<PAGE> 1
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
FORM 10 - Q
-----------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM_________TO _________
COMMISSION FILE NUMBER: 0-22689
-----------------
SCM MICROSYSTEMS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0444317
STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION IDENTIFICATION NUMBER)
160 KNOWLES DRIVE, LOS GATOS, CA 95032
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES INCLUDING ZIP CODE)
(408) 370-4888
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL
YEAR, IF CHANGED SINCE LAST REPORT)
-----------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [ X ] Yes [ ] No
At November 9, 2000, 15,154,400 shares of common stock were outstanding.
================================================================================
<PAGE> 2
ITEM 1. FINANCIAL STATEMENTS
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Net revenues $ 43,263 $ 36,401 $ 105,383 $ 87,145
Cost of revenues 28,997 23,048 69,187 58,298
--------- --------- --------- ---------
Gross profit 14,266 13,353 36,196 28,847
--------- --------- --------- ---------
Operating expenses:
Research and development 3,493 2,494 9,179 6,365
Sales and marketing 6,410 3,816 14,609 9,410
General and administrative 5,230 2,892 11,457 9,410
In-process research and development 2,867 -- 2,867 900
Other acquisition-related charges -- -- -- 1,168
--------- --------- --------- ---------
Total operating expenses 18,000 9,202 38,112 27,253
--------- --------- --------- ---------
Income (loss) from operations (3,734) 4,151 (1,916) 1,594
Interest and other, net 1,656 1,307 5,760 4,695
--------- --------- --------- ---------
Income (loss) before taxes and minority interest
in earnings (2,078) 5,458 3,844 6,289
Provision for income taxes (765) (1,634) (2,553) (3,311)
Minority interest in loss of consolidated subsidiaries 432 -- 223 --
--------- --------- --------- ---------
Net income (loss) $ (2,411) $ 3,824 $ 1,514 $ 2,978
========= ========= ========= =========
Net income (loss) per share:
Basic $ (0.17) $ 0.27 $ 0.10 $ 0.21
Diluted $ (0.17) $ 0.26 $ 0.10 $ 0.20
Shares used in computing income (loss) per share:
Basic 14,596 14,078 14,439 14,056
Diluted 14,596 14,690 15,551 14,947
Comprehensive income (loss):
Net income (loss) $ (2,411) $ 3,824 $ 1,514 $ 2,978
Unrealized gain on investments, net of deferred taxes (2,264) -- (3,128) --
Foreign currency translation adjustment, net of deferred taxes (1,720) 1,069 (2,618) (1,055)
--------- --------- --------- ---------
Total comprehensive income (loss) $ (6,395) $ 4,893 $ (4,232) $ 1,923
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
2
<PAGE> 3
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 60,155 $ 45,662
Short-term investments 30,919 79,747
Accounts receivable, net 47,890 32,215
Inventories 26,764 15,934
Other current assets 7,370 8,836
--------- ---------
Total current assets 173,098 182,394
Property and equipment, net 7,227 6,372
Long-term investments 12,129 13,945
Intangible assets, net 34,722 8,006
Other assets 269 267
--------- ---------
Total assets $ 227,445 $ 210,984
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 21,208 $ 17,679
Accrued expenses 8,728 7,806
Income taxes payable 2,908 4,906
Short-term debt 405 1,512
--------- ---------
Total current liabilities 33,249 31,903
Deferred tax liability -- 3,201
Minority interest 284 84
Stockholders' equity:
Capital stock 15 14
Additional paid-in capital 195,218 173,048
Retained earnings (deficit) 162 (1,504)
Deferred compensation -- (25)
Other cumulative comprehensive income (loss) (1,483) 4,263
--------- ---------
Total stockholders' equity 193,912 175,796
--------- ---------
$ 227,445 $ 210,984
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
3
<PAGE> 4
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
( in thousands )
( unaudited )
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,514 $ 2,978
Adjustments to reconcile net income to net cash (used in)
provided by operating activities:
Deferred income taxes 1,607 --
Depreciation and amortization 4,203 1,765
Charge off of in-process research and development 2,867 900
Write-off of impairment charge related to Dazzle acquisition -- 600
Minority interest in earnings of subsidiaries (223) --
Other 23 36
Changes in operating assets and liabilities:
Accounts receivable (12,633) (3,998)
Inventories (7,856) 176
Other current assets 1,904 (1,098)
Accounts payable (688) (3,637)
Accrued expenses 374 3,107
Income taxes payable (2,208) (603)
-------- --------
Net cash (used in) provided by operating activities (11,116) 226
-------- --------
Cash flows from investing activities:
Capital expenditures (3,935) (4,158)
Proceeds from sale of subsidiary 39 --
Purchases of long-term investments (5,334) (4,596)
Business acquired, net of cash received (17,842) 836
Proceeds from maturities of short-term investments 102,401 57,062
Purchases of short-term investments (54,003) (43,605)
-------- --------
Net cash provided by investing activities 21,326 5,539
-------- --------
Cash flows from financing activities:
Payments on other current debt (4,017) (30)
Proceeds from issuance of equity securities, net 9,555 1,265
-------- --------
Net cash provided by financing activities 5,538 1,235
Effect of exchange rates on cash and cash equivalents (1,255) (357)
-------- --------
Net increase in cash and cash equivalents 14,493 6,643
Cash and cash equivalents at beginning of period 45,662 47,177
-------- --------
Cash and cash equivalents at end of period $ 60,155 $ 53,820
======== ========
Supplemental disclosures of cash flow information:
Cash paid for income taxes $ 5,451 $ 4,566
======== ========
Cash paid for interest $ 430 $ 238
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE> 5
SCM MICROSYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2000
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with accounting principles generally accepted
in the United States of America for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by accounting
principles generally accepted in the U.S. for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three-month period and nine-month period ended
September 30, 2000 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2000. For further information, refer
to the financial statements and footnotes thereto included in SCM Microsystems'
("SCM's") December 31, 1999 annual report on Form 10-K.
2. LONG-TERM INVESTMENTS
Long-term investments consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ -----------
<S> <C> <C>
Investment in SmartDisk, at fair value $ 4,845 $10,234
Investment in Spyrus, at cost 3,550 3,546
Investment in ActivCard, at fair value 2,680 --
Investment in SATUP, at cost 750 --
Other 304 165
------- -------
Total $12,129 $13,945
======= =======
</TABLE>
The investments in SmartDisk and ActivCard represent the quoted market
value of SCM's investment in their common stock.
In 1999, SCM made loans to Spyrus, a privately held company which
provides Internet identification and encryption solutions for e-business. In
March 2000, SCM converted its loans into shares of Spyrus' Series B convertible
preferred stock (see Note 8).
In September 2000, SCM loaned SATUP Databroadcasting AG ("Satup"), a
privately held satellite content distributor located in Weinstadt Germany,
$750,000. The loan is convertible into common shares of Satup and is guaranteed
by its majority investor. The loan has a term of three months and earns interest
at 10% per annum which is payable at the end of the term. Satup is a customer of
SCM.
3. INVENTORIES
Inventories consist of (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------ ------------
<S> <C> <C>
Raw materials $13,154 $ 9,077
Finished goods 13,610 6,857
------- -------
$26,764 $15,934
======= =======
</TABLE>
5
<PAGE> 6
4. SHORT-TERM DEBT
As of September 30, 2000, short-term debt consisted of a bank loan of
$401,000 related to the acquisition of 2-Tel and $4,000 in other short-term
debt. The $401,000 bank loan was repaid in October 2000. Short-term debt as of
December 31, 1999 consisted of $1,418,000 in notes payable and $94,000 in other
short-term debt.
As of December 31, 1999, Dazzle Multimedia, Inc. ("Dazzle") had
convertible promissory notes of $1,418,000 with $1,358,000 of the notes payable
in June 2000 and the remainder payable in July 2000. In June 2000, Dazzle repaid
$1,168,000 of the notes and the remaining $190,000 of the notes along with
accrued interest converted into 117,431 shares of Dazzle's Series B preferred
stock. In July 2000, Dazzle repaid the convertible promissory note of $60,000
along with its accrued interest.
5. RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board issued Statement
No. 133, Accounting for Derivative Instruments and Hedging Activities ("SFAS No.
133"), which defines derivatives, requires that all derivatives be carried at
fair value, and provides for hedge accounting when certain conditions are met.
SFAS No. 133, as amended, is effective for SCM in 2001. SCM does not believe
adoption of this statement will have a material impact on our consolidated
financial position or results of operations.
In December 1999, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin No. 101 ("SAB 101"), Revenue Recognition in Financial
Statements, which provides guidance on the recognition, presentation and
disclosure of revenues in financial statements filed with the SEC. SAB 101
outlines the basic criteria that must be met to recognize revenue and provides
guidance for disclosures related to revenue recognition policies. SAB 101 will
be effective for SCM's fiscal quarter ending December 31, 2000. SCM does not
believe adoption of this statement will have a material impact on our
consolidated financial position or results of operations.
