AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 9, 2000
REGISTRATION NO. 333-35300
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
---------------
SMARTDISK CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 3577 65-0733580
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>
3506 MERCANTILE AVENUE
NAPLES, FLORIDA 34104
(941) 436-2500
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
MICHAEL S. BATTAGLIA
PRESIDENT AND CHIEF EXECUTIVE OFFICER
3506 MERCANTILE AVENUE
NAPLES, FLORIDA 34104
(941) 436-2500
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
---------------
COPIES OF COMMUNICATIONS TO:
<TABLE>
<S> <C> <C>
BRUCE E. MACDONOUGH, ESQ. TIMOTHY TOMLINSON, ESQ. TREVOR J. CHAPLICK, ESQ.
GREENBERG TRAURIG, LLP TOMLINSON ZISKO MOROSOLI & MASER LLP WILSON SONSINI GOODRICH & ROSATI,
ONE EAST CAMELBACK ROAD 200 PAGE MILL ROAD PROFESSIONAL CORPORATION
SUITE 1100 PALO ALTO, CALIFORNIA 94306 7927 JONES BRANCH DRIVE, SUITE 200
PHOENIX, ARIZONA 58012 (650) 325-8666 MCLEAN, VIRGINIA 22102
(602) 263-2300 (703) 734-3100
</TABLE>
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after this Registration Statement becomes effective.
---------------
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933 (the "Securities Act"), other than securities offered only in
connection with dividend or interest reinvestment plans, check the following
box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ] ---------------
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
PROPOSED MAXIMUM
TITLE OF EACH CLASS AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED PRICE(1)(2) REGISTRATION FEE(2)
- --------------------------------------------------------------------------------
<S> <C> <C>
Common Stock, $0.001 par value......... $133,568,907 $35,263
</TABLE>
================================================================================
(1) Includes shares that the Underwriters have the option to purchase from the
Company to cover over-allotments, if any.
(2) Estimated solely for the purpose of computing the amount of the
registration fee pursuant to Rule 457(c) under the Securities Act.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE>
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED MAY 9, 2000
PROSPECTUS
3,900,000 SHARES
[SMARTDISK LOGO]
COMMON STOCK
----------------
SmartDisk Corporation is selling 2,513,172 shares of our common stock and
some of our stockholders are selling 1,386,828 shares. We will not receive any
of the proceeds from the sale of shares by the selling stockholders.
Our common stock is quoted on the Nasdaq National Market under the symbol
"SMDK." On May 8, 2000, the last sale price of the common stock as reported on
the Nasdaq National Market was $32.50 per share.
INVESTING IN THE COMMON STOCK INVOLVES RISKS THAT ARE DESCRIBED IN THE
"RISK FACTORS" SECTION BEGINNING ON PAGE 7 OF THIS PROSPECTUS.
----------------
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<CAPTION>
PER SHARE TOTAL
----------- ------
<S> <C> <C>
Public offering price ............................ $ $
Underwriting discount ............................ $ $
Proceeds, before expenses, to SmartDisk .......... $ $
Proceeds to the selling stockholders ............. $ $
</TABLE>
The underwriters may also purchase up to an additional 585,000 shares from
us and some of the members of our management at the public offering price, less
the underwriting discount, within 30 days from the date of this prospectus to
cover over-allotments.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
The shares will be ready for delivery on or about , 2000.
----------------
MERRILL LYNCH & CO.
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
----------------
The date of this prospectus is , 2000.
<PAGE>
SIMPLIFYING THE DIGITAL LIFESTYLE/trademark/
SmartDisk's flash memory card readers enable consumers to transfer digital
information from digital appliances to PCs and the Internet. Our personal
storage systems serve as libraries for digital photographs, documents, music,
video files and more.
[drawings of digital appliances with arrows
pointing to picture of FlashPath readers,
USB Tri-Media readers
and USB future readers]
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<S> <C> <C>
FlashPath
Floppy Drive USB Tri-Media Future
Readers Reader Readers
for SmartMedia/trademark/, Memory for SmartMedia/trademark/, CompactFlash, for USB and FireWire connectivity
Stick and MultiMediaCard IBM MicroDrive and floppy disk
</TABLE>
[arrows pointing to a personal computer with arrows pointing to pictures of
personal storage systems]
[Internet] [Internet]
Photo Album Music Jukebox Video Library
The products shown above highlighted in yellow
are part of the SmartDisk product line.
Other products shown are manufactured by third parties.
<PAGE>
TABLE OF CONTENTS
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PAGE
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<S> <C>
Prospectus Summary ................................................................... 1
Risk Factors ......................................................................... 7
Note Regarding Forward-Looking Statements ............................................ 22
Corporate History and Development .................................................... 22
Use of Proceeds ...................................................................... 24
Price Range of Common Stock .......................................................... 24
Dividend Policy ...................................................................... 24
Capitalization ....................................................................... 25
Selected Consolidated Financial Data ................................................. 26
Unaudited Pro Forma Financial Data ................................................... 28
Management's Discussion and Analysis of Financial Condition and Results of Operations 33
Business ............................................................................. 47
Management ........................................................................... 66
Principal and Selling Stockholders ................................................... 76
Related Party Transactions ........................................................... 80
Description of Capital Stock ......................................................... 83
Shares Eligible For Future Sale ...................................................... 86
Underwriting ......................................................................... 87
Legal Matters ........................................................................ 89
Experts .............................................................................. 89
Where You Can Find Additional Information ............................................ 89
Index to Financial Statements ........................................................ F-1
</TABLE>
----------------
We own or have rights to the product names,
trade names and trademarks that we use
in conjunction with the sale of our products. This prospectus also contains
product names, trade names and trademarks of other companies.
You should rely only on the information contained in this prospectus. We
have not, and the underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with different or
inconsistent information, you should not rely on it. We are not, and the
underwriters are not, making an offer to sell these securities in any
jurisdiction where the offer or sale is not permitted. You should assume that
the information appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial condition, results
of operations and prospects may have changed since that date.
i
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY HIGHLIGHTS SELECTED INFORMATION CONTAINED ELSEWHERE IN THIS
PROSPECTUS. YOU SHOULD READ THIS ENTIRE PROSPECTUS CAREFULLY.
OUR BUSINESS
SmartDisk designs, develops, manufactures and markets digital connectivity
products and personal storage systems that allow consumers to easily access and
exchange digital data. As a result, our products provide consumers with a
user-friendly way to transfer, store, manage and share digital photographs,
video, music, voice and data among digital appliances, personal computers and
the Internet. For example, with the help of our products, consumers can use
their PCs as:
/bullet/ Electronic photo albums--to store digital still images;
/bullet/ Video libraries--for the home video collection;
/bullet/ Music jukeboxes--consisting of a selection of one's favorite
music, either retrieved from the Internet, "ripped" from a CD or
recorded from an audio cassette; and
/bullet/ Document vaults--for the secure storage and retrieval of documents
such as life insurance policies, mortgages, deeds and stock
certificates.
With the growth of digital appliances, such as digital cameras, digital
video camcorders, voice recorders and music players, consumers are increasingly
using the PC as the "multimedia center" of the home or office. These digital
appliances capture digital data on high capacity, reusable flash memory cards
that appeal to consumers because of their small size, versatility and
portability.
Our digital connectivity products and personal storage systems provide an
easy way to transfer, store, manage and share digital data. Our products are
designed to cross PC operating systems, support most leading media types and
use high performance PC interfaces, such as universal serial bus, or USB, and
FireWire. Our patented digital connectivity products, such as our FlashPath
products for the Toshiba SmartMedia card, SanDisk MultiMediaCard and Sony
Memory Stick, as well as Smarty, allow consumers to use the familiar 3.5 inch
floppy drive--found on most PCs worldwide--to simplify the exchange of images,
music, voice and other digital data between PCs and digital appliances. Our
latest digital connectivity product, the Tri-Media Reader, utilizes a USB cable
interface to exchange digital data and is intended to address an expanding
installed base of PCs with USB cable interfaces. Our personal storage systems
include high performance, external portable hard disk drives and floppy disk
drives for desktop and notebook PCs utilizing USB and FireWire, as well as
expansion bay disk drives for notebooks. Substantially all of our personal
storage systems are compatible with Windows and Macintosh/registered trademark/
operating systems.
We have strategic relationships with a number of leading flash memory card
manufacturers, PC manufacturers and consumer product OEMs, including Apple,
Cannon, FujiFilm, Hitachi, IBM, Iomega, JVC, NEC, Olympus, Panasonic, SanDisk,
Sony and Toshiba. As such, they actively participate in the development of our
products, provide us with access to leading-edge manufacturing capabilities and
market and/or distribute our products globally. For example, we have a
strategic relationship with Sony for the development of our FlashPath product
for the Sony Memory Stick and a strategic relationship with SanDisk for the
development of our FlashPath product for the SanDisk MultiMediaCard. In
addition, under our arrangement with Iomega, we have the exclusive right to
develop and market internal Zip drives for Apple's Macintosh PowerBooks.
1
<PAGE>
Our strategy is to use our proprietary technologies to:
/bullet/ Establish our connectivity solutions as the industry standard for
the transfer of data among digital appliances, PCs and the
Internet by strengthening our position as a technological and
market leader; and
/bullet/ Bring our personal storage systems quickly to market with industry
leading solutions that emphasize ease of use and portability and
therefore capitalize on the growth of the PC as the "multimedia
center" of the home or office.
Key elements of this business strategy are to:
/bullet/ Capitalize on our technology expertise and technology platforms to
expand our product lines;
/bullet/ Expand our customer and strategic industry relationships to take
advantage of the significant marketing strength of our OEM
customers and the new product designs that result from our
cooperative development activities;
/bullet/ Maintain media, interface and platform neutrality by supporting
different flash memory card standards, such as those from SanDisk,
Sony and Toshiba, as well as all rotational media, including hard
disk drives, floppy disk drives, Iomega Zip drives and Imation
SuperDisk drives, in order to address the data transfer and
storage needs of purchasers of emerging digital appliances;
/bullet/ Promote market awareness of our products, as well as the SmartDisk
name;
/bullet/ Continue our focus on easy-to-use digital connectivity products
and personal storage systems that offer seamless integration with
the PC's operating system to conveniently transfer and store
digital information; and
/bullet/ Capitalize on the first-to-market advantages provided by our
technical expertise to provide various connectivity and storage
solutions that satisfy the needs created by the proliferation of
digital appliances.
2
<PAGE>
RECENT DEVELOPMENTS
ACQUISITION OF VST TECHNOLOGIES, INC. On March 6, 2000, we completed our
acquisition of VST Technologies, Inc. VST designs, develops, manufactures and
markets USB-based flash memory readers and USB and FireWire-based high
performance personal storage systems for Windows and Macintosh operating
systems. Our acquisition of VST will, therefore, expand our existing product
lines to include advanced FireWire and USB technologies and, additionally,
expand our access to the rapidly growing digital video and digital music
markets. In addition, we expect that the acquisition of VST will position us to
participate in the market for Apple products. VST's product line includes
expansion bay storage devices, such as the Zip 100 drive for Apple, IBM and
Fujitsu notebooks, SuperDisk drives for select Apple and IBM notebooks, USB
floppy drives, portable FireWire hard drives and a dual flash memory card and
rotational media reader, as well as a recently introduced 100 Gigabyte FireWire
redundant array of independent disks, or RAID array.
We acquired VST for approximately $16.4 million in cash, approximately 1.1
million shares of our common stock and options to acquire approximately 443,000
shares of our common stock with exercise prices ranging from $0.90 to $4.45.
VST, a Delaware corporation whose predecessor was incorporated in 1993, is
located near Boston, Massachusetts. For the year ended December 31, 1999, VST
had gross revenues of approximately $61.5 million, operating income of
approximately $6.5 million and net income of approximately $6.2 million.
ACQUISITION OF EL GATO SOFTWARE LLC. On April 21, 2000, we completed our
acquisition of El Gato Software LLC. El Gato, a California limited liability
company, is located near San Jose, California. El Gato develops and markets USB
and FireWire drivers, applications and firmware support for leading personal
storage systems, including SmartMedia, CompactFlash, hard drives, Zip drives,
floppy drives and optical drives. We use El Gato drivers in our FireWire hard
drives, FireWire Zip drives and USB-based products, including our Tri-Media
Reader. We acquired substantially all of the intellectual property of El Gato
for approximately $755,000 in cash and approximately 37,000 shares of our
common stock. We also retained the services of El Gato's staff of five software
developers under two-year consulting agreements.
ACQUISITION OF IMPLEO LIMITED. On April 28, 2000, we completed our
acquisition of Impleo Limited. Impleo, an English corporation established in
November 1999, is based in England. Impleo manufactures and markets digital
connectivity products and personal storage systems under the Datawise brand. We
plan to use Impleo as our primary European distributor. We acquired all of the
capital stock of Impleo for approximately $200,000 in cash and approximately
125,000 shares of our common stock.
RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2000. On May 4, 2000, we
announced our results for the three months ended March 31, 2000. Revenues
increased approximately 216% to approximately $17.4 million compared to
approximately $5.5 million for the three months ended March 31, 1999. Net
income for the three months ended March 31, 2000, excluding amortization of
goodwill and other intangibles related to the VST acquisition, was
approximately $1.3 million or approximately $0.07 per diluted share compared
with a net loss of approximately $2.0 million or approximately $0.22 per share
for the three months ended March 31, 1999. Including amortization of goodwill
and other intangibles related to the VST acquisition, our net loss was
approximately $0.5 million or approximately $0.03 per share for the three
months ended March 31, 2000. Gross profit increased to approximately $6.1
million or approximately 35% of revenue for the three months ended March 31,
2000 compared to approximately $0.8 million or approximately 15% for the three
months ended March 31, 1999. Our first quarter results include VST's results of
operations for the period from March 6, 2000 through March 31, 2000.
3
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH
31,
------------------------
1999 2000
----------- ----------
<S> <C> <C>
Total revenues ......................................................... $ 5,507 $ 17,383
Cost of revenues ....................................................... 4,671 11,331
-------- --------
Gross profit ........................................................... 836 6,052
Operating expenses
Research and development .............................................. 881 2,004
Sales and marketing ................................................... 385 808
General and administrative ............................................ 1,565 2,169
Amortization of goodwill and other intangible assets .................. -- 2,238
-------- --------
Total operating expenses ............................................... 2,831 7,219
-------- --------
Operating loss ......................................................... (1,995) (1,167)
Interest and other income, net ......................................... 46 671
-------- --------
Loss before income taxes ............................................... (1,949) (496)
Income tax expense ..................................................... 17 8
-------- --------
Net loss ............................................................... $ (1,966) $ (504)
======== ========
Net loss per share--basic and diluted .................................. $ (0.22) $ (0.03)
Shares used in computing net loss per share--basic and diluted ......... 8,965 16,005
RESULTS ADJUSTED FOR AMORTIZATION OF GOODWILL
AND OTHER INTANGIBLE ASSETS RELATED TO THEVST ACQUISITION
Net loss ............................................................... $ (1,966) $ (504)
Adjustment for amortization of goodwill and other intangible assets
related to the VST acquisition, net of tax ............................ -- 1,779
-------- --------
Net income (loss), as adjusted ......................................... $ (1,966) $ 1,275
======== ========
Net income (loss) per diluted share, as adjusted ....................... $ (0.22) $ 0.07
Shares used in diluted per share calculation, as adjusted .............. 8,965 17,756
</TABLE>
BALANCE SHEET DATA (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF
MARCH 31, 2000
---------------
<S> <C>
Cash, cash equivalents and short-term investments ......... $ 22,067
Working capital ........................................... 36,487
Total assets .............................................. 151,244
Total stockholders' equity ................................ 118,549
</TABLE>
----------------
We were incorporated in Delaware on March 5, 1997 as "Fintos, Inc." and
changed our name to "SmartDisk Corporation" on September 26, 1997. Our
executive offices are located at 3506 Mercantile Avenue, Naples, Florida 34104,
and our telephone number is (941) 436-2500.
4
<PAGE>
THE OFFERING
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Common stock offered:
By SmartDisk ................................. 2,513,172 shares
By the selling stockholders .................. 1,386,828 shares
Total ..................................... 3,900,000 shares
Shares outstanding after the offering ......... 19,888,793 shares
Use of proceeds ............................... We estimate that our net proceeds from this offering
without exercise of the over-allotment options will be
approximately $77.1 million. We intend to use these net
proceeds for working capital and other general corporate
purposes, including potential acquisitions of technology or
businesses. The other principal purpose of this offering is
to provide liquidity to existing stockholders. We will not
receive any proceeds from the sale of shares by the selling
stockholders.
Risk factors .................................. See "Risk Factors" and other information included in this
prospectus for a discussion of factors you should carefully
consider before deciding to purchase shares of our
common stock.
Nasdaq National Market symbol ................. SMDK
</TABLE>
The number of shares outstanding after the offering is based upon the
shares outstanding as of April 30, 2000 and excludes 3,367,017 shares reserved
for issuance under our stock option plans as of April 30, 2000, of which
options to purchase 2,450,515 shares at an average option price of $19.45 were
outstanding as of April 30, 2000.
5
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
HISTORICAL PRO FORMA
-------------------------------------- ------------
1997 1998 1999 1999(1)
----------- ------------ --------- ------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Total revenues ................................................ $ 893 $ 15,323 40,319 $ 101,845
Cost of revenues .............................................. 301 12,600 24,820 70,594
-------- -------- ------ ---------
Gross profit .................................................. 592 2,723 15,499 31,251
Operating expenses:
Research and development ..................................... 1,412 2,107 5,869 8,477
Sales and marketing .......................................... 12 1,566 1,608 5,373
General and administrative ................................... 3,184 4,631 6,259 9,161
Amortization of goodwill and other intangible assets ......... -- -- -- 28,169
-------- -------- ------ ---------
Total operating expenses ...................................... 4,608 8,304 13,736 51,180
-------- -------- ------ ---------
Operating income (loss) ....................................... (4,016) (5,581) 1,763 (19,929)
Net income (loss) before income taxes ......................... (4,009) (5,605) 2,325 (20,932)
Income tax expense (benefit) .................................. (45) (102) 1,367 (3,261)
-------- -------- ------ ---------
Net income (loss) ............................................. $ (3,964) $ (5,503) $ 958 $ (17,671)
======== ======== ======= =========
Weighted average shares used to calculate
earnings (loss) per share amounts:(2)
Basic ........................................................ 7,739 8,040 10,725 11,798
Diluted ...................................................... 7,739 8,040 13,349 11,798
Earnings (loss) per share:
Basic ........................................................ $ (0.51) $ (0.68) $ 0.09 $ (1.50)
Diluted ...................................................... $ (0.51) $ (0.68) $ 0.07 $ (1.50)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
---------------------------------------------
ACTUAL PRO FORMA(3) AS ADJUSTED(4)
---------- -------------- ---------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments ......... $45,720 $ 30,083 $107,177
Working capital ........................................... 46,108 34,431 111,525
Total assets .............................................. 63,444 165,890 242,984
Total stockholders' equity ................................ 49,787 118,879 195,973
</TABLE>
- ----------------
(1) Gives effect to the VST acquisition as if it had occurred as of January 1,
1999. See "Unaudited Pro Forma Financial Data."
(2) Shares used in computing earnings (loss) per share reflect the retroactive
adjustment of outstanding shares related to the mergers of SmartDiskette
Limited and SmartDisk Security Corporation into SmartDisk, as well as the
one-for-four reverse stock split completed in August 1999.
(3) Gives effect to the VST acquisition as if it had occurred as of December
31, 1999.
(4) Adjusted to give effect to (i) our sale of the 2,513,172 shares of common
stock at an assumed public offering price of $32.50 per share (after
deduction of the estimated underwriting discount and offering expenses)
and the receipt and application of the net proceeds and (ii) the VST
acquisition as if each had occurred as of December 31, 1999. See "Use of
Proceeds," "Capitalization" and "Unaudited Pro Forma Financial Data."
6
<PAGE>
RISK FACTORS
BEFORE YOU INVEST IN OUR COMMON STOCK, YOU SHOULD BE AWARE OF THE RISKS
DESCRIBED BELOW. YOU SHOULD CAREFULLY CONSIDER THESE RISK FACTORS, TOGETHER
WITH ALL OF THE OTHER INFORMATION INCLUDED IN THIS PROSPECTUS, BEFORE YOU
DECIDE WHETHER TO PURCHASE SHARES OF OUR COMMON STOCK.
WE HAVE INCURRED OPERATING LOSSES AND CANNOT GUARANTEE THAT WE WILL BE ABLE TO
SUSTAIN OUR PROFITABILITY.
Except for the third and fourth quarter of 1999, we have incurred net
losses on a quarterly basis since inception. We had a net loss of approximately
$5.5 million during 1998. We had net income of approximately $1.0 million
during 1999 (a net loss of approximately $17.7 million on a pro forma basis
after giving effect to the VST acquisition). In addition, as of December 31,
1999, we had an accumulated deficit of approximately $21.7 million. In light of
our loss history and the VST acquisition, we cannot assure you that we will be
able to achieve profitability in the future.
WE HAVE A LIMITED OPERATING HISTORY ON WHICH TO BASE AN INVESTMENT DECISION.
We were incorporated in March 1997, commenced operations in January 1998,
and our predecessor corporation only conducted limited operations. Further,
commercial sales of our primary product, FlashPath, only commenced in mid-1998.
As a result of our limited operating history, we have limited financial data
that can be used in evaluating our business and prospects and in projecting
future operating results.
OUR MANAGEMENT TEAM HAS ONLY RECENTLY BEEN ASSEMBLED AND MAY NOT BE ABLE TO
WORK TOGETHER AS A COHESIVE UNIT.
Our Chief Financial Officer, Senior Vice President, Japanese Operations,
Vice President, Corporate Development and Legal Affairs, Vice President,
Audio/Video Products all joined us during 1999 and our Chief Technology Officer
and Senior Vice President and General Manager, Personal Storage Systems, joined
us in March 2000. There is the possibility that our management team may not be
able to work together as a cohesive unit.
WE MAY NOT BE ABLE TO SELL SUFFICIENT QUANTITIES OF OUR PRODUCTS TO SUSTAIN A
VIABLE BUSINESS IF THE MARKET FOR DIGITAL CONNECTIVITY PRODUCTS DOES NOT
CONTINUE TO DEVELOP OR IF A COMPETING TECHNOLOGY DISPLACES THESE PRODUCTS.
Our current and planned FlashPath products are designed to provide
connectivity between personal computers and digital appliances that use flash
memory cards. The flash memory market is in the early stage of development and
is still evolving. Our current dependence on sales of FlashPath and lack of
product diversification exposes us to a substantial risk of loss in the event
that the flash memory market does not develop or if a competing technology
replaces flash memory cards. If a competing memory storage device replaces or
takes significant market share from the flash memory cards which our digital
connectivity products support, we will not be able to sell our products in
quantities sufficient to grow our business.
WE MAY NOT BE ABLE TO SELL SUFFICIENT QUANTITIES OF OUR FLASHPATH PRODUCTS TO
SUSTAIN OUR CURRENT BUSINESS IF A SINGLE STANDARD FOR FLASH MEMORY CARDS
EMERGES.
We believe that demand for our flash memory connectivity products is
driven, to a large extent, by the absence of a single standard for flash memory
cards. There are currently four major flash memory cards, none of which has
emerged as the industry standard. Should one of these cards or a new technology
emerge as an industry standard, flash memory card readers could be built into
PCs, eliminating the need for our current flash memory connectivity products.
7
<PAGE>
A REDUCTION IN THE USE OF THE 3.5 INCH FLOPPY DISK DRIVE BY CONSUMERS AND
MANUFACTURERS WOULD LEAD TO A REDUCTION IN DEMAND FOR OUR FLASHPATH PRODUCTS.
Our current FlashPath products only work in conjunction with the standard
3.5 inch floppy disk drive. While the 3.5 inch floppy disk drive is today found
in most PCs, a number of newer PC models, such as the Apple iMac and the Apple
G3 desktop, do not have this device and new industry standards may emerge that
render the 3.5 inch floppy disk drive obsolete. Advances in input devices such
as CD-ROM and removable data storage disk drives, such as Zip drives, may
reduce or eliminate the need for the 3.5 floppy diskette, which will lead to a
corresponding reduction in demand for our FlashPath products. We would then
have to rely on our other products or develop new products that use a different
interface between personal computers and digital appliances. We may not be able
to redesign our FlashPath products to fit the new interface and demonstrate
technological feasibility of those products on a timely basis, if at all, or in
a cost effective manner.
SINCE OUR FLASHPATH PRODUCTS WORK ONLY IN CONJUNCTION WITH THE 3.5 INCH FLOPPY
DISK DRIVE, ADVANCES IN FLASH MEMORY CARDS MAY MAKE THESE PRODUCTS LESS
COMPETITIVE BECAUSE OF THE INCREASED TIME NEEDED TO TRANSFER DATA USING THE 3.5
INCH FLOPPY DISK DRIVE.
Consumer acceptance of our FlashPath products will depend upon their
ability to quickly transfer information from flash memory cards to PCs.
However, the time needed to transfer information using a 3.5 inch disk drive
increases as more data is transferred. As more memory is condensed on to flash
memory cards, the time necessary to transfer all of the data from a single card
will increase. As technological advances make it possible and feasible to
produce higher density cards, our ability to create products which quickly
transfer all of the stored information on a single card will be constrained by
the inherent limitations of the 3.5 inch disk drive. In that case, our
FlashPath products would be less attractive to consumers and our sales would
decline.
WE MAY NOT BE ABLE TO SELL SUFFICIENT QUANTITIES OF OUR PERSONAL STORAGE
SYSTEMS TO SUSTAIN OUR FUTURE GROWTH IF PC MANUFACTURERS DO NOT ADOPT IEEE 1394
AS A HIGH-SPEED PERIPHERAL INTERFACE OR IF A COMPETING CPU INTERFACE DISPLACES
OR PREVENTS THE WIDESPREAD ADOPTION OF IEEE 1394.
A substantial portion of our business depends on the adoption of Institute
of Electrical and Electronics Engineering, or IEEE, 1394 technology by PC
manufacturers. IEEE 1394 is a high speed PC interface that is replacing Small
Computer System Interface, or SCSI, and parallel interfaces. If these
manufacturers do not include an IEEE 1394 interface on their PCs or notebook
computers, then we may not be able to sell sufficient quantities of our
FireWire personal storage systems to support our future growth. FireWire is
Apple's trade name for IEEE 1394. For example, a new, competing high speed
interface, such as USB 2.0, could be developed and emerge as an industry
standard, thus limiting the demand for our FireWire technology and related
personal storage systems.
WE MAY NOT BE ABLE TO SELL SUFFICIENT QUANTITIES OF OUR PERSONAL STORAGE
SYSTEMS TO SUPPORT OUR BUSINESS IF SUPPLIERS OF OUR DRIVES DEVELOP NATIVE
FIREWIRE-BASED PERSONAL STORAGE SYSTEMS THAT DO NOT REQUIRE OUR FIREWIRE
CONVERSION TECHNOLOGY.
We embed application specific integrated circuits, or ASICS, and
integrated software drivers in the hard disk drives and Zip drives we obtain
from our suppliers, which enables our FireWire-based personal storage systems
to be used with FireWire-equipped CPUs. We license this technology and the
firmware from LSI Logic. If our suppliers were to develop a native FireWire
solution that does not require the conversion ASICS and drivers embedded in our
products, then we may not be able to sell sufficient quantities of our FireWire
personal storage systems to support our business.
MOST OF OUR REVENUES ARE DERIVED FROM ONLY A FEW MAJOR PRODUCTS AND OUR
BUSINESS WILL BE SERIOUSLY HARMED IF DEMAND FOR THOSE PRODUCTS DECLINES.
To date, substantially all of our revenue has been derived from the sale
of only a few major products. While our long-term strategy is to derive revenue
from multiple products, we anticipate that
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the sale of our FlashPath products and our USB and FireWire storage systems
will continue to represent the most substantial portion of our revenues through
at least 2001. A decline in the price of or demand for these products as a
result of competition, technological change, the introduction of new products
by us or others, a failure to adequately manage product transitions, or for
other reasons, would seriously harm our business. On a pro forma basis after
giving effect to the VST acquisition, for the year ended December 31, 1999, we
derived approximately 36% of our product revenues from the sale of FlashPath,
19% from the sale of our USB-based personal storage systems, 20% from the sale
of our Zip drives and 8% from the sale of our FireWire-based personal storage
systems.
WE MUST DEVELOP NEW PRODUCTS AND INTRODUCE THEM IN A TIMELY MANNER IN ORDER TO
REMAIN COMPETITIVE.
We operate in an industry that is subject to evolving industry standards,
rapid technological changes, rapid changes in consumer demands and the rapid
introduction of new, higher performance products which shorten product life
cycles. To be competitive in this demanding market, we must both continue to
refine current products so that they remain competitive, and continually
design, develop and introduce, in a timely manner, new products that meet the
performance and price demands of OEMs and consumers. These development
activities will require the investment of substantial resources before revenues
are derived from product sales. Any significant delay in releasing new products
would adversely affect our reputation, provide a competitor a first-to-market
opportunity and allow a competitor to achieve greater market share. Product
development is inherently risky because it is difficult to foresee developments
in technology, coordinate our technical personnel and strategic relationships,
and identify and eliminate design flaws. If we are unable to develop and sell
new products, we will not be able to continue our strategy of maintaining media
neutrality, and our target market will be limited. Further, we may not be able
to recoup research and development expenditures if new products are not widely
commercially accepted.
WE MAY NOT BE ABLE TO DEVELOP OR MAINTAIN THE STRATEGIC RELATIONSHIPS NECESSARY
TO PROVIDE US WITH THE INSIGHT WE NEED TO DEVELOP COMMERCIALLY VIABLE PRODUCTS.
We may not be able to produce commercially viable products if we are
unable to anticipate market trends and the price, performance and functionality
requirements of flash memory card, PC and digital appliance manufacturers. We
must continue to collaborate closely with our customers, our OEM manufacturers
and our other contract manufacturers to ensure that critical development
projects proceed in a coordinated manner. This collaboration is also important
because our ability to anticipate trends and plan our product development
activities depends to a significant degree upon our continued access to
information derived from these strategic relationships. We currently rely on
strategic relationships with flash memory card manufacturers, such as Sony,
SanDisk and Toshiba, PC manufacturers, such as Apple, and consumer product
OEMs, such as IBM and FujiFilm. For example, through our co-development efforts
with Sony, we developed our FlashPath for the Sony Memory Stick, which began
shipping in the fourth quarter 1999, and introduced a follow-on FlashPath
product for new models of Sony's Mavica digital still camera a few months
later. If we cannot maintain our relationship with these manufacturers, like
Sony, then we may not be able to continue to develop products that are
compatible with their flash memory cards, PCs and digital appliances. However,
collaboration is more difficult because many of these companies are located
overseas. If any of our current relationships deteriorates or is terminated, or
if we are unable to enter into future alliances that provide us with comparable
insight into market trends, we will be hindered in our ability to produce
commercially viable products. For example, we depend on our relationship with
Iomega Corporation in order to produce our Zip drive products for IBM notebook
computers. If we cannot maintain our relationship with Iomega, or if Iomega
wishes to produce these products internally, then our current market for these
products will deteriorate.
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WE MAY NOT BE ABLE TO SUSTAIN OUR RELATIONSHIP WITH APPLE COMPUTER WHICH WOULD
GREATLY HINDER OUR ABILITY TO TIMELY DEVELOP PRODUCTS WHICH ARE COMPATIBLE WITH
MACINTOSH OPERATING SYSTEMS.
In 1999 on a pro forma basis after giving effect to the VST acquisition,
approximately 53% of our revenues were derived from Apple-related products.
Historically, Apple has provided us, as an Apple developer, access to selected
product road maps, which has allowed us to timely develop and engineer many of
our current products, including our current FireWire and USB storage systems.
As a result of this collaborative relationship, we are substantially dependent
on Apple for a significant portion of our historical revenues from direct sales
to Apple and Apple users. Moreover, we anticipate that a significant portion of
our product revenues will continue to be derived from sales of our Apple
compatible products in the future. If Apple were to terminate our status as an
Apple developer or if there were a material deterioration of our relationship,
we would not be able to timely develop new technologies which are compatible
with Apple's product road maps and this would have a material adverse effect on
our business. Moreover, we currently sell a number of our Apple products
through the Apple Web Store, where our products may be sold separately or may
be configured and ordered along with a Macintosh CPU. While we do not
anticipate any change in this arrangement, Apple is not contractually obligated
to offer our products on their website. In addition, Apple chooses which of our
products they wish to include on their website.
A DECLINE IN THE DEMAND FOR APPLE PRODUCTS WOULD REDUCE THE MARKET FOR MANY OF
OUR PRODUCTS.
Our continued growth depends to a large extent on both our strategic
relationship with Apple and the continued demand for Apple products. This
dependence is due primarily to the fact that, to date, Apple has been the
principal PC manufacturer using the USB and FireWire interface technologies on
which many of our products are based. If the demand for Apple products declines
or Apple suffers a material change in its business, the market for many of our
products would be negatively impacted.
OUR OPERATING RESULTS HAVE FLUCTUATED SIGNIFICANTLY AND MAY FLUCTUATE
SIGNIFICANTLY IN THE FUTURE, WHICH COULD LEAD TO DECREASES IN OUR STOCK PRICE.
Our operating results have fluctuated significantly in the past and we
expect that they will continue to fluctuate in the future. If our future
operating results materially fluctuate or are below the expectations of stock
market analysts, our stock price would likely decline. Future fluctuations may
result from a variety of factors including the following:
/bullet/ The timing and amount of orders we receive from our customers,
which may be tied to seasonal demand for the consumer products
manufactured and sold by OEMs;
/bullet/ Cancellations or delays of customer product orders, or the loss of
a significant customer;
/bullet/ Reductions in consumer demand for our customers' products
generally or for our products in particular;
/bullet/ The timing and amount of research and development expenditures;
/bullet/ The availability of manufacturing capacity necessary to make our
products;
/bullet/ General business conditions in our markets, particularly Japan, as
well as global economic uncertainty;
/bullet/ Any new product introductions, or delays in product introductions,
by us or our competitors;
/bullet/ Increased costs charged by our suppliers or changes in the
delivery of products to us;
/bullet/ Increased competition or reductions in the average selling prices
that we are able to charge;
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/bullet/ Fluctuations in the value of foreign currencies, particularly the
Japanese yen, against the U.S. dollar; and
/bullet/ Changes in our product mix as well as possible seasonal demand for
our products.
As a result of these and other factors, we believe that period-to-period
comparisons of our historical results of operations are not a good predictor of
our future performance.
WE MAY FAIL TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY AND, THEREFORE,
LOSE OUR COMPETITIVE ADVANTAGE.
Our proprietary technology with respect to 3.5 inch floppy disk drive
interfaces and USB and FireWire source codes is critical to our future growth.
We rely in part on patent, trade secret, trademark and copyright law to protect
our intellectual property. However, the patents issued to us may not be
adequate to protect our proprietary rights, to deter misappropriation or to
prevent an unauthorized third party from copying our technology, designing
around the patents we own or otherwise obtaining and using our products,
designs or other information. We have, in fact, filed a complaint against one
of our former patent attorneys for improperly copying one of our patent
applications and filing a patent application without our consent naming himself
as a co-inventor. This matter was settled with no materially adverse
consequences to SmartDisk. In addition, we may not receive trademark protection
for our "SmartDisk" name. We have filed for trademark registration of the name
"SmartDisk," but this has not yet been granted. We are aware of a trademark
application for the name "SmartDisk" that was filed by another company. Our
application could be denied and we could be prohibited from using the
"SmartDisk" name. In that event, we would be required to incur substantial
costs to establish new name recognition.
We also claim copyright protection for some proprietary software and
documentation. We attempt to protect our trade secrets and other proprietary
information through agreements with our customers, employees and consultants,
and through other security measures. However, despite our efforts to protect
our intellectual property, unauthorized parties may attempt to copy aspects of
our products or obtain and use information and software that we regard as
proprietary. Those parties may have substantially greater financial resources
than we have, and we may not have the resources available to challenge their
use of our proprietary technology. If we fail to adequately protect our
intellectual property, it will be easier for our competitors to sell competing
products.
WE MAY FACE COMPETITION FROM INTEL IF IT DECIDES TO UTILIZE ITS COMPETING
PATENT.
Intel Corporation was issued a patent in 1997 disclosing and claiming
technology substantially similar to that disclosed in one of our key patents.
The Intel patent was filed four years after our effective filing date, and we
do not believe that the Intel patent can be validly applied to any of the
technology disclosed in our patent. However, given the substantial resources
available to Intel, our financial condition could suffer if we engage in a
dispute with Intel. Our business could also be harmed if Intel's patent is
determined to be valid and Intel or any licensee of Intel decides to sue our
customers or develop and commercialize products based on its patent.
INFRINGEMENT CLAIMS BY THIRD PARTIES COULD RESULT IN COSTLY LITIGATION AND
OTHERWISE ADVERSELY IMPACT OUR BUSINESS.
From time to time we may receive communications from third parties
asserting that our products infringe, or may infringe, the proprietary rights
of these third parties. These claims of infringement may result in protracted
and costly litigation which could require us to pay substantial damages or have
sales of our products stopped by an injunction. Infringement claims could also
cause product shipment delays, require us to redesign our products or require
us to enter into royalty or licensing agreements, any of which could harm our
business. For example, we received communications alleging that our FlashPath
products infringed a third party's patent rights. We have met with this third
party
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to obtain a better understanding of its claim and have agreed to retain a
mediator to review the facts and to help us resolve this dispute. Although we
believe that we do not infringe upon this third party's patent, we cannot
guarantee that the mediation will avoid litigation, or that the outcome of any
such litigation will be favorable to SmartDisk. In another instance, we
received a letter from SanDisk stating that SanDisk held two patents which it
believes might apply to our products. Although we subsequently obtained a
non-exclusive worldwide license for a 10-year period for all of SanDisk's
intellectual property rights in connection with multimedia floppy disk
interfaces, if the license terminates or expires, we could face a potential
conflict with SanDisk regarding the scope of those patents. We also received
correspondence alleging that our SafeBoot product violated another third
party's intellectual property rights. We discussed this correspondence with
counsel and concluded that our product does not infringe upon the third party's
rights. While none of these claims has resulted in litigation at this time,
future claims may. In addition, we license a portion of the intellectual
property included in our products from third parties, which may increase our
exposure to infringement actions because we rely upon those third parties for
information about the origin and ownership of the licensed intellectual
property. We may also lose our license rights with respect to the intellectual
property for which infringement is claimed. Further, if our customers are
required to obtain a license on other than commercially reasonable terms, our
business could be jeopardized.
WE MAY HAVE PARTICULAR DIFFICULTY PROTECTING OUR INTELLECTUAL PROPERTY RIGHTS
OVERSEAS.
The laws of some foreign countries do not protect proprietary rights to as
great an extent as do the laws of the United States, and many U.S. companies
have encountered substantial infringement problems in some foreign countries.
Because many of our products are sold and much of our business is conducted
overseas, primarily Japan, our exposure to intellectual property risks may be
higher.
BECAUSE MOST OF OUR SALES ARE TO A RELATIVELY SMALL NUMBER OF CUSTOMERS THE
LOSS OF ANY OF OUR KEY CUSTOMERS WOULD SERIOUSLY HARM OUR BUSINESS.
Our business will be seriously harmed if we lose any of our significant
customers, particularly Olympus, FujiFilm or Ingram Micro, or suffer a
substantial reduction in or cancellation of orders from these customers. Our
current distribution strategy results, and will continue to result, in sales to
only a limited number of customers. Some of our products are sold as
stand-alone products by OEMs and, to a lesser extent, are bundled together and
sold with systems manufactured by third party OEMs. We currently sell to ten
OEMs, sales to which collectively accounted for approximately 57% of our
revenues for 1999 on a pro forma basis after giving effect to the VST
acquisition. More specifically, on a pro forma basis after giving effect to the
VST acquisition, Olympus, FujiFilm and Ingram Micro accounted for approximately
11%, 11% and 22% of our revenues and our top five customers collectively
accounted for approximately 58% of our revenues for fiscal 1999. Furthermore,
we expect to continue to depend on sales of our products to relatively few
customers, which will continue to account for a significant portion of our net
revenues, for the foreseeable future.
OUR CUSTOMERS COULD STOP PURCHASING OUR PRODUCTS AT ANY TIME BECAUSE WE DO NOT
HAVE LONG-TERM PURCHASE CONTRACTS WITH THEM.
No OEM or other customer is contractually obligated to purchase products
from us. As a result, our customers are free to cancel their orders or stop
ordering our products at any time. In addition, even if we are able to
demonstrate that our products are superior, OEMs may still choose not to bundle
our products with theirs or market and distribute our products on a stand-alone
basis. OEMs may also change their business strategies and manufacturing
practices, which could cause them to purchase fewer of our products, find other
sources for products we currently manufacture or manufacture these products
internally.
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OUR ABILITY TO SELL OUR PRODUCTS WILL BE LIMITED IF THE OEMS' PRODUCTS DO NOT
ACHIEVE MARKET ACCEPTANCE OR IF THE OEMS DO NOT ADEQUATELY PROMOTE OUR
PRODUCTS.
We depend upon our OEM customers to market our products and we do not have
significant experience and resources devoted to independent marketing efforts.
Failure of the OEMs' products to achieve market acceptance, the failure of the
OEMs to bundle our products with theirs, or any other event causing a decline
in our sales to the OEMs could seriously harm our business. Even if consumers
buy OEMs' products, their ultimate decision to buy our products depends on OEM
packaging, distribution and sales efforts, which may not be sufficient to
maintain or increase sales of our products. If we cannot achieve or maintain a
sufficient consumer acceptance rate of our products concurrent with their
purchases of OEM products, our future sales to OEM customers will be adversely
affected.
