a consulting agreement in fiscal 1998,
the Company issued a warrant to purchase 60,000 shares of its common stock
at $2.00 per share. This warrant expires on July 15, 2003. At December 31,
1998, this warrant was unexercised. The estimated fair value of these
warrants is not significant.
Stock option activity is summarized as follows:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS
-----------------------------
NUMBER WEIGHTED AVERAGE
OF SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Balance, January 1, 1997 ......................... -- $ --
Granted .......................................... 1,739,734 0.36
----------
Balance, December 31, 1997 (434,933 shares vested) 1,739,734 0.36
Granted .......................................... 3,722,034 0.21
Exercised ........................................ (65,000) 0.22
Canceled ......................................... (2,080,234) 0.33
----------
Balance, December 31, 1998 ....................... 3,316,534 $ 0.21
==========
</TABLE>
In 1998, options for 1,739,734 shares were canceled and regranted at the
then fair value of $0.25 per share.
<PAGE> 15
DAZZLE MULTIMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1998 (CONTINUED)
The following table summarizes information as of December 31, 1998
concerning currently outstanding and vested options:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------------
WEIGHTED
AVERAGE
REMAINING NUMBER
EXERCISE NUMBER CONTRACTUAL OF SHARES
PRICES OF SHARES LIFE (YEARS) VESTED
-------- --------- ------------ ----------
<S> <C> <C> <C>
$ 0.10 502,800 9.98 8,000
0.19 1,249,234 8.41 790,612
0.25 1,564,500 9.31 559,112
------- --------- ---- --------
$ 0.21 3,316,534 9.07 1,357,724
======= ========= ==== =========
</TABLE>
At December 31, 1998, 1,073,700 shares remained available for future grant.
Additional Stock Plan Information
As discussed in Note 1, the Company accounts for its stock-based awards to
employees using the intrinsic value method in accordance with APB Opinion
No. 25, Accounting for Stock Issued to Employees, and its related
interpretations.
SFAS No. 123, Accounting for Stock-Based Compensation, requires the
disclosure of pro forma net income (loss) and net income (loss) per share
had the Company adopted the fair value method since the Company's
inception. Under SFAS No. 123, the fair value of stock-based awards to
employees is calculated through the use of option pricing models. These
models also require subjective assumptions, including expected time to
exercise, which greatly affect the calculated values.
The Company's calculations for employee grants were made using the minimum
value method with the following weighted average assumptions: expected
life, three years following vesting; risk free interest rate of 6%; and no
dividends during the expected term. The Company's calculations are based on
a multiple award valuation approach and forfeitures are recognized as they
occur. If the computed values of the Company's stock-based awards to
employees had been amortized to expense over the vesting period of the
awards as specified under SFAS No. 123, the effect on net loss for the
years ended December 31, 1997 and 1998 would be immaterial.
The number and estimated weighted-average value per option for employee and
nonemployee awards, granted are as follows:
<PAGE> 16
DAZZLE MULTIMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1998 (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1997 1998
---------- -------------
<S> <C> <C>
Employee options:
Number of shares .................. 1,448,734 3,490,034
Estimated weighted average value... $ 0.04 $ 0.05
Nonemployee options:
Number of shares .................. 291,000 232,000
Estimated weighted average value... $ -- $ 0.11
</TABLE>
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases its facilities under noncancelable operating leases.
These leases expire on various dates through 2002. Minimum future lease
payments under noncancelable operating and capital leases as of December
31, 1998 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING SUBLEASE
FISCAL YEARS ENDING DECEMBER 31, LEASES LEASES INCOME
------- --------- --------
<S> <C> <C> <C>
1999..................................... $ 75 $269 $ 67
2000..................................... 59 210 33
2001..................................... 9 -- --
----- ---- ----
Total minimum lease payments ............ 143 $479 $100
==== ====
Less amount representing interest ....... (27)
-----
Present value of minimum lease payments.. 116
Less current portion .................... (56)
-----
Long term portion ....................... $ 60
=====
</TABLE>
Rent expense under the operating leases for the years ended December 31,
1997 and 1998 was $74,000 and $276,000, respectively.
9. FINANCIAL SUPPORT FROM SCM
The Company used $3,027,000 and $6,135,000 of cash in operating and
investing activities in 1997 and 1998, respectively. Accumulated deficit
was $10,075,000 at December 31, 1998. As a result, the Company has been and
continues to be substantially dependent on debt and equity financing from
SCM. SCM has informed the Company that it intends to fully support the
Company at least through December 31, 1999.
10. RELATED PARTY TRANSACTIONS
The Company has transactions with related parties in the ordinary course of
business. Related party transactions during the years ended 1997, 1998 and
the three months ended March 31, 1999, and not otherwise disclosed herein,
were as follows:
<PAGE> 17
DAZZLE MULTIMEDIA, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997 AND 1998 (CONTINUED)
Inventory includes $0 and $1,648,000 of parts purchased from SCM at
December 31, 1997 and 1998, respectively.