6. ACQUISITIONS AND DIVESTITURES
Dazzle Multimedia, Inc.
On June 30, 1999, SCM acquired a 51% interest in Dazzle Multimedia,
Inc., a privately held company based in Fremont, California, in a transaction
that was accounted for under the purchase method of accounting. The results of
Dazzle have been consolidated from the date of acquisition.
In September 2000, SCM acquired an additional 1.8% of Dazzle's
outstanding common stock for approximately $1.2 million. The purchase of these
additional shares resulted in additional intangible assets of approximately $1.0
million and approximately $0.2 million of in-process research and development
costs.
The in-process research and development costs were written off and are
reflected in SCM's income statement for the quarter ended September 30, 2000.
The other intangible assets are being amortized over an estimated life of five
years. SCM has not yet completed the valuation of the additional intangibles
acquired. The valuation of these intangible assets will be completed in the
fourth quarter of 2000. The allocation of the purchase price is subject to a
final valuation to be completed by an independent valuation specialist.
Microtech International
On June 27, 2000, SCM paid $7,466,000 in cash and issued approximately
98,700 shares of its common stock, valued at $91.19 per share, to the
shareholders of Microtech International ("Microtech"), a privately held company
in North Branford, Connecticut, in exchange for all of the outstanding share
capital of Microtech. Microtech is a provider of digital photography solutions
for the consumer and business markets. The transaction has been accounted for
under the purchase method of accounting and the results of operations of
Microtech have been included in SCM's results of operations since the date of
acquisition. In connection with the acquisition, SCM incurred acquisition costs
of $997,000. Additional payments of up to $5.0 million, in equal amounts of cash
and
6
<PAGE> 7
stock, can be paid to Microtech's former shareholders if Microtech meets certain
financial criteria to be measured for the last six months of 2000 and the first
six months of 2001.
A valuation of the intangible assets related to the acquisition is
currently under way and will be completed in the fourth quarter of 2000. A
summary of the preliminary allocation of the purchase price is as follows (in
thousands):
<TABLE>
<S> <C>
Cash $447
Tangible assets 7,160
Trade name 1,200
Acquired workforce 1,100
Customer relationships 1,700
Non-compete agreements 700
Goodwill and other intangible assets 13,028
Assumed liabilities (7,872)
-------
Total $17,463
=======
</TABLE>
Intangible assets from the acquisition approximated $17,728,000 and
represented the excess of the purchase price over the fair value of the tangible
assets acquired less the liabilities assumed. The preliminary purchase price
allocation is based on the assumption that the entire amount of intangible
assets will have a life of five years and will be amortized on a straight-line
basis over this period. SCM has not yet completed the valuation of the
intangible assets acquired. When completed, certain amounts identified as
intangible assets may be amortized over periods other than the five-year period.
The following summary, prepared on a pro forma basis, combines SCM's
consolidated results of operations with Microtech's results of operations for
the three and nine months ended September 30, 2000 and 1999, as if Microtech had
been acquired at January 1, 1999. The table includes the impact of certain
adjustments including the elimination of intercompany profit and additional
amortization relating to intangible assets acquired (in thousands, except per
share data):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Revenues $ 43,263 $ 44,242 $ 118,449 $ 105,661
Net income (loss) $ (2,411) $ 2,828 $ (2,818) $ (1,107)
Net income (loss) per share:
Basic $ (0.16) $ 0.20 $ (0.19) $ (0.08)
Diluted $ (0.16) $ 0.19 $ (0.19) $ (0.08)
Shares used in per share computations:
Basic 14,695 14,177 14,537 14,155
Diluted 14,695 14,789 14,537 14,155
</TABLE>
Personal Video Division of FAST Multimedia
Effective July 1, 2000, Dazzle, a 53% owned subsidiary of SCM, acquired
the Personal Video Division ("PVD") of FAST Multimedia AG ("FAST"), a developer
of digital video production hardware and software for professional markets,
headquartered in Munich, Germany. The transaction was accounted for under the
purchase method of accounting and the results of operations of this division
were included in SCM's results of operations since its acquisition. Under the
terms of the agreement, Dazzle acquired FAST's PVD and all the assets of the PVD
division, including its research and development, marketing, sales, distribution
and administrative operations. Dazzle paid FAST approximately $4,000,000 in cash
for the division. Up to 2.8 million shares of Dazzle common stock, presently
valued at approximately $4,000,000, could be issued to PVD if the division meets
certain financial performance criteria for the last six months of 2000 and the
first six months of 2001. (See note 9.)
Acquisition costs related to this acquisition were $245,000. A valuation
of the assets acquired is currently under way and will be finalized in the
fourth quarter of 2000. A
7
<PAGE> 8
summary of the preliminary allocation of the purchase price is as follows (in
thousands):
<TABLE>
<S> <C>
Fixed assets, net $120
Trade name 373
Acquired workforce 749
In-process research and development 877
Core technology 146
Developed technology 671
Goodwill 1,783
Deferred tax liability (474)
-----
Total $4,245
======
</TABLE>
Intangible assets from the acquisition approximated $4,599,000 and
represented the excess of the purchase price over the fair value of the tangible
assets acquired. The in-process research and development costs of $877,000 were
expensed in the third quarter of 2000. The preliminary purchase price allocation
is based on the assumption that the developed technology will have a life of
three years and all other intangible assets will have a life of five years and
will be amortized on a straight line basis over those periods. SCM has not yet
completed the valuation of the intangible assets acquired. The allocation of the
purchase price is subject to a final valuation to be completed by an independent
valuation specialist.
2-Tel BV
On September 28, 2000, SCM paid $4,140,000 in cash and issued
approximately 106,229 shares of its common stock, valued at $36.5625 per share,
to the shareholders of 2-Tel BV ("2-Tel"), a privately held company in the
Netherlands, in exchange for all of the outstanding share capital of 2-Tel.
2-Tel is a provider of hardware and software solutions for the chip and smart
card-based electronic commerce applications. The transaction has been accounted
for under the purchase method of accounting. In connection with the acquisition,
SCM incurred acquisition costs of approximately $300,000.
A valuation of the intangible assets related to the acquisition is
currently under way and will be completed in the fourth quarter of 2000. A
summary of the preliminary allocation of the purchase price is as follows (in
thousands):
<TABLE>
<S> <C>
Cash $10
Tangible assets 423
Developed technology 2,060
In-process research and development 1,790
Acquired workforce 120
Customer relations 240
Goodwill 4,317
Assumed liabilities (636)
-----
Total $8,324
======
</TABLE>
Intangible assets from the acquisition approximated $8,527,000 and
represented the excess of the purchase price over the fair value of the tangible
assets acquired less the liabilities assumed. The in-process research and
development costs of $1,790,000 were expensed in the third quarter of 2000. The
preliminary purchase price allocation is based on the assumption that the
remaining intangible assets will have a life of five years and will be amortized
on a straight-line basis over this period. SCM has not yet completed the
valuation of the intangible assets acquired. The allocation of the purchase
price is subject to a final valuation to be completed by an independent
valuation specialist.
Divestiture
In April 2000, SCM sold to SmartDisk its interest in Impleo, a UK-based
company, for $39,000 in cash and 24,579 shares of SmartDisk common stock,
resulting in a net gain of $420,000. The gain is included in interest and other,
net in the statement of operations.
8
<PAGE> 9
7. SEGMENT REPORTING, GEOGRAPHIC INFORMATION AND MAJOR CUSTOMERS
Summary information by segment for the three and nine months ended
September 30, 2000 and 1999, is as follows (in thousands):
<TABLE>
<CAPTION>
QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- ----------------------
2000 1999 2000 1999
------- ------- ------- -------
<S> <C> <C> <C> <C>
Digital TV:
Revenues $18,418 $12,072 $50,285 $29,770
Gross margin 6,693 4,842 18,226 10,874
Digital Media and Connectivity:
Revenues $21,013 $18,589 $42,823 $44,854
Gross margin 6,041 6,078 12,696 12,600
PC/Network Security:
Revenues $ 3,832 $ 5,740 $12,275 $12,521
Gross margin 1,532 2,433 5,274 5,373
</TABLE>
Geographic revenues are based on the country where the customers are
located. Information regarding revenues by geographic region for the three
months and nine months ended September 30, 2000 and 1999 is as follows (in
thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------ ------------------------
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
United States $ 26,376 $ 19,657 $ 55,272 $ 40,146
Europe 12,025 10,920 35,125 34,296
Asia-Pacific 4,862 5,824 14,986 12,703
-------- -------- -------- --------
$ 43,263 $ 36,401 $105,383 $ 87,145
======== ======== ======== ========
</TABLE>
No customer exceeded 10% of total net revenues for the three and nine
months ended September 30, 2000 and 1999.
8. RELATED PARTY TRANSACTIONS
In 1999, SCM loaned $3,550,000 to Spyrus, Inc., a privately held company
which provides Internet identification and encryption solutions for e-business.