A NEW OR COMPETING DATA TRANSFER SOLUTION THAT ACHIEVES SIGNIFICANT MARKET
SHARE OR RECEIVES SIGNIFICANT SUPPORT FROM FLASH MEMORY CARD OR DIGITAL
APPLIANCE MANUFACTURERS WOULD JEOPARDIZE OUR BUSINESS.
Our products currently compete with a number of cable and non-cable
interfaces between personal computers and digital appliances, including ports,
Personal Computer Memory Card International Association, or PCMCIA, slots and
infrared interfaces, all of which are PC peripheral interfaces. It is possible
that one of these competing data transfer solutions, or another existing or new
technology, could achieve a significant market presence or become supported by
a number of significant flash memory card or digital appliance manufacturers.
Regardless of the relative benefits of our products, if a competing product
gains significant market share or significant support of flash card
manufacturers, this product would likely emerge as the industry standard and
thereby achieve a dominant market position that would jeopardize our survival.
SINCE WE SELL OUR PRODUCTS TO A LIMITED NUMBER OF LARGE CUSTOMERS, WE EXPECT
THAT THOSE CUSTOMERS MAY PRESSURE US TO MAKE PRICE CONCESSIONS, WHICH WOULD
REDUCE OUR FUTURE GROSS MARGINS.
Our reliance on sales to a limited number of large customers may expose us
to pressure for price concessions. Because of this reliance and because of our
dependence on OEMs as our primary distribution channel, we expect that our OEM
customers may seek price concessions from us, which would reduce our average
selling prices and our gross margins. Since we do not manufacture our own
products, we may be unable to reduce our manufacturing costs in response to
declining average per unit selling prices.
WE EXPECT TO CONTINUE OUTSOURCING KEY OPERATIONAL FUNCTIONS AND OUR ABILITY TO
DO SO WILL BE IMPAIRED IF WE ARE UNABLE TO MAINTAIN OUR STRATEGIC
RELATIONSHIPS.
We have formed strategic relationships with a number of significant
industry participants, including Apple, FujiFilm, Hitachi, IBM, Iomega,
Olympus, Rohm, SanDisk, Sony, Toshiba, Visa and Yamaichi. We depend upon these
corporations to provide technical assistance and perform key manufacturing,
marketing, distribution and other functions. For example, Yamaichi is currently
one of three manufacturers of our FlashPath products, Toshiba, Apple and IBM
provide technological assistance in the development of our products, and
Olympus and FujiFilm market our products. We expect that these and similar
types of relationships will be critical to our growth because our business
model calls for the continued outsourcing of many key operational functions and
we do not currently have the resources to perform these functions ourselves.
WE MUST OVERCOME GEOGRAPHIC AND CULTURAL DIFFERENCES IN ORDER TO MAINTAIN OUR
STRATEGIC RELATIONSHIPS.
There are inherent difficulties in developing and maintaining
relationships with foreign entities. Language and cultural differences often
impair relationships, and geographical distance, at times, is also an
impediment. We must overcome these difficulties. If any of our current
relationships is impaired, or if we are unable to develop additional strategic
relationships in the future, our product development costs would significantly
increase and our business would be materially and adversely affected.
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OUR SALES AND EXPENSES ARE GEOGRAPHICALLY CONCENTRATED IN JAPAN, AND,
THEREFORE, WE COULD SUFFER FROM EXCHANGE RATE FLUCTUATIONS.
On a pro forma basis after giving effect to the VST acquisition,
approximately 31% of our revenues for 1999 were attributable to sales to
Japanese customers, and we expect that sales to Japanese customers will
continue to account for a significant portion of our total revenues for the
foreseeable future. All of our Japanese sales, as well as the related expenses,
are denominated in yen. Fluctuations in exchange rates between the yen and the
U.S. dollar, particularly with respect to Japanese transactions denominated in
a currency other than the yen, could adversely impact our financial results.
Some transactions and accounts of our Japanese subsidiary are U.S. dollar
denominated. Since the Japanese subsidiary's accounting records are kept in
yen, those U.S. dollar denominated transactions are accounted for in yen at the
time of the transaction. U.S. dollar denominated accounts are remeasured at the
end of the accounting period. This remeasurement results in adjustments to
income. In addition, the balance sheet accounts of our Japanese subsidiary are
translated to the U.S. dollar for financial reporting purposes and resulting
adjustments are made to stockholders equity. The value of the yen may
deteriorate against the dollar, which would impair the value of stockholders'
investment in us. Since a substantial portion of our revenues and receivables
are denominated in yen, the longer our Japanese receivables remain outstanding,
the greater the risk to our stockholders of an impairment of their investment
due to a deterioration of the yen relative to the U.S. dollar. Deterioration of
the yen against the dollar has occurred in recent years, resulting in a foreign
currency loss of approximately $48,000 and a foreign currency translation
adjustment to equity of approximately $290,000 for 1998. In 1999, we had a
foreign currency gain of approximately $30,000 and a foreign currency
translation adjustment to equity of approximately $277,000. Further, we do not
currently hedge against foreign currency exposure. 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.
OUR SALES ARE GEOGRAPHICALLY CONCENTRATED IN JAPAN, AND, THEREFORE, WE COULD
SUFFER FROM ECONOMIC AND POLITICAL DIFFICULTIES.
We are also subject to risks associated with a significant amount of sales
being made to one geographical area. An economic downturn in Asia generally,
and Japan in particular, could lead to a reduced demand for our products. In
recent years, Japan has been subject to political and economic instability and,
while that instability has not yet adversely impacted us, if it continues,
sales of our products in Japan may be adversely affected.
Given our dependence on sales to Japanese customers, we must develop and
maintain alliances in Japan to help with the promotion and distribution of our
products. We may not be able to develop or maintain these alliances.
OUR FOREIGN OEM CUSTOMERS MAY CHOOSE TO WORK WITH A LOCAL COMPETITOR, WHICH
WOULD ADVERSELY IMPACT OUR SALES.
Our OEM customers, most of which are based in Japan and to whom most of
our sales are made, may choose to work with, and purchase products from, a
local competitor if one were able to provide a substitute product. This may
occur because of geographic distance, time differences, or for other reasons.
In that event, we may not be able to find other OEM customers and our sales
could decline.
WE DEPEND ON A LIMITED NUMBER OF CONTRACT AND OFFSHORE MANUFACTURERS, AND IT
MAY BE DIFFICULT TO FIND REPLACEMENT MANUFACTURERS IF OUR EXISTING
RELATIONSHIPS ARE IMPAIRED.
We contract with offshore manufacturers to produce many of our products
and our dependence on a limited number of contract manufacturers exposes us to
a variety of risks, including shortages of manufacturing capacity, reduced
control over delivery schedules, quality assurance, production yield and costs.
For example, Yamaichi, Hitachi and Mitsumi are the sole manufacturers of our
FlashPath
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products. We do not have contracts with any of Yamaichi, Hitachi or Mitsumi. If
Yamaichi, Hitachi or Mitsumi terminates production or cannot meet our
production requirements, we may have to rely on other contract manufacturing
sources or identify and qualify new contract manufacturers. The lead time
required to qualify a new manufacturer could range from approximately three to
six months. 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. Any
significant delay in our ability to obtain adequate quantities of our products
from our current or alternative contract manufacturers would cause our sales to
decline.
TOSHIBA INTRODUCED US TO ONE OF OUR MANUFACTURERS AND WE MAY NOT BE ABLE TO
RETAIN THE SERVICES OF THE MANUFACTURER IF OUR RELATIONSHIP WITH TOSHIBA IS
IMPAIRED.
Yamaichi, one of the manufacturers of our FlashPath products, was
introduced to us by Toshiba, which is one of our major stockholders. If our
relationship with Toshiba is impaired, we may not be able to retain the
services of Yamaichi in manufacturing our products.
OUR DEPENDENCE ON FOREIGN MANUFACTURING AND INTERNATIONAL SALES EXPOSES US TO
DIFFICULTIES OFTEN NOT ENCOUNTERED BY EXCLUSIVELY DOMESTIC COMPANIES.
Many of our products are manufactured overseas and a substantial portion
of our revenues are derived from overseas sales. On a pro forma basis after
given effect to the VST acquisition, approximately 38% of our revenues in 1999
were derived from customers located outside the United States, primarily in
Japan. Our dependence on foreign manufacturers and international sales poses a
number of risks, including:
/bullet/ Difficulties in monitoring production;
/bullet/ Transportation delays and interruptions;
/bullet/ Unexpected changes in regulatory requirements;
/bullet/ Currency exchange risks;
/bullet/ Tariffs and other trade barriers, including import and export
restrictions;
/bullet/ Difficulties in staffing and managing disparate branch operations;
/bullet/ Political or economic instability;
/bullet/ Compliance with foreign laws;
/bullet/ Difficulties in protecting intellectual property rights in foreign
countries;
/bullet/ Exchange controls; and
/bullet/ Potential adverse tax consequences, including with respect to
repatriation of earnings.
We intend to continue manufacturing our products overseas and we
anticipate that international sales will continue to account for a significant
portion of our revenues. Therefore, we expect to be subject to the risks
outlined above for the foreseeable future.
WE HAVE A LIMITED NUMBER OF SUPPLIERS OF KEY COMPONENTS AND OUR ABILITY TO
PRODUCE FINISHED PRODUCTS WILL BE IMPAIRED IF WE ARE UNABLE TO OBTAIN
SUFFICIENT QUANTITIES OF SOME COMPONENTS.
Rohm is our sole provider of ASICs for our FlashPath products and we
purchase ASICs for Smarty from Rohm and Atmel. In our products, the specific
function of these integrated circuits is the
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conversion of digital and analog data. In addition, Iomega is a sole source
supplier of Zip drives, and LSI Logic is our primary supplier of ASICs for our
FireWire products. Our dependence on a limited number of suppliers and our lack
of long-term supply contracts exposes us to several risks, including a
potential inability to obtain an adequate supply of components, price
increases, late deliveries and poor component quality. Disruption or
termination of the supply of components could delay shipments of our products.
The lead time required for orders of some of our components is as much as six
months. In addition, the lead time required to qualify new suppliers for our
components is as much as 12 months. If we are unable to accurately predict our
component needs, or if our component supply is disrupted, we may miss market
opportunities by not being able to meet the demand for our products. This may
damage our relationships with current and prospective customers. For example,
in 1997 and 1998 we experienced a nine-month delay in the shipment of our first
notebook Zip drives resulting from delays in deliveries of Zip mechanisms from
our sole supplier. We suffered additional costs as a result of these delays
which adversely affected our gross margin.
OUR CURRENT AND POTENTIAL COMPETITORS HAVE SIGNIFICANTLY GREATER RESOURCES THAN
WE DO, AND INCREASED COMPETITION COULD HARM SALES OF OUR PRODUCTS.
Increased competition is likely to result in price reductions, reduced
operating margins and loss of market share. Many of our current and potential
competitors have significantly greater financial, technical, marketing,
purchasing and other resources than we do. 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.
OUR BUSINESS MAY SUFFER IF WE ARE UNABLE TO MANAGE OUR GROWTH.
Failure to effectively manage our growth could impair our ability to
execute our business strategy. Our business has grown substantially in recent
periods, with revenues increasing from approximately $15.3 million in 1998 to
approximately $102 million in 1999, on a pro forma basis after giving effect to
the VST acquisitions. The growth of our business has placed a strain on our
management, operations and financial systems. In addition, the number of
employees has increased from 16 at January 1, 1998 to 128 as of April 30, 2000.
We expect to continue to increase the number of employees as our business
grows, and may expand operations to locations other than those in which we
currently operate.
Continued growth is likely to place a greater burden on our operating and
financial systems as well as our senior management and other personnel.
Existing and 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. Management of our operations in diverse locations may also
complicate the task of managing our growth.
WE MAY NOT BE ABLE TO INTEGRATE THE BUSINESS OF COMPANIES WE ACQUIRE AND
THEREFORE THESE ACQUISITIONS MAY NOT PROVIDE ADDITIONAL VALUE TO OUR
STOCKHOLDERS.
We continually evaluate potential acquisitions of complementary
businesses, products and technologies. We acquired VST Technologies, Inc.,
located near Boston, Massachusetts, in March 2000. In addition, in April 2000,
we acquired El Gato Software LLC, located near San Jose, California, and
16
<PAGE>
Impleo Limited, based in England. We may not realize the desired benefits of
these transactions or of future transactions. In order to successfully
integrate acquired companies we must, among other things:
/bullet/ Continue to attract and retain key management and other personnel;
/bullet/ Integrate the acquired products from both an engineering and sales
and marketing prospective;
/bullet/ Establish a common corporate culture; and
/bullet/ Integrate geographically distant facilities, systems and
employees.
If our management's attention to day-to-day operations is diverted to
integrating acquired companies or if problems in the integration process arise,
our business could be adversely affected and we could be required to use a
significant portion of our available cash. If an acquisition is made utilizing
our securities, a significant dilution to our stockholders and significant
acquisition related charges to earnings could occur.
Our acquisition of VST was dilutive and we expect that our earnings per
share will remain negative for the foreseeable future as a result of the VST
acquisition. We may incur additional charges in the future resulting from
redundancies in product lines, customer lists and sales channels associated
with these acquisitions. Acquisitions may also cause us to incur or assume
additional liabilities or indebtedness, including liabilities that are unknown
or not fully known to us at the time of the acquisition, which could have an
adverse effect on us. Furthermore, we cannot assure that any products we
acquire in connection with any acquisition will gain acceptance in our markets.
OUR GROWTH PROSPECTS WILL BE REDUCED IF WE CANNOT SUCCESSFULLY MARKET AND SELL
OUR NEW FIREWIRE RAID ARRAY PRODUCT.
We recently introduced a 100 Gigabyte FireWire RAID array. We do not know
whether this product will achieve any significant level of consumer acceptance.
In addition, because this product is more expensive than our other products, we
cannot distribute this product though our normal sales channels. If we are not
be able to develop the marketing and sales infrastructure necessary to
successfully distribute this product, our growth prospects will be reduced.
Finally, our ability to exploit this technology in the future depends on our
continued renewal of an exclusive license of source codes from a third party.
OUR GROWTH PROSPECTS WILL BE REDUCED IF THE SMART CARD MARKET DOES NOT DEVELOP.
Our future growth and operating results will depend, in part, on whether
our Smarty family of smart card readers achieves significant sales. A smart
card reader retrieves information from a card that uses a microprocessor or
memory chip for security and data storage purposes. The current primary use for
Smarty is as a smart card token-based security application designed to provide
protection from unauthorized access to digital information. However, the market
for network and electronic commerce security applications is still emerging and
the smart card may not become the industry standard for these applications.
Similarly, the market for other smart card applications may not develop, or may
develop more slowly than we expect. If the market for the Smarty family of
products fails to develop or develops more slowly than expected, or if any of
the standards supported by us do not achieve or sustain market acceptance, our
growth prospects would be reduced.
WE HAVE INDEMNIFICATION OBLIGATIONS RELATED TO OUR INTELLECTUAL PROPERTY, WHICH
MAY REQUIRE US TO PAY DAMAGES.
Our arrangements with SanDisk, Iomega, Sony, Toshiba and others require us
to indemnify them for any damages they may suffer if a third party claims that
we are violating their intellectual property
17
<PAGE>
rights. While, to date, we have not received indemnification claims, there may
be future claims. Any indemnification claim may require us to pay substantial
damages, which could negatively impact our financial condition.
OUR PRODUCTS MAY BE RETURNED TO US BY OUR CUSTOMERS IF PROJECTED CONSUMER
DEMAND DOES NOT MATERIALIZE, WHICH WOULD LEAD TO A REDUCTION IN OUR REVENUES.
Lack of consumer demand for our products may result in efforts by OEMs and
our other customers to return products to us. While we are contractually
obligated to accept returned products only on a limited basis, we may determine
that it is in our best interest to accept returns in order to maintain good
relations with our customers. Product returns reduce our revenues. While we
have experienced very limited product returns to date, returns may increase in
the future.
WE COULD BE HELD LIABLE FOR PRODUCT DEFECTS, WHICH COULD REQUIRE US TO PAY
SUBSTANTIAL DAMAGES AND HARM OUR REPUTATION WITH OUR CUSTOMERS.
Complex products such as ours can contain errors, defects and bugs when
first introduced or as new versions are released. Delivery of products with
production defects or reliability, quality or compatibility problems could
hinder market acceptance of our products, which could damage our reputation and
harm our ability to attract and retain customers. Errors, defects or bugs could
also cause interruption, delays or a cessation of sales to our customers, and
could subject us to warranty claims from our customers. We would have to expend
significant capital and resources to remedy these problems. Errors, defects or
bugs could be discovered in our new products after we begin commercial
production of them, despite testing by us and our suppliers and customers. This
could result in additional development costs, loss of, or delays in, market
acceptance, diversion of technical and other resources from our other
development efforts, claims by our customers or others against us or the loss
of credibility with our current and prospective customers.
OUR EXECUTIVE OFFICERS AND KEY PERSONNEL ARE CRITICAL TO OUR BUSINESS, AND
THESE OFFICERS AND PERSONNEL MAY NOT REMAIN WITH US IN THE FUTURE.
We depend upon the continuing contributions of our key management, sales
and product development personnel. The loss of any of those personnel could
seriously harm us. Although some of our officers are subject to employment
agreements, we cannot be sure that we will retain their services. In addition,
we have not obtained key-person life insurance on any of our executive officers
or key employees.
OUR LOCATION IN NAPLES, FLORIDA MAKES IT MORE DIFFICULT TO HIRE QUALIFIED
TECHNICAL PERSONNEL.
Our technology is specialized and complex, requiring us to recruit and
train qualified technical personnel. However, there are many employers
competing to hire qualified technical personnel and we may have difficulty
attracting and retaining qualified technical personnel. Our recruiting efforts
are further hindered by the lack of a readily available pool of candidates in
Naples, Florida, where we are headquartered. The inability to attract and
retain qualified personnel could make it more difficult to develop our products
and execute our business strategy.
ONE OF OUR PRINCIPAL STOCKHOLDERS CAN EXERT SIGNIFICANT INFLUENCE OVER US AND
MAY PREVENT OR DELAY A CHANGE OF CONTROL AND WHOSE INTERESTS MAY BE DIFFERENT
FROM THOSE OF OUR OTHER STOCKHOLDERS.
Addison Fischer, the Chairman of our board of directors, will beneficially
own approximately 39% of our common stock after the offering. Accordingly, Mr.
Fischer will be able to exert significant influence over SmartDisk, subject to
his fiduciary duty as a director under Delaware law. The interests of Mr.
Fischer may not always coincide with our interests or the interests of other
stockholders, and he could cause us to enter into transactions or agreements
which we would not otherwise consider absent his influence.
18
<PAGE>
The purchasers of common stock in this offering will not have sufficient
voting power to elect any members of our board of directors. As a result, Mr.
Fischer will be able to exert significant influence over all matters requiring
stockholder approval, including the election of directors and approval of
significant corporate transactions, which could have the effect of delaying or
preventing a change of control of SmartDisk.
OUR BUSINESS COULD STILL BE AFFECTED BY YEAR 2000 ISSUES.
The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century of the year. Many existing
electronic systems, including computer systems, use only the last two digits to
refer to a year. Therefore, these systems may recognize a date using "00" as
1900 rather than the year 2000. If not corrected, these electronic systems
could fail or create erroneous results when addressing dates on and after
January 1, 2000. Although, to date we have not experienced any material effect
on our business or operations as a result of any Year 2000 Issues, we believe
that it is impossible to determine with certainty that all Year 2000 Issues
affecting our business have been identified and/or corrected. The Year 2000
Issue could adversely impact our business. For a more complete discussion
regarding our efforts to minimize the effects of these problems, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Year 2000 Issues."
WE HAVE ANTITAKEOVER DEFENSES THAT COULD DELAY OR PREVENT AN ACQUISITION OF OUR
COMPANY.
Some provisions of our certificate of incorporation and bylaws and the
provisions of Delaware law could have the effect of delaying, deferring or
preventing an acquisition of SmartDisk. For example, we have a staggered board
of directors, the members of which may only be removed for cause, authorized
but unissued shares of preferred stock which could be used to fend off a
takeover attempt, our stockholders may not take actions by written consent and
our stockholders are limited in their ability to make proposals at stockholder
meetings.
MANAGEMENT MAY APPLY THE PROCEEDS OF THIS OFFERING TO USES THAT DO NOT INCREASE
OUR OPERATING RESULTS OR MARKET VALUE.
We currently have no specific use planned for the net proceeds from this
offering. As a consequence, our management will have broad discretion to
allocate a large percentage of these proceeds to uses which the stockholders
may not deem desirable, and there can be no assurance that the proceeds can or
will yield a positive return. We may use a portion of these funds for the
acquisition of complementary businesses, products and technologies. See "Use of
Proceeds."
WE MAY NEED TO RAISE ADDITIONAL CAPITAL WHICH MIGHT NOT BE AVAILABLE OR WHICH,
IF AVAILABLE, MIGHT ONLY BE AVAILABLE ON TERMS ADVERSE TO PERSONS BUYING SHARES
IN THIS OFFERING.
We expect the net proceeds from this offering, our current cash and cash
equivalents and cash from commercial borrowing availability under credit
facilities will meet our working capital and capital expenditure needs for at
least one year. After that, we may need to raise additional funds, and we
cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all. We may also require additional capital for the
acquisition of businesses, products and technologies that are complementary to
ours. Further, if we issue equity securities, the ownership percentage of our
stockholders would be reduced, and the new equity securities may have rights,
preferences or privileges senior to those of existing holders of our common
stock. If we cannot raise needed funds on acceptable terms, we may not be able
to develop or enhance our products, take advantage of future opportunities or
respond to competitive pressures or unanticipated requirements, which could
seriously harm our business, operating results and financial condition.
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<PAGE>
OUR STOCK HAS BEEN, AND MAY CONTINUE TO BE, VOLATILE, WHICH MIGHT MAKE IT HARD
FOR INVESTORS TO SELL THEIR SHARES AT A PREDICTABLE PRICE, OR AT ALL.
Our common stock has only been trading on a public market since October 6,
1999. The trading price has been, and is likely to continue to be, highly
volatile. The market price of our common stock is likely to fluctuate
significantly in response to the following factors, some of which are beyond
our control:
/bullet/ Variations in our quarterly operating results;
/bullet/ Changes in financial estimates of our revenues and operating
results by securities analysts;
/bullet/ Announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures or capital
commitments;
/bullet/ Loss of or decrease in sales to a major customer or failure to
complete significant transactions;
/bullet/ Additions or departures of key personnel;
/bullet/ Future sales of our common stock, including sales which dilute
existing investors;
/bullet/ Stock market price and volume fluctuations attributable to
inconsistent trading volume levels of our stock;
/bullet/ General stock market conditions;
/bullet/ Commencement of or involvement in litigation; and
/bullet/ Announcements by us or our competitors of key innovations or
product introductions.
WE COULD BE SUBJECT TO CLASS ACTION LITIGATION DUE TO STOCK PRICE VOLATILITY,
WHICH, IF IT OCCURS, WILL DISTRACT MANAGEMENT, RESULT IN SUBSTANTIAL COSTS AND
HARM OUR BUSINESS.
In the past, securities class action litigation has often been brought
against companies following periods of volatility in the market price of their
securities. We may be the target of similar litigation in the future.
Securities litigation could result in substantial costs and divert management's
attention and resources, which could cause serious harm to our business.
FUTURE SALES OF OUR COMMON STOCK MAY DEPRESS OUR STOCK PRICE.
After this offering, we will have approximately 19.9 million shares of
common stock outstanding. Of these shares, the 3.45 million shares sold in our
initial public offering are, and the 3.9 million shares sold in this offering
will be, freely tradable without restriction under the Securities Act, except
for any shares held by "affiliates" of SmartDisk as that term is defined in
Rule 144 of the Securities Act. As of April 30, 2000, approximately 13.7
million of the outstanding shares of common stock were "restricted shares" as
that term is defined in Rule 144. In addition, all our executive officers and
some of our directors and stockholders, including some selling stockholders,
who together, assuming no exercise of the underwriters' over-allotment option,
will hold an aggregate of approximately 7.3 million shares of common stock upon
completion of the offering, have agreed that they generally will not offer,
sell, contract to sell or otherwise dispose of any common stock or any
securities that are convertible into common stock for a period of 90 days after
the date of this prospectus without the prior written consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated. As a result of these lock-up agreements,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, none of their shares will be eligible for resale
until 91 days after the date of this prospectus. Merrill Lynch, Pierce, Fenner
& Smith Incorporated may, at its sole discretion, and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements.
20
<PAGE>
As of April 30, 2000, options to purchase 2,450,515 shares of our common
stock were outstanding. Should the holders of these options exercise their
options, there will be additional shares eligible for sale. In addition,
several of our stockholders have the right to require us to file a registration
statement to enable them to sell their shares. These include three of our
principal stockholders, holders of a majority of the shares of our common stock
issued to former management stockholders of VST, holders of a majority of the
shares of our common stock issued to former non-management stockholders of VST
and holders of shares of our common stock issued to former Impleo stockholders.
These and one other stockholder also have the right to require us to include
their shares in subsequently filed registration statements. If our stockholders
sell substantial amounts of the common stock, including shares issued upon the
exercise of outstanding options, in the public market, the market price of our
common stock could fall.
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<PAGE>
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. You can find many of
these statements by looking for words like "will," "should," "believe,"
"expect," "anticipate," "estimate," "intend," "may," "pro forma," "plan" or
similar expressions used in this prospectus. We have based these forward-looking
statements on our current expectations and projections about future events.
These forward-looking statements include, among other things:
/bullet/ Our anticipated growth strategies, including trends in revenues,
costs, gross margins and profitability;
/bullet/ Our intention to develop, market and introduce new products;
/bullet/ Anticipated growth of the personal computer and technology
industries;
/bullet/ Anticipated trends in our businesses, including trends in the
demand for digital appliances and, therefore, demand for our
products;
/bullet/ Expectations of consumer preferences and desires;
/bullet/ Future projections of our financial performance;
/bullet/ Future expenditures for capital projects;
/bullet/ The emergence of certain competing technologies;
/bullet/ Potential uses for and applications of our products;
/bullet/ Our ability to continue to control costs and maintain quality; and
/bullet/ Other forward-looking statements in the document.
The forward-looking statements included in the prospectus are subject to
risks, uncertainties and assumptions about our company. Our results of
operations may differ materially from the forward-looking statements as a
result of, among other things, the risk factors described under "Risk Factors."
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
In light of these risks, uncertainties and assumptions, the forward-looking
events discussed in this prospectus might not occur.
CORPORATE HISTORY AND DEVELOPMENT
SmartDisk Security Corporation, or SDSC, our predecessor, was incorporated
in May 1993. At the time of incorporation, SDSC was 100% beneficially owned by
Addison Fischer, the Chairman of SmartDisk's board of directors and SmartDisk's
principal stockholder. Upon formation, SDSC entered into a manufacturing
license agreement with SmartDiskette Limited, or SDL, the indirect owner of
SmartDisk's key patents, which was also controlled by Mr. Fischer. Under this
agreement, SDL granted SDSC a license to manufacture, distribute and sell
diskettes or diskette connectors relating to the fields of data and computer
security, validation, and access control.
From 1993 to 1995, SDSC exploited the licensed technology on its own
behalf. However, in 1996 it entered into an operating agreement with Fischer
International Systems Corporation, a data security company also controlled by
Mr. Fischer, to provide operating services to enhance, manufacture and sell
products using this technology. Under this arrangement, SDSC developed
SafeBoot, a software product for computer and network security, as well as
SmartDisk's initial Smarty and FlashPath products.
On March 5, 1997 SmartDisk Corporation was incorporated. Our initial name
was "Fintos, Inc." which was changed to "SmartDisk Corporation" in September
1997.
In January 1998, we entered into an operating agreement with SDSC and
Fischer International and commenced operations. Under this operating agreement,
we agreed, along with Fischer International, to provide operating services to
SDSC and to market and develop SafeBoot, Smarty and FlashPath on behalf of
SDSC.
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<PAGE>
In February 1998, Phoenix House Investments, LP (Formerly Phoenix House
Investments, L.L.C.), an investment company controlled by Mr. Fischer, Fischer
International and Toshiba entered into a joint venture agreement which detailed
a plan of capital contribution, corporate governance and business strategies
for us. Although we commenced operations in January 1998, it was under this
strategic arrangement that we received our first significant capital
contributions and became the successor-in-interest to SDSC.
In May 1998, Mr. Fischer contributed his shares of SDSC to Phoenix House
in exchange for ownership interests in Phoenix House. Phoenix House was, for a
short time, the sole owner of SDSC.
Before the significant capital contributions discussed below,
substantially all outstanding shares of our common stock were owned by our
employees or consultants as a result of the exercise of stock options.
The joint venture arrangement became effective in May 1998, with the
following results:
/bullet/ Toshiba purchased 2,487,500 shares of our common stock,
representing approximately 23% of our common stock immediately
after the purchase, in exchange for approximately $10.0 million,
consisting of a cash payment of approximately $5.0 million and the
cancellation of a $5.0 million note which evidenced a prior loan
made by Toshiba to us.
/bullet/ Phoenix House purchased 7,350,000 shares of our common stock,
representing approximately 69% of our common stock immediately
after the purchase, in exchange for all of the outstanding shares
of SDSC.
/bullet/ Fischer International purchased 150,000 shares of our common
stock, representing approximately 1% of our common stock
immediately after the purchase, in exchange for trademarks it
owned relating to SafeBoot, FlashPath and Smarty.
/bullet/ SDSC became our wholly owned subsidiary.
/bullet/ Fischer International, Toshiba, and Phoenix House became our major
stockholders.
In June 1998, SDSC was merged into SmartDisk and the separate corporate
existence of SDSC ended.
In May 1999, Phoenix House and the other stockholders of SDL exchanged all
of their SDL shares for 515,500 shares of our common stock. As a result of the
exchange, SDL became our wholly-owned subsidiary.
In March 2000, we acquired VST Technologies, Inc. in exchange for
approximately $16.4 million in cash, approximately 1.1 million shares of our
common stock and options to purchase approximately 443,000 shares of our common
stock at exercise prices ranging from $0.90 to $4.45. Upon consummation of the
merger, VST's name was changed to SmartDisk Personal Storage Systems
Corporation and it became our wholly owned subsidiary.
On April 21, 2000, we acquired substantially all of the intellectual
property of El Gato Software LLC for approximately $755,000 in cash and
approximately 37,000 shares of our common stock. We also retained the services
of El Gato's staff of five software developers under two-year consulting
agreements.
On April 28, 2000, we acquired all of the capital stock of Impleo Limited
for approximately $200,000 in cash and approximately 125,000 shares of our
common stock.
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USE OF PROCEEDS
Assuming an offering price of $32.50 per share, we estimate that our net
proceeds from the sale of the 2,513,172 shares of common stock that we are
offering will be approximately $77.1 million, after deducting estimated
offering expenses of approximately $500,000 and underwriting discounts and
commissions payable by us. We will not receive any of the proceeds from the
sale of common stock by the selling stockholders. We intend to use the net
proceeds of this offering for working capital and other general corporate
purposes. We have not yet determined the amount of net proceeds to be used for
any specific purpose. Therefore, management will have significant flexibility
in applying the net proceeds of this offering.
We may use a portion of the net proceeds to acquire or invest in
complementary businesses, products or technologies or to obtain the right to
use complementary technologies. We have no agreements or commitments with
respect to any acquisition or investment, and are not involved in any
negotiations with respect to any transaction.
Pending use of the net proceeds for the above purposes, we intend to
invest the net proceeds of this offering in short-term, interest bearing,
investment grade securities.
PRICE RANGE OF COMMON STOCK
Our common stock has been quoted on the Nasdaq National Market under the
symbol "SMDK" since October 6, 1999. The following table sets forth for the
periods indicated the range of high and low closing sales prices per share of
our common stock as reported by the Nasdaq National Market:
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
1999
Fourth Quarter (commencing October 6, 1999) ......... $55.19 $23.56
2000
First Quarter ....................................... $65.13 $24.13
Second Quarter (through May 8, 2000) ................ $36.50 $16.38
</TABLE>
On May 8, 2000, the last sale price of our common stock, as reported by
the Nasdaq National Market, was $32.50 per share. As of April 30, 2000, we had
approximately 80 stockholders of record. We believe that the number of
beneficial owners of our common stock is in excess of 1,250.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our common stock or
other securities and do not anticipate paying cash dividends in the foreseeable
future. In addition, our line of credit prohibits the payment of cash
dividends.
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<PAGE>
CAPITALIZATION
(IN THOUSANDS, EXCEPT SHARE DATA)
The following table sets forth our capitalization as of December 31, 1999:
/bullet/ On an actual basis;
/bullet/ On a pro forma basis to reflect the acquisition of VST; and
/bullet/ On a pro forma as adjusted basis to reflect the acquisition of VST
and the sale of the 2,513,172 shares of common stock offered by
this prospectus at an assumed offering price of $32.50 per share,
and the application of the net proceeds we will receive from the
offering in the manner described in "Use of Proceeds."
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1999
-----------------------------------------------
PRO FORMA
ACTUAL PRO FORMA(1) AS ADJUSTED(2)
------------ -------------- ---------------
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments ........... $ 45,720 $ 30,083 $ 107,177
Stockholders' equity:
Common Stock, $0.001 par value; 60,000,000 shares
authorized; 16,072,399 shares issued and 15,991,422 shares
outstanding, actual; 17,145,892 shares issued and
17,064,915 shares outstanding, pro forma; and 19,659,064
shares issued and 19,578,087 shares outstanding,
pro forma as adjusted .................................... 16 17 20
Capital in excess of par value ............................. 71,247 140,338 217,429
Treasury stock ............................................. (58) (58) (58)
Accumulated other comprehensive income ..................... 712 712 712
Notes receivable from officers/employees ................... (388) (388) (388)
Accumulated deficit ........................................ (21,742) (21,742) (21,742)
--------- --------- ---------
Total stockholders' equity ................................ 49,787 118,879 195,973
--------- --------- ---------
Total capitalization ..................................... $ 49,787 $ 118,879 $ 195,973
========= ========= =========
</TABLE>
- ----------------
(1) Gives effect to the VST acquisition as if it had occurred as of December
31, 1999. See "Unaudited Pro Forma Financial Data."
(2) Gives effect to (i) our sale of 2,513,172 shares of common stock offered
hereby at an assumed public offering price of $32.50 per share (after
deduction of the estimated underwriting discount and offering expenses)
and the receipt and application of the net proceeds and (ii) the VST
acquisition as if each had occurred as of December 31, 1999.
The table does not reflect the issuance of approximately 99,000 shares of
our common stock upon the exercise of options since January 1, 2000, the
issuance approximately 37,000 shares of our common stock on April 21, 2000 in
connection with the El Gato acquisition or the issuance of approximately
125,000 shares of our common stock on April 28, 2000 in connection with the
Impleo acquisition.
The outstanding share information excludes the following:
/bullet/ 1,136,750 shares of common stock issuable on exercise of
outstanding options as of December 31, 1999 with a weighted
average exercise price of $7.19 per share;
/bullet/ 2,329,000 shares of common stock reserved for grant and issuance
under our stock option plans as of December 31, 1999; and
/bullet/ 80,977 shares of common stock held in treasury as of December 31,
1999.
This table should be read together with the sections entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," "Use of Proceeds" and "Management--
Employee Benefit Plans" and the financial statements and the notes included
elsewhere in this prospectus.
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<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Our consolidated statements of operations data set forth below for the
years ended December 31, 1997, 1998 and 1999 and the consolidated balance sheet
data as of December 31, 1998 and 1999 have been derived from audited
consolidated financial statements which are in this prospectus. Our
consolidated statement of operations data set forth below for the year ended
December 31, 1996 and the consolidated balance sheet data as of December 31,
1996 and 1997 have been derived from audited consolidated financial statements
which are not included in this prospectus. Our selected financial data as of
and for the year ended December 31, 1995, have been derived from unaudited
consolidated financial statements, which are not included in this prospectus.
The following selected financial data should be read together with the
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements and notes beginning on page F-1 of
this prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ------------ ----------- ------------ ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Product sales ................................ $ 316 $ 500 $ 893 $ 15,038 $37,262
Research and development revenue ............. -- -- -- -- 2,587
Royalties .................................... -- -- -- 285 470
-------- --------- -------- -------- -------
Total revenues ................................ 316 500 893 15,323 40,319
Cost of revenues .............................. 486 367 301 12,600 24,820
-------- --------- -------- -------- -------
Gross profit (loss) ........................... (170) 133 592 2,723 15,499
Operating expenses:
Research and development ..................... 331 720 1,412 2,107 5,869
Sales and marketing .......................... 48 6 12 1,566 1,608
General and administrative ................... 1,728 3,418 3,184 4,631 6,259
Impairment loss .............................. -- 7,807 -- -- --
-------- --------- -------- -------- -------
Total operating expenses ...................... 2,107 11,951 4,608 8,304 13,736
-------- --------- -------- -------- -------
Operating income (loss) ....................... (2,277) (11,818) (4,016) (5,581) 1,763
Gain (loss) on foreign exchange ............... -- -- -- (48) 30
Interest and other income ..................... 38 -- 8 76 586
Interest expense .............................. -- -- (1) (52) (54)
-------- --------- --------- -------- -------
Net income (loss) before income taxes ......... (2,239) (11,818) (4,009) (5,605) 2,325
Income tax expense (benefit) .................. -- (2,348) (45) (102) 1,367
-------- --------- -------- -------- -------
Net income (loss) ............................. $ (2,239) $ (9,470) $ (3,964) $ (5,503) $ 958
======== ========= ======== ======== =======
Weighted average shares used to calculate
earnings (loss) per share amounts:(1)
Basic ........................................ 7,350 7,579 7,739 8,040 10,725
Diluted ...................................... 7,350 7,579 7,739 8,040 13,349
Earnings (loss) per share:
Basic ........................................ $ (0.30) $ (1.25) $ (0.51) $ (0.68) $ 0.09
Diluted ...................................... $ (0.30) $ (1.25) $ (0.51) $ (0.68) $ 0.07
</TABLE>
26
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------
1995 1996 1997 1998 1999
------------ ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term
investments ....................................... $ 51 $ 8 $ 330 $ 2,920 $45,720
Working capital (deficit) .......................... (3,579) (2,191) (4,753) 2,869 46,108
Total assets ....................................... 437 250 1,607 11,136 63,444
Long-term debt (including current portion) ......... -- 93 645 648 --
Redeemable common stock ............................ -- -- -- 9,992 --
Total stockholders' equity (deficit) ............... (3,580) (2,017) (4,626) (6,336) 49,787
</TABLE>
- ----------------
(1) Shares used in computing earnings (loss) per share reflect the retroactive
adjustment of outstanding shares related to the mergers of SmartDiskette
Limited and SmartDisk Security Corporation into SmartDisk, as well as the
one-for-four reverse stock split completed in August 1999.
27
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
The following unaudited pro forma combined condensed statement of
operations for the year ended December 31, 1999, and the unaudited pro forma
combined condensed balance sheet as of December 31, 1999 give effect to the VST
acquisition as if it had occurred on (i) January 1, 1999 in the case of the
statement of operations and (ii) December 31, 1999 in the case of the balance
sheet. These unaudited pro forma combined condensed financial statements are
based upon the historical financial information appearing elsewhere in this
prospectus.
The VST acquisition was accounted for as a purchase business combination
for financial accounting purposes. The total purchase price of the acquisition
was allocated to the tangible and intangible assets and liabilities of VST
based upon their respective fair values as of the date of the closing of the
acquisition, pending final determination of certain acquired balances. In the
opinion of management, the appropriate adjustments have been made to the
historical financial statements which are necessary to fairly present the pro
forma combined condensed data. These pro forma adjustments are described in the
notes accompanying these unaudited pro forma combined condensed financial
statements. These unaudited pro forma combined condensed financial statements
are provided for information purposes only and do not purport to represent what
our results of operations or financial position would actually have been had
the transactions in fact occurred at such dates or to project our results of
operations or financial position at or for any future date or period.
These unaudited pro forma combined condensed financial statements and
accompanying notes should be read in conjunction with "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
financial statements and notes beginning on page F-1 of this prospectus.
28
<PAGE>
SMARTDISK CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
AS OF DECEMBER 31, 1999
(IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL
--------------------------------
SMARTDISK VST PRO FORMA PRO FORMA
CORPORATION(1) TECHNOLOGIES(2) ADJUSTMENTS COMBINED
---------------- ----------------- ------------------- ------------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash, cash equivalents and short-term
investments ..................................... $ 45,720 $ 797 $ (16,434)(a) $ 30,083
Restricted cash ................................... 1,050 -- -- 1,050
Accounts and notes receivable, net ................ 10,168 11,178 -- 21,346
Inventories, net .................................. 1,475 10,799 -- 12,274
Other current assets .............................. 1,353 166 -- 1,519
Deferred tax asset ................................ -- 1,485 -- 1,485
--------- -------- ---------- ---------
Total current assets ............................... 59,766 24,425 (16,434) 67,757
Property and equipment, net ........................ 2,623 1,288 -- 3,911
Goodwill and other intangible assets, net .......... 883 -- 93,167 (a) 94,050
Deposits and other assets .......................... 172 -- -- 172
--------- -------- ---------- ---------
Total Assets ....................................... $ 63,444 $ 25,713 $ 76,733 $ 165,890
========= ======== ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................. $ 5,330 $ 9,122 $ -- $ 14,452
Bank line of credit and discounted notes .......... 4,894 4,500 -- 9,394
Other accrued liabilities ......................... 2,015 1,624 2,975 (a) 6,614
Income taxes payable .............................. 1,110 1,448 -- 2,558
Deferred revenue .................................. 308 -- -- 308
--------- -------- ---------- ---------
Total current liabilities .......................... 13,657 16,694 2,975 33,326
Deferred income taxes and other .................... -- 5 13,680 (a) 13,685
Redeemable convertible preferred stock ............. -- 11,974 (11,974)(a) --
Stockholders' equity (deficit):
Common stock ...................................... 16 1 (1)(a) 17
1 (a)
Capital in excess of par value .................... 71,247 744 (744)(a) 140,338
69,091 (a)
Treasury stock, at cost ........................... (58) -- -- (58)
Accumulated other comprehensive income ............ 712 -- -- 712
Notes receivable from officers/employees .......... (388) -- -- (388)
Accumulated deficit ............................... (21,742) (3,705) 3,705 (a) (21,742)
--------- -------- ---------- ---------
Total stockholders' equity (deficit) ............... 49,787 (2,960) 72,052 118,879
--------- -------- ---------- ---------
Total Liabilities and Stockholders' Equity ......... $ 63,444 $ 25,713 $ 76,733 $ 165,890
========= ======== ========== =========
</TABLE>
- ----------------
(1) Represents the balance sheet for SmartDisk as of December 31, 1999. See
our financial statements and notes beginning on page F-2 of this
prospectus.