Accounts payable and accrued expenses include $1,608,000 and $2,539,000
payable to SCM for inventory at December 31, 1997 and 1998 and March 31,
1999.
11. MAJOR CUSTOMERS
Two customers accounted for 15% and 12% of revenues in fiscal 1997, while
another four customers accounted for 15%, 12%, 11% and 10% of revenues in
fiscal 1998.
At December 31, 1997, two customers accounted for 40% and 24% of trade
receivables. At December 31, 1998, three customers accounted for 20%, 15%
and 13% of trade receivables.
12. GEOGRAPHIC DATA
During the years ended December 31, 1997 and December 31, 1998, the Company
generated approximately 10% and 3%, respectively, of its revenues from
customers domiciled in Europe and 16% and 22%, respectively, from customers
domiciled in Asia.
13. SUBSEQUENT EVENTS
On April 9, 1999, Comerica Bank informed the Company that it was in breach
of the terms of the revolving credit loan and security agreement dated June
22, 1998, and was no longer willing to advance the Company funds under this
agreement. The repayment of this loan constituted a default of the Note and
Warrant Financing agreement between SCM Microsystems and Dazzle Multimedia
dated December 30, 1998, and pursuant to this agreement SCM Microsystems
were informed of the default.
On June 30, 1999, in accordance with the terms of the Note and Warrant
Financing agreement between SCM Microsystems and Dazzle Multimedia dated
December 30, 1998, SCM Microsystems elected to take a 51% interest in the
Company by converting $2.0 million of its accounts receivable from Dazzle,
the $2.5 million convertible promissory note and accrued interest on the
note and accounts payable of $216,000 into Series B Preferred equity. In
addition SCM exercised warrants for 7.7 million common shares at an
exercise price of $0.01 per share.
On June 30, 1999, notes payable to shareholders of $735,000 were converted
into Series B preferred stock at a conversion price of $2.00 per share,
following the creation of Series B preferred stock pursuant to the SCM
financing. (See Note 3)
* * * * *
<PAGE> 18
SCM MICROSYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma combined condensed financial
statements give effect to the acquisition by SCM Microsystems, Inc. ("SCM" or
the "Company") of 51% of the issued and outstanding capital stock of Dazzle
Multimedia, Inc. ("Dazzle") in a business combination accounted for by the
purchase method of accounting.
The unaudited pro forma combined condensed statements of operations give
effect to the business combination as if it had occurred on January 1, 1998. The
pro forma adjustments are based upon available information and certain
assumptions that management believes are reasonable under the circumstances. In
the opinion of management, all adjustments have been made that are necessary to
present fairly the pro forma data. Final amounts could differ from those set
forth below. In connection with the transaction, the Company recorded a charge
of $900,000 representing the fair value of in process research and development
acquired from Dazzle. This one-time charge is excluded from the pro forma income
statements.
The following unaudited pro forma combined condensed financial
statements are not necessarily indicative of the future results of operations of
the Company or the results of operations which would have resulted had the
Company and Dazzle been combined during the periods presented. In addition, the
pro forma results are not intended to be a projection of future results. The
unaudited pro forma combined condensed financial statements should be read in
conjunction with the audited consolidated financial statements of SCM for the
year ended December 31, 1998 included in the December 31, 1998 annual report on
form 10-K, and the unaudited consolidated financial statements for the quarter
ended June 30, 1999 included in the June 30, 1999 form 10-Q, and the financial
statements of Dazzle appearing elsewhere in this Form 8-K/A.
<PAGE> 19
SCM MICROSYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
For the year ended December 31, 1998
(in thousands, except per share information)
<TABLE>
<CAPTION>
THE COMPANY DAZZLE PRO FORMA PRO FORMA
ACTUAL ACTUAL ADJUSTMENTS COMBINED
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $ 85,009 $ 9,289 $ (3,609)(b) $ 90,689
Cost of revenues 57,148 7,736 (3,609)(b)
178 (a) 61,453
-------- ------- -------- --------
Gross margin 27,861 1,553 (178) 29,236
-------- ------- -------- --------
Operating expenses:
Research and development 6,356 1,619 7,975
Sales and marketing 8,904 3,725 12,629
General and administrative 9,288 2,717 928 (c) 12,933
In-process research and development 3,101 -- 3,101
Accelerated amortization of goodwill 5,211 -- 5,211
Other acquisition-related charges 3,153 -- 3,153
-------- ------- -------- --------
Total operating expenses 36,013 8,061 928 45,002
-------- ------- -------- --------
Loss from operations (8,152) (6,508) (1,106) (15,766)
Interest income (expense), net 5,832 (220) 5,612
Foreign currency transaction gains 192 -- 192
-------- ------- -------- --------
Loss before income taxes and minority interest (2,128) (6,728) (1,106) (9,962)
Provision for income taxes 2,845 -- 2,845
-------- ------- -------- --------
Loss before minority interest (4,973) (6,728) (1,106) (12,807)
Minority interest 1,038 (d) 1,038
-------- ------- -------- --------
Net loss $ (4,973) $(6,728) $ (68) $(11,769)
======== ======= ======== ========
Basic net income (loss) per share $ (0.38) $ (0.89)
======== ========
Diluted net income (loss) per share $ (0.38) $ (0.89)
======== ========
Shares used to compute basic net income (loss) per share 13,253 13,253
======== ========
Shares used to compute diluted net income (loss) per share 13,253 13,253
======== ========
</TABLE>
See accompanying notes to unaudited pro forma
combined condensed financial information.