In March 2000, Spyrus consummated a $20,150,000 preferred stock financing. In
this transaction, SCM acquired 35,500,000 shares of Spyrus' Series B preferred
stock at a price of $0.10 per share through the conversion of the loan. This
represents approximately 15.8% of Spyrus' outstanding common stock on an as
converted basis. In connection with this transaction, three directors of SCM
acquired additional Spyrus Series B preferred stock on the same terms as SCM.
Shares held by these individuals represent approximately 3.6% of Spyrus'
outstanding common stock on an as converted basis. SCM has the right to appoint
a director to Spyrus' board of directors and a member of SCM's Board currently
serves as SCM's appointee.
9. SUBSEQUENT EVENT
In October of 2000, SCM announced its intention to acquire all of the
remaining outstanding common shares of Dazzle. SCM owned approximately 53% of
Dazzle as of September 30, 2000. The acquisition will involve both cash and SCM
common stock and is expected to be completed in the fourth quarter of 2000.
9
<PAGE> 10
ITEM 2. 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 including statements regarding the Company's
anticipated gross profits, research and development costs, and general and
administrative costs. SCM'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 "Factors That May Affect Future Operating Results" and elsewhere in this
document.
OVERVIEW
SCM Microsystems designs, develops and sells hardware, software and
silicon that enables people to conveniently and securely access digital content
and services, including content and services that have been protected through
digital encryption. We sell our products primarily into the Digital Television,
Broadband Access, PC/Network Security and Digital Media Transfer markets. Our
target customers are manufacturers in the consumer electronics, computer,
digital appliance, digital media and conditional access system industries. We
sell and license our products through a direct sales and marketing organization,
primarily to original equipment manufacturers. We also sell through
distributors, value added resellers and systems integrators worldwide.
Operationally, we have organized our business around three divisions: Digital
Television and Broadband Access, PC/Network Security, and Digital Media and
Connectivity. We were organized in Delaware in 1996.
ACQUISITIONS
Dazzle
On June 30, 1999, SCM acquired a 51% interest in Dazzle Multimedia,
Inc., a privately held company based in Fremont, California, in a transaction
that was accounted for under the purchase method of accounting. The results of
Dazzle have been consolidated from the date of acquisition.
In September 2000, SCM acquired an additional 1.8% of Dazzle's
outstanding common stock for approximately $1.2 million. The purchase of these
additional shares resulted in additional intangible assets of approximately $1.0
million and approximately $0.2 million of in-process research and development
costs.
The in-process research and development costs were written off and are
reflected in SCM's income statement for the quarter ended September 30, 2000.
The other intangible assets are being amortized over an estimated life of five
years. SCM has not yet completed the valuation of the additional intangibles
acquired. The valuation of these intangible assets will be completed in the
fourth quarter of 2000. The allocation of the purchase price is subject to a
final valuation to be completed by an independent valuation specialist.
Microtech International
On June 27, 2000, SCM paid $7,466,000 in cash and issued approximately
98,700 shares of its common stock, valued at $91.19 per share, to the
shareholders of Microtech International ("Microtech"), a privately held company
in North Branford, Connecticut, in exchange for all of the outstanding share
capital of Microtech. Microtech is a provider of digital photography solutions
for the consumer and business markets. The transaction has been accounted for
under the purchase method of accounting and the results of operations of
Microtech have been included in SCM's results of operations since the date of
acquisition. In connection with the acquisition, SCM incurred acquisition costs
of $997,000. Additional payments of up to $5.0 million, in equal amounts of cash
and stock, can be paid to Microtech's former shareholders if Microtech meets
certain financial criteria to be measured for the last six months of 2000 and
the first six months of 2001.
10
<PAGE> 11
Intangible assets from the acquisition approximated $17,728,000 and
represented the excess of the purchase price over the fair value of the tangible
assets acquired less the liabilities assumed. The preliminary purchase price
allocation is based on the assumption that the entire amount of intangible
assets will have a life of five years and will be amortized on a straight-line
basis over this period. SCM has not yet completed the valuation of the
intangible assets acquired. The allocation of the purchase price is subject to a
final valuation to be completed by an independent valuation specialist.
Personal Video Division of FAST Multimedia
Effective July 1, 2000, Dazzle, a 53% owned subsidiary of SCM, acquired
the Personal Video Division ("PVD") of FAST Multimedia AG ("FAST"), a developer
of digital video production hardware and software for professional markets,
headquartered in Munich, Germany. The transaction was accounted for under the
purchase method of accounting and the results of operations of this division
were included in SCM's results of operations since its acquisition. Under the
terms of the agreement, Dazzle acquired FAST's PVD and all the assets of the PVD
division, including its research and development, marketing, sales, distribution
and administrative operations. Dazzle paid FAST approximately $4,000,000 in cash
for the division. Up to 2.8 million shares of Dazzle common stock, presently
valued at approximately $4,000,000, could be issued to PVD if the division meets
certain financial performance criteria for the last six months of 2000 and the
first six months of 2001. (See note 9.)
Intangible assets from the acquisition approximated $4,599,000 and
represented the excess of the purchase price over the fair value of the tangible
assets acquired. The in-process research and development costs of $877,000 were
expensed in the third quarter of 2000. The preliminary purchase price allocation
is based on the assumption that the developed technology will have a life of
three years and all other intangible assets will have a life of five years and
will be amortized on a straight line basis over those periods. SCM has not yet
completed the valuation of the intangible assets acquired. The allocation of the
purchase price is subject to a final valuation to be completed by an independent
valuation specialist.
At the time of the acquisition, the estimated aggregate fair value of
the PVD Division's research and development efforts that had not reached
technological feasibility and had no alternative future uses was estimated to be
approximately $877,000. This amount was expensed in the third quarter of 2000
and represented the estimated fair value based on risk-adjusted cash flows
related to incomplete research and development projects. PVD had three projects
considered to be in-process technology at the time of the acquisition. These
projects were DV.now AV, DV.twin and TV-Master. As of the date of acquisition,
these projects are estimated to be 80%, 90% and 50% complete, respectively, and
are scheduled to be complete in the fourth quarter of 2000. As of September 30,
2000, the percentage completion of these projects were estimated to be 95% for
DV.now AV and DV.twin and 75% for TV-Master.
The fair value assigned to purchased in-process technology was
determined by estimating the completion percentage of research and development
efforts at the acquisition date, forecasting risks adjusted revenues considering
the completion percentage, estimating the resulting net cash flows from the
projects and discounting the net cash flows to their present value. The
completion percentages were estimated based on cost incurred to date, importance
of completed development tasks and the elapsed portion of the total project
time.
The revenue projection used to value the in-process technology is based
on sales forecasts for worldwide sales territories and adjusted to consider only
the revenue related to development achievements completed at the acquisition
date. Projected revenues for the in-process technology projects were assumed to
increase from product release to 2002 and to decline significantly in 2003 and
2004. Gross margins were projected to range from 42% for the remainder of 2000
to 40% for 2001 through to 2004. Projected gross margins were based on estimated
cost of revenues including component costs, tooling costs, assembly and testing
costs and packaging based on PVD's experience with similar products. Estimated
operating costs, income taxes and capital charges to provide a return on other
acquired assets were deducted from gross profit to arrive at net operating
income for the in-process development projects. Operating expenses were
estimated as a percentage of revenues and included sales and marketing expenses,
administrative expenses and development costs to maintain the technology once it
has achieved technological feasibility. In addition, net cash flow estimates
were adjusted to allow a fair return on working capital and fixed assets. A 30%
discount rate was used to discount the net cash flows back to their present
value. If these projects are not successfully developed, we may not realize the
value assigned to the in-process research and
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development projects. Total costs incurred for the DV.now AV project was
approximately $125,000 as of the acquisition date with an anticipated $35,000
needed for completion. Total costs incurred for the DV.twin project is
approximately $36,000 as of the acquisition date with an anticipated $5,000
needed for completion. Total costs incurred for the TV-Master product is
approximately $120,000 as of the acquisition date with an anticipated $120,000
needed for completion.
2-Tel BV
On September 28, 2000, SCM paid $4,140,000 in cash and issued
approximately 106,229 shares of its common stock, valued at $36.5625 per share,
to the shareholders of 2-Tel BV ("2-Tel"), a privately held company in the
Netherlands, in exchange for all of the outstanding share capital of 2-Tel.
2-Tel is a provider of hardware and software solutions for the chip and smart
card-based electronic commerce applications. The transaction has been accounted
for under the purchase method of accounting. In connection with the acquisition,
SCM incurred acquisition costs of approximately $300,000.
Intangible assets from the acquisition approximated $8,527,000 and
represented the excess of the purchase price over the fair value of the tangible
assets acquired less the liabilities assumed. The in-process research and
development costs of $1,790,000 were expensed in the third quarter of 2000. The
preliminary purchase price allocation is based on the assumption that the
remaining intangible assets will have a life of five years and will be amortized
on a straight-line basis over this period. SCM has not yet completed the
valuation of the intangible assets acquired. The allocation of the purchase
price is subject to a final valuation to be completed by an independent
valuation specialist.