(2) Represents the balance sheet for VST, which we acquired on March 6, 2000,
as of December 31, 1999. See VST's financial statements and notes
beginning on page F-26 of this prospectus.
29
<PAGE>
SMARTDISK CORPORATION
UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
HISTORICAL
----------------------------------
SMARTDISK VST PRO FORMA PRO FORMA
CORPORATION(1) TECHNOLOGIES(2) ADJUSTMENTS COMBINED
---------------- ----------------- ----------------- ------------
<S> <C> <C> <C> <C>
Revenues:
Product sales ................................... $37,262 $61,526 $ -- $ 98,788
Research and development revenue ................ 2,587 -- -- 2,587
Royalties ....................................... 470 -- -- 470
------- ------- --------- ---------
Total revenues ................................. 40,319 61,526 -- 101,845
Cost of revenues ................................. 24,820 45,774 -- 70,594
------- ------- --------- ---------
Gross profit ..................................... 15,499 15,752 -- 31,251
Operating expenses:
Research and development ........................ 5,869 2,608 -- 8,477
Sales and marketing ............................. 1,608 3,765 -- 5,373
General and administrative ...................... 6,259 2,902 -- 9,161
Amortization of goodwill and other
intangible assets ............................. -- -- 28,169 (b) 28,169
------- ------- --------- ---------
Total operating expenses ....................... 13,736 9,275 28,169 51,180
------- ------- --------- ---------
Operating income (loss) .......................... 1,763 6,477 (28,169) (19,929)
Interest and other income (expense), net ......... 562 (265) (1,300)(c) (1,003)
------- ------- --------- ---------
Net income (loss) before income taxes ............ 2,325 6,212 (29,469) (20,932)
Income tax expense ............................... 1,367 -- 1,965 (d)
(6,593)(e) (3,261)
--------- ---------
Net income (loss) ................................ $ 958 $ 6,212 $ (24,841) $ (17,671)
======= ======= ========= =========
Earnings (loss) per share--basic ............... $ 0.09 $ (1.50)
Earnings (loss) per share--diluted ............. $ 0.07 $ (1.50)
Weighted average shares used to calculate
earnings (loss) per share amounts
Basic .......................................... 10,725 1,073 (f) 11,798
Diluted ........................................ 13,349 1,073 (f) 11,798
</TABLE>
- ----------------
(1) Represents actual results of operations for SmartDisk for the year ended
December 31, 1999. See our financial statements and notes beginning on
page F-2 of this prospectus.
(2) Represents the actual results of operations for VST, which we acquired on
March 6, 2000, for the year ended December 31, 1999. See VST's financial
statements and notes beginning on page F-26 of this prospectus.
30
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL STATEMENTS
NOTE 1. UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
The pro forma combined condensed balance sheet gives effect to the
acquisition as if it had occurred on December 31, 1999.
On March 6, 2000, SmartDisk Corporation acquired all the outstanding
shares of VST stock in exchange for approximately 1.073 million shares of
SmartDisk common stock and approximately $16.4 million in cash. In addition,
SmartDisk issued options to purchase a total of approximately 443,000 shares of
SmartDisk common stock in exchange for all issued and outstanding VST options.
The following adjustment has been reflected in the unaudited pro forma combined
condensed balance sheet.
(a) To reflect cash, common stock and options issued to the shareholders of
VST, and applicable purchase accounting entries, including the elimination
of VST's common stock, capital in excess of par value and retained
earnings. The Company also recorded additional goodwill and a deferred
income tax liability associated with separately identified intangible
assets.
Under purchase accounting, the total purchase price of the acquisition was
allocated to VST's assets and liabilities based on their relative fair values
as of the date of the closing of the acquisition pending final determination of
certain acquired balances. The amounts and components of the purchase price
along with the allocation of the purchase price to net assets acquired are
presented below (in thousands).
PURCHASE PRICE
<TABLE>
<S> <C>
Cash ............................................. $ 16,434
Common stock ..................................... 1
Capital in excess of par ......................... 49,299
Value of SmartDisk options issued ................ 19,792
Transaction costs ................................ 2,975
---------
Total purchase price ............................. $ 88,501
=========
NET ASSETS ACQUIRED
Book value of net tangible assets of VST ......... $ 9,551
Intangible assets:
Non-compete agreements .......................... 21,300
Distribution channels ........................... 4,900
VST trade name .................................. 4,800
Patents ......................................... 2,200
Workforce in place .............................. 1,000
Deferred income taxes ............................ (13,680)
Goodwill ......................................... 58,430
---------
Net assets acquired .............................. $ 88,501
=========
</TABLE>
31
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL
STATEMENTS--(CONTINUED)
NOTE 2. UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
The pro forma combined condensed statement of operations gives effect to
the acquisition as if it had occurred on January 1, 1999.
(b) Adjustment to reflect the amortization of goodwill and other intangible
assets resulting from the allocation of purchase price. The pro forma
adjustment assumes goodwill and other intangible assets will be amortized
on a straight-line basis over the following lives. Historical amortization
of goodwill and other intangible assets for SmartDisk has been included in
general and administrative expenses.
<TABLE>
<S> <C>
Intangible assets:
Non-compete agreements ......... 2 years
Distribution channels .......... 2 years
VST trade name ................. 2 years
Patents ........................ 3 years
Workforce in place ............. 4 years
Goodwill ........................ 5 years
</TABLE>
(c) To reflect an increase in interest expense assuming we borrowed the
approximately $16.4 million cash paid to VST security holders at
SmartDisk's effective borrowing rate of 8.5% on January 1, 1999 until the
date of our IPO at which time we would have paid down the debt. The
resulting decrease in cash proceeds would correspondingly decrease
interest income associated with cash, cash equivalents and short-term
investments.
(d) To reflect income tax expense at a rate of approximately 40% on income
earned by VST less pro forma interest expense.
(e) To reflect an income tax benefit at a rate of approximately 40% on
amortization expense on separately identified intangible assets.
(f) To reflect the shares issued as consideration for the acquisition.
32
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION OF OUR FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ TOGETHER WITH OUR FINANCIAL STATEMENTS AND THE NOTES
TO THOSE STATEMENTS INCLUDED IN THIS PROSPECTUS.
COMPANY BACKGROUND
SmartDisk Corporation was incorporated in March 1997 and commenced
operations in January 1998. From May 1993 until May 1998, we conducted
operations primarily through our predecessor, SmartDisk Security Corporation,
or SDSC. SDSC became a wholly owned subsidiary of SmartDisk in May 1998 and was
merged into SmartDisk in June 1998. Moreover, during 1996 and 1997, Fischer
International Systems Corporation, a company controlled by our principal
stockholder and Chairman of the Board, conducted all of SDSC's operations and
development activities pursuant to an operating agreement. Most of our 1996
expenses related to our acquisition and development activities for a product
that was eventually abandoned in late 1996. Moreover, in 1997, we were
primarily a development stage company with limited revenues. We did not begin
to recognize significant revenues from our Smarty and FlashPath products until
mid-1998. For additional information, see "Related Party Transactions" and note
1 of the notes to our financial statements.
On March 6, 2000, we completed our acquisition of VST Technologies, Inc.
VST designs, develops, manufactures and markets USB-based flash memory readers
and USB and FireWire-based high performance personal storage systems for
Windows and Macintosh platforms. Our acquisition of VST will expand our product
lines to include advanced FireWire and USB technologies and additionally expand
our access to the rapidly growing digital video and digital music markets. In
addition, we expect that the acquisition of VST will position us to participate
in the market for Apple products. VST's product line includes expansion bay
storage devices, such as the Zip 100 drive for Apple, IBM and Fujitsu
notebooks, SuperDisk drives for select Apple and IBM notebooks, USB floppy
drives, portable FireWire hard drives and a dual flash memory card and
rotational media reader, as well as a recently introduced 100 Gigabyte FireWire
RAID array.
We acquired VST for approximately $16.4 million in cash, approximately 1.1
million shares of our common stock and options to acquire approximately 443,000
shares of our common stock with exercise prices ranging from $0.90 to $4.45.
VST, a Delaware corporation whose predecessor was incorporated in 1993, is
located near Boston, Massachusetts. For the year ended December 31, 1999, VST
had gross revenues of approximately $61.5 million, operating income of
approximately $6.5 million and net income of approximately $6.2 million. We
have accounted for the VST acquisition under the purchase method of accounting.
Because of the significant amount of goodwill and other intangible assets which
we recognized in respect of the VST acquisition (approximately $93.2 million),
the acquisition was dilutive to our stockholders. We will amortize goodwill
over five years and the various components of other intangible assets over
lives ranging from two to four years.
On April 21, 2000, we completed our acquisition of El Gato Software LLC.
El Gato, a California limited liability company, is located near San Jose,
California. El Gato develops and markets USB and FireWire drivers, applications
and firmware support for leading personal storage systems, including
SmartMedia, CompactFlash, hard drives, Zip drives, floppy drives and optical
drives. We use El Gato drivers in our FireWire hard drives, FireWire Zip drives
and USB-based products, including our Tri-Media Reader. We acquired
substantially all of the intellectual property of El Gato for approximately
$755,000 in cash and approximately 37,000 shares of our common stock. We also
retained the services of El Gato's staff of five software developers under
two-year consulting agreements.
On April 28, 2000, we completed our acquisition of Impleo Ltd. Impleo, an
English corporation established in November 1999, is based in England. Impleo
manufactures and markets digital connectivity products and personal storage
systems under the Datawise brand. We plan to use Impleo as our primary European
distributor. We acquired all of the capital stock of Impleo for approximately
$200,000 in cash and approximately 125,000 shares of our common stock.
33
<PAGE>
OVERVIEW
We design, develop, manufacture and market digital connectivity products
and personal storage systems that allow consumers to easily access and exchange
digital data. As a result, our products provide consumers with a user friendly
way to transfer, store, manage and share digital photographs, video, music,
voice and data among digital appliances, personal computers and the Internet.
With the growth of digital appliances, such as digital cameras, digital video
camcorders, voice recorders and music players, consumers are increasingly using
the PC as the "multimedia center" of the home or office. These digital
appliances capture digital data on high capacity, reusable flash memory cards
that appeal to consumers because of their small size, versatility and
portability. Our digital connectivity products and personal storage systems are
designed to provide an easy way to transfer, store, manage and share digital
data. Our products are designed to cross PC platforms, support most leading
media types and use high performance PC interfaces, such as USB and FireWire.
Our patented digital connectivity products, such as our FlashPath products for
the Toshiba SmartMedia card, SanDisk MultiMediaCard and Sony Memory Stick, as
well as Smarty, allow consumers to use the familiar 3.5 inch floppy
drive--found on most PCs worldwide--to simplify the exchange of images, music,
voice and other digital data between PCs and digital appliances. Our latest
digital connectivity product, the Tri-Media Reader, utilizes a USB cable
interface to exchange digital data and is intended to address an expanding
installed base of PCs with USB cable interfaces. Our personal storage systems
include high performance external portable hard disk drives and floppy disk
drives for desktop and notebook PCs utilizing USB and FireWire interfaces with
the PC, as well as expansion bay disk drives for notebooks. Substantially all
of our personal storage systems are compatible with Windows and Macintosh
operating systems.
Our principal digital connectivity products, our FlashPath family of
products, are used primarily to transfer images to PCs from digital cameras. We
develop and market three FlashPath products, one for each of three different
flash memory cards: SanDisk's MultiMediaCard, Sony's Memory Stick and Toshiba's
SmartMedia card. These flash memory cards are used in cameras and video
camcorders made by a number of leading camera manufacturers, including
FujiFilm, JVC, Olympus, Panasonic, Sanyo, Sharp, Sony and Toshiba. During the
year ended December 31, 1999, we sold over one million FlashPaths for the
SmartMedia card. During the fourth quarter of 1999, we completed development of
our first FlashPath product for the Memory Stick and began full-scale
production and shipping to Sony for distribution. In the fourth quarter of
1999, we also shipped working samples of our FlashPath product for the
MultiMediaCard. We began volume production of FlashPath for the MultiMediaCard
in the first quarter of 2000. In the first quarter of 2000, we also introduced
a follow-on FlashPath product for new models of Sony's Mavica digital still
camera. In January 2000, we introduced a USB Tri-Media Reader which reads and
writes to SmartMedia cards, CompactFlash cards and rotational media, such as a
1.44 Mega-byte floppy disk, all in a single USB cable-powered device for both
Windows and Macintosh systems. We believe that as consumers embrace the digital
lifestyle, the number of applications for flash memory cards will grow. These
flash memory cards are designed for applications in "smart" cellular phones,
digital still cameras and camcorders, digital audio players, digital voice
recorders and video game devices. In addition to our product development
efforts with Sony and SanDisk, we also have strategic relationships with a
number of key electronics industry participants, including Hitachi, NEC, and
Toshiba.
Our personal storage systems enhance the user's ability to store and
manage digital data. Our personal storage systems are compatible with both
Windows and Macintosh operating systems and support very high transfer rates,
up to 400 Megabits per second and 100 Gigabytes of capacity. Since 1992, we
have worked with Apple as an Apple developer. Through this relationship, Apple
has provided us access to selected product road maps which has allowed us to
focus on new opportunities in the development and engineering of many FireWire
and USB systems. Through our strategic relationship with Iomega, we build
Iomega Zip drive products for Apple, IBM and Fujitsu. Iomega designs,
manufactures and markets disk drives that can be purchased as aftermarket
products to be added to PCs and other electronic devices or as a built-in
feature incorporated in PCs. In 1999, we were one of the first companies to
ship FireWire personal storage systems for both Macintosh and
34
<PAGE>
Windows operating systems, as well as FireWire Zip drives. In the first quarter
of 2000, we introduced one of the first 100 Gigabyte portable FireWire RAID
arrays.
Our strategic partners actively participate in the development of our
products, provide us with access to leading-edge manufacturing capabilities,
and market and/or distribute our products globally.
RESULTS OF OPERATIONS
SMARTDISK
In 1997, we were primarily a development stage company with limited
revenues. We did not begin to recognize significant revenues from our FlashPath
and Smarty products until mid-1998. During 1999 and 1998, substantially all of
our product revenues were derived from the sale of our FlashPath product that
works with SmartMedia flash memory cards. Moreover, most of our product
revenues in 1999 were derived from sales to relatively few OEM customers.
FujiFilm and Olympus collectively accounted for approximately 55% of our 1999
revenues, down from 70% in 1998, and our top five customers accounted for
approximately 81% of our revenues, down from 93% in 1998. In 1999, on a pro
forma basis after giving effect to the VST acquisition, Olympus, FujiFilm and
Ingram Micro accounted for approximately 11%, 11% and 22% of our revenues and
our top five customers collectively accounted for approximately 58% of our
revenues. We expect to continue to depend on sales of our products to
relatively few customers, which will continue to account for a significant
portion of our net revenues, for the foreseeable future. Although we work
closely with the OEMs to forecast sales, we do not have purchase contracts with
any of our customers that obligate them to continue to purchase our products,
and they could cease purchasing products from us at any time.
Our operating results fluctuate based on the timing and amount of orders
we receive from our customers, which may be tied to seasonal demand for both
our digital connectivity products and our personal storage systems, as well as
the consumer electronic products manufactured and sold by our OEM customers.
Because fluctuations in orders from our major customers could cause our net
revenues to fluctuate significantly in any given quarter or annual period, we
do not believe that period-to-period comparisons of our financial results are
necessarily meaningful and should not be relied upon as an indication of future
performance. In addition, historically the average selling prices of our
products have declined and we expect that our OEM customers may seek price
concessions, which would reduce our average selling prices and our gross
margins in the future.
Our fiscal year ended December 31, 1999 was our first full year of
profitability and we were profitable in the third and fourth quarters of 1999.
Our net losses in 1998 and 1997 resulted from our significant investment in
research and development and in building sales and marketing and general and
administrative infrastructure. We expect to continue to invest significantly in
research and development related to new digital connectivity products and
personal storage systems, as well as marketing and sales activities to support
those products. No assurance can be given that the introduction or market
acceptance of new products will be successful.
We purchase a substantial portion of our products from contract
manufacturers located in Asia. As a result, a substantial portion of our costs
and expenses are denominated in currencies other than the U.S. dollar,
primarily the Japanese yen. In addition, approximately 85% of our 1999 revenues
were derived from customers located outside the United States, most of which
were denominated in yen. See note 1 of the notes to our financial statements
for additional information with respect to our foreign operations.
While most of the transactions and accounts of our United States and
Japanese operations are dollar or yen denominated, some accounts are
denominated in other currencies. Since the accounting records of our Japanese
operations are kept in yen, any non-yen denominated transactions are accounted
for in yen at the time of the transaction. Upon settlement of such a
transaction, any foreign currency gain or loss results in an adjustment to
income. We could be required to denominate our
35
<PAGE>
product sales in currencies other than yen in the future, which would make the
management of currency fluctuations more difficult and expose us to greater
currency risk. Some accounts of our U.S. and Japanese operations are
denominated in currencies other than the dollar or yen and are remeasured to
the dollar or yen at the end of the accounting period. This remeasurement also
results in an adjustment to income. Additionally, the balance sheet accounts of
our Japanese operations are translated to dollars for financial reporting
purposes and resulting adjustments are made to stockholders' equity. The value
of the yen may strengthen or weaken against the dollar, which would impact the
value of stockholders' investment in our common stock. The strengthening of the
yen against the U.S. dollar in 1999 contributed the most significant portion of
the foreign currency translation gain adjustment. This amount is included in
accumulated other comprehensive income and shown in the equity section of our
balance sheet. We do not currently hedge against foreign currency exposure. The
lack of a hedging program exposes us to foreign currency gains and losses.
Our backlog at December 31, 1999 was approximately $5.4 million, compared
to approximately $2.7 million at December 31, 1998. On a pro forma basis after
giving effect to the VST acquisition, our backlog at December 31, 1999 was
approximately $9.1 million. The increase in backlog of approximately $2.7
million resulted primarily from the year-end introduction of the Memory Stick
FlashPath for use with Sony digital appliances and the MultiMediaCard FlashPath
which utilizes SanDisk's latest flash memory card. However, a substantial
portion of our backlog is typically scheduled for delivery within 60 days.
Variations in the size and delivery schedules of purchase orders received by
us, as well as changes in customers' delivery requirements, may result in
substantial fluctuations in backlog from period to period. Accordingly, we
believe that backlog cannot be considered a meaningful indicator of future
financial results.
COMPARISON OF YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES. Total product revenues were approximately $37.3 million for the
year ended December 31, 1999 compared to approximately $15.0 million for the
year ended December 31, 1998. This increase was primarily attributable to
higher sales of our FlashPath for SmartMedia product, which we commercially
introduced in mid-1998, and, to a lesser extent, sales of our newest product,
FlashPath for the Sony Memory Stick, which we commercially introduced in the
fourth quarter of 1999. Foreign sales accounted for 85% of our 1999 revenues,
compared to 90% of our 1998 revenues. We expect that the acquisition of VST
will significantly increase our revenues for fiscal year 2000.
Our product revenues from the sale of FlashPath increased from $13.8
million for the year ended December 31, 1998 to $36.4 million for the year
ended December 31, 1999. This increase was partially offset by decreases in the
sale of our Smarty product from $1.3 million for the year ended December 31,
1998 to $836,000 for the year ended December 31, 1999. As a result of the
growth of our FlashPath revenues and the decrease in Smarty sales, Smarty
revenues represented less than 3% of product revenues for the year ended
December 31, 1999 compared to approximately 9% in the year ended December 31,
1998. Our product revenues from the sale of our FlashPath and Smarty products
are recognized at the time of shipment to customers.
Fiscal year 1999 was the first year that we have had revenues from our
research and development efforts. During 1999, we entered into a development
agreement with a customer for the development of new products. Upon acceptance
of the product by the customer in the fourth quarter of 1999, we recognized
approximately $2.6 million in revenue. During the fourth quarter, we entered
into an additional research and development agreement with the same customer,
which is expected to be completed during the first half of 2000. Our research
and development revenue is recognized upon final customer acceptance of our
work performed under the terms of the agreement.
Our royalty revenues consist of royalties earned on the sales of our first
product, SafeBoot, which is licensed to and sold by Fischer International, an
affiliate. As our FlashPath revenues continue to increase, these royalties
represent a smaller portion of our total revenues and have decreased to
approximately 1% of our total revenues for the year ended December 31, 1999.
Our royalty revenues
36
<PAGE>
from the sale of our SafeBoot product increased to $470,000 in the year ended
December 31, 1999 as compared to $284,000 in December 31, 1998.
COST OF REVENUES. Cost of revenues includes the purchased cost of product,
packaging, freight and royalties for our FlashPath and Smarty products, the
creation of disks for our SafeBoot product and scrap and inventory provisions.
Cost of revenues increased to approximately $24.8 million for the year ended
December 31, 1999 compared to approximately $12.6 million for the year ended
December 31, 1998. This increase in costs was due primarily to the increase in
sales of our FlashPath product. With the acquisition of VST, we expect that our
cost of revenues will increase significantly next year as we add infrastructure
to expand our product offerings, particularly for FireWire and USB products,
and support anticipated sales growth.
GROSS PROFIT. Our gross profit for the year ended December 31, 1999
increased to approximately $15.5 million or 38% of total revenue, compared to
approximately $2.7 million or 18% of total revenue for the year ended December
31, 1998. These increases in the gross profit and gross profit percentage are
primarily the result of revenue growth and improved margins on our FlashPath
product. The improved FlashPath product margins achieved in 1999 are a result
of our efforts to reduce our costs per unit. The improved margins also resulted
from a favorable mix associated with higher shipments to customers other than
our largest OEMs which we intend to continue. Because we expect OEMs to
continue to account for a large portion of our sales, we expect gross margins
on our FlashPath products to remain relatively consistent with the current
level. However, our largest OEM customers may seek price concessions, which
could cause a reduction in our gross margins. Another contributor to our
improved gross profit in 1999 was the research and development revenue earned
under the research and development agreement we have with one of our customers.
Without the research and development revenue, our gross margin would be
approximately 35% of total revenue. With the acquisition of VST in March 2000,
we expect the actual amount of our gross profit to increase next year, however,
we anticipate our overall gross margin percentage will decrease. In 1999, VST
had a gross margin of 26% of revenues, and on a pro forma basis after giving
effect to the VST acquisition, our gross margin was approximately 31%.
RESEARCH AND DEVELOPMENT EXPENSES. Our research and development expenses
consist primarily of salaries and payroll-related expenses for our design and
development engineers, as well as prototype supplies and contract or
professional services. These expenses increased to approximately $5.9 million,
or 15% of revenues, for the year ended December 31, 1999 compared to
approximately $2.1 million, or 14% of revenues, for the year ended December 31,
1998. This increase was the result of hiring additional technical personnel,
including salaries and related payroll expenses, costs incurred in conjunction
with one of our research and development contracts and the outsourcing of
product development.
All of these expenses were incurred to support our development of enhanced
versions of our existing FlashPath and Smarty products, as well as our
development of our new FlashPath products designed to work with the Sony Memory
Stick and the SanDisk MultiMediaCard. We expect that our research and
development expenses will continue to increase in connection with the
enhancement of our existing FlashPath products and the expansion of the
FlashPath line to support additional flash memory card formats. In addition, we
expect to incur additional costs as we develop other digital connectivity
products to conveniently transfer digital data from competing flash memory
cards to existing, non-PC technologies, such as our recently-announced
FlashTrax/registered trademark/ product, and other products that support
computer interfaces other than the 3.5 inch floppy disk drive, such as our
recently-introduced USB Tri-Media Reader.
VST had research and development expenses of $2.6 million, or 4% of
revenues, for the year ended December 31, 1999 to support the development of
many of their products. On a pro forma basis after giving effect to the VST
acquisition, our 1999 research and development expenses were approximately $8.5
million, or 9% of revenues. We expect our consolidated research and development
expenses to increase but represent a decreasing percentage of our total product
revenues.
37
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SALES AND MARKETING EXPENSES. Sales and marketing expenses include
salaries, benefits and travel expenses for our sales, marketing and product
management personnel in the United States and Japan. These expenses also
include other selling and marketing expenditures for items such as trade shows,
marketing and promotional programs. Sales and marketing expenses increased by
less than $100,000 to approximately $1.6 million for the year ended December
31, 1999 compared to the year ended December 31, 1998. The change from 1998 to
1999 reflects various additional costs incurred in 1998 in connection with the
introduction of the FlashPath product for SmartMedia, including salaries and
payroll related expenses associated with the opening of our Tokyo, Japan office
in March 1998. In connection with the VST acquisition we added approximately 70
new products to our existing product lines. Therefore, we anticipate that the
sales and marketing efforts related to these new products will significantly
increase our expenses.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
include the salaries and related expenses of our executive management, finance,
information systems, human resources, legal and administrative functions, as
well as lease rental expense, utilities, maintenance expenses, taxes,
insurance, legal and accounting professional fees, depreciation and
amortization. General and administrative expenses increased to approximately
$6.3 million in the year ended December 31, 1999 compared to approximately $4.6
million in 1998. This increase is primarily due to increases in professional
services, legal fees and personnel related costs including salaries, bonuses
and relocation expenses. We also expect that these expenses will increase
significantly in 2000 as a result of the VST acquisition due to the addition of
VST's general and administrative expenses. For the year ended December 31,
1999, VST had 46 employees and general and administrative expenses of $2.9
million.
INTEREST AND OTHER INCOME/INTEREST EXPENSE. Interest and other income
includes interest earned on cash balances and gains or losses on foreign
exchange. Interest expense is incurred on the bank line of credit in Japan. The
average outstanding balance on the line of credit in Japan remained consistent
between 1999 and 1998, therefore, interest expense remained consistent between
years. The significant component of interest and other income is interest
earned on the proceeds from our initial public offering in October 1999.
Most of our revenues in 1999, as well as related expenses, were
denominated in Japanese yen. Gain (loss) on foreign exchange generally reflects
the remeasurement of cash and inter-company accounts that are denominated in
different currencies into U.S. dollars. We had a gain of approximately $30,000
in 1999 compared to a loss of approximately $48,000 in 1998. See note 1 of the
notes to our financial statements for additional information.
PROVISION FOR INCOME TAXES. We are subject to tax in Japan and a number of
other jurisdictions where we do business, including the United States and
United Kingdom. These jurisdictions have different marginal tax rates. For the
year ended December 31, 1999, we provided for Japanese withholding tax of
approximately $585,000 on royalty income from Japan. We also provided for
Japanese income tax of approximately $780,000 due to income earned in Japan. As
of December 31, 1999 we had a net operating loss carry forward of approximately
$1.5 million for United States federal income tax purposes. However, we have
provided a valuation allowance to reduce the related deferred tax asset to
zero. See note 11 of the notes to our financial statements for additional
information. Our effective tax rate in 1999 was 58%. We expect this to improve
as a result of the anticipated implementation of proposed tax planning
measures; however, any such improvements will be offset by the acquisition of
VST.
COMPARISON OF YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES. Our revenues increased to approximately $15.3 million in 1998
from $893,000 in 1997. This increase was the result of approximately $13.4
million in sales of our FlashPath for SmartMedia product, which was
commercially introduced in mid-1998, and increased sales of Smarty of
approximately $1.0 million. Substantial shipments of these products did not
occur until the first quarter of 1998 for Smarty and the second quarter of 1998
for FlashPath.
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COST OF REVENUES. Cost of revenues increased to approximately $12.6
million for the year ended December 31, 1998 from $301,000 in 1997. This
increase in costs was primarily due to the increase in sales of our FlashPath
product since substantial shipment of our FlashPath and Smarty products did not
occur until 1998. The cost of revenues in 1997 was primarily related to our
SafeBoot product.
GROSS PROFIT. Gross profits increased to approximately $2.7 million in
1998 from approximately $592,000 in 1997. This increase resulted primarily from
the market introduction of our FlashPath product in mid-1998. Gross profit as a
percentage of revenues decreased to 18% in 1998 compared to 66% in 1997. This
decrease was the result of lower overall margins from sales of FlashPath to our
major OEM customers at quantity pricing levels. The margins generated in 1997
were unrealistically high and could not be maintained with increases in volume
sales to large customers.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $2.1 million in 1998 from $1.4 million in 1997. The increase was
attributable to the hiring of additional technical personnel to support the
development of our FlashPath and Smarty products.
SALES AND MARKETING EXPENSES. Sales and marketing expenses increased to
approximately $1.5 million in 1998 from approximately $12,000 in 1997. This
increase was due to the hiring of sales, marketing and product management
personnel to support our FlashPath and Smarty products, and in particular, the
opening of our Tokyo, Japan office in March 1998.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
increased to approximately $4.6 million in 1998 from approximately $3.2 million
in 1997. This increase was attributable to our hiring of additional executives
to support our growth, including executives to staff our Tokyo office, which
opened in March 1998.
VST
Fiscal 1999 represented VST's second consecutive year of substantial
revenue growth and the first year of profitability. Prior to 1999, all of VST's
sales consisted of expansion bay storage devices and peripheral power
management products for notebook computers. Prior to 1998, all of VST's sales
consisted of peripheral products for Macintosh Powerbooks. In 1998, VST
successfully launched its notebook Zip drives, diversifying its products for
Windows-compatible notebooks. VST's first non-Apple sales in 1998 were from
notebook Zip drives sold for IBM ThinkPads, Fujitsu Lifebooks and NEC Versa
notebooks. Revenue growth in 1999 was due to VST's successful entry into the
desktop marketplace for personal storage systems, as VST began shipping
FireWire and USB-based storage devices for Windows and Macintosh desktop
platforms. These new FireWire and USB personal storage systems represented
approximately 44% of 1999 revenues. Customers purchased most of these desktop
peripherals for use with desktops sold by Apple. USB storage devices sold
particularly well, accounting for approximately two thirds of VST's sales of
new personal storage systems. We expect sales of the FireWire family of
products to grow as the number of PCs featuring FireWire ports increases.
Most of VST's products are sold to domestic customers through the retail
distribution channel, consisting of sales to Apple, national and worldwide
distributors, mail order and catalog houses, and established retail chain
stores. Sales to the retail distribution channel accounted for 74% of 1999
sales and 60% of 1998 sales. VST also sells directly to major OEMs, such as IBM
and Fujitsu. VST's sales to OEMs were 15% of 1999 sales and 24% of 1998 sales.
VST's backlog of orders was approximately $3.7 million at December 31,
1999, compared to approximately $3.0 million in 1998. The increase in the
backlog reflects both the higher sales and increased product offerings at the
end of 1999 compared to 1998. Since most of VST's customers expect product
deliveries shortly after order placement, VST's backlog is usually less than
one month's sales. In addition, VST often builds a backlog of orders for new
products that have been announced but are not yet shipping.
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<PAGE>
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1999 AND 1998
REVENUES. Revenues for the year ended December 31, 1999 were approximately
$61.5 million, an increase of approximately 150% over approximately $24.6
million for the year ended December 31, 1998. The increase in revenue was
primarily attributable to sales of the new USB-based personal storage systems,
which VST commercially introduced in late 1998, and FireWire-based personal
storage systems, which VST commercially introduced in the first half of 1999,
and an increase in sales of expansion bay hard drives and SuperDisk drives for
use with Apple notebook computers. The increase in sales of expansion bay hard
drives and SuperDisk drives was due in part to the fact that Apple began
shipping their notebook computers without floppy drives in the expansion bays
during 1999, and many Powerbook customers bought VST's SuperDisk drives for the
expansion bays in order to have floppy capability. The remainder of the 1999
sales were Zip drives for Apple, Fujitsu, and IBM notebooks and power
peripherals sold into the Apple market. Foreign sales accounted for 8% of total
1999 sales, compared to 9% of 1998 sales.
Revenues from the sale of USB-based personal storage systems increased to
approximately $19.0 million for the year ended December 31, 1999 from
approximately $100,000 for the year ended December 31, 1998. VST began shipping
its first FireWire-based personal storage systems in April 1999, and its
product revenues from the sale of these products were approximately $8.0
million for the year ended December 31, 1999. Revenues from the sale of Zip
drives, primarily for Apple, IBM, Fujitsu and NEC notebooks, decreased to
approximately $20.0 million for the year ended December 31, 1999 from
approximately $22.0 million for the year ended December 31, 1998. Product
revenues are recognized at the time of shipment to customers.
COST OF REVENUES. Cost of revenues includes amounts paid to contract
assembly houses for purchases of finished assemblies and amounts paid to
fulfillment houses for product packaging, handling, storage and shipping
services, as well as provisions to product warranty reserves and reserves for
excess and obsolete inventory. Cost of revenues increased to approximately
$45.8 million for the year ended December 31, 1999 compared to approximately
$19.2 million for the year ended December 31, 1998. This increase in costs was
due primarily to the increase in sales of products. We expect cost of revenues
to increase as we add infrastructure, including tooling, to expand our product
offerings. Cost of revenues in 1998 included significant costs due primarily to
an approximately nine-month delay in the shipment of VST's first notebook Zip
drives resulting from delays in deliveries of Zip mechanisms from VST's
supplier.
GROSS PROFIT. Gross profit margins increased to approximately $15.7
million or 26% of revenues for the year ended December 31, 1999 from
approximately $5.4 million or 22% of revenues for the year ended December 31,
1998. The cost of revenue associated with the delayed shipment of VST's first
notebook Zip drives adversely impacted 1998 gross margin. Overall gross margin
results generally reflect decreasing prices during the life cycle of the
product due to competitive dynamics and aging platforms, counterbalanced by
higher margins for new products and economies of scale.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and payroll-related expenses for design and development
engineers, as well as prototype supplies and contract or professional services.
Research and development expenses increased by approximately 137% to
approximately $2.6 million, or 4% of revenues, for the year ended December 31,
1999 compared to approximately $1.1 million, or 5% of revenues, for the year
ended December 31, 1998. The increase is primarily attributable to additional
engineering personnel and to prototype costs for new product development. The
decrease in research and development expense as a percentage of revenue from
1998 to 1999 is attributable to an increase of approximately 150% in revenue.
We believe that the continued introduction of new personal storage products
with an emphasis on being first-to-market is essential to growth and will
require an increase in the absolute dollars spent on research and development.
SALES AND MARKETING. Sales and marketing expenses include salaries,
benefits and travel expenses for our sales, marketing and product management
personnel in the United States. These expenses also
40
<PAGE>
include other selling and marketing expenditures for items such as trade shows,
marketing and promotional programs. Sales and marketing expenses increased to
approximately $3.8 million for the year ended December 31, 1999 compared to
approximately $2.8 million for the year ended December 31, 1998. The increase
is primarily attributable to increased product advertising and promotion, and
the additional sales personnel and associated expenses required to achieve
$61.5 million sales volume in 1999 compared to the $24.6 million sales volume
in 1998.
GENERAL AND ADMINISTRATIVE. General and administrative expenses include
the salaries and related expenses of executive management, finance, information
systems, human resources, legal and administrative functions, as well as lease
rental expense, utilities, maintenance expenses, insurance, legal and
accounting professional fees, depreciation and amortization. General and
administrative expenses increased to approximately $2.9 million for the year
ended December 31, 1999 compared to approximately $2.2 million for the year
ended December 31, 1998. The increase is primarily attributable to additional
operating and clerical personnel, additional compensation related to
performance-based bonus programs, additional executive travel and general
increases in most other administrative expenses.
INTEREST AND OTHER EXPENSE. Interest and other expense includes interest
on the outstanding balance of VST's line of credit and convertible demand notes
and a loan from strategic partners. Interest expense was approximately $261,000
in 1999 compared to approximately $473,000 in 1998. Although the average
outstanding balance on VST's line of credit was higher in 1999 than in 1998,
interest expense in 1998 also included interest on convertible demand notes
that converted to equity in December 1998 and a note payable to a vendor that
was paid in full during December 1998.
INCOME TAXES. Through fiscal 1998, VST had not been profitable since its
inception, and had accumulated a net operating loss carryforward to be used to
offset future taxable income. Although VST reported over $6.0 million of
pre-tax income in 1999, VST did not record any income tax expense due to the
net operating loss carryforward VST had accumulated. However, VST recorded a
current income tax liability of $1.5 million at December 31, 1999, and also
recorded a deferred tax asset of $1.5 million to recognize the estimated future
effects of temporary differences between the carrying value of assets for
financial reporting and tax reporting purposes. VST recognized this deferred
tax asset in 1999 due to the belief that it was more likely than not that VST
would be able to realize this asset.
COMPARISON OF FISCAL YEARS ENDED DECEMBER 31, 1998 AND 1997
REVENUES. Revenues for the year ended December 31, 1998 were approximately
$24.6 million, an increase of approximately 224% over the approximately $7.6
million for the year ended December 31, 1997. The increase in revenue was
primarily attributable to sales of Zip drives for Apple, Fujitsu, and IBM
notebooks, which VST began shipping in small quantities during November 1997.
The remainder of VST's sales in 1997 were non-Zip expansion bay storage devices
and power peripherals sold into the Apple market, primarily through master
distributors, catalog/mail order houses, and retail resellers. In addition,
foreign sales accounted for 9% of total 1998 sales, compared to 22% of 1997
sales, as VST phased-out its line of notebook magneto optical drives sold in
Japan.
Revenues from the sale of USB-based personal storage systems, which VST
introduced in late 1998, were approximately $100,000 for the year ended
December 31, 1998. Revenues from the sale of notebook Zip drives increased to
approximately $22.0 million for the year ended December 31, 1998 from
approximately $1.5 million for the year ended December 31, 1997. Revenues from
the sale of non-Zip expansion bay storage devices and power peripherals
decreased to approximately $3.0 million for the year ended December 31, 1998
from approximately $6.0 million for the year ended December 31, 1997.
COST OF REVENUES. Cost of revenues increased to approximately $19.2
million for the year ended December 31, 1998 compared to approximately $6.2
million for the year ended December 31, 1997.
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<PAGE>
The increased costs were primarily due to the increase in sales of products and
an approximately nine-month delay in the shipment of VST's first notebook Zip
drives resulting from delays in deliveries of Zip mechanisms from VST's
supplier.
GROSS PROFIT. Gross profit margins increased to approximately $5.4 million
or 22% of revenues in 1998 from approximately $1.5 million or 19% of revenues
in 1997. Cost of revenue associated with the delayed shipment of VST's first
notebook Zip drives adversely impacted 1998 gross margins. Excluding the effect
of these costs, gross profit margins decreased to 26% in 1998 from 27% in 1997.
VST's 1997 sales mix included a greater percentage of higher margin power
products than the lower margins associated with the notebook storage drives
that dominated the 1998 sales mix. Overall gross margin results generally
reflect decreasing prices during the life cycle of the product due to
competitive dynamics and aging platforms, counterbalanced by higher margins for
new products and economies of scale.
RESEARCH AND DEVELOPMENT. Research and development expenses decreased by
approximately 6% to approximately $1.1 million or 5% of revenues for the year
ended December 31, 1998 compared to approximately $1.2 million or 15% of
revenues for the year ended December 31, 1997 due in part to research and
development funding from strategic partners in 1998. This decrease in research
and development expense as a percentage of revenue from 1997 to 1998 was
attributable to an increase of approximately 224% in revenue.
SALES AND MARKETING. Sales and marketing expenses increased to
approximately $2.8 million for the year ended December 31, 1998 compared to
approximately $2.2 million for the year ended December 31, 1997. The increase
was primarily attributable to the increased infrastructure required to support
VST's approximately $24.6 million sales volume in 1998 compared to supporting
an approximately $7.6 million sales volume in 1997. The increased
infrastructure included additional leased space, additional sales, customer and
technical support personnel, and the increased depreciation from the supporting
computer equipment, office furniture and fixtures.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to approximately $2.2 million for the year ended December 31, 1998 compared to
approximately $1.4 million for the year ended December 31, 1997. The increase
is primarily attributable to the increased infrastructure required to support
VST's higher sales volume in 1998 compared to 1997.
INTEREST AND OTHER EXPENSE. Interest expense was approximately $457,000 in
1998 compared to approximately $348,000 in 1997. Increase in interest expense
in 1998 was primarily the result of interest on convertible demand notes issued
in September and October 1998 and interest on a loan from strategic partner. A
higher average balance on VST's bank line of credit during 1998 compared to
1997 also contributed to the higher interest expense.
INCOME TAXES. Through fiscal 1997, VST had not achieved profitability and
had accumulated a net operating loss carryforward to be used to offset future
taxable income.
QUARTERLY RESULTS
The following table sets forth unaudited quarterly operating data for each
of the eight quarters ended December 31, 1999. In the opinion of management,
these data have been prepared substantially on the same basis as the audited
financial statements appearing elsewhere in this prospectus, and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the data. However, our operating results have fluctuated
significantly in the past and we expect that they will continue to fluctuate in
the future. Future fluctuations may be a result of a variety of factors,
including the timing and amount of orders we receive from our customers,
reductions in average selling prices, the timing and level of our research and
development expenditures, the availability of manufacturing capacity necessary
to make our products. In addition, this historical data does not include the
financial performance of VST which we acquired in
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March 2000. Therefore, we believe that period-to-period comparisons of our
historical results are neither meaningful nor predictive of our future
performance. The quarterly data should be read together with the financial
statements and the notes to those statements appearing elsewhere in this
prospectus.