<PAGE> 20
SCM MICROSYSTEMS, INC.
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENTS OF OPERATIONS
For the six months ended June 30, 1999
(in thousands, except per share information)
<TABLE>
<CAPTION>
THE COMPANY DAZZLE PRO FORMA PRO FORMA
ACTUAL ACTUAL ADJUSTMENTS COMBINED
----------- -------- ----------- ---------
<S> <C> <C> <C> <C>
Revenues $ 50,744 $ 5,902 $ (3,077)(b) $53,569
Cost of revenues 35,250 4,984 (3,077)(b)
187 (a) 37,344
-------- ------- -------- -------
Gross margin 15,494 918 (187) 16,225
-------- ------- -------- -------
Operating expenses:
Research and development 3,871 742 4,613
Sales and marketing 5,594 1,188 6,782
General and administrative 4,568 1,467 464 (c) 6,500
In process research and development 900 (900)(e) 0
Other acquisition and integration charges 1,168 1,168
Other one time charges 1,950 1,950
-------- ------- -------- -------
Total operating expenses 18,051 3,397 (436) 21,013
-------- ------- -------- -------
Loss from operations (2,557) (2,479) 249 (4,788)
Interest and other, net 3,388 (323) 3,065
-------- ------- -------- -------
Loss before income taxes 831 (2,802) 249 (1,722)
Provision for income taxes 1,677 1,677
-------- ------- -------- -------
Net loss $ (846) $(2,802) $ 249 $(3,399)
======== ======= ======== =======
Net loss per share:
Basic and diluted ($0.06) $ (0.24)
======== =======
Shares used in computing net loss per share:
Basic and diluted 14,067 14,067
======== =======
</TABLE>
See accompanying notes to unaudited pro forma
combined condensed financial information.
<PAGE> 21
SCM MICROSYSTEMS, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
On June 30, 1999, the Company acquired 51% of the issued and outstanding
capital stock of Dazzle Multimedia, Inc., a privately held company based in
Fremont, directly from Dazzle in exchange for (i) the conversion of a
convertible loan of $2.5 million and of $2.0 million of accounts receivable from
Dazzle resulting from sales to Dazzle by SCM Microsystems (Asia) during 1998 and
1999 prior to the acquisition date, (ii) upon the exercise by the Company of a
common stock warrant with an exercise price of $0.1 million issued by Dazzle and
(iii) the conversion of interest on the loan and accounts receivable of $0.2
million in connection with the convertible loan financing transaction.
Under purchase accounting, the total purchase price will be allocated to
the Company's assets and liabilities based on their relative fair values.
Allocations are subject to valuations as of the date of the purchase
transaction.
A summary of the preliminary allocation of the purchase price is as
follows (in thousands):
<TABLE>
<S> <C>
In-process research and development $ 900
Cash 963
Accounts receivable 3,245
Other assets 1,307
Notes payable (1,418)
Accounts payable (1,437)
Accrued expenses (2,211)
Goodwill 4,642
-------
Total $ 5,991
=======
</TABLE>
The actual allocation of the purchase price will depend upon the
composition of Dazzle's net assets on the closing date and the Company's
evaluation of the fair value of such net assets as of such date. Consequently,
the ultimate allocation of purchase price could differ from that presented.
The Company recorded a charge of $900,000 for the fair value of acquired
in process research and development related to the net assets acquired. Such
charge has not been included in the unaudited pro forma combined condensed
statements of operations.
The balance sheet as of June 30, 1999 is included in the June 30, 1999
form 10-Q, filed August 16, 1999.
The following adjustments have been reflected in the unaudited pro forma
combined condensed statements of operations:
(a) This adjustment represents the pro forma elimination of
intercompany profit in inventory relating to product purchased by
Dazzle from SCM.
<PAGE> 22
(b) These adjustments represent the pro forma elimination of
intercompany revenue and costs relating to the sale of products by the
Company to Dazzle during the periods presented.
(c) These adjustments represent, for each period presented, the
amortization of goodwill over an estimated life of five years.
(d) To record minority interest in losses of Dazzle, to the extent of
minority equity.
(e) To eliminate one-time charge resulting from the acquisition for
in-process research and development.
<PAGE> 23
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
SCM MICROSYSTEMS, INC.
A Delaware Corporation
Dated: September 30, 1999 By: /s/ Andrew C. Warner
-------------------------------------
Andrew C. Warner
Vice - President Finance, Chief
Financial Officer