At the time of the acquisition, the estimated aggregate fair value of
2-Tel's research and development efforts that had not reached technological
feasibility and had no alternative future uses was estimated to be approximately
$1,790,000. This amount was expensed in the third quarter of 2000 and
represented the estimated fair value based on risk-adjusted cash flows related
to incomplete research and development projects. 2-Tel had three projects
considered to be in-process technology at the time of the acquisition. These
projects were E-Gate 2000, Retail Application Terminal and the Transmobile
Wallet. The E-Gate 2000 and Retail Application Terminal projects are due to be
completed in the fourth quarter of 2000 while the Transmobile Wallet is
scheduled for completion in the second quarter of 2001. As of the date of the
acquisition and September 30, 2000, the percentage completion of these projects
were estimated to be 79% for the E-Gate 2000, 81% for the Retail Application
project and 31% for the Transmobile Wallet.
The fair value assigned to purchased in-process technology was
determined by estimating the completion percentage of research and development
efforts at the acquisition date, forecasting risks adjusted revenues considering
the completion percentage, estimating the resulting net cash flows from the
projects and discounting the net cash flows to their present value. The
completion percentages were estimated based on cost incurred to date, importance
of completed development tasks and the elapsed portion of the total project
time.
The revenue projection used to value the in-process technology is based
on sales forecasts for worldwide sales territories and adjusted to consider only
the revenue related to development achievements completed at the acquisition
date. Since the projected debt-free cash flow for the E-Gate 2000 product was
considered to be slightly negative, no in-process technology value was ascribed
to this product. Projected revenues for the two remaining in-process technology
projects were assumed to increase from product release to 2003 and to decline
significantly in 2004 and 2005. Gross margins were projected to range from 62%
in the first few years to 54% in 2004 and 2005 for the Retail Application
Terminal and 41% in 2001 to 46% for the following years for the Transmobile
Wallet. Projected gross margins were based on estimated cost of revenues
including component costs, tooling costs, assembly and testing costs and
packaging based on 2-Tel's experience with similar products. Estimated operating
costs, income taxes and capital charges to provide a return on other acquired
assets were deducted from gross profit to arrive at net operating income for the
in-process development projects. Operating expenses were estimated as a
percentage of revenues and included sales and marketing expenses, administrative
expenses and development costs to maintain the technology once it has achieved
technological feasibility. In addition, net cash flow estimates were adjusted to
allow a fair return on working capital and fixed assets. A 45% discount rate was
used to discount the net cash flows back to their present value for the Retail
Application Terminal while a 50% rate was used for the Transmobile Wallet. The
higher rate for the Transmobile Wallet relates to the additional risk related to
technological similarity to existing products and its stage of completion. If
these projects are not successfully
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developed, we may not realize the value assigned to the in-process research and
development projects. The calculated value of the in-process technology for the
Retail Application Terminal is $1,560,000 and $230,000 for the Transmobile
Wallet. Total costs incurred for the E-Gate 2000 project is approximately
$360,000 as of the acquisition date and September 30, 2000 with an anticipated
$120,000 needed for completion. Total costs incurred for the Retail Application
Terminal is approximately $324,000 as of the acquisition date and September 30,
2000 with an anticipated $108,000 needed for completion. Total costs incurred
for the Transmobile Wallet is approximately $180,000 as of the acquisition date
and September 30, 2000 with an anticipated $420,000 needed for completion.
RESULTS OF OPERATIONS
Net Revenues. Net revenues reflect the invoiced amount for goods shipped
less an allowance for estimated returns. Revenue is recognized upon product
shipment. Net revenues for the quarter ended September 30, 2000 were $43.3
million compared to $36.4 million in 1999, an increase of 19%. For the first
nine months of 2000, net revenues were $105.4 million, an increase of 21% over
the $87.1 million for the same period of 1999. The increase in revenues in the
first nine months of 2000 over the same period in 1999 was due primarily to an
increase in sales of our Digital TV and Broadband Access products of $20.5
million, offset by decreases in sales of Digital Media and Connectivity products
of $2.0 million and in sales of PC/Network Security products of $0.2 million.
The increase in the third quarter of 2000 compared to the same quarter in 1999
was primarily due to an increase in sales of our Digital TV and Broadband Access
products of $6.3 million and a $2.4 million increase in sales of Digital Media
and Connectivity products, offset by a decrease of $1.9 million in sales of
PC/Network Security products. The increases in Digital TV and Broadband Access
sales primarily consisted of shipments of Dazzle products to its customers,
including a new MPG-2 digital video product. No Dazzle product sales were
included in the first six months of 1999 since Dazzle was acquired on June 30,
1999. The increase in Digital Media and Connectivity sales in the third quarter
of 2000 compared to the same quarter in 1999 was primarily due to sales to the
retail channel by Microtech, which was acquired on June 27, 2000, and to
increased sales of our Digital Media Reader/Writers. The decrease in Digital
Media and Connectivity sales in the first nine months of 2000 compared to the
same period in 1999 was primarily due to the lack of availability of multimedia
flash memory cards for the digital music player market in the first six months
of 2000. The decrease in PC/Network Security shipments was primarily due to a
reduction of demand for our legacy SwapBox products. In the third quarter, PC
Security revenues came primarily from smart card reader products.
Gross Profit. Gross profit for the third quarter of 2000 was $14.3
million, or 33% of total net revenues, compared to $13.4 million, or 37% for the
same quarter of 1999. Gross profit for the first nine months of 2000 was $36.2
million, or 34% of total net revenues compared to $28.8 million, or 33% of total
net revenues for the same period of 1999. The increase in gross profit in
absolute dollars for the third quarter and first nine months of 2000 was
primarily due to the aforementioned increase in shipments of Digital TV and
Broadband Access products in both periods. Digital Media and Connectivity
margins in the nine months ended September 30, 1999 also included a $1.1 million
charge resulting from the write down of excess inventory in that division and
costs associated with the ramp up of production of certain Digital Media and
Connectivity products in the second quarter of 1999. The write down of inventory
resulted from a review of SCM's products in the Digital Media and Connectivity
division, which was conducted following a slow down in sales of certain
products. These declining sales were attributed to an overlap in SCM's product
lines. The decrease as a percentage of total net revenues for the quarter ended
September 30, 2000 compared to the same period in 1999 was primarily due to
lower margins in our Digital TV and Digital Media and Connectivity products as a
result of as change in product mix within those product groups. We believe that
our gross profit in absolute dollars during 2000 will continue to be above the
levels experienced in 1999. Our 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, product enhancements, software and
services, and the cost and availability of components. Accordingly, gross profit
percentages are expected to fluctuate from period to period.
Research and Development. Research and development expenses consist
primarily of employee compensation and fees for the development of prototype
products. Research and development costs are primarily related to hardware and
chip development, and to a lessor degree software development. To date, the
period between achieving technological feasibility and completion of software
has been short, and software development costs qualifying for capitalization
have been insignificant. Accordingly, SCM has not capitalized any software
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development costs. For the third quarter of 2000, research and development
expenses were $3.5 million, compared with $2.5 million in the same quarter of
1999, an increase of 40%. For the first nine months of 2000, research and
development expenses were $9.2 million, compared with $6.4 million, an increase
of 44%. As a percentage of total net revenues, research and development expenses
were 8% in the third quarter of 2000, 9% for the first nine months of 2000 and
7% for the corresponding 1999 periods. The increase in absolute amounts was
primarily due to increased engineering headcount and related product development
costs at our development centers in France and India, and to research and
development expenses of Dazzle. Personnel related expenses increased by $1.1
million in the third quarter of 2000 compared to the same quarter in 1999.
Personnel related expenses increased by $2.4 million and prototype expenses
increased by $0.4 million in the first nine months of 2000 compared to the same
period in 1999. We believe that the absolute amount of research and development
expenses during 2000 will be higher than in 1999 due to a higher number of
personnel involved in our new product development and customer projects, but
that such expenses will fluctuate as a percentage of total net revenues.
Sales and Marketing. Sales and marketing expenses consist primarily of
employee compensation, trade show and other marketing costs. Sales and marketing
expenses for the third quarter of 2000 were $6.4 million, or 15% of revenues,
compared with $3.8 million in the third quarter of 1999, or 10% of revenues, an
increase of 68%. Sales and marketing expenses for the first nine months of 2000
were $14.6 million, or 14% of revenues, compared with $9.4 million, or 11% of
revenues, in the same period of 1999, an increase of 55%. These increases in
absolute amounts in 2000 were primarily due to the acquisition of Dazzle and
Microtech which incur relatively higher marketing costs because of their retail
sales strategy and an increase in sales and marketing costs in the U.S. and
Germany. The increases in the third quarter of 2000 compared to the same period
in 1999 consisted primarily of personnel related expenses of $1.1 million and
marketing program costs of $1.7 million. In the first nine months of 2000
compared to the same period in 1999, increases in spending were primarily from
personnel related expenses of $2.0 million, marketing program costs of $2.3
million, external and internal sales commissions of $0.6 million and
depreciation expenses of $0.3 million. We expect sales and marketing expenses in
2000 to increase in absolute amounts as we continue to expand our sales and
business development efforts on a worldwide basis.