<TABLE>
<CAPTION>
THREE MONTHS ENDING
-------------------------------------------------------------------------------------------------
MARCH JUNE SEPTEMBER DECEMBER MARCH JUNE SEPTEMBER DECEMBER
31, 30, 30, 31, 31, 30, 30, 31,
1998 1998 1998 1998 1999 1999 1999 1999
----------- ----------- ----------- ------------ ----------- ----------- ----------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ..................... $ 532 $ 3,440 $ 4,889 $ 6,462 $ 5,507 $ 8,486 $ 11,463 $ 14,863
Gross profit ................. 91 629 1,520 483 836 2,886 4,495 7,282
Gross profit margin .......... 17% 18% 31% 7% 15% 34% 39% 49%
Total operating expenses ..... 1,297 2,205 2,187 2,615 2,831 3,037 3,548 4,320
Operating income (loss) ...... (1,206) (1,576) (667) (2,132) (1,995) (151) 948 2,961
Net income (loss) ............ $ (1,189) $ (1,540) $ (690) $ (2,084) $ (1,967) $ (189) $ 702 $ 2,412
</TABLE>
As a result of our extremely limited operating history, we do not have
historical financial data for a significant number of periods on which to base
planned operating expenses. Our expense levels are based in part upon our
expectations concerning future revenue and, to an extent, are fixed. Quarterly
revenues and operating results depend substantially upon the timing and amount
of orders we receive from our relatively small number of customers, which may
be tied to seasonal demand for both our digital connectivity products and our
personal storage systems, as well as the consumer electronic products
manufactured and sold by our OEM customers. Accordingly, the cancellation or
delay of customer orders, or the loss of a significant customer, could have a
material adverse effect on our business. We may be unable to adjust spending
for our research and development or other activities in a timely manner to
compensate for any unexpected revenue shortfall, and any significant shortfall
in revenue in relation to our expectations would have an immediate adverse
effect on our business, results of operations and financial condition.
Due to the above factors, quarterly revenues and results of operations are
difficult to forecast, and we believe that period-to-period comparisons of our
operating results are neither meaningful nor predictive of future performance.
In one or more future quarters our results of operations may fall below the
expectations of securities analysts and investors. In that event, the trading
price of our common stock would likely be materially adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------
1998 1999 % CHANGE
------------ ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Cash, cash equivalents and short-term investments ......... $ 2,920 $45,720 1,466%
Working capital ........................................... $ 2,869 $46,108 1,507%
Stockholders' equity (deficit) ............................ $ (6,336) $49,787 *
</TABLE>
- ----------------
* not meaningful
During 1997, we financed our operations principally through loans payable
to related parties. During 1998 and 1999, we financed our operations and repaid
loans outstanding through short-term borrowings and the sale of equity
securities in private placements with several strategic investors including
Hitachi, NEC, Rohm, Toshiba and Yamaichi. In October 1999, we completed an
initial public offering of our common stock which raised capital in the amount
of $39.14 million.
VST financed its operations and met its capital requirements since its
inception in 1993 primarily through private placements of common and preferred
stock, convertible demand notes from existing investors and loans from
strategic partners, and from working capital lines of credit with commercial
banks.
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We maintain a line of credit under which we may borrow up to $5 million.
Any amounts borrowed under this line of credit bear interest at 2% over the
30-day LIBOR rate and are secured by substantially all of the assets of the
Company. This line of credit expires on December 15, 2000. We have not borrowed
against this line of credit and we have no current plans to borrow any amounts
under this line of credit.
Our Japanese branch has a line of credit with maximum borrowing capacity
of approximately $2.9 million, or 295 million yen. The facility, which has no
fixed term, is secured by a time deposit and accounts receivable. The branch
maintains a time deposit with the bank that had a balance at December 31, 1999
of approximately $1.0 million. We may borrow up to 90% of this amount. The
credit agreement corresponding to the time deposit collateral is renewable
automatically on May 31, 2000. In addition, accounts receivable of up to $2
million, or 200 million yen, of specified trade customers may be used as
additional collateral. The credit agreement corresponding to the accounts
receivable collateral is renewable automatically on January 31, 2001. The
interest rate on borrowings under the credit facility is 1.38% per year. The
outstanding balance under the line of credit was approximately $2 million, or
200 million yen, as of December 31, 1999 compared to approximately $0.9 million
at December 31, 1998.
The Japanese branch also discounts certain short-term promissory notes
received from trade customers with the bank. Bank borrowings collateralized by
promissory notes totaled approximately $2.9 million, or 302 million yen, at
December 31, 1999 and approximately $1.4 million, or 160 million yen, at
December 31, 1998.
Net cash used in operating activities was approximately $0.2 million for
the year ended December 31, 1999 as compared to approximately $6.0 million and
$4.1 million for the years ended December 31, 1998 and 1997. Net cash used in
operating activities in 1999 was due to increases in accounts and notes
receivable of approximately $6.7 million, prepaid expenses and other current
assets of approximately $0.9 million. These amounts were partially offset by
approximately $1.0 million of net income and increases in accounts payable of
approximately $1.6 million, accrued expenses of approximately $2.4 million and
deferred research and development revenues of approximately $0.3 million. At
December 31, 1999, approximately $6.3 million, or 62%, of our trade
receivables, substantially all of which related to sales to Asian OEMs, were
subject to extended payment term arrangements secured by promissory notes. This
is a normal business practice in Asia, particularly in Japan, and, in these
cases, credit terms generally ranged from 90 to 150 days. The OEMs are required
to pay for the products that they order from us and which we deliver to them
whether or not they ultimately resell the products. Product returns are
contractually required only for defective products and, to date, returns have
been negligible. In addition, our allowance for doubtful accounts at December
31, 1999 was minimal in relation to the value of the accounts receivable, but
we believe it to be adequate because the majority of our revenues are derived
from sales in Japan to "blue chip" customers, who either secure the accounts
receivable with a promissory note or have historically consistently paid
without default. Since a substantial portion of our revenues and receivables
are denominated in yen, the longer our Japanese receivables remain outstanding,
the greater the risk to our stockholders of an impairment of their investment
due to a deterioration of the yen relative to the U.S. dollar.
Net cash used for VST's operating activities in 1999 was approximately
$1.7 million, compared to $2.8 million during 1998. Cash used for operating
activities in 1998 was primarily for funding receivables growth and its
operating loss. VST also invested in approximately $1.2 million of new property
and equipment during 1999 compared to approximately $0.6 million during 1998.
VST total assets grew from $8.5 million at December 31, 1998 to $25.7 million
at December 31, 1999. VST leveraged the growth in assets primarily through
supplier trade debt and bank debt. VST's trade debt increased by $5.7 million
while the bank debt increased by $3.0 million in 1999.
Net cash used in investing activities was approximately $30.2 million for
1999 compared to $2.1 million in 1998 and $0.3 million in 1997. The most
significant use of cash in 1999 was for the purchase
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<PAGE>
of short-term investments with a portion of the proceeds from our initial
public offering in October 1999. Cash was also used for capital expenditures,
primarily the acquisition of production equipment for the manufacture of our
products in Japan.
Net cash provided by financing activities was approximately $46.6 million
in 1999 compared to $10.4 million in 1998 and $4.8 million in 1997. This was
primarily attributable to approximately $43.8 million in proceeds from private
sales and the initial public offering of our common stock, as well as,
approximately $2.6 million in net borrowings under our line of credit with a
Japanese bank.
During 1998 VST raised approximately $4.4 million in cash from the
issuance of convertible demand notes and its Series C preferred stock,
including the conversion of $663,000 of notes payable from 1997. The
approximately $483,000 balance of a loan from a strategic partner was paid in
full during 1998. All outstanding convertible demand notes converted into
shares of Series C preferred stock on December 23, 1998.
On October 6, 1999, we completed our initial public offering. We realized
net proceeds of approximately $39.14 million from the sale of 3,450,000 shares
of our common stock, including 450,000 shares issued upon the exercise of the
underwriters' over allotment option, at an initial public offering price of
$13.00 per share after deducting underwriting discounts and commissions of
approximately $3.14 million and offering expenses of approximately $2.57
million.
The net proceeds from our initial public offering have been invested in
cash, cash equivalents and short-term investments. In early March 2000, in
connection with the acquisition of VST, we paid $19.0 million dollars in
purchase price consideration and other acquisition related costs. Following the
acquisition, we funded VST's current operations with approximately $3.0 million
and repaid the balance of approximately $4.3 million of VST's line of credit,
which is secured by a security interest in substantially all of VST's assets,
including all of its intellectual property. As of March 31, 2000, no amounts
were outstanding under this line of credit. We plan to use the net proceeds
from this offering and the remaining net proceeds from our initial public
offering for general corporate purposes, including working capital and capital
expenditures, as well as potential acquisitions of technology and businesses.
The use of the proceeds from our initial public offering does not represent a
material change in the use of proceeds described in our prospectus dated
October 5, 1999.
We believe that the net proceeds of this offering, along with our cash and
cash equivalents, short-term investments, credit facility and the remaining net
proceeds of the initial public offering, will be sufficient to meet our working
capital and anticipated capital expenditure needs for at least the next 12
months. We may need to raise additional capital if we expand more rapidly than
initially planned, to develop new or enhanced products and/or services, to
respond to competitive pressures or to acquire complementary products,
businesses or technologies. The capital, if needed, may not be available or may
not be available on terms acceptable to us.
YEAR 2000 ISSUES
The "Year 2000 Issue" refers generally to the problems that some software
may have in determining the correct century of the year. Many existing
electronic systems, including computer systems, use only the last two digits to
refer to a year. Therefore, these systems may recognize a date using "00" as
1900 rather than the year 2000. If not corrected, these electronic systems
could fail or create erroneous results when addressing dates on and after
January 1, 2000.
In 1999, we completed our remediation and testing of hardware and software
systems to assess their Year 2000 readiness. Our costs associated with Year
2000 compliance have been minimal, and, therefore, these costs have not been
accounted for separately. To date, we have not experienced any material adverse
effect on our business or operations as a result of any Year 2000 Issues. In
addition, we have not deferred any material information technology projects or
equipment purchases as a result of our Year 2000 activities. However, we
believe that it is not possible to determine with complete
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certainty that all Year 2000 Issues affecting us have been identified or
corrected. If we, our customers, our providers of hardware and software or our
third-party computer network providers fail to remedy any Year 2000 Issues, the
reasonably likely worst case scenario would be a disruption in the supply of
our products from our subcontractors or an interruption of our research
programs, which could have a material adverse affect on our business, financial
conditions and results of operations. Presently we are unable to quantitatively
estimate the duration and extent of any such disruption or interruption, or
estimate the effect such disruption or interruption may have on our future
revenue. However, we believe that the impact of any Year 2000 Issue on the
supply of our products or on our research programs will be limited to our
ongoing operations. We do not expect that any historical data will be affected.
MARKET RISK
We do not currently use derivative financial instruments. We currently
place our marketable security investments in high-quality credit instruments,
primarily U.S. Government obligations and corporate obligations with
contractual maturities of less than two years. We do not expect any material
loss from our marketable security investments and, therefore, believe that our
potential interest rate exposure is not material.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin No. 101,
"Revenue Recognition." This bulletin established guidelines for revenue
recognition and is effective for periods beginning after March 15, 2000. We do
not expect the adoption of the guidelines required by SAB No. 101 to have a
material impact on our financial condition or results of operations.
In June 1998, the Financial Standards Board issued Statement of Financial
Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities." SFAS No. 133 establishes accounting and reporting standards for
derivative instruments and hedging activities. SFAS No. 133, as amended by SFAS
No. 137, will be effective for our financial reporting beginning in the first
quarter of fiscal 2001. SFAS No. 133 will require us to recognize all
derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. The accounting for gains
and losses from changes in the fair value of a particular derivative will
depend on the intended use of the derivative. We do not expect the adoption of
SFAS No. 133 to have a material impact on our results of operations or
financial position.
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BUSINESS
OVERVIEW
We design, develop, manufacture and market digital connectivity products
and personal storage systems that allow consumers to easily access and exchange
digital data. As a result, our products are designed to provide consumers with
a user friendly way to transfer, store, manage and share digital photographs,
video, music, voice and data among digital appliances, personal computers and
the Internet. With the growth of digital appliances, such as digital cameras,
digital video camcorders, voice recorders and music players, consumers are
increasingly using the PC as the "multimedia center" of the home or office.
These digital appliances capture digital data on high capacity, reusable flash
memory cards that appeal to consumers because of their small size, versatility
and portability. Our digital connectivity products and personal storage systems
provide an easy way to transfer, store, manage and share digital data. Our
products are designed to cross PC platforms, support most leading media types
and use high performance PC interfaces, such as USB and FireWire. Our patented
digital connectivity products, such as our FlashPath products for the Toshiba
SmartMedia card, SanDisk MultiMediaCard and Sony Memory Stick, as well as
Smarty, are designed to allow consumers to use the familiar 3.5 inch floppy
drive - found on most PCs worldwide - to simplify the exchange of images,
music, voice and other digital data between PCs and digital appliances. Our
latest digital connectivity product, the Tri-Media Reader, utilizes a USB cable
interface to exchange digital data and is intended to address an expanding
installed base of PCs with USB cable interfaces. Our personal storage systems
include high performance external portable hard disk drives and floppy disk
drives for desktop and notebook PCs utilizing USB and FireWire interfaces with
the PC, as well as expansion bay disk drives for notebooks. Substantially all
of our personal storage systems are compatible with Windows and
Macintosh/registered trademark/ operating systems.
Our principal digital connectivity products, our FlashPath family of
products, are used primarily to transfer images to PCs from digital cameras. We
develop and market three FlashPath products, one for each of three different
flash memory cards: SanDisk's MultiMediaCard, Sony's Memory Stick and Toshiba's
SmartMedia card. These flash memory cards are used in cameras and video
camcorders made by a number of leading camera manufacturers, including
FujiFilm, JVC, Olympus, Panasonic, Sanyo, Sharp, Sony, and Toshiba. During the
12-month period ended December 31, 1999, we sold over one million FlashPaths
for the SmartMedia card. During the fourth quarter of 1999, we completed
development of our first FlashPath product for the Memory Stick and began
full-scale production and shipping to Sony for distribution. In the fourth
quarter of 1999, we also shipped working samples of our FlashPath product for
the MultiMediaCard. We began volume production of FlashPath for the
MultiMediaCard in the first quarter of 2000. In the first quarter of 2000, we
also introduced a follow-on FlashPath product for new models of Sony's Mavica
digital still camera. In January 2000, we introduced a USB Tri-Media Reader
which reads and writes to SmartMedia cards, CompactFlash cards and rotational
media, such as a 1.44 Mega-byte floppy disk, all in a single USB cable-powered
device for both Windows and Macintosh systems. We believe that as consumers
embrace the digital lifestyle, the number of applications for flash memory
cards will grow. These flash memory cards are designed for applications in
"smart" cellular phones, digital still cameras and camcorders, digital audio
players, digital voice recorders and video game devices. In addition to our
product development efforts with Sony and SanDisk, we also have strategic
relationships with a number of key electronics industry participants, including
Hitachi, NEC, and Toshiba.
Our personal storage systems enhance the user's ability to store and
manage digital data. Our personal storage systems are compatible with both
Windows and Macintosh operating systems and support very high transfer rates,
up to 400 Megabits per second and 100 Gigabytes of capacity. Since 1992, we
have worked with Apple as an Apple developer. Through this relationship, Apple
has provided us access to selected product road maps which has allowed us to
focus on new opportunities in the development and engineering of many FireWire
and USB systems. Through our strategic relationship with Iomega, we build
Iomega Zip drive products for Apple, IBM and Fujitsu. Iomega designs,
manufactures and markets disk drives that can be purchased as aftermarket
products to be
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added to PCs and other electronic devices or as a built-in feature incorporated
in PCs. In 1999, we were one of the first companies to ship FireWire personal
storage systems for both Macintosh and Windows operating systems, as well as
FireWire Zip drives. In addition, in the first quarter of 2000, we introduced
one of the first 100 Gigabyte portable FireWire RAID array. In recognition of
our technological innovation, in 1999 we received the Pinacor Best of Show
Award and the IBM Technologies Group Achievement Award for our FireWire hard
drive.
Our strategic partners actively participate in the development of our
products, provide us with access to leading-edge manufacturing capabilities,
and market and/or distribute our products globally.
INDUSTRY OVERVIEW
Consumer lifestyles are being transformed by the increasing use of digital
information in the home and workplace. Individuals increasingly rely upon PCs,
computer networks and the Internet to access digital information for
entertainment and productivity purposes. The proliferation of PCs in both the
home and office, as well as the growth of Internet use, has led to widespread
consumer familiarity with the storage, manipulation, transfer and management of
digital data. In addition, the convergence of advanced consumer electronic
products, PCs and the Internet offers consumers the opportunity to personalize,
exchange, store and manage digital data generated from a wide range of sources.
This convergence has precipitated greater demand for connectivity and data
storage and management.
In recent years, digital computing and processing have expanded beyond the
boundaries of desktop computer systems to include a broader array of
sophisticated consumer electronic products. These products, often referred to
as digital appliances, include digital still cameras, digital voice recorders,
digital camcorders, digital music players, electronic photo albums, personal
digital assistants and "smart" phones. We believe that approximately 18 million
of these types of digital appliances were shipped in 1999, and we believe that
this number will grow to approximately 78 million by 2002. One of the most
popular digital appliances today is the digital camera. Approximately 5 million
digital cameras were shipped in 1999, and we believe that this number will grow
to approximately 15 million by 2002.
A major challenge created by the digitization of audio and video is the
increasing need for portable mass storage devices for the PC and high
performance interfaces, such as USB and FireWire, to connect these storage
devices to the PC. MP3 and other compression methods, voice recognition
software, video movies, video conferencing, the Internet, digital video cameras
and digital still camera images have all driven the digitization of audio and
video. For example, one hour of digital video requires approximately 14
Gigabytes of memory and one hour of MP3 near-CD quality music requires
approximately 60 Megabytes of memory.
As a result of their high performance capabilities, USB and FireWire
interfaces are quickly beginning to be installed on new desktop and notebook
PCs. For example, most new PCs, including all Apple PCs, feature USB ports. In
addition, FireWire ports have recently started to appear on PCs from Compaq,
Dell, Gateway, Sony and NEC, and all of Apple's Macintosh CPUs except the
entry-level iBook.
USB is a high performance PC interface technology that is replacing low to
medium speed CPU interfaces such as serial ports, which are generally used for
mice, keyboards, floppy disk drives and tablets. FireWire is Apple's trade name
for Institute of Electrical and Electronics Engineering, or IEEE, 1394, a high
speed PC interface that is replacing SCSI and parallel interfaces, which are
generally used for digital appliances, hard disk drives and Zip drives.
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The following table depicts the relationship among digital applications,
storage technologies and capacities and transfer technologies.
<TABLE>
<CAPTION>
TRANSFER TECHNOLOGY APPLICATION STORAGE TECHNOLOGY STORAGE CAPACITY
- ----------------------------- ------------------ ------------------------ ------------------
<S> <C> <C> <C>
RAID Array 100 GB High
FireWire; USB 2.0 Video Large Hard Disk Drive 25 GB
SCSI Medium Hard Disk Drive 6 GB
DVD RAM
USB 1.1 Music CD RW 650 MB
LS120 Medium
Electronic Parallel Port ZIP Drive 100 MB
Still Images
Floppy Disk Emulation Data Floppy Disk Drive 1.4 MB
Electronic Books
Voice
Low
</TABLE>
-
MB denotes Megabyte; and GB denotes Gigabyte. Cable transfer rates are
generally stated in Megabits, while drive capacities and drive transfer rates
are generally stated in Megabytes or Gigabytes.
One of the principal challenges to connectivity between digital appliances
and PCs is the variety of non-standardized flash memory cards available in the
market today. Flash memory cards are the miniature devices used by many of the
emerging digital appliances to store digital data. There are currently five
major removable flash memory cards, none of which has emerged as an industry
standard and none of which is compatible or operable with any of the others:
/bullet/ the Toshiba SmartMedia card;
/bullet/ the SanDisk CompactFlash card;
/bullet/ the SanDisk MultiMediaCard;
/bullet/ the Sony Memory Stick; and
/bullet/ the SanDisk, Toshiba and Matsushita Secure Digital (SD) Card.
A second major challenge to connectivity between digital appliances and
PCs is the current lack of convenient connection methods. While consumers' use
of digital appliances is becoming increasingly popular, the inherent difficulty
of connecting digital appliances to PCs due to non-conforming interfaces
continues to be a major barrier to widespread acceptance. As a result, we
believe that the continued growth of the consumer-oriented digital appliance
market will depend in large part upon the ability of users to conveniently
transfer stored digital data which is captured by digital appliances. The
popularity of the PalmPilot was also largely fueled by the ability of consumers
to easily connect and transfer data to and from their PCs. Therefore, one of
the principal challenges faced by manufacturers of other consumer digital
appliances is the interface between their appliances and PCs or other digital
appliances.
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There are currently a number of interfaces used to transfer data from
digital appliances to personal computers:
/bullet/ Cable interfaces that connect to serial ports, parallel ports, USB
and FireWire; and
/bullet/ Non-cable interfaces such as infrared interfaces, Personal
Computer Memory Card International Association, or PCMCIA, and
floppy disk drive slots.
We believe that serial port and parallel port interfaces have
disadvantages that make them less desirable for use with consumer-oriented
digital appliances. Those interfaces require the use of cumbersome cables and
limited PC peripheral ports, which are frequently dedicated to connecting the
PC to devices such as printers, scanners, modems and other peripherals. In
addition, direct digital appliance-to-PC connections via serial or parallel
port consume the appliances' battery power and render the appliances unusable
while data is being transferred.
While USB and FireWire solutions utilize direct cable connection, they do
not have the same limitations of serial or parallel port interfaces. In
general, USB and FireWire have the ability to provide a direct source of power
to the digital appliance and therefore do not drain the appliances' batteries.
Moreover, USB and FireWire interfaces allow much faster data transfer rates
than their traditional serial or parallel port alternatives, can accommodate
numerous serial devices and offer hot-plug and plug-n-play connections so that
storage devices can be connected and disconnected without shutting down or
restarting the PC. In addition, while many of the current installed base of
desktop PCs worldwide are not equipped with USB or FireWire ports, most new
computers are shipped with USB or FireWire support. Similarly, some of the
non-cable interfaces have inherent limitations. For example, while virtually
all portable PCs being sold today contain a PCMCIA slot or infrared interface
as a standardized feature, we believe that neither the PCMCIA slot nor the
infrared interface is generally available on desktop computers.
THE SMARTDISK SOLUTIONS
We design, develop, manufacture and distribute easy-to-use, portable and
low cost devices that facilitate data exchange, manipulation and storage among
digital appliances, PCs and the Internet. Our products include our FlashPath
flash memory card readers, USB Tri-Media Reader, Smarty smart card readers,
external portable hard disk drives and floppy disk drives for desktop and
notebook PCs, as well as expansion bay disk drives for notebook PCs. Our
products are available for both Windows and Macintosh operating systems,
allowing the OEMs that market our consumer products to reach a large installed
base of potential users. Our current and planned digital connectivity products
and personal storage systems are designed to offer the following principal
benefits:
EASE OF USE. Our products are easy to use and install. FlashPath transfers
digital data to the PC through the familiar and ubiquitous 3.5 inch floppy disk
drive. This widely recognized format reduces consumer intimidation frequently
created by new technologies, facilitating the adoption of our products and
various consumer-oriented digital appliances. A consumer using a digital camera
removes the flash memory card that serves as the camera's digital film, places
that flash memory card into our FlashPath product, and then inserts the
FlashPath into the PC's 3.5 inch floppy disk drive. While the flash memory card
stores the digital images captured by the digital camera, FlashPath easily
transfers the digital images from the flash memory card to the PC. The consumer
can then use the PC to edit and print the image, add sound or text, transmit
the image over the Internet or incorporate the image in advertisements,
newsletters, reports or other documents produced using the PC. Our USB
Tri-Media Reader reads and writes to flash memory cards, as well as rotational
media such as floppy disks, allowing consumers to use a single flash memory
card reader to transfer digital data from multiple digital appliances, flash
memory cards and/or rotational media at a rapid transfer rate. Our personal
storage systems address the needs of today's consumers: portability, user
friendliness, reliability and seamless integration with the computer's
operating system, or plug-n-play. Our personal storage systems also offer our
proprietary product-specific software that enhances the user's experience,
further differentiating our products from competitors' offerings.
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PRODUCTS COMPATIBLE WITH MULTIPLE MEDIA. We believe that our established
ability to design products that support competing flash memory cards is
critical because of the lack of flash memory industry standards. Our FlashPath
product is designed to transfer digital data, images and audio from the Toshiba
SmartMedia card, the Sony Memory Stick, and the SanDisk MultiMediaCard to a
standard 3.5 inch floppy disk drive. Our USB Tri-Media Reader also supports the
SanDisk CompactFlash card and the Toshiba SmartMedia card. Our ability to
design products compatible with multiple media is enhanced by our strategic
relationships with the three leading manufacturers of flash memory storage
cards--SanDisk, Sony and Toshiba. By supporting various media, we will be able
to address the data transfer needs of purchasers of existing and emerging
digital appliances that use different flash memory cards. In addition, our
Smarty product supports various smart card formats. Our personal storage
systems also support most leading rotational storage media, including hard disk
drives, floppy disk drives, Iomega Zip drives and Imation SuperDisk drives.
They can also store high quality digital still images and video movies and
digital music due to their ability to support very high transfer rates of up to
400 Megabits per second and 100 Gigabytes of capacity.
VERSATILE. Our products can be used with a variety of PC hardware
platforms and software environments. Our driver software is included with our
products and can also be downloaded free of charge from the Internet. The
software enables our products to operate with Windows 95, Windows 98, Windows
NT, Windows 2000, NEC Windows and Macintosh operating systems. As a result, the
same FlashPath that is used to transfer images from one digital camera to a
Microsoft-based PC can be used to transfer images from another digital camera
to an Apple computer. Similarly, the same FlashPath that is used to transfer
images may also be used to transfer voice, images and other digital data from a
variety of digital appliances that use the same flash memory card. The
versatility of our products will become more important as consumers
increasingly rely on flash memory cards to store and transfer digital data
where traditional memory storage devices such as floppy disks are inadequate
due to capacity or form factor constraints. Our personal storage systems are
also compatible with both Windows and Macintosh operating systems.
INDEPENDENT POWER SOURCE. Unlike serial and parallel port cables, our
flash memory and smart card reader products do not rely upon a digital
appliance's power source to transfer digital data from a flash memory card to a
PC. For example, our FlashPath and Smarty products run on two replaceable
batteries and our USB Tri-Media Reader uses the PC's power source. Our
USB-based and FireWire-based personal storage systems also utilize the PC's
power source rather than the appliance's power supply. This is important
because digital appliances, such as digital cameras, consume significant
amounts of power and require frequent battery replacement or recharging.
Products that use serial or parallel cable interfaces quickly drain power from
digital appliances, making those competing products less attractive.
BUSINESS STRATEGY
Our strategy is to use our proprietary technologies to:
/bullet/ Establish our connectivity solutions as the industry standard for
the transfer of data among digital appliances, PCs and the
Internet by strengthening our position as a technological and
market leader; and
/bullet/ Bring our personal storage systems quickly to market with industry
leading solutions that emphasize ease of use and portability and
therefore capitalize on the growth of the PC as the "multimedia
center" of the home or office.
Key elements of this business strategy are to:
CAPITALIZE ON TECHNOLOGY EXPERTISE TO EXPAND OUR PRODUCT OFFERINGS. We
have developed extensive expertise, intellectual property and core capabilities
in digital connectivity, personal storage systems and flash memory card and
smart card technologies. We intend to capitalize on our
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technology base, partnerships and patents to design, develop and market a broad
range of digital connectivity and personal storage systems that can operate
across a variety of flash memory products, hardware platforms and software
environments. In addition, we are using our technology expertise, patents and
trade secrets to develop application-specific, non-PC based devices that will
permit flash memory cards to be used with other existing technologies, such as
our recently announced FlashTrax/registered trademark/ product which enables
conventional audio cassette players to play MP3-formatted music downloaded from
the Internet or copied from an existing CD collection to a flash memory card.
EXPAND CUSTOMER AND STRATEGIC INDUSTRY RELATIONSHIPS. We have formed
strategic relationships with a number of leading consumer product OEMs and
other key industry participants, including Apple, FujiFilm, Hitachi, IBM, JVC,
NEC, Olympus, Panasonic, SanDisk, Sony and Toshiba. We intend to continue to
develop long-term alliances with a diversified base of OEMs and other industry
participants in additional consumer electronics segments. We believe that these
relationships provide significant operating leverage and a number of other
important benefits:
/bullet/ Many of our OEM customers advertise, promote, package, sell and
distribute our products under some of the world's most recognized
brand names. OEM customers that perform some of or all of these
activities include Apple, FujiFilm, Hitachi, JVC, Olympus,
Polaroid, SanDisk, Sharp, Sony and Toshiba. As a result, we have
access to extraordinary market strength without the need to invest
heavily in our own marketing programs and distribution
infrastructure.
/bullet/ Our product development relationships have provided access to
flash memory card and PC manufacturers early in the design phase
of their product development process. This has allowed us to
anticipate these manufacturers' future technological requirements
and to develop long-term relationships across a number of products
and through multiple product generations. In addition, these
partners have assisted with engineering and design for
manufacturability, which helps ensure that mechanical and
electrical considerations are integrated into a total systems
approach to achieve a high quality and cost-effective product.
MAINTAIN MEDIA, INTERFACE AND PLATFORM NEUTRALITY. We are using our
flexible technology architecture and core capabilities to create connectivity
and personal storage products that enable consumers to use all leading flash
memory cards and rotational media. There is a rapidly growing number of digital
appliances that use competing flash memory technologies, none of which we
currently expect to become an industry standard. We are committed to
maintaining media neutrality to enable users of various leading flash memory
technologies to transfer data quickly and easily among devices that use
different flash memory card formats, as well as to support all of the leading
rotational media with our personal storage systems, including hard disk drives,
floppy disk drives, Iomega Zip drives and Imation SuperDisk drives.
PROMOTE BRAND AWARENESS OF OUR PRODUCTS. It is critical that we obtain
ultimate consumer acceptance of and demand for our products independent of
sales that occur in conjunction with sales of our OEMs' products. To this end,
we intend to build upon our initial success by promoting the FlashPath and
Smarty brand names, as well as the SmartDisk name wherever possible. We are
able to benefit from the powerful advertising and promotion of our products by
the OEMs while simultaneously building our brand identity. In addition, we
intend to expand our use of advertising and other marketing programs designed
to promote our brand and enhance brand awareness. We also intend to increase
distribution channels for our products by promoting direct sales via the
Internet and through retailers. Recently, we formed a strategic relationship
with Tech Data Corporation, a leading global provider of information technology
products and logistics services. Under our arrangement, Tech Data will
distribute our FlashPath for SmartMedia to its customers, which we believe is
an important first step toward our goal of enhancing the penetration of our
digital connectivity products throughout retailers worldwide.
EMPHASIZE USER-FRIENDLY PRODUCTS. We are committed to capitalizing on our
patent portfolio of user-friendly digital connectivity products and personal
storage systems that offer seamless integration
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with the PC's operating system to enable consumers to conveniently transfer and
store images, music, voice and other types of digital data among consumer
electronic devices, the Internet and PCs, including portable personal storage
systems.
CAPITALIZE ON FIRST-TO-MARKET ADVANTAGES. Our focus is on technologies and
market segments where we can maximize the first-to-market advantages provided
by our technical expertise to provide various connectivity and storage
solutions to the needs presented by the proliferation of digital appliances.
Our products are developed using a building block approach which leverages
previously developed technologies. This ability to modify and extend our
existing base of technologies to yield new product offerings, allows us to
rapidly respond to industry developments, provides first-to-market advantages
and reduces development costs for future products. To augment the
time-to-market advantages provided by our building block approach, we also draw
on the substantial capabilities of an extensive list of development partners
including major OEMs, key component suppliers, manufacturers, and firms that
specialize in rapid prototyping. We have also developed an expertise in compact
packaging techniques and driver integration for our personal storage systems
that also provide first-to-market advantages. We intend to use these
first-to-market advantages to lengthen our product life cycles and increase our
market share. Our internal processes and external relationships are tightly
integrated, and are designed to enable us to rapidly develop products from
design stage to commercial launch. For example, in 1996 we completed the
development of a miniaturized, portable Zip drive for the Macintosh PowerBook
in less than 6 weeks. In 1997, we introduced one of the first miniaturized
SuperDisk and Zip drive products for the IBM ThinkPad series of notebook
computers. In 1998, we were the largest OEM provider of Iomega Zip drives for
notebooks, and shipped product to Fujitsu, Apple Computer and IBM. In 1999, we
remained one of the largest OEM providers of Iomega Zip drives.
Our products have won many industry awards including the following:
Best of Show, MacWorld EXPO 1996 for our Zip drive for PowerBook
Windows Sources Stellar Award, April 1998 for our Zip100
MacAddict Freakin Awesome Award, October 1999 for our FireWire hard
drive
Pinacor Best of Show Award, November 1999 for our FireWire hard drive
Wired for 3D Editors Choice Winner, 1999 for our FireWire hard drive
IBM Technologies Group, 1999 Achievement Award, for our FireWire hard
drive
PRODUCTS
Our products are designed to easily transfer digital data among digital
appliances, PCs and the Internet and to store and manage that digital data.
DIGITAL CONNECTIVITY PRODUCTS
FLASHPATH PRODUCTS. FlashPath is a solid state electronic device in the
shape of a 3.5 inch floppy diskette. It works in any standard 3.5 inch floppy
drive found in most PCs today. The current principal use of our FlashPath
product is to transfer images from digital cameras to PCs. Digital cameras use
flash memory cards as film. After the flash memory card captures and stores
images, the flash memory card is removed from the camera and is placed into
FlashPath. FlashPath is then inserted into the PC's floppy disk drive and the
images are transferred to the PC. With the aid of readily available software,
the consumer may then edit the images, add text, graphics or sound, or mail the
images over the Internet. Because FlashPath transfers images from the camera to
the PC without using cables or PC peripheral ports and without any hardware
installation, the consumer has a device that is familiar, easy to use, not
intimidating and transportable among multiple PCs. FlashPath uses our
proprietary driver software provided with our products and available free of
charge from the Internet. Our driver software enables our products to operate
with Windows 95, Windows 98, Windows NT, Windows 2000, NEC Windows and
Macintosh operating systems.
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Our current FlashPath products transfer images from digital cameras using
the SmartMedia, MultiMediaCard, and Memory Stick flash memory cards. A number
of manufacturers use these flash cards in their digital cameras, including
Agfa, FujiFilm, JVC, Olympus, Ricoh, Sanyo, Sharp, Sony and Toshiba. In
addition, we expect that these FlashPath adapters will support other
applications, including digital audio players, "smart" cellular phones,
camcorders and voice recorders. We expect that these new applications will
enable us to reach new markets and new customers. In addition, we are
developing a new consumer-oriented product that is designed to allow flash
memory cards to be used with an existing, non-PC technology.
USB-BASED DIGITAL CONNECTIVITY PRODUCTS. Our recently introduced USB
Tri-Media Reader reads and writes to SmartMedia, Compact Flash and 3.5-inch
floppy disks in a single USB cable-powered device. This product is designed to
be extensible to other flash memory cards, such as the SanDisk MultiMediaCard
and the Sony Memory Stick. It is compatible with both Windows and Macintosh
operating systems.
PERSONAL STORAGE SYSTEMS
EXPANSION BAY STORAGE DEVICES. We market floppy disk drives, Iomega Zip
drives, Imation SuperDisk drives and hard drives to OEMs for inclusion in the
expansion bays of IBM, Apple and Fujitsu notebooks. We design, manufacture and
ship Zip drives to IBM for their most recent three models of high performance
ThinkPad notebooks, including the model 600, 600E and 570 lines. In addition,
we also market products for other ThinkPad product lines with an UltraBay under
the "ThinkPad Proven" certification logo. We are a leading supplier of notebook
Zip drive products and we sell both the 100 Megabyte and 250 Megabyte Iomega
FireWire Zip drives. In addition, we provide many personal storage systems for
the expansion bays of the Apple PowerBook line, including the Iomega Zip drive,
the Imation SuperDisk drive, a DVD-ROM drive and a recently introduced CD-R/W.
SuperDisk drives read and write to either a SuperDisk 120 MB removable storage
cartridge or a standard 3.5 inch floppy diskette.
USB-BASED PRODUCTS. We offer USB hard drives and floppy disk drives that
are compatible with both Windows and Macintosh operating systems. They operate
seamlessly with the PC's operating system, offering hot-plug and plug-n-play
connections so that storage devices can be connected and disconnected without
shutting down or restarting the PC. Our portable external USB floppy disk drive
is one of the highest volume products for all Macintosh CPUs in the U.S. and
addresses the need of Macintosh users for floppy capability since Apple no
longer includes floppy disk drives in its PCs. Our USB floppy disk drive is
very compact and light weight, and requires no external power supply. Our line
of 6 and 12 Gigabyte USB ultra-slim hard drives, weighing approximately 6.5
ounces, are among the smallest, lightest and most portable products in their
class. Our 6, 12, 18 and 25 Gigabyte USB/
FireWire combination drive offers both USB and FireWire interfaces in a single
device, while maintaining the ultra-compact footprint, light weight and
plug-n-play ease of use. We believe that this personal storage system is one of
the industry's best for backup and portability for large volumes of digital
data.
FIREWIRE-BASED PRODUCTS. We offer FireWire hard drives, floppy disk drives
and Zip drives. Our line of 4 to 25 Gigabyte ultra-slim FireWire hard drives
provide the fastest data transfer rates of any portable storage device. We
believe that these drives have great appeal to the mobile user of digital video
cameras. We also market a line of full-height FireWire hard drives in various
capacities up to 37 Gigabytes. Our FireWire cardbus card allows users to plug
these devices into notebooks that do not yet have FireWire ports. Substantially
all of these products are compatible with both Windows and Macintosh operating
systems. Our FireWire hard drives combine portability, modularity and FireWire
connectivity to offer high performance, mobile storage solutions. Reflecting
our expertise in the notebook market, our ultra-slim FireWire hard drives are
compact and truly portable with the smallest measuring only 3" x 5.5" x 0.7"
and weighing as little as 6.5 ounces. The full-height FireWire drives address
the demand for larger capacities for a variety of digital video, audio and
multimedia applications. Our FireWire hard drives offer not only hot-plug and
plug-n-play functionality, but also
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transfer speeds of 12 to 25 Megabytes per second, fast enough for digital video
recording and playback. These drives do not require an AC power adapter since
they are efficient enough to be powered by the FireWire connection. When our
FireWire hard drive is connected to the computer with a single FireWire cable,
the drive interacts with the computer's operating system, automatically
configures itself, and mounts to the desktop. This allows the user to easily
transport our FireWire hard drive in a shirt pocket from the "home office" to
the "work office" with all operating systems, applications, and document files
intact.
Our recently introduced 100 Gigabyte FireWire RAID array offers even
higher storage capacity than standard large hard disk drives. It also offers
transfer speeds of up to 35 Megabytes per second, fast enough to capture and
store live digital video. In the first quarter of 2000, we introduced a line of
250 Megabyte Iomega FireWire Zip drives.
OTHER
Our Smarty product enables smart cards to store and retrieve information
through a PC's floppy disk drive, thereby eliminating the need for dedicated
smart card reader peripherals. Like our FlashPath products, the Smarty product
is a solid state electronic device the size of a 3.5 inch floppy disk, is
powered by two replaceable batteries and requires no external power source,
cable connections or hardware installation. A user simply places the smart card
into Smarty, inserts Smarty into the 3.5 inch floppy disk drive and connects
with the smart card application. Smart cards are typically used to store
information such as medical information, digital money and security codes.
Accordingly, smart cards can serve as personal identification, a credit card, a
mass transit pass and as a cash substitute for purchases at stores or over the
Internet.
We also offer a line of power management products such as power adapters,
smart-chargers and long-life, lithium-ion batteries for the Macintosh PowerBook
series.
In March of this year, we announced the development of a patented
technology, called FlashTrax, that enables conventional audio cassette players,
particularly those installed in automobiles, to play MP3-formatted music
downloaded from the Internet or copied from an existing CD collection to a
flash memory card. FlashTrax resembles a conventional audio cassette but has a
slot that accepts a removable flash memory card on which digital audio files
are stored. We recently demonstrated the FlashTrax technology in a working
prototype model that uses MultiMediaCard flash memory cards.
We are also currently developing driver and applications software called
Media Manager which is designed to enhance consumers' ability to manage digital
information, including information stored and transferred from many of our
products.
TECHNOLOGY
Since our inception, we have focused our research and development efforts
in the area of digital connectivity on designing and developing products that
facilitate the transfer of data from digital appliances using flash memory
cards and smart cards to PCs. We have been actively involved in all aspects of
this development process, including the development of a proprietary technology
architecture which supports all of our FlashPath and Smarty products and can be
used as the basis for new products. We believe that our patents provide
substantial proprietary protection relating to the transfer of digital data
through floppy disk interfaces. We also believe that we have developed
particular expertise in driver technologies, product design and product
development of USB-based and FireWire-based personal storage systems.
Another element of our business strategy is to enter into strategic
alliances without licensing our proprietary digital connectivity technology to
OEMs. Our strategic alliances with Hitachi, NEC, SanDisk, Sony and Toshiba
began with their initial inquiries to license our FlashPath technology. Those
preliminary overtures developed into more extensive dialogues and the exchange
of
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information that permitted us to better demonstrate our technology platform,
proprietary rights and research, design and development expertise. We believe
that the broad scope of our strategic alliances with these leading industry
participants demonstrates the appeal and strength of our proprietary
technology. Many of these alliances have led to equity investments and
cooperative development arrangements.