General and Administrative. General and administrative expenses consist
primarily of compensation expenses for employees performing SCM's administrative
functions, professional fees such as legal, audit, tax and consulting fees, and
the amortization of intangible assets. In the third quarter of 2000, general and
administrative expenses were $5.2 million, an increase of 81% compared with $2.9
million in the third quarter of 1999, and representing 12% and 8% of total net
revenues in the third quarter of 2000 and 1999, respectively. For the first nine
months of 2000, general and administrative expenses totaled $11.5 million, an
increase of $2.0 million from the same period of 1999. Increases in the third
quarter of 2000 as compared to the same period in 1999 related primarily to $0.9
million for personnel related expenses, $1.1 in amortization expense and $0.2
million in investor relations costs. The increase in amortization expenses
relates to our recent acquisitions. The increase in investor relations costs
relates to expenses associated with our annual meeting, including the
identification of shareholders and solicitation of proxies. Increases in
expenses in the first nine months of 2000 as compared to the same period of 1999
were $1.6 million for personnel related expenses, $1.6 million for amortization
expense, $0.6 million for professional fees, and $0.2 million for investor
relations, offset by the $2.0 million charge taken in the second quarter of
1999. The increases in professional fees were primarily related to tax
consulting and the rollout of our SAP software worldwide. The increases in
intangible asset amortization and in personnel expenses were primarily due to
the acquisition of Dazzle and Microtech. We believe general and administrative
expenses in 2000 will continue to increase in absolute amounts as we continue to
improve our infrastructure, but will fluctuate as a percentage of total net
revenues.
In-Process Research and Development. In-process research and development
costs of $2.9 million were included in our third quarter results for 2000 as
one-time charges for the development efforts that had not reached technological
feasibility within our recently acquired companies. Of this expense, $1.8
million related to the acquisition of 2-Tel, $0.9 million related to the
acquisition of the PVD division of FAST by Dazzle and the remaining $0.2 million
related to SCM's purchase of additional Dazzle common stock during the quarter.
The $0.9 million recorded in the second quarter of 1999 related to our purchase
of 51% of Dazzle's outstanding common stock.
Other Acquisition-Related Charges. In connection with the acquisition of
a majority interest in Dazzle in the second quarter of 1999, SCM incurred a
non-recurring charge of $0.6 million resulting from the write down of the Dazzle
investment at the date of the acquisition, headcount termination costs of $0.3
million and other costs of $0.2 million.
Interest Income and Other, Net. Interest income and other, net consists
primarily of interest earned on invested cash, offset by interest paid or
accrued on outstanding debt and foreign currency gains or losses. Interest
income and other, net for the third quarter of 2000 was $1.5 million and foreign
currency gains of $0.2 million, compared to $1.5 million for interest income and
other, net and a foreign currency loss of $0.2 million in the same period in
1999. For the first nine
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months of 2000, the net gain on sale of investments was $0.4 million, interest
income and other, net was $4.7 million and the foreign currency gain was $0.7
million compared to interest income and other, net of $4.7 million in the same
period of 1999.
Income Taxes. The provision for income taxes in the first nine months of
2000 was $2.6 million, or 66% of net income before tax, compared to $3.3
million, or 53% of net income before tax for the same period in 1999. SCM's tax
rate is affected by the mix of taxable income among the various tax
jurisdictions in which we do business and the non-deductibility of various
one-time charges and the amortization of intangibles.
Minority interest. Minority interest reflects the proportional profits
or losses that are attributable to the minority shareholders in two of SCM's
majority owned subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, our working capital was $139.8 million,
compared to working capital of $150.5 million as of December 31, 1999. The
decrease in working capital as of September 30, 2000 related primarily to lower
short-term investment levels.
During the first nine months of 2000, cash and cash equivalents
increased by $14.5 million due primarily to $21.3 million provided by investing
activities and $5.5 million by financing activities being offset by a use of
cash of $11.1 million in operations. The cash provided by investing activities
was primarily from net proceeds of $48.4 million from short-term investments,
offset by $17.8 million (net of cash acquired) paid to purchase Microtech, PVD
and 2-Tel, the purchase of $5.3 million of long-term investments and $3.9
million of capital expenditures. The $5.5 million of cash was primarily provided
by financing activities from proceeds for the exercise of stock options of $9.6
million being offset by $4.0 million of debt repayment. Cash used in operations
of $11.1 million was primarily from increases of accounts receivable of $12.6
million and inventories of $7.9 million, and decreases in accounts payable of
$0.7 million and income taxes payable of $2.2 million, more than offsetting a
decrease of other current assets of $1.9 million and income from operations of
$10.2 million after adding back depreciation and amortization of $4.2 million,
in process research and development costs of $2.9 million and deferred income
taxes of $1.6 million.
SCM has revolving lines of credit with two banks in Germany providing
total borrowings of up to DM 3,000,000 (approximately $1,356,000 as of September
30, 2000). Neither line has an expiration date. The German lines of credit bear
interest at rates ranging from 7.25% to 10.00%, and borrowings under these lines
of credit are unsecured. In France, we have a FF2,000,000 line of credit
(approximately $269,000 as of September 30, 2000) bearing interest at 5.59%.
This line has an expiration date of August 2001 and is unsecured. In the United
States, we have an unsecured $3,000,000 line of credit which bears interest at
8.5% and expires in May 2001. In addition, we have a Singapore overdraft
facility with a local bank of S$1,200,000 (approximately $690,000 as of
September 30, 2000) due on demand. The Singapore line is secured by a U.S.
$380,000 fixed deposit and has a base interest rate of 6.5%. Japan also has a 67
million yen line of credit (approximately $621,000 as of September 30, 2000)
with a local bank that is renewed annually for one year each June. The Japanese
line has an interest rate of 1.625% and is secured by a 67 million yen deposit.
At September 30, 2000, no amounts were outstanding under any of the above lines
of credit. SCM did have a $401,000 bank loan as of September 30, 2000 related to
our acquisition of 2-Tel. This loan was repaid in October 2000.
We believe that our current capital resources and available borrowings
should be sufficient to meet our operating and capital requirements through at
least the end of 2000. We may, however, seek additional debt or equity financing
prior to that time. We can not assure you that additional capital will be
available to SCM on favorable terms or at all. The sale of additional debt or
equity securities may cause dilution to existing stockholders.
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing SCM. Additional risks and uncertainties not presently known to
us or that we currently deem immaterial may also impair our business operations.
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If any of the following risks actually occur, our business, financial
condition or results of operations could be materially adversely affected. In
such case, the trading price of our common stock could decline and you could
lose all or part of your investment.
SEASONAL TRENDS IN SALES OF OUR PRODUCTS MAY AFFECT OUR QUARTERLY OPERATING
RESULTS.
Our business and operating results reflect seasonal trends. We have
typically experienced lower net revenue and operating income in the first
quarter and second quarter and higher net revenue in the third quarter and
fourth quarter of each calendar year. We believe that the seasonal trends in our
business and operating results are primarily due to the retail selling cycles of
our OEM and retail customers in our Digital Media Transfer, Digital TV and
Broadband Access markets, which are typically stronger in the second half of the
calendar year. SCM sells readers for digital cameras and Internet music players
in the U.S. and digital video broadcasting products in Europe. Because OEMs
typically bundle our devices into their consumer products, and because the
market for consumer products is stronger in the second half of the year, our
business is impacted as well. We expect that our sales to consumer-oriented OEMs
and the retail channel will increase, and the seasonal trends that effect our
business and operating results will continue.
OUR TARGET MARKETS MAY NOT DEVELOP AS QUICKLY AS EXPECTED, AND THEY MAY NOT
ACCEPT OUR PRODUCTS AS THEIR PREFERRED SOLUTIONS.
SCM's future growth and operating results will depend on whether our
products are commercially successful. As described below, each of our product
families address needs in different emerging markets. These markets may not
develop as quickly as or in the ways that we expect them to, which could limit
demand for our products. For example, widespread use of smart cards requiring
readers depends upon the successful implementation of user applications such as
credit card programs in the U.S. or home banking in Europe. If new applications
are not timely or effective, then the market for smart card-based services
requiring readers might not develop further.