DIGITAL CONNECTIVITY. Our digital connectivity products are compatible
with a broad range of hardware platforms and software environments. Our floppy
disk drive interface architecture builds upon key elements of our technology,
including digital and analog ASICs, driver software and key mechanical
components, and allows us to develop products that support different flash
memory cards and smart cards. In addition, we believe that this architecture
improves reliability, decreases time to market and lowers new product
development costs. For example, the development of our FlashPath product for
SmartMedia flash memory cards took approximately 18 months from determining
product feasibility to commencing commercial production, while the time for the
development of our products for the SanDisk MultiMediaCard and Sony Memory
Stick was shortened to less than 12 months. We are also utilizing our core
technological capabilities to develop products that conveniently transfer
digital data from competing flash memory cards to existing, non-PC
technologies, such as our recently announced FlashTrax product which enables
conventional audio cassette players to play MP3-formatted music downloaded from
the Internet or copied from an existing CD collection to a flash memory card,
as well as products that support computer interfaces other than the 3.5 inch
floppy disk drive, such as our recently introduced USB Tri-Media Reader which
utilizes a USB cable interface to the PC, rather than a floppy disk drive.
The technology comprised in our digital connectivity product offerings
consists of five key components:
/bullet/ FLASH MEMORY OR SMART CARD READ/WRITE SYSTEM. This proprietary
system uses the central processing logic to store data on and
retrieve data from the flash memory card in the product.
/bullet/ DIGITAL ASIC. Our proprietary digital ASIC prepares the digital
data to be retrieved from the flash memory, encodes it and sends
it to the analog ASIC. The digital ASIC also decodes data from the
analog ASIC for use with the flash memory or smart card read/write
system.
/bullet/ ANALOG ASIC. Our proprietary analog ASIC converts the digital data
to analog signals for retrieval from the flash memory card.
/bullet/ CENTRAL PROCESSING UNIT. This unit consists of an industry
standard microprocessor, memory and other processing logic to
control the functions of the digital and analog ASICs and the
flash memory or smart card read/write system.
/bullet/ DRIVER SOFTWARE. Our proprietary driver software enables our
products to operate with a variety of commonly installed PC
operating systems such as Windows and Macintosh.
PERSONAL STORAGE SYSTEMS. Our personal storage systems are compatible with
a broad range of hardware platforms and software environments, as well as with
both Windows and Macintosh operating systems. Our Macintosh-compatible hard
drives also include key features, such as encryption, password protection, boot
capability and partitioning features. We were one of the first manufacturers to
ship with all of these features integrated into our Macintosh-compatible
products. Our FireWire hard drives were also one of the first-to-market in the
Macintosh platform and also the first to be certified by Microsoft for Windows
98SE and 2000.
USB is a high performance PC interface technology that is replacing low to
medium speed CPU interfaces such as serial ports. USB interfaces offer data
transfer speeds of up to 12 Megabits per second, as compared to one or two
Megabits per second for traditional serial ports. USB interfaces are used for
mice, keyboards, floppy disk drives and tablets. FireWire is Apple's trade name
for
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IEEE 1394, a high speed PC interface that is replacing SCSI and parallel
interfaces. Other manufacturers may adopt the IEEE 1394 standard under their
own trade names, such as Sony's iLink. Sony and Apple are currently licensing
these trade names at no charge. FireWire interfaces offer data transfer speeds
of up to 400 Megabits per second, as compared to 50 Megabits per second for
traditional SCSI and parallel ports. FireWire interfaces are used for digital
appliances, hard disk drives and Zip drives. Both USB and FireWire are
intelligent serial buses that can support new digital appliance hot-plug and
plug-n-play connections so that storage devices can be connected and
disconnected without shutting down or restarting the PC. USB and FireWire can
also accommodate multiple devices connected to the PC, up to 127 in the case of
USB and 63 in the case of FireWire, as compared to one or two for serial and
parallel interfaces and seven for SCSI interfaces. Furthermore, USB-based and
FireWire-based personal storage systems may be powered directly from the USB or
FireWire cable, eliminating the need for external power adapters.
We expect IEEE 1394 to become a new standard for connecting high-speed
serial devices to CPUs, replacing the parallel and SCSI interfaces. Speeds in
the 1 Gigabit range are expected in 2001, which makes FireWire conducive even
to internal interfaces such as hard drives. Multiple CPUs can be connected to a
single FireWire device, allowing multiple computers to share the same digital
video camera for the first time. FireWire is also much more user-friendly than
Small Computer System Interface, or SCSI. The device drivers are loaded
automatically and there are no bulky cables, terminators or SCSI ID switches
that must be set. FireWire also employs a memory bus architecture that allows
peripherals to communicate directly with each other, without burdening the
host. Software drivers are loaded automatically, simplifying the user
experience. In addition, we expect next generation technologies, including
high-end Digital Subscriber Line, or DSL, and cable modems, to be supported
with FireWire.
We introduced one of the first personal storage systems utilizing a
FireWire RAID array in January 2000, and volume production is scheduled for the
second quarter of 2000. This FireWire RAID array product is a very compact,
high capacity, high-performance system of proprietary hardware and software in
which four large hard disk drives are arrayed in a series and connected to the
PC through a FireWire cable interface. This array format multiplies the drive's
data capacity to 100 Gigabytes, compared to 32 Gigabytes for standard large
hard disk drives, and the drive's data transfer rate to 35 Megabytes per second
compared to 12 Megabytes per second for standard large hard disk drives,
enabling it to store and manage live digital video. The FireWire RAID array
also uses battery operation for portability. We believe that our FireWire RAID
array is especially useful in that it is one of the only currently available
personal storage systems that takes full advantage of the very high data
transfer speeds of FireWire cables, which currently reach 400 Megabits, or 40
Megabytes, per second. We believe that there are significant opportunities in
professional and consumer digital still image, digital video capture and
editing and also potential Internet server-related applications for this future
product.
The technology comprised in our FireWire personal storage product
offerings consists of five components:
/bullet/ FIREWIRE-BASED POWER SOURCING. An embedded, integrated and wide
range power supply allows our FireWire drives to run from FireWire
bus power, so no external power supply is required.
/bullet/ DIGITAL BRIDGE ASIC. This device is an ASIC bridge that allows
high performance transmission of digital data from the disk drive
to the FireWire cable. We currently license this technology and
the firmware from LSI Logic.
/bullet/ FIREWIRE DRIVERS. We design and own separate and integrated
drivers for all of our FireWire products. These drivers provide a
high level of integration to the operating system and, we believe,
allow more flexibility and features than those found on
competitive products.
/bullet/ FIREWIRE APPLICATIONS. We offer the first fully integrated
FireWire formatting, utility, benchmarking and updated application
for FireWire products. This application provides performance
improvements, data security and protection.
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/bullet/ INTEGRATED RAID FAMILY OF PRODUCTS. Our FireWire storage systems
can be embedded into a RAID array system that we expect to ship in
the second quarter of 2000. This hardware and software solution
allows individual FireWire drives to be used together to achieve
higher data transmission, or striping, and for data protection, or
mirroring.
DEVELOPMENT EFFORTS. During the remainder of 2000 and in 2001, we expect
that our development efforts will be primarily focused on the following
initiatives:
/bullet/ Expanding our FlashPath product line to support the SD flash
memory card and new operating systems, such as Millenium and
Linux;
/bullet/ Expanding our USB reader product line to support other flash
memory cards;
/bullet/ Introducing new, audio products that will allow flash memory cards
to be used with existing non-PC technologies;
/bullet/ Expanding our USB product line to support the faster USB 2.0
standard;
/bullet/ Expanding our FireWire product line to support the FireWire RAID
array and software;
/bullet/ Further reducing our product costs;
/bullet/ Enhancing product performance; and
/bullet/ Media management software.
MARKETING, CUSTOMERS AND STRATEGIC RELATIONSHIPS
SALES AND MARKETING. We market and sell our products primarily through a
combination of OEMs, distributors and resellers. We sell our current flash
memory products to OEMs, including FujiFilm, JVC, Olympus, Panasonic, Ricoh,
SanDisk, Sanyo, Sharp, Sony, and Toshiba. These OEMs compete in some of the
fastest growing segments of the electronics industry, including digital
cameras, digital audio players and digital camcorders. We sell a portion of our
personal storage systems to OEMs such as IBM, which sells several of our
products under the "Options By IBM" program. In addition, we sell our personal
storage system products to Apple which, in turn, distributes them on a
consignment basis to their customers. Most of these sales are made through the
Apple Web Store, where our products may be configured and ordered along with a
Macintosh CPU.
Often, both the OEM's brand name and our FlashPath trade name appear on
the product packaging. As a result, we benefit from the powerful advertising
and promotion of our products by the OEMs without having to incur significant
additional marketing expenses. For example, our products have been featured in
OEM advertisements in major publications, including THE WALL STREET JOURNAL,
TIME MAGAZINE and USA TODAY.
The marketing of our FlashPath product with FujiFilm's, Olympus' and
Sony's digital cameras illustrates the cooperative relationships we have with
some of our customers. Their marketing campaigns have emphasized the
convenience of using the FlashPath product to transfer digital photographs to
the PC. We believe that our FlashPath adapter is one of the key reasons that
many of the top selling digital cameras in the world use Toshiba's SmartMedia
card. We shipped more than one million FlashPath for SmartMedia units during
the 12-month period ended December 31, 1999 largely as a result of our
customers' extensive market penetration.
Recently, we formed a strategic relationship with Tech Data Corporation, a
leading global provider of information technology products and logistics
services, to distribute some of our flash memory products. Under our
arrangement, Tech Data will distribute our FlashPath for SmartMedia to
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its customers, which we believe is an important first step toward our goal of
enhancing the penetration of our digital connectivity products throughout
retailers worldwide. We market and sell most of our personal storage systems
through distributors and resellers. Ingram Micro and Pinacor handle our
distribution to the vast majority of our U.S. resellers. We sell our personal
storage systems to the major catalog and mail order houses with Micro Warehouse
as our largest customer of the group. We also sell directly to end users such
as CompUSA, Inc. and Fry's Electronics, Inc.
We support the marketing activities of our customers with a dedicated
product manager for each of our principal product lines. In addition, we
support their sales efforts through sales training courses, public relations
activities, trade shows and industry education programs. We also employ
marketing communications personnel to develop packaging, brochures and other
collateral materials.
We market and sell our Smarty product to financial institutions and other
service providers who promote Smarty to their customers as part of their smart
card-based programs. Our Smarty customers include ABN Amro Bank (The
Netherlands), Bally Gaming, Bank of America, la Caixa Bank (Spain), Hitachi and
Visa-related banks in Latin America. Bank of America, for example, distributes
Smarty to some of its corporate customers for use in making secure electronic
funds transfers. Visa distributes Smarty with its Platinum card in some Latin
American regions for use in authenticating permitted access to restricted areas
on the Visa Platinum website.
In addition to catalogs, we promote our products through print and Web
advertising. Some of the OEMs with whom we have developed or manufactured
products prohibit us from marketing those products outside of their own
marketing programs. Our Web-based sales, though modest, have grown steadily
since we implemented the capability on our site. We have also been featured in
many ads and technical write-ups in the press and magazines.
As of April 30, 2000, we had 23 full-time employees engaged in sales and
marketing activities. We also use the services of Japan-based dealers to serve
as our agents in connection with sales to OEMs based in that country. Those
intermediaries generally mark up the selling price to the OEM purchaser by
approximately 3% to 4%. Our customers generally place orders for our products
on an as-needed basis, with no long-term commitments. We also sell our personal
storage systems through a manufacturing representative organization.
STRATEGIC RELATIONSHIPS. An important element of our business strategy is
to develop strategic relationships with industry participants that can assist
us in the development of new products, provide us with access to leading-edge
manufacturing capabilities and market and distribute our products globally.
This approach allows us to concentrate our resources on our core expertise of
product design and development, reduces our capital requirements and generally
provides a high degree of operating leverage. In addition, our close
relationships with flash memory card manufacturers, PC manufacturers, and
consumer product OEMs frequently provide insight into the current and future
needs of these companies, enabling us to design specific products to meet these
needs. OEMs frequently distribute our flash memory products in connection with
the distribution of their consumer electronic products. Similarly, other OEMs
frequently distribute our personal storage systems in connection with the
distribution of their premium products. As a result, we believe that these
strategic relationships allow us to take advantage of OEMs' direct sales
organization, distributors and manufacturers' representatives. We evaluate
potential collaborative arrangements on an ongoing basis and intend to continue
to pursue additional strategic relationships.
Set forth below are brief descriptions of some of our strategic
relationships:
APPLE COMPUTER. Apple has led the industry in forging transitions to new
interface technologies, such as USB, FireWire and Airport, or IEEE 802.11.
Since 1992, we have worked with Apple as an Apple developer. Through this
relationship, Apple has provided us access to selected product road maps, which
has allowed us to focus on new opportunities in the development and engineering
of many FireWire and USB systems. We sell these products to Apple which, in
turn, distributes them on
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a consignment basis to their customers. Most of these sales are made through
the Apple Web Store, where our products may be configured and ordered along
with a Macintosh CPU. In addition, we provide many personal storage systems for
the expansion bays of Apple's PowerBook line, including the Iomega Zip drive,
the Imation SuperDisk drive, a DVD-ROM drive and a recently introduced CD-R/W.
IBM. We design, manufacture and ship Zip drives to IBM for their most
recent three models of high performance ThinkPad notebooks, including the model
600, 600E and 570 lines. We build these under the IBM logo. In addition, we
also market products for other ThinkPad product lines with an UltraBay under
the "ThinkPad Proven" certification logo, which IBM sells under the "Options By
IBM" program. We have also developed Imation SuperDisk products for certain
ThinkPad lines. Separately, IBM's Storage Division also provides components for
many of our notebook, USB and FireWire products.
IOMEGA CORPORATION. Through a strategic relationship with Iomega, we build
Iomega Zip drive products for Apple, IBM and Fujitsu. Iomega designs,
manufactures and markets disk drives that can be purchased as aftermarket
products to be added to PCs and other electronic devices or as a built-in
feature incorporated in PCs. We are one of Iomega's leading notebook suppliers
of Zip drive solutions, and in the first quarter of 2000, shipped one of the
first FireWire Zip drives in 100 Megabyte and 250 Megabyte capacities. Our
FireWire Zip drives enjoy the same Windows and Macintosh operating system
compatibility, ease of use and plug-n-play performance users expect from all of
our integrated FireWire products. We own portions of the source code required
for the operation of the Zip drive on the Macintosh operating system. Through a
cross-licensing agreement with Iomega, we have the exclusive right to produce
Zip drives for the PowerBook series of Macintosh computers.
SANDISK. We also have a co-development agreement with SanDisk, a leading
developer and marketer of flash memory storage products, including
CompactFlash, MultiMediaCard and the SD Card. Under this arrangement, we
jointly developed a FlashPath product to support the SanDisk MultiMediaCard. We
funded the development costs and are entitled to revenues derived from the sale
of our FlashPath for the MultiMediaCard. We pay SanDisk a royalty based on the
portion of those revenues derived from sales other than to SanDisk. In June
1999, we issued 37,500 shares of our common stock to SanDisk as partial payment
for entering into the co-development agreement.
SONY. Under our co-development agreements with Sony, we have developed
FlashPath products for use with the Sony Memory Stick. Sony reimburses us for a
portion of our development expenses and pays us additional fees during the
course of development. We are manufacturing, and Sony is marketing and
distributing, these co-developed products.
TOSHIBA. Toshiba Corporation, a leading electronics company, played a
critical role in our early development stage. Toshiba made an equity investment
of approximately $10.0 million in SmartDisk and introduced us to most of the
key technical personnel that now constitute our Tokyo-based applied engineering
and production engineering team. Toshiba also assisted us in the development
and engineering of FlashPath, helped guide our selection of manufacturing
techniques, aided our introduction into mass production and introduced our
management to potential strategic partners. Toshiba continues to provide
cooperative support in several areas.
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The following table illustrates the nature of some of our strategic
relationships:
TYPE OF STRATEGIC RELATIONSHIP
<TABLE>
<CAPTION>
ASSISTED IN MANUFACTURER
INVESTED IN PRODUCT PROVIDED SUPPLIER OF OF SMARTDISK CUSTOMER OF
NAME SMARTDISK DEVELOPMENT LICENSE COMPONENTS PRODUCTS SMARTDISK
- ---------------------- -------------- -------------- -------------- -------------- -------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Apple ................ /check mark/ /check mark/ /check mark/ /check mark/
Atmel ................ /check mark/ /check mark/
Hitachi .............. /check mark/ /check mark/ /check mark/ /check mark/
IBM .................. /check mark/ /check mark/ /check mark/
Iomega Corp. ......... /check mark/ /check mark/ /check mark/
LSI Logic ............ /check mark/ /check mark/ /check mark/
Mitsumi .............. /check mark/ /check mark/
Rohm ................. /check mark/ /check mark/ /check mark/
SanDisk .............. /check mark/ /check mark/ /check mark/ /check mark/
Sony ................. /check mark/ /check mark/
Toshiba .............. /check mark/ /check mark/ /check mark/ /check mark/
Y-E Data ............. /check mark/ /check mark/ /check mark/ /check mark/
Yamaichi ............. /check mark/ /check mark/ /check mark/ /check mark/
</TABLE>
RESEARCH AND DEVELOPMENT
Our product design and development activities are conducted in our offices
in San Jose, California; Naples, Florida; Atlanta, Georgia; Boston,
Massachusetts; and Tokyo, Japan. Our research and development teams at all
locations regularly collaborate and share data and research protocols in order
to maximize innovation and development.
NAPLES. Our Naples team is primarily responsible for our core research and
development activities, including product conceptualization, software and
firmware development, technical writing, printed circuit board layouts and
mechanical engineering. Our Naples team has significant expertise with floppy
disk drive interfaces, flash memory media and smart card interfaces, driver,
user and utility software interfaces, and firmware design and ASIC design. Our
engineers and other research and development employees also develop design
specifications based on customer requirements and supervise our quality
assurance activities. This team consists of executive management, line
management, engineers, developers and quality assurance personnel.
BOSTON. Our Boston research and development team designs and develops
FireWire, USB and notebook product lines for Macintosh and Windows-based
systems. This team has primary responsibility for Macintosh software
integration, FireWire ASIC integration and ultra-compact industrial product
design, prototyping and tooling design functions. Extensive use of Computer
Aided Design provides very fast product development cycles, which enabled the
Boston-based operation to provide in excess of forty new products in 1999.
Industrial design, product design, tooling design, mold flow analysis,
electronics design, printed circuit layout, mechanical design and high volume
manufacturing test fixtures are all performed in our Boston design center.
ATLANTA. Our Atlanta team focuses their research and development
activities on product conceptualization relative to audio and video digital
appliance hardware and software. The first audio product under development is
our recently announced FlashTrax product, a flash memory-based adapter that
facilitates the transfer of digital music files from the Internet to the
well-established base of cassette players. Additionally, the team is focused on
a family of products that will allow consumers to conveniently download, play,
and manage a library of digital music files.
TOKYO. Our Tokyo research and development team actively assists in the
implementation of our product designs, with primary responsibility for applied
engineering, production engineering and the
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supervision of our contract manufacturers. Our Tokyo team also plays a
principal role in coordinating our development activities with the leading
flash memory card manufacturers and refining the product requirements of our
OEM customers. Other activities include the localization/translation of our
products for the Japanese market, debugging and quality assurance. Our Tokyo
research and development team consists of our Japanese subsidiary's Vice
President of Engineering, the Senior Manager of Audio/Video products and four
Toshiba engineers who provide services on a contract basis.
SAN JOSE. Our San Jose team designs and develops USB and FireWire drivers,
applications and firmware support for our personal storage systems.
For 1997, 1998, and 1999, our research and development expenditures were
approximately $1.4 million, $2.1 million and $5.9 million ($8.5 million in 1999
on a pro forma basis after giving effect to the VST acquisition).
In addition, we have endeavored to develop and maintain close
relationships with key suppliers of components and technologies in order to
enable us to quickly introduce new products that incorporate the latest
technological advances. As a result, the substantial resources of companies
such as Apple, Hitachi, Iomega, LSI Logic, Mitsumi, NEC, Rohm, SanDisk, Sony,
Toshiba and Yamaichi augment our internal research and development efforts.
These cooperative arrangements take many forms and provide a number of
benefits. For example, SanDisk, Sony and Toshiba have licensed technology to us
that allows our products to interface with their flash memory cards and provide
extensive engineering support. We believe that our close relationships with
flash card manufacturers and consumer product OEMs also provide insight into
their current and future needs, enabling us to design specific products that
meet those requirements.
MANUFACTURING AND SOURCES OF SUPPLY
We currently outsource our manufacturing and plan to continue to outsource
manufacturing for the foreseeable future. This strategy allows us to focus on
our core research, product design and development capabilities, and to reduce
the substantial capital investment required to manufacture our products. We
believe that our use of experienced, high-volume manufacturers provides greater
manufacturing specialization and expertise, higher levels of flexibility and
responsiveness, and faster delivery of product than in-house manufacturing. In
particular, we have developed a system of managing the supply chain for our
personal storage systems which is designed to enable us to move quickly from
initial design phase to market introduction in 8-16 weeks. In addition, we
frequently seek the advice of our experienced manufacturers with respect to
design changes that reduce manufacturing costs or lead times or increase the
manufacturing yields and the quality of our finished products.
Our digital connectivity products are currently manufactured in the
Philippines and Japan at facilities operated by Hitachi, Yamaichi and Mitsumi.
We currently outsource all of our personal storage system manufacturing to four
contract manufacturers located in New England, yet we maintain multiple global
sourcing capabilities for PC board fabrication. We design and own substantially
all of our personal storage system tooling. Our personal storage system
products are distributed from one of two fulfillment centers, both of which are
located in Massachusetts. Under our manufacturing arrangements, we receive
fully assembled and tested products based upon our proprietary designs and
specifications. We selected our manufacturers based upon their reputations for
quality, their cost structures, their production capacities and their support
of state-of-the-art manufacturing processes and systems. However, our current
dependence on a limited number of manufacturers exposes us to a variety of
risks, including shortages of manufacturing capacity and reduced control over
delivery schedules, quality assurance, production yields and costs.
Accordingly, we intend to seek additional manufacturing capacity and, in
particular, at least two manufacturers for each of our products.
To ensure that our products manufactured by others meet our standards, our
production engineers generally work with our contract manufacturers throughout
the production process. We
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establish product specifications, select the components to be used to produce
our products, select the suppliers, and negotiate the prices for most of these
components. We also work with our contract manufacturers to improve process
control and product design, and conduct periodic, on-site inspections of our
manufacturers. In addition, our production engineers conduct regular review
meetings with our manufacturers to discuss sales forecasts and the procurement
of long lead-time parts, production capacities and facilities.
We rely upon a limited number of suppliers of several key components used
in our digital connectivity products. In particular, Rohm manufactures our
proprietary ASICs used in our FlashPath products and our proprietary analog
ASICs used in our Smarty products, and Atmel manufactures our proprietary
digital ASICs used in our Smarty products. Moreover, we purchase ASICs and
other components pursuant to purchase orders placed from time to time and have
no guaranteed supply arrangements. Our reliance on limited source suppliers
involves several risks, including a potential inability to obtain an adequate
supply of required components, unexpected price increases, lack of timely
delivery and variable component quality.
COMPETITION
There are no competitors known to us that offer a digital connectivity
product for flash memory or smart cards using a 3.5 inch floppy drive. However,
we face competition from numerous providers of cable and other non-cable
interfaces, including ports, USB and infrared interfaces, including:
/bullet/ In the case of flash memory card interfaces, Hagiwara, SanDisk and
SCM Microsystems; and
/bullet/ In the case of smart card interfaces, Gemplus, Hitachi, SCM
Microsystems and Toshiba.
We face competition from numerous providers of stand-alone FireWire and
USB personal storage devices. These competing products are offered by a number
of companies, including:
/bullet/ In the case of USB devices, iDrive, Imation, La Cie, Newer
Technology and Teac; and
/bullet/ In the case of FireWire devices, ADS Technologies, Evergreen
Technologies, EZQuest, FireStorm, FireWire Direct, La Cie, QPS,
SANCube, Seagate Technologies, Western Digital and Yano.
The market for digital connectivity and storage products is intensely
competitive and characterized by rapidly changing technology and rapid changes
in consumer preference. We believe that competition is likely to intensify as a
result of increasing demand for digital appliances using USB-based and
FireWire-based technology. Future competition may also accelerate as
Windows-based PCs migrate towards USB-based and FireWire-based interfaces.
Many of our current and potential competitors have greater financial,
technical, marketing, purchasing and other resources than we do. As a result,
some of our competitors may be able to respond more quickly to new or emerging
technologies or standards or 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.
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We believe that the principal competitive factors affecting the market for
digital connectivity products and personal storage systems include:
/bullet/ Ease of use;
/bullet/ Quality and reliability;
/bullet/ Rate of throughput, or data transfer speed;
/bullet/ Strength of distribution channels;
/bullet/ Price; and
/bullet/ The extent to which our products work with existing and will work
with future digital appliances.
We believe that our products compete successfully on most of these bases.
INTELLECTUAL PROPERTY
We do not intend to license our proprietary digital connectivity
technology to flash memory card manufacturers, consumer product OEMs or other
third parties in the future. We have granted Fischer International a
non-exclusive license to produce our SafeBoot product until 2001. We have
granted certain USB and FireWire product manufacturers who are competitors a
limited, non-exclusive license to include our USB and FireWire drivers in
specific products for certain periods. In all cases, these versions of the USB
and FireWire drivers are base level drivers, without the benefit of our
complete feature set, which adds significant value to our products. The
protection of our intellectual property rights is critical to our future
success, and we rely in part on patent, trade secret, trademark, maskwork and
copyright law. We own 11 United States patents and approximately 60 foreign
patents. We also have a number of pending patent applications in various
countries. Our patents and patent applications cover various aspects of our
technology.
Although we believe that our patent rights, when considered in conjunction
with our allowed patent applications and trade secret protection, should limit
another party's ability to manufacture and sell competing data transfer
products that use a floppy disk drive or FireWire interface, we cannot
guarantee that the steps we have taken to protect our technology will be
successful. The patents issued to us may not be adequate to protect our
proprietary rights, to deter misappropriation or to prevent an unauthorized
third party from copying our technology, designing around the patents we own or
otherwise obtaining and using our products, designs or other information. In
addition, patents may not be issued under our current or future patent
applications, and the patents issued under those patent applications could be
invalidated, circumvented or challenged. It may also be particularly difficult
to protect our products and intellectual property under the laws of some
countries in which our products are or may be manufactured or sold.
Moreover, third parties could develop technologies that are similar or
superior to our technology or could make infringement claims against us.
Regardless of the outcome, an infringement claim would likely result in
substantial cost and diversion of our resources. In addition, we may not
prevail in litigation or be able to license any valid and infringed patents
from third parties on commercially reasonable terms, if at all. Any
infringement claim or other litigation against us or by us could therefore harm
our business, financial condition and results of operations.
Our FlashPath and Smarty trademarks are registered in the United States
and a variety of other countries in which we do business, and we will continue
to evaluate the registration of additional trademarks as appropriate. However,
we do not have the rights to the Smarty trade name in Germany, Japan or The
Netherlands, and our trademark application for the SmartDisk name is still
pending in
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the United States. Our FlashTrax trademark is registered in the United States.
We also claim copyright protection for some of our proprietary software and
documentation. In addition, we generally enter into confidentiality and
non-disclosure agreements with our employees and with key consultants, vendors
and suppliers.
EMPLOYEES
As of April 30, 2000, we had 128 full-time employees, including 63
employees (all of whom work in the United States or Japan) engaged in research
and development, 23 engaged in sales and marketing, 18 engaged in operations
and 24 engaged in general and administrative activities. Our employees are not
represented by any collective bargaining agreements, and we have never
experienced a work stoppage. We believe our employee relations are good.
PROPERTIES
Our corporate and technical headquarters are located in Naples, Florida.
We lease approximately 15,000 square feet of space in Naples, Florida under a
three-year lease which expires in December 2001. We also lease approximately
1,400 square feet of space in Alpharetta, Georgia for a portion of our research
and development efforts. The lease on our Alpharetta facility expires in
September 2000. We also lease approximately 22,000 square feet in our Acton,
Massachusetts facility under a five-year lease which expires in April of 2002.
We also lease approximately 3,500 square feet of space in Tokyo for our
Japanese operations. This lease expires in April 2002. We believe that our
existing facilities are adequate to support our existing operations and that,
if needed, we will be able to obtain suitable additional facilities on
commercially reasonable terms.
LITIGATION
SmartDisk is not a party to any material legal proceedings.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
Our executive officers, directors and key employees, and their ages as of
April 30, 2000, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- ----- --------------------------------------------------------
<S> <C> <C>
Addison M. Fischer ............ 51 Chairman of the Board of Directors
Michael S. Battaglia .......... 55 President, Chief Executive Officer and Director
Vincent Fedele ................ 44 Chief Technology Officer
James M. Giarrusso ............ 49 Senior Vice President and General Manager,
Personal Storage Systems
Douglas R. Kraul .............. 44 Vice President, Audio/Video Products
Michael R. Mattingly .......... 51 Chief Financial Officer
Robert Protheroe .............. 43 Senior Vice President, Research and Development
Daniel E. Reed ................ 32 Vice President, Corporate Development and Legal Affairs
Quresh Sachee ................. 37 Vice President, Sales and Marketing
Yoshiaki Uchida ............... 57 Senior Vice President and General Manager,
Japanese Operations
D. James Bidzos ............... 45 Director
Anthony A. Ibarguen ........... 40 Director
Shigeki Morita ................ 55 Director
Timothy Tomlinson ............. 50 Director
Joseph M. Tucci ............... 52 Director
Hatim Tyabji .................. 55 Director
Other Key Employees:
NAME AGE POSITION
- -------------------------------- -- --------------------------------------------------------
O. Lee Drennan ................ 42 Director of Product Engineering
Kazuhisa Fukatsu .............. 58 Senior Manager, Production Control and Assistant to the
President of SmartDisk International
Kazuhiro Iwata ................ 53 Vice President, Engineering of SmartDisk International
Jon Kaplan .................... 41 Vice President, Software Development
Konosuke Nakamura ............. 52 Vice President, Marketing of SmartDisk International
</TABLE>
ADDISON M. FISCHER has served as Chairman of the Board of Directors since
our inception in 1997. Mr. Fischer has been an investor in numerous emerging
technology companies as his principal occupation for at least the past five
years. Many of these companies are involved in the fields of computer security
and office automation. He also serves on the board of directors of a number of
companies, including Fischer International Systems Corporation, a
privately-held software company which he controls. He was also a long-time
board member of and significant investor in RSA Data Security, Inc., a leader
in cryptographic software, until its merger in 1996 with Security Dynamics
Technologies, Inc., a network security company. Mr. Fischer also controls
Phoenix House Investments, LP, one of our principal stockholders. In addition,
Mr. Fischer was one of the founders of VeriSign, Inc., a publicly-held
electronic credentials/digital certificate company. Mr. Fischer is a member of
committees that set U.S. standards for computer security and electronic
commerce. He has addressed the U.S. Congress, by invitation, on several topics,
including digital signature standards, proposed FBI digital telephony
legislation, and global U.S. competitiveness. Mr. Fischer holds numerous U.S.
and international patents, and is a lifetime member of the Association of
Former Intelligence Officers.
MICHAEL S. BATTAGLIA has served as our President and Chief Executive
Officer since January 1998 and as a director since October 1998. From May 1995
to December 1998, Mr. Battaglia was President and Chief Executive Officer of
Fischer International Systems Corporation, a company controlled by
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Addison Fischer, our Chairman of the Board of Directors and holder of a
majority interest in Phoenix House Investments, LP, one of our principal
stockholders. During 1998, Mr. Battaglia also served as an officer of Fischer
International. From August 1992 to December 1994, Mr. Battaglia was President
of Mosler Inc., a provider of electronic security systems and security
equipment. For the 25-year period prior to his Mosler tenure, Mr. Battaglia
held various senior management positions in the computer and information
systems industry. He spent most of his professional career at Sperry
Corporation in New York City and Philadelphia. Mr. Battaglia also serves on the
board of directors of Fischer International and Xcert International, which are
privately-held.
VINCENT FEDELE has served as our Chief Technology Officer since March
2000. Mr. Fedele was the founder of VST, which we acquired on March 6, 2000. He
served as Chairman of the Board of Directors of VST from its inception until
joining us. In addition, from June 1993 until October 1998, he served as
President and Chief Executive Officer of VST. Most recently, Mr. Fedele managed
new business development, strategic marketing and new product development for
VST.
JAMES M. GIARRUSSO has served as our Senior Vice President and General
Manager, Personal Storage Systems, since March 2000. Mr. Giarrusso served as
Chief Operating Officer of VST from July 1998 until July 1999 and as Chief
Executive Officer from July 1999 until joining us in March 2000. He also served
as a director of VST from July 1993 to July 1995. For the ten years prior to
joining VST, he served in various senior management positions for Data General
Corporation, a computer storage and server developer and manufacturer, most
recently as Director-Customer Fulfillment.
DOUGLAS R. KRAUL has served as our Vice President, Audio/Video Products
since July 1999. From February 1997 to June 1999, Mr. Kraul was President and
Chairman of Harmony Systems, Inc., a developer of Internet desktop client
software and applications for information management and electronic musical
products. From October 1993 until February 1997, Mr. Kraul served in several
positions with Motorola, Inc., an electronic and communications company, most
recently as Vice President, General Manager, Motorola Platform Software
Division and Vice President, General Manager, Personal Communicator Systems &
Software Division.
MICHAEL R. MATTINGLY has served as our Chief Financial Officer since May
1999 and was our Corporate Controller from February 1999 to May 1999.
Previously, Mr. Mattingly was employed by Mosler Inc., a provider of electronic
security systems and security equipment. During a 20-year career at Mosler, Mr.
Mattingly held various positions in finance and accounting, most recently Cost
Controller and Company Controller. Prior to his service with Mosler, Mr.
Mattingly served in various financial and accounting positions with American
Standard, Inc., a public company whose shares are traded on the New York Stock
Exchange. His professional background includes 28 years of general accounting,
cost accounting, planning and budgeting, as well as management of those
functions.
ROBERT PROTHEROE has served as our Senior Vice President, Research and
Development since March 1999. From November 1995 to March 1999, Mr. Protheroe
held senior management positions, most recently Vice President of Engineering,
at IVI/Checkmate Electronics, Inc., an Atlanta-based designer and manufacturer
of point-of-sale payment systems. Prior to joining IVI/Checkmate, Mr. Protheroe
was employed by Electronic Power Technologies, Inc., AT&T Global Information
Systems and by NCR Corporation in various engineering and engineering
management positions.
DANIEL E. REED has served as our Vice President, Corporate Development and
Legal Affairs since May 1999. From August 1994 to May 1999, Mr. Reed was an
attorney with the law firm of Greenberg Traurig, P.A., Miami, Florida, where he
concentrated his law practice in the areas of mergers and acquisitions, public
offerings and private financings, representing both public and private
companies. From August 1989 to April 1991, Mr. Reed served as a senior auditor
with Ernst & Young, LLP, New York City, New York, concentrating his practice in
the financial services and electronics industries.
QURESH SACHEE has served as our Vice President, Sales and Marketing, since
May 1998. From 1993 to May 1998, Mr. Sachee was employed by IVI/Checkmate
Electronics, Inc., a designer and
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manufacturer of point-of-sale systems, in various positions, including
Executive Vice President, Senior Vice President of Product Management, and
prior to that, Vice President, International Sales. Prior to that time, Mr.
Sachee was employed by VeriFone Inc., a Hewlett Packard company, in various
product development and marketing management positions, and by Unisys
Corporation.
YOSHIAKI UCHIDA has served as our Senior Vice President and General
Manager, Japanese Operations, since February 2000, and previously served as our
Vice President and General Manager, Asian Operations since November 1998. Prior
to that time, Mr. Uchida spent 33 years with Toshiba Corporation in various
management positions. He served as Deputy General Manager of Toshiba's OME
manufacturing and development facility, and most recently was Senior Executive
Vice President of MediaServe Corporation, a Toshiba affiliate.
D. JAMES BIDZOS has served as a director since May 1998. Since March 1999,
Mr. Bidzos has served as Vice Chairman of the Board of Directors of RSA
Security, Inc., a network security company, and served as its Executive Vice
President from July 1996 to February 1999. From 1986 to February 1999, Mr.
Bidzos served as President, Chief Executive Officer and a director of RSA Data
Security, Inc., an encryption software company that was acquired by Security
Dynamics Technologies, which subsequently changed its name to RSA Security, in
July 1996. Mr. Bidzos has served as Chairman of the Board of Directors of
VeriSign, Inc., a publicly-held electronic credentials/digital certificate
company, since its inception in April 1995, and was Chief Executive Officer of
that company from April 1995 to July 1995.
ANTHONY A. IBARGUEN has served as a director since August 1999. Since
December 1999, Mr. Ibarguen has served as a Managing Director, Operations and
President of Professional Services of Internet Capital Group, an Internet
holding company. In addition, from September 1996 through December 1999, he
served in varying capacities at Tech Data Corp., a manufacturer of micro-
computer hardware and software, including President and Chief Operating
Officer. From August 1993 to August 1996, he was employed by ENTEX Information
Services, Inc., an information technology company, as Executive Vice President
of Sales and Marketing. Mr. Ibarguen is also a director of eMerge Interactive,
Inc., a publicly-held provider of an online marketplace for the cattle
industry.
SHIGEKI MORITA has served as a director since April 1999. Since 1994, Mr.
Morita has served in various capacities with Toshiba Corporation, including his
current position as Technology Executive, Semiconductor Company, which he has
held since November 1998.
TIMOTHY TOMLINSON has served as a director since our inception in 1997. He
co-founded Tomlinson Zisko Morosoli & Maser LLP, a law firm, in 1983, and has
been a partner there since that time. Mr. Tomlinson also serves on the board of
directors of VeriSign, Inc., Oak Technology, Inc. and Portola Packaging, Inc.,
which are publicly-held, as well as other, privately-held companies, including
Fischer International where he has served since April 1999.
JOSEPH M. TUCCI has served as a director since August 1999. Since January
2000, Mr. Tucci has served as President and Chief Operating Officer of EMC
Corporation, a publicly-held company that designs and manufactures
storage-related hardware and software products. Prior to joining EMC, Mr. Tucci
served as Deputy Chief Executive Officer of Getronics N.V., a provider of
information and communication technology services, from June 1999 through
December 1999. From August 1990 through June 1999, Mr. Tucci was employed by
Wang Laboratories, Inc., a provider of information technology services and
solutions, initially as Executive Vice President, Operations, and, from January
1993 until June 1999, as President and Chief Executive Officer. Mr. Tucci
served as Chairman of the Board of Directors of Wang Laboratories from October
1993 until June 1999. Getronics acquired Wang in June 1999, and Wang
Laboratories is currently a subsidiary of Getronics. Mr. Tucci is also a
director of Telecom Italia, S.p.A. and Paychex, Inc., a company engaged in
providing computerized payroll accounting services, which are publicly-held.
HATIM TYABJI has served as a director since August 1999. Since September
1998, Mr. Tyabji has been Chairman and Chief Executive Officer of Saraide,
Inc., a provider of Internet and wireless data
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services. From 1986 until 1998, Mr. Tyabji served as President and Chief
Executive Officer of VeriFone, Inc., a company which designs systems for
automated payment transactions. He also served as Chairman of Verifone from
1992 until 1998. Mr. Tyabji is also a director of Best Buy Co., Inc.,
PubliCARD, Inc., Deluxe Corporation and Ariba, Inc., which are publicly-held.
O. LEE DRENNAN has served as our Director of Product Engineering since
January 1998. From March 1991 to January 1998, he served in a number of
positions for Fischer International and SmartDisk Security Corporation, most
recently as Director of Product Engineering for Fischer International.
KAZUHISA FUKATSU has served as Senior Manager, Production Control and
Assistant to the President of SmartDisk International since June 1998. From
July 1996 to May 1998, he served in the position of Director of Akia
Corporation, a computer and electronics company. From September 1992 to July
1996, he served as Controller for Serano Japan Co., Ltd., a pharmaceutical
company.
KAZUHIRO IWATA has served as Vice President, Engineering of SmartDisk
International since April 1999. Prior to that time, Mr. Iwata spent almost 28
years with Toshiba Corporation where he held a number of management positions,
most recently Chief Specialist, Engineering Administration.
JON KAPLAN has served as our Vice President, Software Development since
January 1998. Prior to that time, he spent 8 years with Fischer International
as Vice President, Product Development.
KONOSUKE NAKAMURA has served as Vice President, Marketing of SmartDisk
International since March 1999. Prior to that time, Mr. Nakamura spent nearly
29 years with Toshiba Corporation in various management positions. Most
recently, he served as a Senior Manager, International Sales & Marketing,
Storage Device Division for Toshiba.
BOARD OF DIRECTORS AND COMMITTEES
Our certificate of incorporation provides for a board of directors
consisting of three classes serving three-year staggered terms. Class I
Directors consist of Michael S. Battaglia, Timothy Tomlinson and Joseph M.
Tucci, with the initial term of office of the Class I Directors expiring at the
annual meeting of stockholders in 2000. Class II Directors consist of Shigeki
Morita and D. James Bidzos, with the initial term of office of Class II
Directors expiring at the annual meeting of stockholders in 2001. Class III
Directors consist of Addison M. Fischer, Anthony A. Ibarguen and Hatim Tyabji,
with the initial term of office of Class III Directors expiring at the annual
meeting of stockholders in 2002.
The board of directors has a compensation committee and an audit
committee.