SCM sells security and connectivity products across four target markets:
Digital TV, Broadband Access, PC/Network Security and Digital Media Transfer. In
the Digital Media Transfer market, our reader and connectivity products provide
easy to use, high-speed connections between digital platforms, such as PCs and
digital cameras, and electronic media, such as copyright-protected music from
the Internet. If the benefits of rapid transfer of digital photographs or music
are not perceived as sufficient, or if alternative technologies are more widely
adopted than the use of a media reader, then demand for products such as ours
may not grow.
In the PC/Network Security market, smart card-based security
applications are beginning to be adopted by computer makers and software
providers. Smart card token-based security applications provide protection from
unauthorized access to digital information. Our smart card reader products are
designed to provide security for PCs and other platforms, such as point of sale
(POS). However, the market for network and electronic commerce security
applications is still emerging and the smart card may not become the industry
standard; hence other token architectures or other security approaches may be
selected for these applications.
In the Digital TV market, our products provide a means of controlling
access to digital television broadcasts. Our DVB-CAM products provide
conditional access decryption functionality while adhering to the European
DVB-CI and U.S. NRSS-B standards. To date, our DVB-CAM products have been
implemented in a relatively limited number of Digital TV set-top boxes in
Europe. The European standard for Digital TV conditional access applications is
still emerging. Although we believe that the DVB-CI standard will eventually
become the European standard for Digital TV conditional access applications,
this standard may not be adopted and the European Digital TV market may fail to
develop further. In the United States, the Federal Communications Commission has
mandated the transition to open standards-based Digital cable TV products by
2005. However, no products are currently available in the market. The
substantial base of proprietary analog set-top boxes already installed in the
U.S. may cause the market for Digital TV conditional access products in general,
and our products in particular, to grow more slowly than expected or not at all.
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In the market for Broadband Access, our products provide a means of
accessing high-bandwidth content on the PC utilizing the broadband satellite,
terrestrial and cable networks. If other solutions address this demand more
quickly, more cost effectively or more conveniently than our products, or if we
are unable to development sufficient relationships with partners to distribute
our products, then our Broadband Access business may not grow.
If the market for the products described above or any of our other
products fail to develop or develop more slowly than expected, or if any of the
standards supported by us do not achieve or sustain market acceptance, our
business and operating results would be materially and adversely affected.
WE DEPEND UPON SALES TO ORIGINAL EQUIPMENT MANUFACTURERS AND TO DISTRIBUTORS.
Many of our products are intended for use as components subsystems or
value-added devices in systems manufactured and sold by third party original
equipment manufacturers, or OEMs. In order to convince an OEM to incorporate our
products into its systems, we must demonstrate that our products provide
significant commercial advantages over alternative solutions. We may fail to
successfully demonstrate these advantages or our products may cease to provide
any advantages. Even if we are able to demonstrate that our products are
superior, OEMs may still choose not to incorporate our products into their
systems. OEMs may also change their business strategies and manufacturing
practices, which could cause them to purchase fewer units of our products, find
other sources for products we currently manufacture or manufacture these
products internally. Our OEM customers may also seek price concessions from us.
Failure of OEMs to incorporate our products into their systems, the failure of
such OEMs' systems to achieve market acceptance or any other event causing a
decline in our sales to OEMs would have a material adverse effect on our
business and operating results.
We also sell some of our Digital Media and Connectivity and PC/Network
Security products through two-tiered distribution channels that include
distributors, systems integrators, value-added resellers, and retailers, who
maintain inventories of our products. We work closely with our distributors and
resellers to monitor inventory levels and ensure that appropriate levels of
products are available to end-users. Notwithstanding such efforts, if channel
partners attempt to reduce their levels of inventory or if they do not maintain
sufficient levels to meet customer demand, our sales could be negatively
impacted. In addition, delays in shipments by and payments to our distribution
customers by their customers may have a material adverse effect on our business
and operating results.
A SIGNIFICANT PORTION OF OUR SALES COMES FROM A SMALL NUMBER OF CUSTOMERS.
Sales to a relatively small number of OEM consumer electronics,
computer, digital appliance, digital media and conditional access system
manufacturers historically have accounted for a significant percentage of our
total sales. Sales to our top 10 customers accounted for approximately 45% of
our total net revenues in the third quarter of 2000. No customer exceeded 10% of
our revenues in the third quarter and for the first nine months of 2000. We
expect that sales of our products to a limited number of customers will continue
to account for a high percentage of our 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 our products, changes in customer buying patterns, or market, economic or
competitive conditions in the digital information security business, could harm
our business and operating results.
OUR MARKETS ARE HIGHLY COMPETITIVE.
The market for our products is intensely competitive and characterized
by rapidly changing technology. We believe that competition in this market is
likely to intensify as a result of increasing demand for digital data security,
access control and connectivity products. We currently experience competition
from a number of sources, including:
- Motorola/General Instrument, PubliCard and Scientific Atlanta in
DVB-CAM modules;
- Pinnacle Systems in digital video creation;
- Broadlogic, Harmonic, Motorola, Terayon and Thomson Multimedia
in broadband PC receivers;
- ActionTec, Carry Computer Engineering, Greystone and Litronic in
PC Card adapters;
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- Gemplus, Litronic, PubliCard and Towitoka in smart card readers
and universal smart card reader interfaces; and
- Carry Computer Engineering, DataFab, Lexar and SmartDisk for
digital media readers and connectivity.
We also experience indirect competition from some of our customers which
sell alternative products or are expected to introduce competitive products in
the future. We may in the future face competition from these competitors and new
competitors, such as Motorola, that develop digital information security
products. In addition, the market for digital data security, access control and
connectivity products may ultimately include technological solutions other than
ours.
Many of our current and potential competitors have significantly greater
financial, technical, marketing, purchasing and other resources. As a result,
our competitors may be able to respond more quickly to new or emerging
technologies or standards and to changes in customer requirements. Our
competitors may also be able to devote greater resources to the development,
promotion and sale of products, and may be able 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 our
prospective customers. Therefore, 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 these factors could have a
material adverse effect on our business and operating results.
We believe that the principal competitive factors affecting the market
for digital data security and connectivity products include:
- the extent to which products comply with existing industry
standards;
- technical features;
- ease of use;
- quality and reliability;
- level of security;
- strength of distribution channels; and
- price.
We may not be able to successfully compete as to these or other factors
and the competitive pressures may cause our business and operating results to
suffer.
THE MARKETS FOR OUR PRODUCTS MAY UNDERGO RAPID TECHNOLOGICAL CHANGE AND OUR
FUTURE SUCCESS WILL DEPEND ON OUR ABILITY TO MEET THE SOPHISTICATED NEEDS OF OUR
CUSTOMERS.
The markets for our products are characterized by rapidly changing
technology. Our customers' needs change and product requirements change
frequently. Product life cycles are short and industry standards are still
evolving. For example, in the broadband datacasting market, applications are
constantly evolving as companies strive to create sustainable and profitable
business models for their products or services. This impacts the features and
functions we must incorporate into our St@rKey broadband access products. Rapid
changes in technology or technology requirements could render our existing
products obsolete and unmarketable. Therefore, our future success will depend
upon our ability to successfully develop and introduce new and enhanced products
that meet our customers' evolving expectations and incorporate the latest
technology. Product development is risky because it is difficult to foresee
developments in technology, coordinate technical personnel and identify and
eliminate design flaws. Any significant delay in releasing new products could
have a material adverse effect on the ultimate success of our products and could
reduce sales of predecessor products. We may not be able to introduce new
products on a timely basis. In addition, new products introduced by us may fail
to achieve a significant degree of market acceptance or, once accepted, may fail
to sustain viability in the market for any significant period. These factors
could have a material adverse effect on our business and operating results.
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<PAGE> 19
WE RELY ON OUR STRATEGIC RELATIONSHIPS TO GENERATE REVENUE.
SCM collaborates with a number of corporations and is a member of key
industry consortia. Our future success will depend significantly on the success
of our current arrangements and our ability to establish additional
arrangements. We have formed strategic relationships, including
technology-sharing agreements, with a number of key industry players such as
Intel, Microsoft, Ericsson, Nokia and SanDisk. We evaluate, on an ongoing basis,
potential strategic alliances and intend to continue to pursue such
relationships. These arrangements may not result in commercially successful
products.
OUR SALES TO GOVERNMENT CONTRACTORS ARE SUBJECT TO UNCERTAINTIES AND MAY
DECREASE.
Approximately 1%, 8%, 12% and 17% of our net revenues for the nine
months ended September 30, 2000 and the years ended 1999, 1998 and 1997,
respectively, were derived from sales of our SwapBox PC Card reader product for
use by the U.S. government. These sales were made under contracts between SCM
and major OEMs that sell PCs to the United States Department of Defense ("DOD").
We believe that indirect sales to the DOD are subject to a number of significant
uncertainties, including timing and availability of funding, unpredictable
changes in the timing and quantity of orders and the generally competitive
nature of government contracting. In addition, the U.S. Government is planning
to transition to smart card-based security systems, and has reduced the number
of new PC Card reader products it purchases. While we are actively competing for
this new business, we may not be successful in securing new contracts for smart
card readers with the DOD or other government suppliers. In addition, we cannot
assure you that our products will meet new 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 our business and operating results. For example, in
the quarters ended September 30, 2000 and June 30, 2000, sales of our SwapBox
product were impacted by a reduction in orders from OEMs selling to the U.S.
DOD.
ANY DELAYS IN OUR NORMALLY LENGTHY SALES CYCLE COULD RESULT IN SIGNIFICANT
FLUCTUATIONS IN OUR QUARTERLY OPERATING RESULTS.
When we obtain a new OEM customer, our initial sales to that customer
usually take six to nine months. During this sales cycle, we may expend
substantial financial resources and our management's time and effort with no
assurance that a sale will ultimately result. The length of a new OEM customer's
sales cycle depends on a number of factors that we may not be able to control.
These factors include the customer's product and technical requirements and the
level of competition we face for that customer's business. Any delays in the
sales cycle for new customers could have a material adverse effect on our
business and operating results.
WE HAVE EXPERIENCED SIGNIFICANT GROWTH IN OUR BUSINESS IN RECENT PERIODS AND WE
MAY NOT BE ABLE TO MANAGE THIS GROWTH OR ANY FUTURE GROWTH.
Our business has grown substantially in recent periods, with net
revenues increasing from $10.9 million in 1994 to $127.3 million 1999 and
revenues of $105.4 million in the first nine months of 2000. We have expanded
our focus from the PC/Network Security market to include Digital TV, Digital
Media Transfer and more recently Broadband Access. Managing business in each of
these markets requires skilled management, significant attention and substantial
resources. To address our need for additional resources and because of
acquisitions, we have increased in size from 67 employees at December 31, 1995
to 530 employees as of September 30, 2000. The growth of our business places a
significant strain on our management and operations.
If we are successful in achieving our growth plans, our growth is likely
to continue to place a significant burden on our operating and financial systems
and increased responsibility for senior management and other personnel. Existing
management or any new members of management may not be able to improve existing
systems and controls or implement new systems and controls in response to
anticipated growth. Our failure to do so could have a material adverse effect on
our business and operating results.
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<PAGE> 20
WE MAY NOT BE ABLE TO SUCCESSFULLY INTEGRATE ACQUIRED COMPANIES.
We continually evaluate potential acquisitions of complementary
businesses, products and technologies. SCM acquired Microtech International,
based in North Branford, Connecticut in July 2000, 2-Tel BV based in The
Netherlands, in September 2000, and announced intentions to complete the
acquisition of Dazzle Multimedia, based in Fremont, California, by December
2000. In addition, Dazzle acquired the consumer products division of FAST
Multimedia, based in Munich, Germany, effective July 2000. We may not realize
the benefits of these recent and planned transactions or of future transactions.
Products we acquire in connection with acquisitions may not gain acceptance in
our markets, or may, because of similarities to our own products, cause
confusion in our markets. We may not be able to integrate acquired technologies
with our own products, and technologies we acquire may not be sufficient to
address market requirements.
In order to successfully integrate acquired companies, we must, among
other things:
- continue to attract and retain key management and other
personnel;
- integrate the acquired technologies and products;
- minimize any impact to productivity of our research and
development and marketing groups;
- establish a common corporate culture; and
- integrate geographically distant facilities and employees.
If we fail to achieve these goals, or if our management's attention to
day-to-day operations is diverted to integrating acquired companies or if
problems in the integration process arise, this could result in an adverse
effect on our business and operating results.
OUR GLOBAL LOCATIONS MUST WORK TOGETHER EFFECTIVELY.
SCM has its global headquarters in Los Gatos, California, as well as a
significant-sized facility in North Branford, Connecticut. European headquarters
are located in Pfaffenhofen, Germany, and the company maintains divisional
offices in Munich, Germany and Heeswijk-Dinther, The Netherlands. We also have
sales offices in Wokingham, England, and research and development facilities in
La Ciotat, France and Chennai, India. In Asia, we have manufacturing facilities
in Singapore and sales offices in Taiwan and Tokyo, Japan. Operating in diverse
geographic locations imposes a number of risks and burdens on us, 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 these difficulties can be reduced through the use
of electronic mail and teleconferencing, unforeseen difficulties or logistical
barriers in operating in diverse locations may occur. Operating in widespread
geographic locations requires us to implement and operate complex information
and operational systems. Although we believe that our systems are adequate, in
the future we may have to implement new systems. Implementation of new
information systems, in particular, may be costly. Any failure or delay in
implementing needed systems, procedures and controls on a timely basis or in
expanding current systems in an efficient manner could have a material adverse
effect on our business and operating results.
WE HAVE A LIMITED NUMBER OF SUPPLIERS OF KEY COMPONENTS.
We rely upon a limited number of suppliers of several key components of
our products. For example, SCM purchases mechanical components for use in our
smart card reader product exclusively from Stocko, a German-based supplier. Our
reliance on only one supplier could impose several risks, including an
inadequate supply of components, price increases, late deliveries and poor
component quality. Disruption or termination of the supply of these components
could delay shipments of our products, which could have a material adverse
effect on our business and operating results. These delays could also damage
relationships with current and prospective customers.
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<PAGE> 21
OUR BUSINESS COULD SUFFER IF WE OR OUR CONTRACT MANUFACTURERS CANNOT MEET
PRODUCTION REQUIREMENTS.
We are designing and manufacturing new products and technologies to
address emerging markets that are early in their life cycles. In many cases our
products are the first of their kind to address the evolving business
requirements of our customers. While we perform initial beta testing on all our
products, in certain cases we are unable to test the efficacy of the design or
functionality of our products for mass production. If we are successful in
securing large contracts for our products, we cannot be certain that we will be
able to produce them in sufficient quantities and that they will meet customer
specifications.
In addition, most of our products are manufactured outside the United
States because we believe that global sourcing enables us to achieve greater
economies of scale, improve gross margins and maintain uniform quality standards
for our products. Any significant delay in our ability to obtain adequate
supplies of our products from our current or alternative sources would
materially and adversely affect our business and operating results. In an effort
to reduce our manufacturing costs, SCM has shifted volume production of many of
our product components to our wholly owned subsidiary in Singapore. In addition,
we utilize contract manufacturers in Europe and Asia. Foreign manufacturing
poses a number of risks, including transportation delays and interruptions,
difficulties in staffing, currency fluctuations, potentially adverse tax
consequences and unexpected changes in regulatory requirements, tariffs and
other trade barriers, and political and economic instability. If we or any of
our contract manufacturers cannot meet our production requirements, we may have
to rely on other contract manufacturing sources or identify and qualify new
contract manufacturers. Despite efforts to do so, we may not be able to identify
or qualify new contract manufacturers in a timely manner and these new
manufacturers may not allocate sufficient capacity to us in order to meet our
requirements.
WE MAY BE EXPOSED TO RISKS OF INTELLECTUAL PROPERTY INFRINGEMENT.
SCM's success depends significantly upon our proprietary technology. We
currently rely on a combination of patent, copyright and trademark laws, trade
secrets, confidentiality agreements and contractual provisions to protect our
proprietary rights. Our software, documentation and other written materials are
protected under trade secret and copyright laws, which afford only limited
protection. SCM generally enters into confidentiality and non-disclosure
agreements with our employees and with key vendors and suppliers. For example,
our SwapBox and SwapSmart trademarks are registered in the United States. We
continuously evaluate the registration of additional trademarks as appropriate.
We currently have seven United States patents issued and five European patents
issued. We also have nineteen patent applications pending worldwide. In
addition, we have exclusive licenses under four other United States patents, and
licenses for two United States patents associated with our products. Although we
often seek to protect our proprietary technology through patents, it is possible
that no new patents will be issued, that our proprietary products or
technologies are not patentable, and that any issued patent will fail to provide
us with any competitive advantages.
There has been a great deal of litigation in the technology industry
regarding intellectual property rights. Litigation may be necessary to protect
our proprietary technology. SCM has from time to time received claims that it is
infringing upon third parties' intellectual property rights and future disputes
with third parties may not be resolved on terms acceptable to us. As the number
of products and competitors in our target markets grows, the likelihood of
infringement claims also increases. Any claims or litigation may be
time-consuming and costly, cause product shipment delays, or require us to
redesign our products or require us to enter into royalty or licensing
agreements. Any of these events could have a material adverse effect on our
business and operating results. Despite our efforts to protect our proprietary
rights, unauthorized parties may attempt to copy aspects of our products or to
use our proprietary information and software. 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. Our means of protecting
our proprietary and intellectual property rights may not be adequate. There is a
risk that our competitors will independently develop similar technology,
duplicate our products or design around patents or other intellectual property
rights.
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<PAGE> 22
MANY OF OUR CUSTOMERS ARE LOCATED IN OTHER COUNTRIES WHICH EXPOSES OUR BUSINESS
TO RISKS RELATED TO INTERNATIONAL SALES AND CURRENCY FLUCTUATIONS.