COMPENSATION COMMITTEE. The compensation committee of the board of
directors reviews and makes recommendations to the board regarding all forms of
compensation provided to our executive officers and directors and our
subsidiaries including stock compensation and loans. In addition, the
compensation committee reviews and makes recommendations on stock compensation
arrangements for all of our employees. The compensation committee also
administers our 1999 Incentive Compensation Plan, 1999 Employee Stock Purchase
Plan, 1998 Employee Stock Option Plan and 1998 Directors and Consultants Stock
Option Plan. The current members of the compensation committee are D. James
Bidzos, Hatim Tyabji and Joseph M. Tucci, with Mr. Bidzos chairing the
committee.
AUDIT COMMITTEE. The audit committee of the board of directors reviews and
monitors the corporate financial reporting and the external audit of SmartDisk,
including, among other things, our internal control structure, the results and
scope of the annual audit and other services provided by our independent
auditors and our compliance with legal requirements that have a significant
impact on our financial reports. The audit committee also consults with our
management and our independent auditors regarding the preparation of financial
statements and, as appropriate, initiates inquiries into
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aspects of our financial affairs. In addition, the audit committee has the
responsibility to consider and recommend the appointment of, and to review fee
arrangements with, our independent auditors. The current members of the audit
committee are Timothy Tomlinson and Anthony A. Ibarguen, with Mr. Tomlinson
chairing the committee.
DIRECTOR COMPENSATION
Our 1999 Incentive Compensation Plan includes an automatic option grant
program for non-employee directors of SmartDisk. See "Employee Benefit
Plans--1999 Incentive Compensation Plan" for a description of the automatic
grant program.
Timothy Tomlinson, one of our directors, received a stock grant of 2,500
shares of our common stock upon completion of our initial public offering in
October 1999.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation committee of the board of directors consisted in 1999 of
D. James Bidzos, Hatim Tyabji and Joseph M. Tucci. There were no compensation
committee interlocks during our last fiscal year.
EXECUTIVE COMPENSATION
The following table sets forth compensation information for the fiscal
years ended December 31, 1998 and 1999 paid by us for services by our Chief
Executive Officer and our four most highly compensated executive officers who
served in such capacities as of December 31, 1999, collectively referred to
below as the "named executive officers":
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
---------------------------------- -------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS OPTIONS COMPENSATION
- ----------------------------- ------ ---------------- --------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Michael S. Battaglia 1999 $ 275,000 $ 109,500 200,000 --
Chief Executive Officer 1998 100,440(1) 45,000(1) 426,136 --
and President
Quresh Sachee 1999 146,667 69,304 50,000 --
Vice President, 1998 89,306 47,500 50,000 --
Marketing and Sales
Robert L. Protheroe 1999 142,500 25,000 100,000 --
Senior Vice President,
Research and Development
Yoshiaki Uchida 1999 168,800 39,475 50,000 --
Senior Vice President and 1998 25,000 -- 25,000 --
General Manager,
Japanese Operations
Michael R. Mattingly 1999 105,972 14,750 75,000 --
Chief Financial Officer
</TABLE>
- ----------------
(1) In addition, Mr. Battaglia received $100,440 in salary and $60,000 in bonus
from Fischer International for services rendered to Fischer International
in 1998. Commencing January 1, 1999, Mr. Battaglia became our full-time
employee.
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OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth each grant of stock options during the
fiscal year ended December 31, 1999 to each of the named executive officers. No
stock appreciation rights were granted to these individuals during that year.
OPTION GRANTS IN 1999
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE VALUE
AT ASSUMED ANNUAL RATES
OF STOCK PRICE APPRECIATION
INDIVIDUAL GRANTS FOR OPTION TERM(1)
---------------------------------------------------------- --------------------------
NUMBER OF % OF TOTAL
SECURITIES OPTIONS
UNDERLYING GRANTED TO EXERCISE OR
OPTIONS EMPLOYEES IN BASE PRICE EXPIRATION
NAME GRANTED FISCAL YEAR ($)(SH)(2) DATE(2) 5%($) 10%($)
- ------------------------------ ------------ -------------- ------------ ----------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Battaglia ......... 87,500 8.5% $4.80 2/11/09 $264,136 $ 669,372
112,500 11.0% 8.00 5/13/09 563,490 1,427,993
Quresh Sachee ................ 6,250 0.6% 4.80 2/11/09 18,867 47,812
43,750 4.3% 8.00 5/13/09 220,113 557,810
Robert L. Protheroe .......... 40,000 3.9% 4.80 3/16/09 120,748 305,999
60,000 5.9% 8.00 5/13/09 301,869 764,996
Yoshiaki Uchida .............. 12,500 1.2% 4.80 2/11/09 37,734 95,625
37,500 3.7% 8.00 5/13/09 188,668 478,123
Michael R. Mattingly ......... 25,000 2.4% 4.80 2/14/09 75,467 191,249
50,000 4.9% 8.00 5/13/09 251,558 637,497
</TABLE>
- ----------------
(1) Potential realizable value is based on the assumption that the common stock
price appreciates at the annual rate shown, compounded annually, from the
date of grant until the end of the option term. The amounts have been
calculated based on the requirements promulgated by the Securities and
Exchange Commission. The actual value, if any, a named executive officer
may realize will depend on the excess of the stock price over the exercise
price on the date the option is exercised, if the executive were to sell
the shares on the date of exercise, so there is no assurance that the
value realized will be equal to or near the potential realizable value as
calculated in this table.
(2) Prior to our initial public offering on October 6, 1999, there was no
public market for our common stock. The exercise price of each of these
options granted prior to that time is equal to the fair market value of
our common stock on the date of grant as determined by our board of
directors.
(3) Each of the options granted have a term of ten years from the date of
grant, subject to acceleration upon a change of control of our company.
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AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION
VALUES
The following table sets forth information concerning the year-end number
and value of unexercised options for each of the named executive officers.
These values have been calculated based on a price of $32.75 per share, which
is equal to the closing price of our common stock on December 31, 1999 as
reported on the Nasdaq National Market. We have never granted stock
appreciation rights. Value realized is calculated by subtracting the aggregate
exercise price paid from the likely value of the shares on completion of this
offering.
AGGREGATE OPTION EXERCISES IN 1999 AND YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS IN-THE-MONEY OPTIONS
SHARES AT DECEMBER 31, 1999(#) AT DECEMBER 31, 1999($)
ACQUIRED VALUE ----------------------------- ----------------------------
ON EXERCISE(#) REALIZED($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------- ------------ ------------- --------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Michael S. Battaglia ..... -- -- -- 200,000 -- 5,230,000
Quresh Sachee ............ -- -- 20,000 50,000 575,000 1,257,500
Robert L. Protheroe ...... -- -- -- 100,000 -- 2,603,000
Yoshiaki Uchida .......... -- -- -- 75,000 -- 1,996,250
Michael R. Mattingly ..... -- -- -- 75,000 -- 1,936,250
</TABLE>
EMPLOYMENT AGREEMENTS
MICHAEL S. BATTAGLIA. Mr. Battaglia's employment agreement has a
three-year term ending December 31, 2002. His annual base salary is $275,000
and he is eligible for annual merit increases at the discretion of our board of
directors and an annual bonus of $125,000 for 2000 if we achieve specific
revenue and profitability goals. Bonuses for the remaining years in the term
are at the discretion of the compensation committee of our board of directors.
If we terminate Mr. Battaglia without cause, we must pay him severance of six
months' base salary plus fifty percent of his bonus, if any, for the year in
which he was terminated. Mr. Battaglia has agreed not to compete with us for
one year after his employment if he resigns and for six months after his
employment if we terminate him.
ROBERT PROTHEROE. Mr. Protheroe's employment agreement has a three-year
term ending March 15, 2002. His annual base salary is $190,000 and he is
eligible for a bonus of $60,000 for 2000 if we achieve specific revenue and
profitability goals. Bonuses for the remaining years are at the discretion of
the compensation committee of our board of directors. If we terminate Mr.
Protheroe without cause, we must pay him severance of six months' base salary.
Mr. Protheroe has agreed not to compete with us for one year after termination
of his employment.
QURESH SACHEE. Mr. Sachee's employment agreement has a two-year term
ending May 3, 2000. His annual base salary is $150,000 and he is eligible for a
bonus of $50,000 for 2000 if we achieve specific revenue and profitability
goals. If we terminate Mr. Sachee without cause, we must pay him severance of
three months' base salary. Mr. Sachee has agreed not to compete with us for one
year after termination of his employment if he resigns and for six months after
his employment if we terminate him.
VINCENT FEDELE. Mr. Fedele's employment agreement with our subsidiary,
SmartDisk Personal Storage Systems Corporation, has a two year term ending
March 6, 2002. His annual base salary is $200,000 and he is eligible for a
bonus of $60,000 if we achieve specific revenue and profitability goals. If we
elect not to renew his employment agreement upon its expiration, we must pay
Mr. Fedele severance of three months base salary. In addition, if we terminate
him without cause, we must pay him severance of three months' base salary and
his pro rata portion of any bonus compensation to which he is entitled. Mr.
Fedele has agreed not to compete with us for two years after termination of his
employment if we terminate him for cause and for the later of one year
following the termination date or March 6, 2002 if he resigns or we terminate
him without cause.
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JAMES M. GIARRUSSO. Mr. Giarrusso's employment agreement with our
subsidiary, SmartDisk Personal Storage, has a two year term ending March 6,
2002. His annual base salary is $200,000 and he is eligible for a bonus of
$60,000 if we achieve specific revenue and profitability goals. If we elect not
to renew his employment agreement upon its expiration, we must pay Mr.
Giarrusso severance of three months base salary. In addition, if we terminate
him without cause, we must pay him severance of three months' base salary and
his pro rata portion of any bonus compensation to which he is entitled. Mr.
Giarrusso has agreed not to compete with us for two years after termination of
his employment if we terminate him for cause and for the later of one year
following the termination date or March 6, 2002 if he resigns or we terminate
him without cause.
EMPLOYEE BENEFIT PLANS
1999 INCENTIVE COMPENSATION PLAN. Our board of directors adopted our 1999
Incentive Compensation Plan in July 1999 and our stockholders approved the
adoption of the plan in July 1999. We have reserved 2,500,000 shares of common
stock for issuance under the plan, of which options to purchase 1,496,330
shares were outstanding as of April 30, 2000. There remain 916,502 shares of
common stock available for issuance under the plan. Under the plan, officers,
employees, members of the board of directors and consultants are eligible to
receive awards. The types of awards that may be made under the plan are options
to purchase shares of common stock, stock appreciation rights, restricted
shares, deferred shares, bonus shares, dividend equivalents and other
stock-based awards. Options may be either incentive stock options that qualify
for favorable tax treatment for the optionee under Section 422 of the Internal
Revenue Code of 1986 or nonstatutory stock options not designed to qualify for
favorable tax treatment. If shares awarded under the plan are forfeited, then
those shares will again become available for new awards under the plan. Annual
cash awards are limited to $10,000,000 per person, and annual cash performance
awards are limited to $20,000,000 per person.
The compensation committee of our board of directors administers the plan.
The committee has complete discretion to make all decisions relating to the
interpretation and operation of the plan, including the discretion to determine
which eligible individuals are to receive any award, and to determine the type,
number, vesting requirements and other features and conditions of each award.
The exercise price for incentive stock options granted under the plan may
not be less than 100% of the fair market value of the common stock on the
option grant date. The exercise price may be paid in cash or by other means,
including a cashless exercise method as determined by the compensation
committee.
The plan includes an automatic grant program for our non-employee
directors. Under the plan, non-employee directors are automatically granted
options to purchase 15,000 shares of common stock upon their initial election
to the board of directors and 500 shares upon appointment to any committee of
the board and upon appointment as chairman of a committee. Prior to January 1,
2000, directors were granted options to purchase an additional 6,000 shares in
January of each year that they served on the board and 500 each year that they
served as a member, and 500 each year that they served as chairman, of a
committee. Pursuant to an amendment to the plan adopted by the board of
directors effective January 1, 2000, directors are granted options to purchase
an additional 7,500 shares in January of each year that they serve on the board
and 2,000 each year that they serve as a member, and 1,000 each year that they
serve as chairman, of a committee. All options granted under the automatic
grant program vest 2% a month for each month after the grant. Directors who
were serving on the board on the date that the plan was adopted are eligible to
participate in the program in 2001. Otherwise, directors are eligible upon
election.
Our board of directors may amend or terminate our plan at any time. If the
board amends the plan, stockholder approval of the amendment will be sought
only if required by an applicable law. The plan will continue in effect
indefinitely unless the board decides to terminate the plan earlier.
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On March 24, 2000 the board of directors adopted an amendment to the plan,
subject to the approval of our stockholders at the 2000 Annual Meeting,
scheduled to be held on May 23, 2000. If the amendment is approved by our
stockholders, the amended plan will differ from our current plan as follows:
/bullet/ the number of shares of common stock reserved and available for
delivery in connection with awards under the plan will be
increased to 3,000,000 shares from 2,500,000 shares; and
/bullet/ the number of shares of common stock reserved and available for
delivery in connection with awards under the plan will
automatically increase on the first trading day of each calendar
year, commencing 2001 and continuing through 2005, by an amount
equal to 3.0% of the total number of shares of our common stock
outstanding on the last trading day of the immediately preceding
calendar year.
1999 EMPLOYEE STOCK PURCHASE PLAN. Our board of directors adopted our 1999
Employee Stock Purchase Plan in July 1999, and our stockholders approved the
adoption of the plan in July 1999. We have reserved 465,000 shares of common
stock for issuance under the plan, of which 15,411 shares have been issued as
of April 30, 2000. There remain 449,589 shares of common stock available for
issuance under the plan. Once an employee enters the plan, on the first day of
each offering period he or she is granted an option to purchase shares of our
common stock, up to a maximum of 1,000 shares, on June 30 and December 31 of
each offering period. The plan, which is intended to qualify under Section 423
of the Internal Revenue Code of 1986, is implemented through successive twelve-
month offering periods, generally commencing the first of January each year.
The initial offering period commenced on October 6, 1999, the date of the
initial public offering of our common stock, and runs through December 31,
2000. The plan is administered by the compensation committee. Employees become
eligible to participate when they have been employed for more than five (5)
months in a calendar year, working at least 20 hours a week. The plan permits
eligible employees to purchase common stock through payroll deductions, which
may not exceed 15% of an employee's compensation. The price of stock purchased
under the plan will be 85% of the lower of the fair market value of the common
stock at either the beginning of the offering period or the day that the
employee became eligible under the plan (if after the beginning of such
period), whichever is higher, or the end of each six-month exercise period.
Employees may not be granted shares under the plan if immediately following a
grant they would hold stock and/or options to acquire stock possessing more
than 5% of the total voting power of the shares of our company. In addition,
employees may be granted options to purchase a maximum of $21,250 worth of
stock per year under the plan. Employees may end their participation at any
time and participation ends automatically upon termination of employment with
us. Our board of directors may amend or terminate the plan at any time. If the
board amends the plan, stockholder approval of the amendment will be sought
only if required by an applicable law.
1998 EMPLOYEE STOCK OPTION PLAN. Our board of directors adopted a 1998
Employee Stock Option Plan in January 1998, and our stockholders approved the
adoption of the plan in March 1998. Although we terminated this plan in July
1999, options to purchase 814,592 shares were outstanding as of April 30, 2000.
We have reserved shares of common stock for issuance upon the exercise of these
options.
The plan required that the exercise price for incentive stock options
granted under the plan may not be less than 100% of the fair market value of
the common stock on the option grant date. The exercise price may be paid in
cash or, at the discretion of the compensation committee, in outstanding shares
of common stock, by delivery of a promissory note, or by any combination of
cash, shares of common stock or promissory notes. At the discretion of the
compensation committee, the exercise price may also be paid by using a cashless
exercise method.
If a merger or other reorganization occurs, and our stockholders before
the transaction hold a majority of the voting securities of the acquiring or
surviving corporation after the transaction,
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outstanding options under the plan shall become exercisable for securities of
the acquiring or surviving corporation. If our stockholders before the
transaction hold less than a majority of the voting securities of the acquiring
or surviving corporation after the transaction, outstanding options shall
generally be canceled unless the merger or reorganization agreement provides
otherwise.
1998 DIRECTORS AND CONSULTANTS STOCK OPTION PLAN. Our board of directors
adopted a 1998 Directors and Consultants Stock Option Plan in January 1998, and
our stockholders approved the adoption of the plan in March 1998. Although we
terminated this plan in July 1999, options to purchase 139,593 shares were
outstanding as of April 30, 2000. We have reserved shares of common stock for
issuance upon the exercise of these options.
The plan required that the exercise price for stock options granted under
the plan shall be determined by the compensation committee at the time of
grant. The exercise price may be paid in cash or, at the discretion of the
committee, in outstanding shares of common stock, by delivery of a promissory
note, or by any combination of cash, shares of common stock or promissory
notes. At the discretion of the committee, the exercise price may also be paid
by using a cashless exercise method.
If a merger or other reorganization occurs, and our stockholders before
the transaction hold a majority of the voting securities of the acquiring or
surviving corporation after the transaction, outstanding options under the plan
shall become exercisable for securities of the acquiring or surviving
corporation. If our stockholders before the transaction hold less than a
majority of the voting securities of the acquiring or surviving corporation
after the transaction, outstanding options shall generally be canceled unless
the merger or reorganization agreement provides otherwise.
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<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The table below sets forth information regarding the beneficial ownership
of our common stock as of April 30, 2000, by the following individuals or
groups:
/bullet/ Each person or entity who is known by us to own beneficially more
than 5.0% of our outstanding stock;
/bullet/ Each of the named executive officers;
/bullet/ Each of our directors;
/bullet/ All directors and executive officers as a group; and
/bullet/ Each of the stockholders selling shares of our common stock in
this offering.
Unless otherwise indicated, the address of each of the individuals listed
in the table is c/o SmartDisk Corporation, 3506 Mercantile Avenue, Naples,
Florida 34104. Except as otherwise indicated, the persons named in the table
have sole voting and investment power with respect to all shares of common
stock held by them.
Percentage ownership in the following table is based on 17,375,621 shares
of common stock outstanding as of April 30, 2000. Beneficial ownership is
determined in accordance with the rules of the Securities and Exchange
Commission and generally includes voting or investment power with respect to
securities. Shares of our common stock subject to options that are presently
exercisable or exercisable within 60 days of April 30, 2000 are deemed to be
outstanding and beneficially owned by the person holding the options for the
purpose of computing the percentage of ownership of that person, but are not
treated as outstanding for the purpose of computing the percentage of any other
person.
The number of shares offered does not reflect the possible sale of shares
upon the exercise of the underwriters' over-allotment option. We and some of
the members of our management have granted an option to the underwriters,
exercisable for 30 days after the date of this prospectus, to purchase up to an
aggregate of 630,000 additional shares of our common stock at the public
offering price set forth on the cover page of this prospectus, less the
underwriting discount. The members of management who have granted these options
are Michael S. Battaglia, O. Lee Drennan, Kazuhisa Fukatsu, Jon Kaplan, Douglas
R. Kraul, Michael R. Mattingly, Konosuke Nakamura, Robert Protheroe, Daniel E.
Reed, Quresh Sachee and Yoshiaki Uchida.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO THE OFFERING NUMBER THE OFFERING
----------------------- OF SHARES ----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------------ ----------- --------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C>
DIRECTORS, NAMED EXECUTIVE OFFICERS
AND 5% STOCKHOLDERS
Phoenix House Investments, LP(1) ......... 7,382,917 42.5% 100,000 7,282,917 36.6
Toshiba Corporation(2) ................... 2,537,500 14.6 500,000 2,037,500 10.2
Michael S. Battaglia(3) .................. 447,480 2.6 -- 447,480 2.2
D. James Bidzos(4) ....................... 29,200 * -- 29,200 *
Vincent Fedele(5) ........................ 253,501 1.4 63,375 190,126 1.0
Addison M. Fischer(6) .................... 7,961,685 45.8 300,000 7,661,685 38.5
James M. Giarrusso(7) .................... 90,710 * 24,000 66,710 *
Anthony A. Ibarguen(8) ................... 9,050 * -- 9,050 *
Douglas R. Kraul(9) ...................... 676 * -- 676 *
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED PRIOR OWNED AFTER
TO THE OFFERING NUMBER THE OFFERING
------------------------ OF SHARES -----------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT OFFERED NUMBER PERCENT
- -------------------------------------------- ------------ --------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C>
Michael R. Mattingly(10) ................... 8,332 * -- 8,332 *
Shigeki Morita ............................. -- -- -- -- --
Robert Protheroe(11) ....................... 13,256 * -- 13,256 *
Daniel E. Reed(12) ......................... 6,679 * -- 6,679 *
Quresh Sachee(13) .......................... 52,596 * -- 52,596 *
Timothy Tomlinson(14) ...................... 31,134 * -- 31,134 *
Joseph M. Tucci(15) ........................ 7,550 * -- 7,550 *
Hatim Tyabji(16) ........................... 12,050 * -- 12,050 *
Yoshiaki Uchida(17) ........................ 14,260 * -- 14,260 *
All directors and executive officers,
as a group (16 persons)(18) .............. 8,938,159 50.4 387,375 8,550,784 42.2
OTHER SELLING STOCKHOLDERS
Add Venture Associates ..................... 12,397 * 12,397 -- --
Mark S. Ain ................................ 5,913 * 5,913 -- --
Alson Partners III ......................... 44,958 * 9,000 35,958 --
Ascent Venture Partners II, L.P. ........... 147,360 * 33,300 114,060 *
Ascent Venture Partners, L.P. .............. 14,733 * 3,300 11,433 *
Lawrence Owen Brown Family Trust ........... 3,763 * 3,763 -- --
Henry Crouse ............................... 7,645 * 3,000 4,645 *
O. Lee Drennan(19) ......................... 15,930 * -- 15,930 *
Kazuhisa Fukatsu(20) ....................... 4,891 * -- 4,891 *
Germanium Power Devices Corp. .............. 7,859 * 7,859 -- --
Germanium Power Devices Corp. Profit
Sharing Trust Group F .................... 10,998 * 10,998 -- --
Green Mountain Capital, L.P. ............... 62,497 * 30,000 32,497 *
Allen Greenberg ............................ 680 * 680 -- --
Jon Kaplan(21) ............................. 41,252 -- 41,252 *
Keystone Venture Partners V, L.P. .......... 277,142 1.6 70,000 207,142 1.0
Konosuke Nakamura(22) ...................... 6,203 -- 6,203 *
Le Serre ................................... 1,711 * 1,711 -- --
Massachusetts Technology Development
Corporation .............................. 55,809 * 55,809 -- --
Anthony P. Morris .......................... 5,418 * 5,418 -- --
NEC Corporation ............................ 125,000 * 25,000 100,000 *
Leonard & Dena Oppenheim ................... 3,906 * 3,906 -- --
Rhovin Engineering Pension Plan ............ 4,702 * 4,702 -- --
Rohm Company, Ltd. ......................... 250,000 1.4 50,000 200,000 1.0
Rufus R. Ward .............................. 1,568 * 1,568 -- --
Richard Scherr ............................. 1,949 * 949 1,000 *
T & B Investors, LLC ....................... 76,770 * 15,000 61,770 --
William Thalheimer ......................... 921 * 180 741 --
Yamaichi Electronics Company, Ltd. ......... 250,000 1.4 50,000 200,000 1.0
Zero Stage Capital V, L.P. ................. 190,590 1.1 95,000 95,590 *
Other selling stockholders,
as a group (29 persons)(22) .............. 1,632,565 9.4 499,453 1,133,112 5.7
</TABLE>
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- ----------------
* Less than one percent.
(1) The address for Phoenix House is Phoenix House Investments, LP, 101
Convention Center Drive, Suite 850, Las Vegas, Nevada 89109. Phoenix House
is controlled by Addison M. Fischer, the Chairman of our board of
directors.
(2) The address for Toshiba Corporation is 1-1 Shibaura 1-Chome, Minato-ku,
Tokyo 105, Japan.
(3) Includes 36,344 shares subject to options either currently exercisable or
exercisable by Mr. Battaglia within 60 days of April 30, 2000. Does not
reflect the possible sale of shares upon the exercise of the underwriters'
over-allotment option. If the underwriters exercise the option in full, Mr.
Battaglia will sell 80,000 shares, resulting in him owning 367,480 shares
(2.2%) after the closing of the offering.
(4) Includes 300 shares subject to options either currently exercisable or
exercisable by Mr. Bidzos within 60 days of April 30, 2000. Excludes shares
held by Phoenix House, in which Mr. Bidzos owns a 2.5% ownership interest.
Mr. Bidzos disclaims beneficial ownership of the shares held by Phoenix
House.
(5) Includes 200,048 shares subject to options either currently exercisable or
exercisable by Mr. Fedele within 60 days of April 30, 2000 and 16,521
shares owned by Mr. Fedele's wife and minor children, as to which Mr.
Fedele disclaims beneficial ownership. Of the 63,375 shares offered by Mr.
Fedele, 4,129 are offered on behalf of his wife and minor children.
(6) Includes 7,382,917 shares held of record by Phoenix House and 150,000
shares held by Fischer International. Mr. Fischer effectively controls both
entities.
(7) Includes 40,242 shares subject to options either currently exercisable or
exercisable by Mr. Giarrusso within 60 days of April 30, 2000 and 5,255
shares owned by Mr. Giarrusso's daughter and 5,225 held by Mr. Giarrusso as
custodian for his minor son, as to which 10,510 shares Mr. Giarrusso
disclaims beneficial ownership. Of the 24,000 shares offered by Mr.
Giarrusso, 4,000 are offered on behalf of his daughter and son.
(8) Includes 4,050 shares subject to options either currently exercisable or
exercisable by Mr. Ibarguen within 60 days of April 30, 2000.
(9) Does not reflect the possible sale of shares upon the exercise of the
underwriters' over-allotment option. If the underwriters exercise the
option in full, Mr. Kraul will sell 676 shares, resulting in him owning no
shares after the closing of the offering.
(10) Includes 7,813 shares subject to options either currently exercisable or
exercisable by Mr. Mattingly within 60 days of April 30, 2000. Does not
reflect the possible sale of shares upon the exercise of the underwriters'
over-allotment option. If the underwriters exercise the option in full, Mr.
Mattingly will sell 8,332 shares, resulting in him owning no shares after
the closing of the offering.
(11) Includes 12,500 shares subject to options either currently exercisable or
exercisable by Mr. Protheroe within 60 days of April 30, 2000. Does not
reflect the possible sale of shares upon the exercise of the underwriters'
over-allotment option. If the underwriters exercise the option in full, Mr.
Protheroe will sell 10,000 shares, resulting in him owning 3,256 shares
after the closing of the offering.
(12) Includes 6,250 shares subject to options either currently exercisable or
exercisable by Mr. Reed within 60 days of April 30, 2000. Does not reflect
the possible sale of shares upon the exercise of the underwriters'
over-allotment option. If the underwriters exercise the option in full, Mr.
Reed will sell 5,000 shares, resulting in him owning 1,679 shares after the
closing of the offering.
(13) Includes 21,954 shares subject to options either currently exercisable or
exercisable by Mr. Sachee within 60 days of April 30, 2000. Does not
reflect the possible sale of shares upon the exercise of the underwriters'
over-allotment option. If the underwriters exercise the option in full, Mr.
Sachee will sell 15,000 shares, resulting in him owning 37,596 shares after
the closing of the offering.
(14) Includes 1,050 shares subject to options either currently exercisable or
exercisable by Mr. Tomlinson within 60 days of April 30, 2000. Includes
1,500 shares held by trusts for which Mr. Tomlinson and his wife are the
sole trustees. Mr. Tomlinson disclaims beneficial ownership of those
shares. Also includes 7,417 shares held by an investment fund of which Mr.
Tomlinson is a general partner. Mr. Tomlinson disclaims beneficial
ownership of such shares except to the extent of his pecuniary interest
therein.
(15) Includes 4,050 shares subject to options either currently exercisable or
exercisable by Mr. Tucci within 60 days of April 30, 2000.
(16) Includes 4,050 shares subject to options either currently exercisable or
exercisable by Mr. Tyabji within 60 days of April 30, 2000.
(17) Includes 13,283 shares subject to options either currently exercisable or
exercisable by Mr. Uchida within 60 days of April 30, 2000. Does not
reflect the possible sale of shares upon the exercise of the underwriters'
over-allotment option. If the underwriters exercise the option in full, Mr.
Uchida will sell 10,977 shares, resulting in him owning 3,283 shares after
the closing of the offering.
(18) See footnotes (3) through (17) above.
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<PAGE>
(19) Includes 15,625 shares subject to options either currently exercisable or
exercisable by Mr. Drennan within 60 days of April 30, 2000. Does not
reflect the possible sale of shares upon the exercise of the underwriters'
over-allotment option. If the underwriters exercise the option in full, Mr.
Drennan will sell 9,900 shares, resulting in him owning 6,030 shares after
the closing of the offering.
(20) Includes 4,531 shares subject to options either currently exercisable or
exercisable by Mr. Fukatsu within 60 days of April 30, 2000. Does not
reflect the possible sale of shares upon the exercise of the underwriters'
over-allotment option. If the underwriters exercise the option in full, Mr.
Fukatsu will sell 3,360 shares, resulting in him owning 1,531 shares after
the closing of the offering.
(21) Includes 781 shares subject to options either currently exercisable or
exercisable by Mr. Kaplan within 60 days of April 30, 2000. Does not
reflect the possible sale of shares upon the exercise of the underwriters'
over-allotment option. If the underwriters exercise the option in full, Mr.
Kaplan will sell 8,000 shares, resulting in him owning 33,252 shares after
the closing of the offering.
(22) Includes 5,469 shares subject to options either currently exercisable or
exercisable by Mr. Nakamura within 60 days of April 30, 2000. Does not
reflect the possible sale of shares upon the exercise of the underwriters'
over-allotment option. If the underwriters exercise the option in full, Mr.
Nakamura will 734 sell shares, resulting in him owning 5,469 shares after
the closing of the offering.
(23) See footnotes (19) through (22) above.
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RELATED PARTY TRANSACTIONS
PRE-FORMATION ADVANCES
Prior to 1997, Addison Fischer and his affiliates, including Fischer
International, advanced SDSC, our predecessor, non-interest bearing loans in
the aggregate amount of approximately $9.6 million in order to fund our
operations. Of the total amount advanced to SDSC, approximately $4.6 million
was contributed to the capital stock of SDSC in 1996 and 1997. SDSC repaid the
remaining $5.0 million of advances in May 1998, of which $1,045,000 was paid to
Fischer International and $3,955,000 was paid to Addison Fischer.
In addition, from 1996 to March 1999, Addison Fischer and his affiliates,
including Fischer International, advanced SmartDiskette Limited, or SDL,
non-interest bearing loans in the aggregate amount of approximately $600,000.
In May 1999, prior to our acquisition of SDL, these advances were converted
into 96,710 shares of SDL common stock and, after the acquisition in May 1999,
these shares were in turn converted into 76,018 shares of our common stock.
FORMATION TRANSACTIONS
Although we commenced operations in January 1998, we did not receive
significant capital contributions until February of that year. In February
1998, we entered into a joint venture agreement along with Toshiba and Phoenix
House which detailed a plan of capital contribution, corporate governance and
business strategies for us. Pursuant to this agreement, each of Toshiba,
Fischer International and Phoenix House agreed to purchase shares of our common
stock and become our principal stockholders. Before the May 1998 stock
purchases described below substantially, all outstanding shares of our common
stock were owned by employees of, or consultants to, SmartDisk, as a result of
the exercise of stock options.
The joint venture agreement called for Toshiba to make an immediate loan
to us of $5.0 million in exchange for a convertible note. The note had an
interest rate of 4% per annum. The note remained outstanding until May 22,
1998. At that time, Toshiba acquired 2,487,500 shares of our common stock in
exchange for a cash payment of $4,950,000 and delivery and cancellation of the
February 1998 note, including accrued interest.
At the same time that Toshiba purchased its shares of our common stock,
both Phoenix House and Fischer International acquired shares of our common
stock. Both Phoenix House and Fischer International are controlled by Addison
Fischer, the Chairman of our board of directors. Phoenix House acquired
7,350,000 shares of our common Stock in exchange for all of the outstanding
shares of SDSC. As a result, SDSC became our wholly owned subsidiary and we
became the owner of the exclusive patent licenses owned by SDSC. Fischer
International acquired 150,000 shares of our common stock in return for
trademarks it owned relating to the SafeBoot, FlashPath and Smarty products.
Immediately after their capital contributions, Phoenix House, Toshiba and
Fischer International owned 68.8%, 23.3% and 1.4% of our outstanding common
stock.
On May 26, 1999, the shareholders of SDL, which included Addison Fischer
and Phoenix House, exchanged all of their shares of SDL for 515,500 shares of
our common stock. Of the total number of our shares issued, Addison Fischer
received 428,768 shares, Phoenix House received 32,918 shares and the other
shareholders of SDL received the remaining 53,814 shares. As a result of this
transaction, we acquired 100% of SDL, the indirect owner of its current
principal patents.
FISCHER TRANSACTIONS
In 1996 and 1997, all of the products of SDSC were sold through Fischer
International and its affiliates. Under this arrangement, Fischer International
and its affiliates received a fee of approximately 25% of the sales of SDSC.
The consolidated revenues shown in our 1996 and 1997
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financial statements, which reflect the revenue of SDSC, are net of the fees
paid to Fischer International and its affiliates. In addition, operating
expenses totaling approximately $4.0 million in 1997 were incurred by Fischer
International on behalf of SDSC.
In January 1998, SDSC entered into an operating agreement with Fischer
International and SmartDisk to provide operating services to SDSC, including
developing and marketing the SafeBoot, FlashPath and Smarty products. SDSC
agreed in return to reimburse Fischer International and us for the expenses
related to providing those services. Upon our obtaining control of SDSC in May
1998, this agreement was terminated and replaced with a new operating agreement
between Fischer International and us. Under this new agreement, as amended in
June 1999, we reimburse Fischer International for marketing, accounting and
other similar services. In addition, until recently we have shared office space
with Fischer International. We have reimbursed Fischer International for the
cost of this office space as well as other general and administrative expenses.
Our share of these expenses is based on an internal analysis of the relative
amount of time devoted to our business by employees of Fischer International as
well as the overhead charges attributable to these employees. In 1998 and 1999,
we paid Fischer International approximately $1.5 million and $300,000 under
this arrangement for the reimbursement of expenses under the operating
agreement and for the other shared services.
In May 1998, we entered into license and distribution agreements with
Fischer International. Under these agreements, we granted Fischer International
a non-exclusive license to our SafeBoot product and distribution rights to our
SafeBoot, Smarty and FlashPath products until 2001. Pursuant to this agreement,
Fischer International agreed to pay us 33.3% of the net revenue derived from
the sale of our products on a stand-alone basis and 5% of the net revenue
derived from the sale of our products which are bundled with the products of
third parties. In 1998 and 1999, we received approximately $285,000 and
$470,000 from Fischer International under these agreements in royalties related
to SafeBoot, and no royalties related to Smarty and FlashPath.
TOSHIBA TRANSACTIONS
In May 1998, we entered into a license agreement with Toshiba, which was
contemporaneously becoming one of our principal stockholders. Under this
agreement, Toshiba granted us a non-exclusive license to patents relating to
the interface with Toshiba's SmartMedia cards. We paid a one-half of 1% royalty
on the net sales price of our products that use the Toshiba license through
March 1999. This agreement was amended in September 1998 to expand the field of
use for the non-exclusive license. In April 1999, we again amended the Toshiba
license. In exchange for 50,000 shares of our common stock, Toshiba agreed to
grant us a fully-paid license as of April 1999, at which time we stopped paying
royalties. In 1998 and 1999, we paid approximately $69,000 and $25,600 to
Toshiba under this license.
In addition, we sell a number of our products to an affiliate of Toshiba
which in turn serves as sales agent to Toshiba in its role as an OEM customer.
In 1997, 1998 and 1999, we had aggregate sales to Toshiba or the sales agent of
approximately $495,000, $0 and $815,000.
Also, since September 1998, four engineers from Toshiba have worked for us
on a contract basis. In 1998 and 1999, we paid Toshiba approximately $74,000
and $474,000 for these services.
EMPLOYEE ADVANCES
On March 3, 1998, we loaned Michael Battaglia $305,114 in connection with
Mr. Battaglia's exercise of an option to purchase 426,136 shares of our common
stock. The loan bears interest at the rate of 5.47% per year and the interest
is payable quarterly. The principal balance is due on the earlier of March 3,
2003 or the end of his employment with us or an affiliate of ours.
On March 29, 1999, we loaned Robert Protheroe $60,000 in connection with
his repayment of amounts owed to his previous employer. The loan bears interest
at the rate of 4.71% per year and is
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due in four annual installments ending in 2003, unless his employment with us
ends at an earlier date, in which case the principal balance and accrued
interest are due within 30 days after termination of employment. The
outstanding principal balance of the loan as of March 31, 2000 is $45,000.
OTHER TRANSACTIONS
On May 28, 1998, we sold 28,750 shares of our common stock at a price of
$4.00 per share to First TZMM Investment Partnership, an entity affiliated with
Tomlinson Zisko Morosoli & Maser LLP. Timothy Tomlinson, one of our directors,
is a partner of Tomlinson Zisko Morosoli & Maser LLP.
On July 1, 1999, as part of a larger round of investments led by SCM
Microsystems, we sold an aggregate of 20,000 shares of common stock to Messrs.
Tomlinson and Bidzos, two of our directors, for $160,000, or $8.00 per share.
Individually, Mr. Tomlinson received 7,500 shares and Mr. Bidzos received
12,500 shares. In addition, First TZMM Investment Partnership acquired 27,500
shares for $220,000.
On January 21, 2000, we granted options to acquire 15,000 shares of common
stock to Mr. Tomlinson with an exercise price of $35.00 per share. Options to
purchase 6,000 shares vested immediately, options to purchase 6,000 shares
vested 12.5% per quarter and options to purchase 3,000 shares vested 2% per
month. On January 31, 2000, we loaned Mr. Tomlinson $209,994 in connection with
his exercise of options to purchase 6,000 shares of our common stock for $35.00
per share. The loan bears interest at the rate of 6.07% per year and the
interest is payable quarterly. The principal balance is due on January 31,
2005.
Mr. Tomlinson is a partner of Tomlinson Zisko Morosoli & Maser LLP, which
provided legal services to us in 1999. Fees paid in 1999 to Mr. Tomlinson's
firm did not exceed 5% of the law firm's gross revenues for its last full
fiscal year.
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DESCRIPTION OF CAPITAL STOCK
GENERAL
Our authorized capital stock consists of 60,000,000 shares of common
stock, $0.001 par value, and 5,000,000 shares of preferred stock, $0.001 par
value.
COMMON STOCK
As of April 30, 2000, there were 17,375,621 shares of common stock
outstanding that were held of record by approximately 80 stockholders. There
will be 19,888,793 shares of common stock outstanding, assuming no exercise
after April 30, 2000 of outstanding options, after giving effect to the sale of
the shares of common stock offered to the public by this prospectus but not the
exercise of the underwriters' over-allotment option.
The holders of common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Subject to any preferential
rights of preferred stockholders, the holders of common stock are entitled to
receive dividends on a pro rata basis, if any, declared from time to time by
the board of directors out of legally available funds. We have never paid
dividends in the past and do not intend to do so in the future. In the event of
our liquidation, dissolution or winding up, subject to any preferential rights
of preferred stockholders, the holders of common stock are entitled to share on
a pro rata basis in all assets remaining after payment of liabilities. The
common stock has no preemptive or conversion rights or other subscription
rights. There are no redemption or sinking fund provisions applicable to the
common stock. All outstanding shares of common stock are fully paid and
nonassessable, and the shares of common stock to be issued upon completion of
this offering will be fully paid and nonassessable.
PREFERRED STOCK
On the closing of this offering, no shares of preferred stock will be
outstanding. The board of directors has the authority to issue the preferred
stock in one or more series and to fix the rights, preferences, privileges and
restrictions of the preferred stock, including dividend rights, dividend rates,
conversion rights, voting rights, terms of redemption, redemption prices,
liquidation preferences and the number of shares constituting any series or the
designation of any series, without further vote or action by the stockholders.
The issuance of preferred stock may have the effect of delaying, deferring or
preventing a change in control of our company without further action by the
stockholders and may adversely affect the voting and other rights of the
holders of common stock. The issuance of preferred stock with voting and
conversion rights may adversely affect the voting power of the holders of
common stock, including the loss of voting control to others. At present, we
have no plans to issue any preferred stock.
REGISTRATION RIGHTS
Concurrently with the purchase of our common stock by Toshiba Corporation,
Phoenix House Investments, LP and Fischer International Systems Corporation, we
entered into an agreement providing registration rights for Toshiba, Phoenix
House and Fischer International. At any time after 90 days following the date
of this prospectus, Toshiba, Phoenix House or the holders of a majority of the
shares held by them may require us to file a registration statement under the
Securities Act covering at least 20% of the securities of SmartDisk held by
them, or a lesser percentage if the net aggregate offering price would exceed
$10.0 million. We will not be required to comply with a request for
registration on more than three occasions or within 60 days before or 90 days
after our good faith estimate of the effective date of another registration
statement filed pursuant to a request.
When we are eligible to utilize a registration statement on Form S-3 to
register an offering of our securities, holders of 20% of the shares held by
Toshiba, Phoenix House and Fischer International may
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request that we file a registration statement on Form S-3, covering all or a
portion of securities of SmartDisk held by them, provided that the aggregate
public offering price is at least $500,000. These holders can request only two
S-3 registrations.
These registration rights will be subject to our right to delay the filing
of a registration statement if, in the view of our board of directors, a filing
would be seriously detrimental to us, not more than once in any 12-month
period, for not more than 150 days after the appropriate number of holders have
requested we file a registration statement.
In addition, in connection with our acquisition of VST Technologies, Inc.,
we entered into agreements providing registration rights for the management
stockholders and other specified non-management stockholders of VST. At any
time after 90 days following the date of this prospectus, holders of a majority
of our common stock received by the management stockholders or holders of a
majority of our common stock received by the non-management stockholders of VST
in connection with the acquisition may require us to file a registration
statement under the Securities Act. The management stockholders may neither
require registration in any one filing of more than 25% of the shares received
by them in connection with the acquisition nor require us to file more than
four registration statements. Only one request for registration may be made by
the management stockholders in any six month period. The non-management
stockholders may neither require registration in any one filing of more than
50% of the shares received by them in connection with the acquisition nor
require us to file more than one registration statement. In addition, under the
agreements, we are required to file a registration statement on Form S-3 as
soon as we are eligible but no later than October 16, 2000 covering all of the
common stock issued in the acquisition and maintain the effectiveness of such
registration statement until the one-year anniversary of the VST acquisition.
The registration rights given in connection with the VST acquisition are
subject to our right to delay the filing of a registration statement for no
more than 60 days if our board of directors determines in good faith that a
filing would have a material adverse affect on any proposal or plan of ours to
engage in a material acquisition or disposition of assets or a material merger,
consolidation, tender offer or other similar transaction. We may not delay a
filing more than once in any nine-month period.
In addition, in connection with our acquisition of Impleo Limited, we
provided registration rights for the stockholders of Impleo. Under the
acquisition agreement, we are required to file a registration statement on Form
S-3 as soon as we are eligible but no later than November 5, 2000 covering all
of the common stock issued in the acquisition and maintain the effectiveness of
such registration statement until the one-year anniversary of the acquisition.
At any time after November 5, 2000, if we are not eligible to file a shelf
registration statement, then the former stockholders of Impleo may require us
to file a registration statement under the Securities Act.
In addition, Toshiba, Phoenix House, SCM Microsystems, Inc., Fischer
International, the former stockholders of VST and the former stockholders of
Impleo Limited have "piggyback" registration rights. If we propose to register
any common stock under the Securities Act, those stockholders may require us to
include all or a portion of their securities in the registration. However, the
managing underwriter, if any, of any offering has the right to limit the number
of securities proposed to be included in the registration.
We are required to bear all registration expenses incurred in connection
with these registrations. Toshiba, Phoenix House, Fischer International, the
former management and non-management stockholders of VST and the former
stockholders of Impleo will pay all underwriting discounts and selling
commissions applicable to the sale of their securities.
We also agreed to indemnify Toshiba, Phoenix House, Fischer International
and the former management and non-management stockholders of VST for any
damages they suffer due to any untrue statement or omission that we make in a
registration statement covering their shares.
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The registration rights of Toshiba, Phoenix House and Fischer
International under the agreement providing registration rights will terminate,
as to each of them, when it may sell all its shares in a three-month period
under Rule 144 under the Securities Act.
ANTITAKEOVER EFFECTS OF DELAWARE LAW AND PROVISIONS OF OUR CERTIFICATE OF
INCORPORATION AND BYLAWS
CERTIFICATE OF INCORPORATION AND BYLAWS. Our certificate of incorporation
provides that all stockholder actions must be effected at a duly called meeting
and not by a consent in writing. Our certificate of incorporation also provides
that the affirmative vote of 80% of our outstanding stock is required to remove
any of our directors, to approve a business combination involving our company
or for our stockholders to amend our bylaws or the anti-takeover provisions of
our certificate of incorporation. Our bylaws provide that our stockholders may
not call a special meeting of stockholders. The bylaws also include advance
notice procedures with regard to the nomination, other than by the board of
directors, of candidates for director elections. These provisions of our
certificate of incorporation and bylaws could discourage potential acquisition
proposals and could delay or prevent a change in control of SmartDisk. These
provisions are intended to enhance the likelihood of continuity and stability
in the composition of our board of directors and in the policies formulated by
our board of directors and to discourage some types of transactions that may
involve an actual or threatened change of control of SmartDisk. These
provisions are designed to reduce our vulnerability to an unsolicited
acquisition proposal. The provisions also are intended to discourage tactics
that may be used in proxy fights. However, these provisions could have the
effect of discouraging others from making tender offers for our shares or proxy
fights and, as a consequence, they also may inhibit fluctuations in the market
price of our shares that could result from actual or rumored takeover attempts.
These provisions also may have the effect of preventing changes in our
management.
DELAWARE ANTITAKEOVER LAW. SmartDisk is subject to Section 203 of the
Delaware General Corporation Law, an antitakeover law. In general, Section 203
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years
following the date the person became an interested stockholder, unless the
"business combination" or the transaction in which the person became an
interested stockholder is approved in a prescribed manner. Generally, a
"business combination" includes a merger, asset or stock sale, or other
transaction resulting in a financial benefit to the interested stockholder.
Generally, an "interested stockholder" is a person who, together with
affiliates and associates, owns or within three years prior to the
determination of interested stockholder status, did own, 15.0% or more of a
corporation's voting stock. The existence of this provision may have an
antitakeover effect with respect to transactions not approved in advance by the
board of directors, including discouraging attempts that might result in a
premium over the market price for the shares of common stock held by
stockholders.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the common stock is American Stock
Transfer & Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, we will have outstanding 19.9 million
shares of common stock based upon shares outstanding as of April 30, 2000,
assuming no exercise of outstanding options prior to completion of this
offering and no exercise of the underwriters' over-allotment option. Of these
shares, the 3.45 million shares sold in our initial public offering are, and
the 3.9 million shares sold in this offering will be, freely tradable without
restriction under the Securities Act except for any shares purchased by
"affiliates" of SmartDisk as that term is defined in Rule 144 under the
Securities Act. As of April 30, 2000, approximately 13.7 million of the
outstanding shares of common stock are "restricted securities" as that term is
defined in Rule 144. In addition, all our executive officers and
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some of our directors and stockholders, including some selling stockholders,
who together, assuming no exercise of the underwriters' over-allotment option,
will hold an aggregate of approximately 7.3 million shares of common stock upon
the completion of the offering, have agreed that they generally will not offer,
sell, contract to sell or otherwise dispose of any common stock or any
securities that are convertible into common stock for a period of 90 days after
the date of this prospectus without the prior written consent of Merrill Lynch,
Pierce, Fenner & Smith Incorporated. As a result of these lock-up agreements,
notwithstanding possible earlier eligibility for sale under the provisions of
Rules 144, 144(k) and 701, none of their shares will be eligible for resale
until 91 days after the date of this prospectus. Merrill Lynch, Pierce, Fenner
& Smith Incorporated may, at its sole discretion, and at any time without
notice, release all or any portion of the securities subject to lock-up
agreements.
In general, the volume limitations under Rule 144, as currently in effect,
provide that a person who has beneficially owned restricted shares for at least
one year, including the holding period of any prior owner except an affiliate,
would be entitled to sell in any three-month period a number of shares that
does not exceed the greater of:
/bullet/ 1.0% of the number of shares of our common stock then outstanding,
which will equal approximately 199,000 shares immediately after
this offering; or
/bullet/ the average weekly trading volume of our common stock during the
four calendar weeks preceding the filing of Form 144 with respect
to the sale.
Sales under Rule 144 must also be made in broker's transactions and are
subject to notice requirements and to the public availability of current
information about SmartDisk.
Toshiba, Phoenix House, Fischer International, the former management and
non-management stockholders of VST and the former stockholders of Impleo are
entitled to registration rights for sale of their shares in the public market.
Registration of those shares under the Securities Act would result in those
shares becoming freely tradable without restriction under the Securities Act,
except for shares purchased by affiliates, immediately upon the effectiveness
of the registration and this could affect the stock price at that time.
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UNDERWRITING
Merrill Lynch, Pierce, Fenner & Smith Incorporated, Chase Securities Inc.
and U.S. Bancorp Piper Jaffray Inc. are acting as representatives of the
underwriters named below. Subject to the terms and conditions described in a
purchase agreement among us, the selling stockholders and the underwriters, we
and the selling stockholders have agreed to sell to the underwriters, and the
underwriters severally have agreed to purchase from us and the selling
stockholders, the number of shares listed opposite their names below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ----------
<S> <C>
Merrill Lynch, Pierce, Fenner & Smith
Incorporated .....................
Chase Securities Inc. ...................
U.S. Bancorp Piper Jaffray Inc. .........
---------
Total ............................. 3,900,000
=========
</TABLE>
The underwriters have agreed to purchase all of the shares sold under the
purchase agreement if any of these shares are purchased. If an underwriter
defaults, the purchase agreement provides that the purchase commitments of the
nondefaulting underwriters may be increased or the purchase agreement may be
terminated.
We and the selling stockholders have agreed to indemnify the underwriters
against certain liabilities, including liabilities under the Securities Act, or
to contribute to payments the underwriters may be required to make in respect
of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as
and if issued to and accepted by them, subject to approval of legal matters by
their counsel, including the validity of the shares, and other conditions
contained in the purchase agreement, such as the receipt by the underwriters of
officer's certificates and legal opinions. The underwriters reserve the right
to withdraw, cancel or modify offers to the public and to reject orders in
whole or in part.
COMMISSIONS AND DISCOUNTS
The representatives have advised us and the selling stockholders that the
underwriters propose initially to offer the shares to the public at the public
offering price on the cover page of this prospectus and to dealers at that
price less a concession not in excess of $ per share. The underwriters may
allow, and the dealers may reallow, a discount not in excess of $ per share
to other dealers. After the initial public offering, the public offering price,
concession and discount may be changed.
The following table shows the public offering price, underwriting discount
and proceeds before expenses to SmartDisk and the selling stockholders. The
information assumes either no exercise or full exercise by the underwriters of
their over-allotment options.
<TABLE>
<CAPTION>
WITHOUT WITH
PER SHARE OPTION OPTION
----------- --------- -------
<S> <C> <C> <C>
Public offering price ........................... $ $ $
Underwriting discount ........................... $ $ $
Proceeds, before expenses, to SmartDisk ......... $ $ $
Proceeds to the selling stockholders ............ $ $ $
</TABLE>
The expenses of the offering, not including the underwriting discount, are
estimated at $500,000 and are payable by SmartDisk.
OVER-ALLOTMENT OPTION
We and some of the members of our management have granted options to the
underwriters to purchase up to 585,000 additional shares at the public offering
price less the underwriting discount.
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The underwriters may exercise these options for 30 days from the date of this
prospectus solely to cover any over-allotments. If the underwriters exercise
these options, each will be obligated, subject to conditions contained in the
purchase agreements, to purchase a number of additional shares proportionate to
that underwriter's initial amount reflected in the above table.
NO SALES OF SIMILAR SECURITIES
We, some selling stockholders, our executive officers and some directors
have agreed, with exceptions, not to sell or transfer any common stock for 90
days after the date of this prospectus without first obtaining the written
consent of Merrill Lynch. Specifically, we and these other individuals have
agreed not to directly or indirectly
/bullet/ offer, pledge, sell or contract to sell any common stock,
/bullet/ sell any option or contract to purchase any common stock,
/bullet/ purchase any option or contract to sell any common stock,
/bullet/ grant any option, right or warrant for the sale of any common
stock,
/bullet/ lend or otherwise dispose of or transfer any common stock,
/bullet/ request or demand that we file a registration statement related to
the common stock, or
/bullet/ enter into any swap or other agreement that transfers, in whole or
in part, the economic consequence of ownership of any common stock
whether any such swap or transaction is to be settled by delivery
of shares or other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities
convertible into or exchangeable or exercisable for or repayable with common
stock. It also applies to common stock owned now or acquired later by the
person executing the agreement or for which the person executing the agreement
later acquires the power of disposition.
QUOTATION ON THE NASDAQ NATIONAL MARKET
Our common stock is quoted on the Nasdaq National Market under the symbol
"SMDK."
PRICE STABILIZATION AND SHORT POSITIONS
Until the distribution of the shares is completed, SEC rules may limit
underwriters and selling group members from bidding for and purchasing our
common stock. However, the representatives may engage in transactions that
stabilize the price of the common stock, such as bids or purchases to peg, fix
or maintain that price.
If the underwriters create a short position in the common stock in
connection with the offering, i.e., if they sell more shares than are listed on
the cover of this prospectus, the representatives may reduce that short
position by purchasing shares in the open market. The representatives may also
elect to reduce any short position by exercising all or part of the
over-allotment option described above. Purchases of the common stock to
stabilize its price or to reduce a short position may cause the price of the
common stock to be higher than it might be in the absence of such purchases.
Neither we nor any of the underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common stock. In addition, neither
we nor any of the underwriters makes any representation that the
representatives or the lead managers will engage in these transactions or that
these transactions, once commenced, will not be discontinued without notice.
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PASSIVE MARKET MAKING
In connection with this offering, underwriters and selling group members
may engage in passive market making transactions in the common stock on the
Nasdaq National Market in accordance with Rule 103 of Regulation M under the
Exchange Act during a period before the commencement of offers or sales of
common stock and extending through the completion of distribution. A passive
market maker must display its bid at a price not in excess of the highest
independent bid of that security. However, if all independent bids are lowered
below the passive market maker's bid, that bid must then be lowered when
specified purchase limits are exceeded.
LEGAL MATTERS
The validity of the common stock offered by this prospectus will be passed
upon for SmartDisk by Greenberg Traurig, P.A., Miami, Florida. Certain legal
matters in connection with the offering will be passed upon for the
underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation,
McLean, Virginia.
EXPERTS
Ernst & Young LLP, independent certified public accountants, have audited
our consolidated financial statements at December 31, 1998 and 1999 and for
each of the three years in the period ended December 31, 1999, as set forth in
their report. We have included our consolidated financial statements in this
prospectus and elsewhere in the registration statement in reliance on Ernst &
Young LLP's report, given on their authority as experts in accounting and
auditing.
The financial statements of VST Technologies, Inc. included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
report, and are included in reliance upon the authority of Arthur Andersen LLP
as experts in giving their report.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Securities and Exchange Commission, Washington,
D.C. 20549, a registration statement on Form S-1 under the Securities Act with
respect to the common stock offered by this prospectus. This prospectus does
not contain all of the information set forth in the registration statement and
the exhibits and schedules to the registration statement. For further
information with respect to SmartDisk and the common stock offered by this
prospectus, refer to the registration statement and the exhibits and schedules
filed as a part of the registration statement. Statements contained in this
prospectus concerning the contents of any contract or any other document
referred to are not necessarily complete; refer in each instance to the copy of
the contract or document filed as an exhibit to the registration statement.
Each statement of the type referred to in the preceding sentence is qualified
in all respects by reference to the exhibit. You may inspect a copy of the
registration statement without charge at the Securities and Exchange
Commission's principal office in Washington, D.C. and obtain copies of all or
any part thereof upon payment of a fee from the Public Reference Room of the
Securities and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, or at the Securities and Exchange Commission's regional offices in New
York, located at 7 World Trade Center, Suite 1300, New York, New York 10048, or
in Chicago, located at 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. You may obtain information on the operation of the Public Reference Room
by calling the Securities and Exchange Commission at 1-800-SEC-0330. The
Securities and Exchange Commission maintains an Internet site that contains
reports, proxy and
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information statements and other information regarding registrants that file
electronically with the Securities and Exchange Commission. The Securities and
Exchange Commission's website address is www.sec.gov.
We furnish holders of common stock with annual reports containing, among
other information, audited financial statements certified by an independent
public accounting firm and quarterly reports containing unaudited condensed
financial information for the first three quarters of each fiscal year. We
intend to furnish other reports as we may determine or as may be required by
law.
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INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
PAGE
----
SMARTDISK CORPORATION
Report of Independent Certified Public Accountants .................................. F-2
Consolidated Balance Sheets of SmartDisk as of December 31, 1998 and 1999 ........... F-3
Consolidated Statements of Operations of SmartDisk for the Years Ended December 31,
1997, 1998 and 1999 ............................................................... F-4
Consolidated Statements of Cash Flows of SmartDisk for the Years Ended December 31,
1997, 1998 and 1999 ............................................................... F-5
Consolidated Statements of Stockholders' Equity (Deficit) of SmartDisk for the Years
Ended December 31, 1997, 1998 and 1999 ............................................ F-6
Notes to Consolidated Financial Statements of SmartDisk ............................. F-7
VST TECHNOLOGIES, INC.
Report of Independent Public Accountants ............................................ F-26
Balance Sheets of VST as of December 31, 1998 and 1999 .............................. F-27
Statements of Operations of VST for the Years Ended December 31, 1997,
1998 and 1999 ..................................................................... F-28
Statements of Redeemable Convertible Preferred Stock and Stockholders' Deficit of VST
for the Years Ended December 31, 1997, 1998 and 1999 .............................. F-29
Statements of Cash Flow of VST for the Years Ended December 31, 1997,
1998 and 1999 ..................................................................... F-30
Notes to Financial Statements of VST ................................................ F-31
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of SmartDisk Corporation:
We have audited the accompanying consolidated balance sheets of SmartDisk
Corporation as of December 31, 1998 and 1999, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for
each of the three years in the period ended December 31, 1999. Our audits also
included the financial statement schedule listed in the Index at Item 14(a)2.
These financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of SmartDisk Corporation at December 31, 1998 and 1999, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion, the related
financial statement schedule, when considered in relation to the basic
financial statements taken as a whole, presents fairly in all material respects
the information set forth therein.
/s/ Ernst & Young LLP
Miami, Florida
January 21, 2000, except
for Note 15 as to which
the date is March 6, 2000
F-2
<PAGE>
SMARTDISK CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1998 1999
---------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 2,919,728 $ 19,079,542
Restricted cash ....................................................... 1,050,000 1,050,000
Short-term investments ................................................ -- 26,640,401
Accounts receivable, net of allowance for doubtful accounts of
$33,848 and $139,842 at December 31, 1998 and 1999, respectively..... 2,195,356 3,865,781
Notes receivable ...................................................... 1,381,886 6,302,439
Inventories, net ...................................................... 1,689,020 1,474,613
Other current assets .................................................. 280,291 1,353,235
------------- -------------
Total current assets ................................................ 9,516,281 59,766,011
Property and equipment, net ............................................ 682,014 2,623,629
Intangible assets, net ................................................. 740,978 882,699
Deposits and other assets .............................................. 196,682 171,855
------------- -------------
TOTAL ASSETS ........................................................... $ 11,135,955 $ 63,444,194
============= =============
LIABILITIES, REDEEMABLE COMMON STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT) .......................................
Current liabilities: ...................................................
Accounts payable ...................................................... $ 3,706,297 $ 5,329,804
Bank line of credit and discounted notes .............................. 2,247,718 4,894,672
Other accrued liabilities ............................................. 693,590 2,014,765
Income taxes payable .................................................. -- 1,110,537
Deferred research and development contract revenue .................... -- 307,874
------------- -------------
Total current liabilities ........................................... 6,647,605 13,657,652
Deferred income tax liability .......................................... 184,658 --
Stockholder loan ....................................................... 648,147 --
Commitments and contingencies .......................................... -- --
Redeemable common stock: 2,487,500 shares issued and outstanding at
December 31, 1998 .................................................... 9,991,918 --
Stockholders' equity (deficit): ........................................
Preferred stock, $.001 par value; 5,000,000 shares authorized;
none issued ......................................................... -- --
Common stock, $.001 par value; 60,000,000 shares authorized;
9,296,723 issued and 9,216,496 outstanding at December 31, 1998;
16,072,399 issued and 15,991,422 outstanding at December 31, 1999.... 9,297 16,072
Capital in excess of par value ........................................ 16,351,092 71,246,592
Treasury stock, 80,227 shares at December 31, 1998 and 80,977 shares
at December 31, 1999, at cost ....................................... (57,764) (58,304)
Accumulated other comprehensive income ................................ 478,948 711,954
Notes receivable from officers/employees .............................. (417,334) (387,454)
Accumulated deficit ................................................... (22,700,612) (21,742,318)
------------- -------------
Total stockholders' equity (deficit) ................................ (6,336,373) 49,786,542
------------- -------------
TOTAL LIABILITIES, REDEEMABLE COMMON STOCK AND
STOCKHOLDERS' EQUITY (DEFICIT) ....................................... $ 11,135,955 $ 63,444,194
============= =============
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
SMARTDISK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1998 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
REVENUES
Product sales .......................................... $ 892,530 $ 15,038,281 $ 37,262,464
Research and development revenue ....................... -- -- 2,586,506
Royalties .............................................. -- 284,298 470,479
------------ ------------ ------------
Total revenues ....................................... 892,530 15,322,579 40,319,449
COST OF REVENUES ........................................ 300,678 12,600,330 24,820,064
------------ ------------ ------------
GROSS PROFIT ............................................ 591,852 2,722,249 15,499,385
OPERATING EXPENSES ......................................
Research and development ............................... 1,411,986 2,107,142 5,868,983
Sales and marketing .................................... 11,582 1,565,865 1,608,214
General and administrative ............................. 3,184,552 4,630,736 6,259,161
------------ ------------ ------------
Total operating expenses ............................. 4,608,120 8,303,743 13,736,358
------------ ------------ ------------
OPERATING INCOME (LOSS) ................................. (4,016,268) (5,581,494) 1,763,027
Gain (loss) on foreign exchange ......................... -- (47,678) 29,919
Interest and other income ............................... 8,210 75,770 586,663
Interest expense ........................................ (514) (51,858) (54,471)
------------ ------------ ------------
Net income (loss) before income taxes ................... (4,008,572) (5,605,260) 2,325,138
Income tax expense (benefit) ............................ (44,598) (102,316) 1,366,844
------------ ------------ ------------
NET INCOME (LOSS) ....................................... $ (3,963,974) $ (5,502,944) $ 958,294
============ ============ ============
Earnings (loss) per share--basic ........................ $ (0.51) $ (0.68) $ 0.09
Earnings (loss) per share--diluted ...................... $ (0.51) $ (0.68) $ 0.07
Weighted average shares used to calculate earnings (loss)
per share amounts .....................................
Basic .................................................. 7,738,909 8,040,169 10,724,608
Diluted ................................................ 7,738,909 8,040,169 13,349,376
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
SMARTDISK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1997 1998 1999
----------------- ----------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) ......................................................... $ (3,963,974) $ (5,502,944) $ 958,294
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation ............................................................. 227,089 613,777 1,478,184
Amortization ............................................................. 179,346 410,917 551,751
Bad debt expense ......................................................... -- 26,565 93,035
Provision for inventory obsolescence ..................................... -- -- 86,600
Employee stock option expense ............................................ -- -- 76,500
Foreign currency (gain) loss ............................................. -- (31,235) (29,919)
Deferred income tax benefit .............................................. (44,598) (102,316) (388,874)
Changes in assets and liabilities:
(Increase) decrease in assets: ..........................................
Accounts receivable ..................................................... -- (2,221,921) (1,763,460)
Notes receivable ........................................................ -- (1,381,886) (4,920,553)
Inventories ............................................................. 23,529 (1,394,524) 127,807
Other current assets .................................................... (274,894) (240,169) (918,472)
Deposits and other assets ............................................... 20,525 (176,942) 93,517
Increase (decrease) in liabilities: .....................................
Accounts payable ........................................................ (397,416) 3,452,485 1,623,507
Deferred research and development contract revenue ...................... -- -- 307,874
Other accrued liabilities and income taxes payable ...................... 80,588 587,575 2,431,712
------------- ------------- -------------
Net cash used in operating activities ...................................... (4,149,805) (5,960,618) (192,497)
Cash flows from investing activities:
Purchases of property and equipment ....................................... (284,943) (1,019,878) (3,057,057)
Purchases of short-term investments ....................................... -- -- (36,707,793)
Sales and maturities of short-term investments ............................ -- -- 9,995,030
Purchase of intangible assets ............................................. -- -- (404,959)
Increase in restricted cash ............................................... -- (1,050,000) --
------------- ------------- -------------
Net cash used in investing activities ...................................... (284,943) (2,069,878) (30,174,779)
Cash flows from financing activities:
Proceeds from issuance of exchangeable note ............................... -- 5,000,000 --
Net proceeds from line of credit .......................................... -- 2,247,718 2,646,954
Net proceeds (repayment) of stockholder loan .............................. 3,709,527 (3,955,000) --
Net proceeds (repayment) of loan from related parties ..................... 1,045,000 (1,045,000) --
Proceeds from sale of redeemable common stock ............................. -- 4,950,000 --
Net proceeds from issuance of common stock ................................ -- 3,259,967 43,820,485
Proceeds from sale of stock by SDL ........................................ -- -- 65,225
Collections on notes receivable from officers ............................. -- -- 29,880
Purchase of treasury stock ................................................ -- (57,764) (540)
------------- ------------- -------------
Net cash provided by financing activities .................................. 4,754,527 10,399,921 46,562,004
Effect of exchange rate fluctuations on cash ............................... 1,973 220,525 (34,914)
------------- ------------- -------------
Increase in cash and cash equivalents ...................................... 321,752 2,589,950 16,159,814
Cash and cash equivalents at beginning of period ........................... 8,026 329,778 2,919,728
------------- ------------- -------------
Cash and cash equivalents at end of period ................................. $ 329,778 $ 2,919,728 $ 19,079,542
============= ============= =============
Significant non-cash activities:
Acquisition of SDL patents ................................................ $ 693,424 $ 300,000
Conversion of stockholder loan to capital ................................. 654,661 $ 648,147
Exchange of note payable plus accrued interest for redeemable common stock 5,041,918
Notes receivable obtained for stock option exercise ....................... 417,334
Issuance of common stock for licenses and trademarks ...................... 600,000 300,000
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
SMARTDISK CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK CAPITAL IN COMPREHENSIVE
----------------------- EXCESS OF INCOME
SHARES AMOUNT PAR VALUE (LOSS)
------------ ---------- --------------- -----------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 7,724,639 $ 7,725 $ 11,027,278
Comprehensive loss:
Net loss ...................... $ (3,963,974)
Foreign currency translation 7,533
-------------
Comprehensive loss ........... $ (3,956,441)
=============
Acquisition of SDL ............. 23,253 23 693,401
Contribution of stockholder
loan to capital ............... 654,661
---------- ------- ------------
Balance at December 31, 1997 7,747,892 7,748 12,375,340
Comprehensive loss:
Net loss ...................... $ (5,502,944)
Foreign currency translation 290,208
-------------
Comprehensive loss ........... $ (5,212,736)
=============
Issuance of common stock in
private placement ............. 666,250 666 3,164,334
Common stock issued for
trademarks .................... 150,000 150 (150)
Common stock issued under
stock option plans ............ 699,863 700 511,601
Acquisition of SDL minority
interest ...................... 32,718 33 299,967
Repurchase of common stock ..... ---------- ------- ------------
Balance at December 31, 1998 9,296,723 9,297 16,351,092
Comprehensive income:
Net income .................... $ 958,294
Foreign currency translation
adjustments .................. 277,147
Unrealized loss on short-
term investments ............. (44,141)
-------------
Comprehensive income ......... $ 1,191,300
=============
Issuance of common stock in
public offering, net .......... 3,452,500 3,453 39,170,411
Conversion of redeemable
common stock .................. 2,487,500 2,487 9,989,431
Issuance of common stock in
private placements ............ 650,000 650 4,299,350
Issuance of common stock
under stock option plans ...... 47,875 48 251,948
Issuance of common stock
under employee stock
purchase plan ................. 15,411 15 171,110
Issuance of common stock for
license ....................... 37,500 37 299,963
Conversion of stockholder
loan into SDL shares .......... 76,018 76 648,071
Issuance of shares by SDL ...... 8,872 9 65,216
Collection on note receivable
from officer ..................
Repurchase of common stock ..... ---------- ------- ------------
Balance at December 31, 1999 16,072,399 $16,072 $ 71,246,592
========== ======= ============
<PAGE>
<CAPTION>
ACCUMULATED NOTES
OTHER RECEIVABLE
COMPREHENSIVE FROM
ACCUMULATED INCOME OFFICERS/ TREASURY
DEFICIT (LOSS) EMPLOYEES STOCK TOTAL
----------------- --------------- ------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ (13,233,694) $ 181,207 $ -- $ -- $ (2,017,484)
Comprehensive loss:
Net loss ...................... (3,963,974)
Foreign currency translation 7,533
Comprehensive loss ........... (3,956,441)
Acquisition of SDL ............. 693,424
Contribution of stockholder
loan to capital ............... 654,661
------------- --------- ---------- --------- -------------
Balance at December 31, 1997 (17,197,668) 188,740 -- -- (4,625,840)
Comprehensive loss:
Net loss ...................... (5,502,944)
Foreign currency translation 290,208
Comprehensive loss ........... (5,212,736)
Issuance of common stock in
private placement ............. 3,165,000
Common stock issued for
trademarks .................... --
Common stock issued under
stock option plans ............ (417,334) 94,967
Acquisition of SDL minority
interest ...................... 300,000
Repurchase of common stock ..... (57,764) (57,764)
------------- --------- ---------- --------- -------------
Balance at December 31, 1998 (22,700,612) 478,948 (417,334) (57,764) (6,336,373)
Comprehensive income:
Net income .................... 958,294
Foreign currency translation
adjustments .................. 277,147
Unrealized loss on short-
term investments ............. (44,141)
Comprehensive income ......... 1,191,300
Issuance of common stock in
public offering, net .......... 39,173,864
Conversion of redeemable
common stock .................. 9,991,918
Issuance of common stock in
private placements ............ 4,300,000
Issuance of common stock
under stock option plans ...... 251,996
Issuance of common stock
under employee stock
purchase plan ................. 171,125
Issuance of common stock for
license ....................... 300,000
Conversion of stockholder
loan into SDL shares .......... 648,147
Issuance of shares by SDL ...... 65,225
Collection on note receivable
from officer .................. 29,880 29,880
Repurchase of common stock ..... (540) (540)
------------- --------- ---------- --------- -------------
Balance at December 31, 1999 $ (21,742,318) $ 711,954 $ (387,454) $ (58,304) $ 49,786,542
============= ========= ========== ========= =============
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
SmartDisk Corporation ("SmartDisk" or the "Company") was incorporated in
March 1997, and its predecessor, SmartDisk Security Corporation ("SDSC") was
incorporated on May 18, 1993. SmartDisk designs and develops products that
enable consumers to easily share digital data among advanced consumer
electronic products, PCs and the Internet. The Company serves customers in the
electronics, banking and other consumer markets. Principal geographic markets
for the Company's products include the United States, Japan, Europe and other
world markets.
SDSC was substantially wholly-owned by Addison Fischer ("Fischer"). From
1993 to 1995, SDSC exploited technology that it licensed under a manufacturing
license agreement with Fischer International Systems Corporation ("FISC"),
another company substantially wholly-owned by Fischer. The patents underlying
the licensed technology were held by SmartDiskette GmbH ("SDG"), a German
company that is wholly-owned by SmartDiskette Limited ("SDL"), an English
company that was approximately 37% owned by Fischer through May 1996. SDG
licensed these patents to SDL. SDL in turn entered into a manufacturing license
agreement with FISC that FISC subsequently assigned to SDSC. The license
agreement covered the manufacture and sale of solid state diskettes relating to
the fields of data security and validation and computer security and access
control. For the period January 1, 1996 through December 31, 1997, FISC,
pursuant to an operating agreement with SDSC, conducted all operations and
development activities on behalf of SDSC. During this period, SDSC (through
FISC) developed several products using proprietary, high-density flash memory
technology. These products are hereafter referred to as the "SmartDisk
Products." The SmartDisk Products consist primarily of FlashPath (used to
read/write flash memory cards) and Smarty (used to read/write smart cards).
SDSC reimbursed FISC for the cost of services provided by FISC under the
operating agreement. In addition, FISC retained 25% of the gross sales price of
SmartDisk Products distributed by it on behalf of SDSC.
On March 21, 1997, FISC and Toshiba Corporation ("Toshiba") entered into a
memorandum of understanding in which the parties agreed to exploit the
SmartDisk Products. SmartDisk commenced operations January 1, 1998. Effective
on that date, SDSC's operating agreement with FISC was terminated.
On May 26, 1998, an agreement was finalized with Toshiba and FISC in order
to, among other things, capitalize SmartDisk. SDSC stockholders exchanged all
the issued and outstanding shares of SDSC for 7,350,000 shares of common stock
of SmartDisk, Toshiba contributed $9,991,918 for 2,487,500 shares of redeemable
common stock and FISC assigned trademarks to SmartDisk in exchange for 150,000
shares of common stock. In conjunction with the capitalization, SDSC was merged
into SmartDisk. The merger was a combination of entities under common control
and accounted for at historical cost. The accounts of SmartDisk and SDSC are
combined in the accompanying financial statements.
In May 1996 and May 1997, Fischer increased his ownership of SDL to 87%
and 92%, respectively. In May 1998, Phoenix House Investments, LLC ("Phoenix
House"), an investment company substantially owned by Fischer, acquired the
remaining outstanding interests of SDL through the issuance of common stock
valued at approximately $300,000. In May 1999, the stockholders of
F-7
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
SDL exchanged all their shares of SDL for 515,500 shares of common stock of
SmartDisk and SDL became a wholly owned subsidiary of SmartDisk. The merger was
a combination of entities under common control and accounted for at historical
cost. The individual financial statements of SmartDisk and SDL are combined in
the accompanying financial statements from May 22, 1996, the date SDL came
under common control. The accounts of SDL were adjusted as of that date to
reflect a new basis under the purchase accounting method.
BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
the Company and its subsidiaries. All intercompany transactions and balances
between the companies have been eliminated. The consolidated financial
statements are stated in U.S. dollars and have been prepared in accordance with
accounting principles generally accepted in the United States.
CERTAIN UNCERTAINTIES AND RISKS
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash and cash equivalents,
short-term investments and trade receivables. The Company places its cash and
cash equivalents, and short-term investments with major financial institutions.
In the normal course of business, the Company extends unsecured credit to its
customers for the sale of products. Credit terms generally range from 30 to 150
days receivables with extended credit terms secured by promissory notes. The
Company evaluates and monitors the credit worthiness of each customer on a
case-by-case basis. Allowances are maintained for potential credit losses.
The Company sells to original equipment manufacturers, retailers, and
distributors in the United States, Japan, Europe and other world markets.
However, the majority of the Company's sales are to Japanese customers.
Japanese sales as well as related expenses are denominated in Yen and,
accordingly, are subject to the risks associated with fluctuations in exchange
rates between the Yen and the US dollar. The Company does not hedge against
foreign currency exposure.
A limited number of customers account for a substantial portion of the
Company's revenues. Further, one product accounts for a substantial portion of
the Company's revenues. Sales of the Company's products will vary as a result
of fluctuations in market demand.
Certain raw materials used by the Company in the manufacture of its
products are available from a limited number of suppliers. The Company is
dependent on its manufacturers to allocate a sufficient portion of their
manufacturing capacity to meet the Company's needs.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
F-8
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
FOREIGN CURRENCY TRANSLATION
Substantially all of the Company's sales are made through a Japanese
branch. This subsidiary and other foreign subsidiaries have their local
currency as their functional currency. Their assets and liabilities are
translated to the US dollar at the current exchange rates in effect at the
balance sheet date. Items of revenue and expense are translated using average
exchange rates in effect for the period in which the items occur. The resulting
gains and losses from translation are included as a component of stockholders'
equity.
Certain intercompany balances with the Japanese branch are denominated in
Yen. Certain cash time deposits and inter-company accounts of the Japanese
branch are dollar-denominated balances. These balances are remeasured to the
functional currency using the current exchange rate at the balance sheet date,
and resulting adjustments are reflected in the gain (loss) on foreign exchange
account included in the statement of operations. Inter-company gains (losses)
included in this account for the years ended December 31, 1998 and 1999 totaled
$170,416 and $87,910, respectively.
RECLASSIFICATIONS
Certain amounts in prior years' consolidated financial statements have
been reclassified to conform to the fiscal 1999 presentation.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of cash, accounts receivable, accounts payable and
other accrued liabilities in the accompanying balance sheet approximates fair
value because of the short-term maturity of these financial instruments. The
fair value of the restricted cash and line of credit approximates market, as
the interest rates on these financial instruments are market rates.
CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS
All highly liquid investments with an original maturity of three months or
less when purchased are considered to be cash equivalents. All cash equivalents
are carried at cost, which approximates fair value. Cash and cash equivalents
include money market funds, certificates of deposit and U.S. Government Agency
securities.
The Company has cash investment policies that limit investments to
investment grade securities. Investments held by the Company are classified as
"available-for-sale" as defined by SFAS No. 115 and are carried at fair value
based on quoted market prices. Such investments consist of U.S. Government
Agency securities, corporate debt securities and asset backed securities with
original maturities beyond three months and less than twenty-four months.
Realized losses represent the difference between the proceeds received upon
sale of an investment and its amortized cost. The Company's realized losses,
net of tax, during the year ended December 31, 1999 were $45,656. Unrealized
losses, net of tax, as of December 31, 1999 were $44,141. The Company did not
have short-term investments during the years ended December 31, 1998 and 1997.
F-9
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
A detail of the Company's short-term investments as of December 31, 1999
is as follows:
<TABLE>
<CAPTION>
AMORTIZED AGGREGATE UNREALIZED UNREALIZED
COST BASIS FAIR VALUE GAINS LOSSES
-------------- -------------- ------------ -------------
<S> <C> <C> <C> <C>
US government and government
agency securities ................... $15,964,942 $15,920,180 $ -- $ (44,762)
Asset backed securities .............. 5,990,602 5,984,190 -- (6,412)
Corporate bonds and notes ............ 4,757,219 4,736,031 -- (21,188)
----------- ----------- ---- ---------
Total short-term investments ......... $26,712,763 $26,640,401 $ -- $ (72,362)
=========== =========== ==== =========
</TABLE>
The following represents the maturities of the Company's short-term
investments as of December 31, 1999:
<TABLE>
<CAPTION>
AGGREGATE
FAIR VALUE
--------------
<S> <C>
Due in 0-12 months ............ $ 9,996,060
Due in 12-24 months ........... 16,644,341
-----------
Total ......................... $26,640,401
===========
</TABLE>
RESTRICTED CASH
Restricted cash is composed of a time deposit that the Company's Japanese
branch maintains as collateral for a line of credit.
INVENTORIES
Inventories are stated at the lower of cost or market with cost being
determined on a first-in, first-out basis.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost less accumulated depreciation.
All major expenditures for production equipment are capitalized and depreciated
over the economic life of the asset. The costs of repairs and maintenance are
charged to expense in the year when they are incurred. Depreciation is computed
using the straight-line and declining balance methods over the estimated useful
lives of 2 to 15 years. In addition, certain production equipment is
depreciated using the units of production method. The units of production
method depreciates the property over the estimated life cycle production
quantities. The monthly depreciation cost is calculated by using the number of
pieces produced times the cost per piece computed from the estimated total
production quantity.
SOFTWARE DEVELOPMENT COSTS
Development costs incurred in the research and development of new software
products and enhancements to existing software products are expensed as
incurred until technological feasibility has been established, at which time
certain development costs required to attain general production
F-10
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
release would be capitalized. To date, the Company's software development has
essentially been completed concurrent with the establishment of technological
feasibility, and, accordingly, no costs have been capitalized.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial
Accounting Standards (SFAS) No. 109 "Accounting for Income Taxes". Deferred
income tax assets and liabilities are determined based upon differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse.
REVENUE RECOGNITION
Sales revenue is recognized when the risk of loss and title transfers to
the customer, which is generally at the time of shipment to customers. Royalty
revenue consists of royalties earned on sales of licensed products. Royalty
revenues are recognized when earned based upon contractual agreement. To date,
all of the Company's royalties relate to the licensing of one software product
to FISC. The Company has no continuing obligations under this licensing
agreement. Revenues from research and development contracts are recognized when
earned based upon achievement of contract milestones.
STOCK BASED COMPENSATION
SFAS No. 123 "Accounting for Stock-Based Compensation" permits the use of
either a fair value based method or the intrinsic value method defined in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB 25") to account for stock-based compensation arrangements. The
Company determines the value of stock-based compensation arrangements under the
provisions of APB 25 and, accordingly, has included the pro forma disclosures
required under SFAS No. 123 in Note 9.
ADVERTISING
Advertising costs are charged to expense as incurred, advertising expenses
for 1997, 1998 and 1999 were $3,785, $214,002 and $147,251, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No.
133 established accounting and reporting standards requiring that every
derivative financial instrument be recorded on the balance sheet as either an
asset or liability measured at its current market value. Because SmartDisk
currently holds no derivative instruments and does not engage in hedging
activities, the Company expects that the adoption of SFAS No. 133 will have no
material impact on its financial position, results of operations or cash flows.
The Company will be required to implement SFAS No. 133 for the year ending
December 31, 2001.
F-11
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
COMPREHENSIVE INCOME
Comprehensive income (loss) includes all changes in equity that result
from transactions and other economic events during the period other than
transactions with stockholders. The significant components of other
comprehensive income (expense) for the Company include equity adjustments
resulting from the translation of the balance sheet for the Japanese branch and
the European subsidiary and unrealized gains and losses on short-term
investments. Accumulated other comprehensive income at December 31, 1999,
includes accumulated foreign currency translation adjustments of $756,095
offset by unrealized losses on short-term investments of $44,141, net of tax.
NOTE 2. INVENTORY
Inventories consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Finished goods ..................... $ 1,687,905 $ 1,561,213
Raw materials ...................... 1,115 --
----------- -----------
Total inventories .................. 1,689,020 1,561,213
Allowance for obsolescence ......... -- (86,600)
----------- -----------
Net inventory ...................... $ 1,689,020 $ 1,474,613
=========== ===========
</TABLE>
NOTE 3. PROPERTY AND EQUIPMENT
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
------------ --------------
<S> <C> <C>
Production Equipment .............................. $ 702,779 $ 3,697,941
Furniture and fixtures ............................ 191,576 318,973
Software .......................................... 167,519 370,487
--------- ------------
Property and equipment, at cost ................... 1,061,874 4,387,401
Accumulated depreciation and amortization ......... (379,860) (1,763,772)
--------- ------------
Property and equipment, net ....................... $ 682,014 $ 2,623,629
========= ============
</TABLE>
NOTE 4. INTANGIBLE ASSETS
The patents and goodwill recorded as of December 31, 1998 relate to
technology held by SDL. These amounts will be fully amortized in the first half
of 2000. During 1999, the Company incurred approximately $400,000 in costs for
the successful defense of the patent on its primary technology and product.