SCM was originally a German corporation and continues to conduct a
substantial portion of our business in Europe. Approximately 48%, 52%, 62%, and
51% of our revenues for the nine months ended September 30, 2000 and the years
ended 1999, 1998, and 1997, respectively, were derived from customers located
outside the United States. Because a significant number of our principal
customers are located in other countries, we anticipate that international sales
will continue to account for a substantial portion of our revenues. As a result,
a significant portion of our 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;
- exchange controls; and
- potential adverse tax consequences.
These factors may have a material adverse effect on our business and
operating results.
We conduct operations and sell products in several different countries.
Over the last two and one-half years, we have acquired companies in Japan,
Singapore, Great Britain, India and The Netherlands. Therefore, our operating
results may be impacted by the fluctuating exchange rates of foreign currencies,
especially the German mark, the Japanese yen, the Singapore dollar, the British
pound and the Indian rupee, in relation to the U.S. dollar. We do not currently
engage in hedging activities with respect to our foreign currency exposure. We
continually monitor our exposure to currency fluctuations and may use financial
hedging techniques when appropriate to minimize the effect of these
fluctuations. Even so, exchange rate fluctuations may still have a material
adverse effect on our business and operating results. In the future, we could be
required to denominate our product sales in other currencies, which would make
the management of currency fluctuations more difficult and expose us to greater
currency risks.
WE MAY FACE PRODUCT LIABILITY RISKS.
Customers rely on our token-based security products to prevent
unauthorized access to their digital information. A malfunction of or design
defect in our products could result in legal or warranty claims. Although we
place warranty disclaimers and liability limitation clauses in our sales
agreements and maintain product liability insurance, we cannot assure you that
these measures will be effective in limiting our liability. Liability for
damages resulting from security breaches could be substantial and could have a
material adverse effect on our business and operating results. In addition, a
well-publicized security breach involving token-based and other security systems
could adversely affect the market's perception of products like ours in general,
or our products in particular, regardless of whether the breach is actual or
attributable to our products. In that event, the demand for our products could
decline, which would cause our business and operating results to suffer.
OUR KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS AND SUCH KEY PERSONNEL MAY NOT
REMAIN WITH SCM IN THE FUTURE.
We depend on the continued employment of our senior executive officers
and other key management and technical personnel. If any of our key personnel
leave and are not adequately replaced, our business would be adversely affected.
In particular, we depend on the continued service of Steven Humphreys, our
Chairman of the Board, Robert Schneider, our Chief Executive Officer, Bernd
Meier, our President and Chief Operations Officer, and Andrew Warner, our Chief
Financial Officer. SCM 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, our 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 nine
months notice, and provides that the officer cannot work for one of our
competitors during the one-year period following his termination. Non-compete
agreements are, however, generally difficult to enforce. Therefore, these
provisions may not provide us with significant protection.
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We believe that our future success will depend in large part on our
continuing ability to attract and retain highly qualified technical and
management personnel. Competition for such personnel is intense, and we may not
be able to retain our key technical and management employees or to attract,
assimilate or retain other highly qualified technical and management personnel
in the future.
WE HAVE INCURRED OPERATING LOSSES AND MAY NOT REMAIN PROFITABLE.
Although SCM was profitable for the quarters ended June 30, 2000, March
31, 2000, December 31,1999, September 30, 1999 and March 31, 1999 and for the
year ended December 31, 1997, we incurred net losses on an annual basis from our
inception in 1993 through the year ended December 31, 1996, as well as in 1998.
Although we remained profitable on a pro forma basis, we also incurred a net
loss as reported in the quarters ended September 30, 2000 and June 30, 1999. In
view of our loss history, we cannot assure you that we will be able to achieve
or sustain profitability on an annual or quarterly basis in the future.
Our quarterly operating results depend on a number of factors that are
difficult to forecast. If our future quarterly operating results fall below the
expectations of securities analysts or investors, the trading price of our
common stock will likely drop. Our quarterly operating results have fluctuated
in the past and may continue to fluctuate in the future as a result of many
factors, including:
- size, timing, cancellation or rescheduling of significant
orders;
- availability of key components or products in the market on
which sales of our product depend;
- new product announcements or introductions by us or our
competitors;
- our ability to develop, introduce and market new products and
product enhancements on a timely basis, if at all;
- our success in expanding our sales and marketing organization
and programs;
- technological changes in the market for our products;
- our level of expenditures on research and development; and
- general economic trends.
In addition, because a high percentage of our operating expenses are
fixed, a small variation in revenue can cause significant variations in our
operating results from quarter to quarter. SCM's operating results may vary
significantly in future periods and our historical results may not be a reliable
indicator of our future performance.
OUR STOCK PRICE IS POTENTIALLY VOLATILE.
The stock market has recently experienced significant price and volume
fluctuations unrelated to the operating performance of particular companies. In
addition, the market price of our common stock has been highly volatile and is
likely to continue to be volatile. The future trading price for our common stock
will depend on a number of factors, including:
- variations in our financial results;
- comments and forecasts by security analysts;
- our ability to effectively manage our business;
- expected or announced relationships with other companies;
- any loss of key management;
- announcements of technological innovations or new products by us
or our competition; and
- patents or other proprietary rights or patent litigation.
In the past, companies that have experienced volatility in the market price of
their stock have been the object of securities class action litigation. If we
were the object of securities class action litigation, it could result in
substantial costs and a diversion of management's attention and resources.
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<PAGE> 24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
FOREIGN CURRENCIES
We conduct operations and sell products in several different countries.
Therefore, our operating results may be impacted by the fluctuating exchange
rates of foreign currencies, especially the German mark, the Japanese yen, the
Singapore dollar, the British pound and the Indian rupee, in relation to the
U.S. dollar. We do not currently engage in hedging activities with respect to
our foreign currency exposure. We continually monitor our exposure to currency
fluctuations and may use financial hedging techniques when appropriate to
minimize the effect of these fluctuations. Even so, exchange rate fluctuations
may still have a material adverse effect on our business and operating results.
FIXED INCOME INVESTMENTS
SCM's exposure to market risk for changes in interest rates relates
primarily to our investment portfolio. We do not use derivative financial
instruments for speculative or trading purposes. We place our investments in
instruments that meet high credit quality standards, as specified in our
investment policy. The policy also limits the amount of credit exposure to any
one issue, issuer and type of instrument. We do not expect any material loss
with respect to our investment portfolio.
We do not use derivative financial instruments in our investment
portfolio to manage interest rate risk. We do, however, limit our exposure to
interest rate and credit risk by establishing and strictly monitoring clear
policies and guidelines for our fixed income portfolios. At the present time,
the maximum duration of all portfolios is limited to two years. The guidelines
also establish credit quality standards, limits on exposure to one issue,
issuer, as well as the type of instrument. Due to the limited duration and
credit risk criteria established in our investment guidelines, the exposure to
market and credit risk is not expected to be material.
PART II: OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not applicable.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On June 27, 2000 and September 28, 2000, SCM acquired Microtech International,
Inc. and 2-Tel BV, respectively. In connection with these acquisitions, SCM
issued 99,141 shares of its common stock for Microtech and 106,229 shares of its
common stock for 2-Tel. These transactions were exempt from registration
requirements of Section 5 of the Securities Act pursuant to Section 4(2)
thereof. The recipients of the securities 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 transaction. All recipients had adequate
access to information regarding us.
ITEM 3. DEFAULTS ON SENIOR SECURITIES
Not applicable.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of shareholders held on July 26, 2000, the
following matters were acted on by the shareholders of the Company:
1. The re-election of Bernd Meier and Andrew Vought as Class II
directors for an additional three-year term:
Bernd Meier
Shares in Favor 5,071,626
Shares Against 6,370
Andrew Vought
Shares in Favor 5,071,626
Shares Against 6,370
2. The approval of an amendment to the Company's 1997 Stock Plan to
immediately increase the aggregate number of shares authorized
for issuance to 750,000:
Shares in Favor 3,539,625
Shares Against 228,226
3. The approval of an amendment to the Company's 1997 Stock Plan to
increase the number of shares authorized under the stock plan
annually to 1 million shares or 4.9%:
Shares in Favor 3,533,850
Shares Against 229,421
4. The ratification of the appointment of Deloitte & Touche as the
independent auditors of the company.
Shares in Favor 5,073,776
Shares Against 4,220
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
27 Financial Data Schedule
(b) Reports on Form 8-K
July 11, 2000 related to the acquisition of Microtech,
International.
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<PAGE> 26
SIGNATURES
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 thereunto duly authorized.
SCM MICROSYSTEMS, INC.
Date: November 14, 2000
/s/ ANDREW WARNER
-------------------------------------------
Andrew Warner
Vice President, Finance and Chief Financial
Officer (Principal Financial and Accounting
Officer)
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EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibits Description
-------- -----------
<S> <C>
27 Financial Data Schedule
</TABLE>
27