These costs have been capitalized and included in patents. These costs will be
amortized over three years, the expected future life of the patent.
On June 30, 1999, the Company issued 37,500 shares of its common stock to
SanDisk Corporation ("SanDisk") in exchange for a license to utilize certain
patented technology developed by SanDisk.
F-12
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 4. INTANGIBLE ASSETS--(CONTINUED)
The Company is amortizing the license on a straight-line basis over the ten
year term of the license. In addition, the Company is required to pay a royalty
to SanDisk on net revenues from direct sales to customers other than SanDisk of
products developed by the Company utilizing this licensed technology.
Intangible assets consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
------------ --------------
<S> <C> <C>
Patents .......................... $ 998,334 $ 1,389,204
Goodwill ......................... 332,791 326,464
License .......................... -- 300,000
--------- ------------
Total intangibles ................ 1,331,125 2,015,668
Accumulated amortization ......... (590,147) (1,132,969)
--------- ------------
Intangible assets, net ........... $ 740,978 $ 882,699
========= ============
</TABLE>
NOTE 5. BANK LINE OF CREDIT
The Company's wholly owned Japanese branch has a line of credit with
maximum borrowing capacity of approximately $2.9 million (295 million Yen). The
facility, which has no fixed term, is collateralized by a time deposit and
accounts receivable. The branch maintains a time deposit with the bank that has
a balance at December 31, 1999 of $1,050,000. The Company may borrow up to 90%
of this amount. The credit agreement corresponding to the time deposit
collateral is renewable automatically on May 31, 2000. In addition, accounts
receivable of up to $2 million (200 million Yen) of specified trade customers
may be used as additional collateral. The credit agreement corresponding to the
accounts receivable collateral is renewable automatically on January 31, 2001.
The interest rate on borrowings under the line of credit is 1.38% per year. The
outstanding balance under the line of credit was approximately $0.9 million
(100 million Yen) as of December 31, 1998 and approximately $2 million (200
million Yen) at December 31, 1999.
The Japanese branch also discounts certain short-term promissory notes
received from trade customers with the bank. Bank borrowings collateralized by
promissory notes totaled approximately $1.4 million (160 million Yen) at
December 31, 1998 and approximately $2.9 million (302 million Yen) at December
31, 1999.
The Company maintains a line of credit under which it may borrow up to $5
million. Any amounts borrowed under this line of credit bear interest at 2%
over the 30-day LIBOR rate and would be collateralized by all assets of the
Company. This line of credit expires on December 15, 2000. The Company has not
borrowed against this line of credit and has no current plans to borrow any
amounts under this line of credit.
Interest paid during the years ended December 31, 1998 and 1999 amounted
to $5,017 and $53,842, respectively. The Company made no interest payments in
1997.
F-13
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 6. COMMITMENTS AND CONTINGENCIES
LEASES
Through May 31, 1999, the Company leased space for its corporate
headquarters from a related party, FISC, on a month-to-month basis. There was
no formalized agreement and the expense was accrued and paid monthly based on a
percent of usage basis. As of June 1, 1999, the Company assumed from FISC a
facilities operating lease with an unrelated lessor that continues through
December 31, 2001. The Company also leases office space under an operating
lease that expires in September 2000. The Company's Japanese branch leases
office space under a two year operating lease that commenced in April 1998.
This lease has been renewed through 2002 on terms similar to the original lease
agreement. Total rent expense on operating leases for 1997, 1998 and 1999 was
$36,995, $261,399 and $443,645, respectively. Rent expense incurred related to
FISC for these same periods totaled $36,995, $135,290 and $58,578,
respectively.
The table below sets forth minimum payments for the years indicated under
operating leases with remaining terms in excess of one year, at December 31,
1999:
<TABLE>
<S> <C>
2000 ........... $440,141
2001 ........... 446,343
2002 ........... 83,896
</TABLE>
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with certain of its
employees. These agreements stipulate, among other things, severance and
benefit arrangements in the event of termination. In addition, the agreements
include confidentiality provisions, invention assignment provisions, and
covenants not to compete.
CONTINGENCIES
The Company relies on a combination of patents, trademarks, copyright and
trade secret laws, confidentiality procedures and licensing arrangements to
protect its intellectual property rights. There can be no assurance that there
will not be any disputes regarding the Company's intellectual property rights.
Specifically, there can be no assurance that any patents held by the Company
will not be invalidated, that patents will be issued for any of the Company's
pending applications or that any claims allowed from existing or pending
patents will be of sufficient scope or strength or be issued in the primary
countries where the Company's products can be sold that will provide meaningful
protection or any commercial advantage to the Company. Additionally,
competitors of the Company may be able to design around the Company's patents.
NOTE 7. EARNINGS (LOSS) PER SHARE DATA
Basic earnings (loss) per share is calculated by dividing net income
(loss) by the weighted average number of common shares outstanding during the
period. Diluted earnings per share is calculated by dividing net income by the
weighted average number of common shares outstanding for the period plus the
dilutive effect of the conversion of the outstanding redeemable common stock,
outstanding
F-14
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 7. EARNINGS (LOSS) PER SHARE DATA--(CONTINUED)
shares of non-vested stock and outstanding stock options using the "treasury
stock" method. For the year ended December 31, 1998, the redeemable common
stock, shares of non-vested stock and stock options were excluded from the
calculation of earnings (loss) per share because they were anti-dilutive. They
have been included in the computation of earnings per share for the year ended
December 31, 1999 due to their dilutive effect on earnings per share.
Earnings (loss) per share has been computed reflecting the retroactive
adjustment of outstanding shares related to the mergers of SDL and SDSC into
SmartDisk as well as the one for four reverse stock split that was effected in
August 1999.
The following table sets forth the computation of basic and diluted
earnings (loss) per share:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1998 1999
---------------- ---------------- -------------
<S> <C> <C> <C>
Numerator:
Net income (loss) .................................. $ (3,963,974) $ (5,502,944) $ 958,294
============ ============ ==========
Denominator:
Weighted average shares outstanding ................ 7,738,909 8,040,169 10,724,608
Dilutive effect of conversion of redeemable
common stock ..................................... -- -- 1,901,404
Dilutive effect of stock options ................... -- -- 365,619
Dilutive effect of non-vested common stock ......... -- -- 357,745
------------ ------------ ----------
Diluted shares outstanding ......................... 7,738,909 8,040,169 13,349,376
============ ============ ==========
Basic earnings (loss) per share ..................... $ (0.51) $ (0.68) $ 0.09
Diluted earnings (loss) per share ................... $ (0.51) $ (0.68) $ 0.07
</TABLE>
Subsequent to December 31, 1999, the Company issued approximately
1,080,000 shares of common stock, of which approximately 1,067,000 related to
the acquisition of VST. The Company also granted approximately 934,000 options
to purchase shares of SmartDisk common stock and issued approximately 443,000
options to acquire shares of SmartDisk Corporation common stock in exchange for
outstanding vested options to acquire shares of VST common stock.
NOTE 8. STOCKHOLDERS' EQUITY (DEFICIT)
In connection with an agreement that was finalized in May 1998, Toshiba
Corporation received 2,487,500 shares of redeemable common stock in exchange
for $9,991,918 (consisting of $4,950,000 cash, the exchange of a $5,000,000
note and accrued interest of $41,918).
In January and July 1999, SmartDisk sold a total of 650,000 shares of its
common stock in private transactions for gross proceeds of $4.30 million.
In August 1999, the Company completed a reverse stock split of one for
four. The consolidated financial statements and footnotes have been
retroactively restated to reflect the reverse stock split in the prior periods,
including all references in the financial statements to number of shares and
per share amounts.
F-15
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 8. STOCKHOLDERS' EQUITY (DEFICIT)--(CONTINUED)
In August 1999, the Company amended and restated its Certificate of
Incorporation such that the number of shares of authorized capital stock was
increased to 65,000,000 shares, consisting of 60,000,000 shares of common stock
with a par value of $0.001 per share and 5,000,000 shares of preferred stock
with a par value $0.001 per share.
On October 6, 1999, the Company completed its initial public offering
(IPO). The Company realized net proceeds of approximately $39.14 million from
the sale of 3,450,000 shares of common stock (including 450,000 shares issued
upon the exercise of the underwriters' over allotment option) at an initial
public offering price of $13.00 per share after deducting underwriting
discounts and commissions of approximately $3.14 million and offering expenses
of approximately $2.57 million. Upon the successful completion of the Company's
IPO, each of the 2,487,500 outstanding shares of redeemable common stock were
converted into one share of common stock.
NOTE 9. STOCK BASED COMPENSATION
STOCK OPTION PLANS
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under SFAS No. 123 requires use
of option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's stock
options equals the market price of the underlying stock on the date of grant,
no compensation expense was recognized during 1998 and 1999.
The Company's 1998 Employee Stock Option Plan authorized the grant of
options to employees including members of the Company's Board of Directors who
are employees of the Company for up to 1,454,545 shares of the Company's common
stock. Options granted under the plan are fully vested after four years and all
options granted have a ten-year contractual life. This plan was terminated in
July 1999.
The Company's 1998 Directors and Consultants Stock Option Plan authorized
the grant of options to officers, directors, consultants and other independent
contractors (including members of the Company's Board of Directors who are not
employees of the Company) for up to 250,000 shares of the Company's common
stock. Options granted under the plan are fully vested after four years and all
options granted have a ten-year contractual life. This plan was terminated in
July 1999.
The Company has reserved 965,750 shares of common stock for outstanding
options issued under the aforementioned stock option plans.
During 1998 and 1999, the Company granted 880,613 stock options to
employees and directors of SmartDisk with exercise prices ranging from $0.72 to
$8.00, which options were immediately exercisable for cash or in part by cash
(minimum par value for the shares purchased) and the balance by a five-year
full recourse promissory note. Such notes would be secured by the shares
purchased (to be held in escrow with no transfer rights pending full payment)
with interest based on the coupon rate yield of a 52-week U.S. Treasury bill
immediately preceding the execution and issuance of the
F-16
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 9. STOCK BASED COMPENSATION--(CONTINUED)
promissory note, with voting rights for the underlying shares remaining with
the shareholder until default, if any, on the note. Of the 880,613 immediately
exercisable options granted, 743,363 options have been exercised and 67,250
have been cancelled as of December 31, 1999. Of the 743,363 shares of common
stock issued upon exercise, 357,745 remain nonvested and 80,977 have been
repurchased and are shown as treasury stock, at cost, in the equity section of
the balance sheet as of December 31, 1999. The nonvested shares of common stock
will vest in accordance with the provisions of the original option award.
In July 1999, the Company established the 1999 Incentive Compensation Plan
(the 1999 Plan) and reserved 2,500,000 shares of common stock for issuance
thereunder. Pursuant to the terms of the 1999 Plan, the Company may grant
participants stock options, stock appreciation rights, restricted stock,
deferred stock, other stock-related awards and performance or annual incentive
awards that may be settled in cash, stock or other property (collectively, the
Awards). Under the 1999 Plan, the total number of shares of common stock that
may be subject to the granting of Awards at any time during the term of the
1999 Plan shall equal 2,500,000 shares, plus the number of shares with respect
to which Awards previously granted under the 1999 Incentive Plan that terminate
without being exercised, and the number of shares of common stock that are
surrendered in the payment of any Awards or any tax withholding requirements.
As of December 31, 1999, 171,000 options have been granted under the 1999 Plan.
No other form of Award has been granted under the 1999 Plan.
During the year ended December 31, 1999, compensation expense of $76,500
was recognized relating to the accelerated vesting of 21,000 options,
exercisable at $0.72 per share.
A summary of the Company's stock option activity, and related information
for the years ended December 31, follows:
<TABLE>
<CAPTION>
WEIGHTED NUMBER OF WEIGHTED
NUMBER OF AVERAGE OPTIONS AVERAGE
OPTIONS EXERCISE PRICE EXERCISABLE EXERCISE PRICE
------------- ---------------- ------------- ---------------
<S> <C> <C> <C> <C>
Outstanding at December 31, 1997 ......... -- $ -- -- $ --
Granted with exercise prices equal to
fair market value ..................... 1,041,613 1.29
Granted with exercise prices less than
fair market value ..................... 25,000 4.00
Exercised ............................... (699,863) 0.73
Canceled ................................ (750) 0.72
---------
Outstanding at December 31, 1998 ......... 366,000 2.54 2,250 0.72
Options granted with exercise prices
equal to fair market value ............ 1,024,500 7.77
Exercised ............................... (47,875) 3.67
Canceled ................................ (205,875) 2.66
---------
Outstanding at December 31, 1999 ......... 1,136,750 $ 7.19 44,794 $ 2.73
=========
</TABLE>
F-17
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 9. STOCK BASED COMPENSATION--(CONTINUED)
The following table summarizes information about stock options outstanding
at December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING OPTIONS EXERCISABLE OPTIONS
--------------------------------------------------- -------------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE OPTIONS AVERAGE
EXERCISE PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- ------------------- ----------- ------------------ ---------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$0.72-$1.00 58,750 8.1 years $ 0.76 24,689 $0.75
$4.00-$4.80 321,125 9.0 years 4.66 16,385 4.28
$8.00-$13.00 740,375 9.4 years 8.24 3,720 9.00
$30.50-$36.50 16,500 9.9 years 32.00 -- --
--------- ------
$0.72-$36.50 1,136,750 9.3 years $ 7.19 44,794 $2.73
========= ======
</TABLE>
EMPLOYEE STOCK PURCHASE PLAN
In July 1999, the Company established the 1999 Employee Stock Purchase
Plan, for which 465,000 shares of the Company's common stock have been
reserved. The plan, which is intended to qualify under Section 423 of the
Internal Revenue Code of 1986, will be implemented through successive
twelve-month Offering Periods, generally commencing the first of January each
year. Employees are eligible to participate if they are employed by the Company
for at least 20 hours per week and more than five (5) months in a calendar
year. Entry dates into the plan are the first day of each calendar quarter.
Each participant is granted an option to purchase the Company's common stock on
June 30 and December 31 (the "Purchase Date") of each Offering Period, up to a
maximum of 1,000 shares, through payroll deductions, which may not exceed 15%
of an employee's total compensation. The initial Offering Period commenced on
October 5, 1999 and will end on the last business day of December 2000. The
price of stock purchased under the plan will be 85% of the lower of the fair
market value of the common stock at the beginning of the Offering Period or the
Purchase Date. Employees may not be granted shares under the plan if
immediately following a grant they would hold stock and/or options to acquire
stock possessing more than 5% of the total voting power of the shares of the
Company. Employee contributions are limited to $21,250 per year. Approximately
90 percent of eligible employees participated in the Plan in 1999. Under the
Plan, the Company sold 15,411 shares of common stock to employees on December
31, 1999.
PRO FORMA INFORMATION FOR STOCK-BASED COMPENSATION
Pro forma information regarding net income and earnings per share is
required by SFAS No. 123, and has been determined as if the Company had
accounted for its employee stock options and employee stock purchase plan under
the fair value method of that Statement. For the fair value disclosure below,
compensation value is estimated for each option grant using a Black-Scholes
option-pricing model. The following weighted average assumptions were used for
option grants in fiscal 1998 and 1999: risk-free interest rate of 5.25% in 1998
and 5.75% in 1999; expected dividend yield of 0% for 1998 and 1999; volatility
factor of the expected market price of the Company's common stock of zero in
1998 and for the period in 1999 prior to the Company's IPO and 0.80 for the
period in 1999 following the Company's IPO; and an expected life of the options
of 3 years for 1998 and 1999. Shares
F-18
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 9. STOCK BASED COMPENSATION--(CONTINUED)
issued through the 1999 Employee Stock Purchase Plan during 1999 were valued
with a minimum value pricing model using the following assumptions: risk-free
interest rate of 5.75%, expected dividend yield of 0% and a life of three
months.
The weighted average grant date fair value of options granted during the
years ended December 31, 1998 and 1999 with exercise prices equal to market
value was $0.84 and $5.11, respectively. There were no options granted during
the year ended December 31, 1999 with exercise prices less than market value.
The weighted average grant date fair value of options granted during the year
ended December 31, 1998 with exercise prices less than market value was $3.40.
The weighted average grant date fair value of the shares issued through the
1999 Employee Stock Purchase Plan for the year ended December 31, 1999 was
$2.11.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options, which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different than those of traded options and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee's stock options.
For purposes of pro forma disclosures, the estimated fair value of options
is amortized to expense over the options' vesting period. The Company's pro
forma information for options issued is as follows:
<TABLE>
<CAPTION>
1998 1999
---------------- ------------
<S> <C> <C>
Net income (loss):
As reported ....................... $ (5,502,944) $ 958,294
Pro forma ......................... $ (5,620,529) $ 754,101
Basic net income (loss) per share:
As reported ....................... $ (0.68) $ 0.09
Pro forma ......................... $ (0.70) $ 0.07
Diluted net income (loss) per share:
As reported ....................... $ (0.68) $ 0.07
Pro forma ......................... $ (0.70) $ 0.06
</TABLE>
The effects of applying SFAS No. 123 on pro forma disclosures of net
income and earnings per share for fiscal 1998 and 1999 are not likely to be
representative of the pro forma effects on net income and earnings per share in
future years because the number of shares to be issued under these plans is not
known and the assumptions used to determine the fair value can vary
significantly.
F-19
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 10. EMPLOYEE BENEFIT PLANS
Effective January 1, 1998, for the benefit of qualified employees, the
Company became a participant in a tax deferred savings plan offered to
employees of FISC. The plan is designed to provide employees with an
accumulation of funds at retirement. Qualified employees may elect to make pre
tax contributions into the plan for up to 15% of their annual compensation, up
to a maximum of $10,000 per year. The Company's matching contributions are
earned by the employee based on a straight line, five year vesting schedule.
The Company may make additional annual contributions to the plan at the
discretion of the Board of Directors. For the years ended December 31, 1998 and
1999, the Company made matching contributions of $10,747 and $30,596,
respectively.
NOTE 11. INCOME TAXES
The United States and foreign components of income (loss) from continuing
operations before income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------------
1997 1998 1999
----------------- ---------------- ------------
<S> <C> <C> <C>
United States ......... $ (3,462,924) $ (4,584,045) $ 552,953
Foreign ............... (545,648) (1,021,215) 1,772,185
------------- ------------ ----------
Total ................ $ (4,008,572) $ (5,605,260) $2,325,138
============= ============ ==========
</TABLE>
The income tax benefit for periods prior to 1999 as presented in the
statements of operations relates to the reduction of the deferred income tax
liability associated with the identified intangible assets. The components of
the income tax provision (benefit) are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------
1997 1998 1999
------------- ------------- --------------
<S> <C> <C> <C>
Current:
United States ............................ $ 0 $ 0 $ 60,000
Foreign .................................. 0 0 1,695,718
--------- ---------- ----------
Total Current Expense (Benefit) .......... $ 0 $ 0 $1,755,718
Deferred:
United States ............................ $ 0 $ (25,000) $ (50,000)
Foreign .................................. $ (44,498) (77,316) (338,874)
--------- ---------- ----------
Total Deferred Expense (Benefit) ......... $ (44,498) $ (102,316) $ (388,874)
--------- ---------- ----------
Income Tax Provision (Benefit) ............ $ (44,598) $ (102,316) $1,366,844
========= ========== ==========
</TABLE>
F-20
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 11. INCOME TAXES--(CONTINUED)
The significant components of the Company's deferred income taxes are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1998 1999
-------------- --------------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards ...................... $ 2,615,236 $ 1,238,163
Depreciation and amortization ......................... 18,377 104,640
Accrued expenses ...................................... 9,225 134,052
Bad debt & inventory reserves ......................... -- 85,211
Foreign tax & alternative minimum tax credits ......... -- 1,759,548
Other ................................................. -- 347,057
------------ ------------
Deferred tax assets ................................... 2,642,838 3,668,671
Less: valuation allowance ............................ (2,642,838) (3,417,277)
------------ ------------
Net deferred tax assets ................................ -- 251,395
Deferred tax liabilities ...............................
Acquired intangibles .................................. (184,658) (56,453)
------------ ------------
Total net deferred taxes ............................... $ (184,658) $ 194,942
============ ============
</TABLE>
The reconciliation of the U.S. federal statutory income tax rate to the
effective income tax rate is:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------
1997 1998 1999
------------ ------------ ----------
<S> <C> <C> <C>
Federal income tax benefit .......................... (34.00)% (34.00)% 34.00%
State taxes, net of federal benefit ................. (3.63) (3.63) 3.57
Foreign tax rate differential ....................... 0.63 (0.13) (0.33)
Non-deductible items ................................ -- 1.38 0.56
Goodwill ............................................ 0.37 0.13 1.83
Recognition of net deferred tax assets from change in
SDSC status ........................................ -- (0.17) --
S corporation loss reported by stockholders ......... 32.51 -- --
Change in valuation allowance ....................... 3.02 34.01 19.48
Other ............................................... -- 0.61 (0.32)
------ ------ -----
Total .............................................. (1.10)% (1.80)% 58.79%
====== ====== =====
</TABLE>
Prior to May 1998, SDSC elected to be taxed as an S corporation under the
Internal Revenue Code. As a result, the taxable income or losses for periods
prior to May 1998 were reported by the stockholders on their individual income
tax returns. Upon the conversion from an S corporation to a C corporation, SDSC
became subject to income tax. Subsequent to the conversion from an S
corporation to a C corporation, SDSC was merged into SmartDisk, a C
corporation.
SFAS 109 requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of the evidence, it is more likely than not
that some portion or all of the deferred tax assets will not be realized. After
consideration of all the evidence, both positive and negative,
F-21
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 11. INCOME TAXES--(CONTINUED)
management has determined that a valuation allowance of approximately $770,000,
$2,643,000 and $3,417,000 at December 31, 1997, 1998 and 1999, respectively, is
necessary to reduce the deferred tax assets to the amount that will more likely
than not be realized. The change in valuation allowance amounted to
approximately $121,000, $1,873,000 and $774,000 for December 31, 1997, 1998 and
1999, respectively.
At December 31, 1998 and 1999, the Company had United States and foreign
net operating loss carryforwards for tax purposes as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1999
------------------------------- -----------------------------
JURISDICTION AMOUNT EXPIRATION AMOUNT EXPIRATION
- --------------------------- ------------- --------------- ------------- -------------
<S> <C> <C> <C> <C>
United States .......... $4,932,000 2018 $1,532,000 2018
United Kingdom ......... 2,343,000 Unlimited 2,005,000 Unlimited
Japan .................. 377,000 2003 -- N/A
</TABLE>
At December 31, 1999, the Company had United States tax credit
carryforwards as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------
TAX CREDIT AMOUNT EXPIRATION
- ------------------------------------------- ------------- -------------
<S> <C> <C>
Foreign tax credit ..................... $1,699,548 2004
Alternative minimum tax credit ......... $ 60,000 Unlimited
</TABLE>
The Company made income tax payments of $145,330 during 1999. No income
tax payments were made in 1998 and 1997.
NOTE 12. SEGMENT INFORMATION
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise," replacing the
"industry segment" approach with the "management" approach. The management
approach designates the internal organization that is used by management for
making operating decisions and assessing performance as the source of the
Company's reportable segments. SFAS No. 131 also requires disclosures about
products and services, geographic areas and major customers. The Company
operates in one reportable business segment.
Sales to foreign markets and to significant customers as a percentage of
the Company's total revenues were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1997 1998 1999
------ ------ -----
<S> <C> <C> <C>
Foreign markets:
Asian and Pacific Rim ......... --% 84% 81%
United States ................. 82 10 15
Europe ........................ 18 6 4
</TABLE>
F-22
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 12. SEGMENT INFORMATION--(CONTINUED)
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------
1997 1998 1999
-------- ------ -----
<S> <C> <C> <C>
Significant Customers:
FujiFilm ............ --% 38% 28%
Olympus ............. -- 32 27
FISC ................ 100 14 9
Sony ................ -- -- 10
</TABLE>
The following is a summary of the carrying amounts of the Company's
foreign net assets (liabilities) by geographic area in which they are located:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1998 1999
------------- -------------
<S> <C> <C>
Asian and Pacific Rim ......... $1,830,076 $4,359,808
Europe ........................ (46,025) 198,115
</TABLE>
The following is a summary of the Company's foreign long-lived assets by
geographic area in which they are located:
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------
1998 1999
----------- -------------
<S> <C> <C>
Asian and Pacific Rim ......... $281,347 $1,680,321
Europe ........................ 750,821 191,637
</TABLE>
NOTE 13. RELATED PARTY TRANSACTIONS
Material related party transactions that have been entered into by the
Company that are not disclosed otherwise in these notes are summarized below.
As outlined in Note 1, SmartDisk (including SDSC and SDL) and FISC were
under the common ownership of Fischer. Further, there were various transactions
between SmartDisk and FISC, such as sharing of certain general and
administrative resources, the purchases/sales of products and services and
similar transactions. In the opinion of management, the allocations were
reasonable and reflect all of the cost of the Company's doing business.
During 1997, FISC provided operating services to SmartDisk pursuant to an
operating agreement. FISC retained 25% of the gross sales price of SmartDisk
Products distributed by it on behalf of the Company. In addition, FISC
allocated direct expenses attributable to the Company such as cost of sales,
product development and depreciation, and indirect expenses such as selling,
general and administrative expenses. The direct expense allocation was based on
actual expenses incurred and the indirect expense allocation was based upon a
pro rata allocation of the total expenses incurred by FISC based upon
management's estimate of the percentage attributable to the Company. All of the
Company's revenues for 1997 and operating expenses totaling approximately $4.0
million in 1997 were recognized or incurred by FISC on behalf of SmartDisk.
Management estimates that had the Company operated on a stand-alone basis for
1997, expenses would have approximated the amount reported.
F-23
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 13. RELATED PARTY TRANSACTIONS--(CONTINUED)
As a direct result of this operating arrangement between FISC and
SmartDisk, the Company's stockholder loan from Fischer was increased by
$3,158,817 in 1997 representing funding of SmartDisk operations by Fischer
through FISC. Stockholder loan amounts totaling $654,661 in 1997 were
contributed to capital. In addition, stockholder loan amounts totaling $648,147
at December 31, 1998, represented advances made by Fischer and related
companies to fund the operations of SDL. Those advances, which were
non-interest bearing and due upon demand, were converted into 386,841 shares of
common stock of SDL in May 1999, which in turn were exchanged for 76,018 shares
of SmartDisk.
At December 31, 1997, the Company owed $1,045,000 to FISC and $3,955,000
to Fischer, which represented non-interest bearing amounts advanced to fund the
Company's operations. These amounts were repaid in 1998.
In 1998, the Company was granted a non-exclusive license to certain
patents relating to the interface with Toshiba's SmartMedia cards. In September
1998, this license was amended to expand the field of use for the license. In
return, the Company agreed to pay a 1/2% royalty on products covered by the
Toshiba patents. Royalty expenses pertaining to this license were $68,752 and
$25,555 in 1998 and 1999, respectively.
The Company has entered into various strategic agreements with related
parties to sell, manufacture and distribute products. In addition, the Company
procures certain engineering services from a strategic investor. During 1998
and 1999, approximately 34% and 18%, respectively, of the Company's sales were
to related parties. During 1998 and 1999, purchases of products and services of
approximately $14.0 million and $37.5 million, respectively, were made from
related parties.
Pursuant to license and distribution agreements entered into in 1998
between FISC and the Company, FISC was granted the right to license and
distribute the Company's products through 2001. For this right, FISC agreed to
pay to the Company royalties ranging from 5% to 33.3% of net revenue derived
from certain SmartDisk product sales. All of the Company's royalty revenues are
from FISC.
Pursuant to operating agreements entered into in 1998, FISC provides
operating assistance to the Company consisting of services, facilities and
shared equipment. The Company's share of expenses for these services is based
on an internal analysis of the relative amount of time devoted to its business
by employees of FISC as well as the overhead charges attributable to these
employees. The Company recorded operating expenses related to these agreements
for the years ended December 31, 1998 and 1999 of approximately $1,500,000 and
$300,000, respectively.
Three of the Company's principal stockholders have the right to require
the Company to file a registration statement to enable them to sell their
shares.
During February 1999, the Company loaned $60,000 to one of its officers
and the full amount was outstanding as of December 31, 1999. The loan was made
pursuant to a Promissory Note, bears interest at 4.71%, and is repayable in
four annual installments. In addition, the Company has, in conjunction with the
1998 Employee Stock Option Plan, made loans to several of its employees to
allow for the immediate exercise of stock option grants. Each loan was made
pursuant to a full
F-24
<PAGE>
SMARTDISK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
NOTE 13. RELATED PARTY TRANSACTIONS--(CONTINUED)
recourse Promissory Note, is secured by a pledge of the shares of stock which
the employee has acquired, bears interest at approximately 5.5% which is
payable quarterly, and is required to be paid in full within five years of the
date of issuance. As of December 31, 1999, the principal amount due under these
loans was $387,454.
NOTE 14. RESEARCH AND DEVELOPMENT CONTRACT REVENUES
During 1999, SmartDisk entered into and completed various research and
development contracts with a customer. The contracts entitled the Company to
invoice and receive funds over the development period, some of which were
conditioned upon acceptance of certain deliverables. Through December 31, 1999,
SmartDisk invoiced approximately $2.6 million for development work. All of
these revenues were recognized as income in the fourth quarter of 1999 upon the
customer's final acceptance of the product. Approximately $1.6 million of
contract costs were charged to expense over the life of the development
periods, which ended in 1999. The Company's accounting for these research and
development revenues was based upon final customer acceptance of the product
being a condition of earning revenue under the contract.
SmartDisk also has an ongoing research and development contract, which was
entered into during the fourth quarter of 1999. This contract entitles
SmartDisk to invoice and receive funds over the development period, which is
through March 31, 2000, some of which are conditioned upon the customer's
acceptance of certain deliverables. Through December 31, 1999, SmartDisk has
not invoiced the customer for the development work under this contract and no
revenues were recognized as income. Approximately $500,000 of contract costs
related to this development contract has been charged to expense as of December
31, 1999. The Company's accounting has been based upon final customer
acceptance being a condition of earning revenue under the contract. Total
estimated costs to be incurred under this contract are approximately $1.0
million.
NOTE 15. SUBSEQUENT EVENTS
On February 23, 2000, the Company signed a letter of intent to acquire
substantially all of the intellectual property of a privately held company for
approximately $800,000 and the issuance of approximately 37,000 shares of
SmartDisk common stock. This company, which is based in California, is a
supplier of software for high-performance storage solutions. The transaction
will be accounted for under the purchase method of accounting and is expected
to close in the first half of 2000.
On March 6, 2000, the Company acquired VST Technologies ("VST") for
approximately $16.4 million in cash and the issuance of 1.1 million shares of
SmartDisk common stock valued at approximately $49 million. In addition, the
Company issued approximately 443,000 options, valued at approximately $19.8
million, to acquire shares of SmartDisk Corporation common stock with exercise
prices ranging from $0.90 to $4.45, in exchange for outstanding vested options
to acquire shares of VST common stock. VST, which is based in Massachusetts,
designs, develops, manufactures and markets high performance portable
peripherals for the computer industry. The transaction will be accounted for
under the purchase method of accounting.
F-25
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To VST Technologies, Inc.:
We have audited the accompanying balance sheets of VST Technologies, Inc.
(a Delaware corporation) as of December 31, 1999 and 1998 and the related
statements of operations, redeemable convertible preferred stock and
stockholders' deficit and cash flows for each of the three years in the period
ended December 31, 1999. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of VST Technologies, Inc. as
of December 31, 1999 and 1998 and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1999 in
conformity with accounting principles generally accepted in the United States.
/s/ Arthur Andersen LLP
Boston, Massachusetts
February 29, 2000 (except for the matter
discussed in Note 1, as to which the date
is March 6, 2000)
F-26
<PAGE>
VST TECHNOLOGIES, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
<TABLE>
<CAPTION>
1998 1999
ASSETS --------------- ---------------
<S> <C> <C>
Current Assets:
Cash and cash equivalents .............................................. $ 605,986 $ 796,834
Accounts receivable, net of reserves of approximately $2,385,000 in 1999
and $980,000 in 1998 ................................................. 4,426,241 11,178,440
Inventories ............................................................ 2,645,531 10,799,268
Prepaid expenses ....................................................... 112,102 165,566
Deferred tax asset (Note 4) ............................................ -- 1,485,000
------------ ------------
Total current assets ................................................. 7,789,860 24,425,108
------------ ------------
Property and Equipment, at cost: ........................................
Production equipment ................................................... 1,328,528 2,107,417
Computer equipment and software ........................................ 369,029 618,565
Furniture and fixtures ................................................. 293,155 412,408
Construction in progress ............................................... 9,900 61,538
------------ ------------
2,000,612 3,199,928
Less--Accumulated depreciation ......................................... 1,247,346 1,912,385
------------ ------------
753,266 1,287,543
------------ ------------
$ 8,543,126 $ 25,712,651
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Line of credit ......................................................... $ 1,500,000 $ 4,500,000
Current portion of capital lease obligation ............................ - 7,071
Accounts payable ....................................................... 3,452,386 9,121,474
Accrued payroll expenses ............................................... 362,419 698,801
Accrued other expenses ................................................. 463,967 918,443
Income taxes payable (Note 4) .......................................... -- 1,448,150
------------ ------------
Total current liabilities ............................................ 5,778,772 16,693,939
------------ ------------
Capital Lease Obligation, net of current portion ........................ -- 5,089
------------ ------------
Commitments (Note 9)
Redeemable Convertible Preferred Stock:
Series A redeemable convertible preferred stock, $0.01 par value-
Authorized--248,840 shares Issued and outstanding--214,949 shares,
recorded at redemption value ......................................... 3,721,169 3,995,570
Series B redeemable convertible preferred stock, $0.01 par value-
Authorized--243,440 shares Issued and outstanding--135,114 shares,
recorded at redemption value ......................................... 2,812,640 3,034,338
Series C redeemable convertible preferred stock, $0.01 par value-
Authorized--560,092 shares Issued and outstanding--553,744 shares,
recorded at redemption value ......................................... 4,495,295 4,943,828
Stockholders' Deficit:
Common stock, $0.01 par value- Authorized--2,813,708 shares
Issued and outstanding--101,037 shares ............................... 878 1,010
Additional paid-in capital ............................................. 725,496 744,187
Accumulated deficit .................................................... (8,991,124) (3,705,310)
------------ ------------
Total stockholders' deficit .......................................... (8,264,750) (2,960,113)
------------ ------------
$ 8,543,126 $ 25,712,651
============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
VST TECHNOLOGIES, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
--------------- ---------------- --------------
<S> <C> <C> <C>
Revenues $ 7,645,025 $ 24,605,867 $ 61,525,751
Cost of Revenues 6,182,709 19,189,060 45,773,589
------------ ------------ ------------
Gross margin 1,462,316 5,416,807 15,752,162
------------ ------------ ------------
Operating Expenses:
Selling and marketing 2,172,582 2,789,188 3,764,981
Research and development 1,172,534 1,098,601 2,608,001
General and administrative 1,421,604 2,182,687 2,901,823
------------ ------------ ------------
4,766,720 6,070,476 9,274,805
------------ ------------ ------------
Income (loss) from operations (3,304,404) (653,669) 6,477,357
Interest Income 488 1,263 1,228
Interest Expense (305,405) (473,231) (261,185)
Other (Expense) Income, net (42,737) 8,062 (5,060)
------------ ------------ ------------
Net income (loss) (3,652,058) (1,117,575) 6,212,340
Accretion of Dividends on Redeemable Convertible
Preferred Stock 279,308 487,951 926,526
------------ ------------ ------------
Net income (loss) attributable to
common stockholders $ (3,931,366) $ (1,605,526) $ 5,285,814
============ ============ ============
Net Income (Loss) per Share:
Basic $ (44.78) $ (18.29) $ 57.58
============ ============ ============
Diluted $ (44.78) $ (18.29) $ 11.57
============ ============ ============
Weighted Average Shares Outstanding:
Basic 87,799 87,799 91,803
============ ============ ============
Diluted 87,799 87,799 456,825
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial
statements.
F-28
<PAGE>
VST TECHNOLOGIES, INC.
STATEMENTS OF REDEEMABLE CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
SERIES A REDEEMABLE SERIES B REDEEMABLE SERIES C REDEEMABLE
------------------------ ------------------------ -----------------------
NUMBER OF REDEMPTION NUMBER OF REDEMPTION NUMER OF REDEMPTION
SHARES VALUE SHARES VALUE SHARES VALUE
----------- ------------ ----------- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 137,734 $2,143,393 -- $ -- -- $ --
Conversion of convertible
subordinated debt and
accrued interest to
redeemable convertible
preferred stock ............. 76,246 1,068,384 109,264 2,093,466 -- --
Issuance of Series B
preferred stock, net of
issuance costs of $28,745 -- -- 25,642 471,274 -- --
Accretion of dividends on
redeemable convertible
preferred stock ............. -- 249,047 -- 30,261 -- --
Proceeds from issuance of
warrants .................... -- -- -- -- -- --
Net loss ..................... -- -- -- -- -- --
------- ---------- ------- ---------- -- ----------
Balance, December 31, 1997 .... 213,980 3,460,824 134,906 2,595,001 -- --
Conversion of convertible
subordinated debt and
accrued interest to
redeemable convertible
preferred stock ............. -- -- -- -- 292,633 2,620,329
Issuance of Series C
preferred stock, net of
issuance costs of $54,939 -- -- -- -- 261,111 1,864,999
Accretion of dividends and
original issuance
discount on redeemable
convertible preferred
stock ....................... -- 260,345 -- 217,639 -- 9,967
Net loss ..................... -- -- -- -- -- --
------- ---------- ------- ---------- ------- ----------
Balance, December 31, 1998 .... 213,980 3,721,169 134,906 2,812,640 553,744 4,495,295
Accretion of dividends on
redeemable convertible
preferred stock ............. -- 260,351 -- 217,642 -- 448,533
Exercise of stock options .... -- -- -- -- -- --
Exercise of warrants ......... 969 14,050 208 4,056 -- --
Net income ................... -- -- -- -- -- --
------- ---------- ------- ---------- ------- ----------
Balance, December 31, 1999 .... 214,949 $3,995,570 135,114 $3,034,338 553,744 $4,943,828
======= ========== ======= ========== ======= ==========
<PAGE>
<CAPTION>
COMMON STOCK TOTAL
----------------------- ADDITIONAL STOCKHOLDERS'
NUMBER OF $0.01 PAR PAID-IN ACCUMULATED EQUITY
SHARES VALUE CAPITAL DEFICIT (DEFICIT)
----------- ----------- ------------ ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 87,799 $ 878 $580,957 $ (3,399,293) $ (2,817,458)
Conversion of convertible
subordinated debt and
accrued interest to
redeemable convertible
preferred stock ............. -- -- -- -- --
Issuance of Series B
preferred stock, net of
issuance costs of $28,745 -- -- -- --
Accretion of dividends on
redeemable convertible
preferred stock ............. -- -- -- (279,308) (279,308)
Proceeds from issuance of
warrants .................... -- -- 144,539 -- 144,539
Net loss ..................... -- -- -- (3,652,058) (3,652,058)
------ ------ -------- ------------ ------------
Balance, December 31, 1997 .... 87,799 878 725,496 (7,330,659) (6,604,285)
Conversion of convertible
subordinated debt and
accrued interest to
redeemable convertible
preferred stock ............. -- -- -- -- --
Issuance of Series C
preferred stock, net of
issuance costs of $54,939 -- -- -- (54,939 (54,939)
Accretion of dividends and
original issuance
discount on redeemable
convertible preferred
stock ....................... -- -- -- (487,951 (487,951)
Net loss ..................... -- -- -- (1,117,575) (1,117,575)
------ ------ -------- ------------ ------------
Balance, December 31, 1998 .... 87,799 878 725,496 (8,991,124) (8,264,750)
Accretion of dividends on
redeemable convertible
preferred stock ............. -- -- -- (926,526) (926,526)
Exercise of stock options .... 10,444 104 18,440 -- 18,544
Exercise of warrants ......... 2,794 28 251 -- 279
Net income ................... -- -- -- 6,212,340 6,212,340
------ ------ -------- ------------ ------------
Balance, December 31, 1999 .... 101,037 $1,010 $744,187 $ (3,705,310) $ (2,960,113)
======= ====== ======== ============ ============
</TABLE>
The accompanying notes are an integral part of these
financial statements.
F-29
<PAGE>
VST TECHNOLOGIES, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998 AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
---------------- ---------------- ---------------
<S> <C> <C> <C>
Cash Flows from Operating Activities:
Net income (loss) ............................................... $ (3,652,058) $ (1,117,575) $ 6,212,340
Adjustments to reconcile net income (loss) to net cash
used in operating activities-
Depreciation ................................................... 458,846 531,583 665,039
Deferred tax asset ............................................. -- -- (1,485,000)
Amortization of original issue discount ........................ 144,539 -- --
Conversion of accrued interest to redeemable
preferred stock .............................................. 220,218 63,729 --
Changes in assets and liabilities-
Accounts receivable ........................................... (664,010) (3,014,739) (6,752,199)
Inventories ................................................... (407,065) (366,931) (8,153,737)
Prepaid expenses .............................................. 18,141 (2,382) (53,464)
Accounts payable .............................................. 863,433 840,638 5,669,088
Accrued expenses .............................................. 376,224 314,771 790,858
Income taxes payable .......................................... -- -- 1,448,150
------------ ------------ ------------
Net cash used in operating activities ........................ (2,641,732) (2,750,906) (1,658,925)
------------ ------------ ------------
Cash Flows from Investing Activities:
Purchases of property and equipment ............................. (631,083) (604,554) (1,175,696)
Decrease in other assets ........................................ 1,970 5,828 --
------------ ------------ ------------
Net cash used in investing activities ........................ (629,113) (598,726) (1,175,696)
------------ ------------ ------------
Cash Flows from Financing Activities:
Net borrowings under line of credit ............................. 680,560 544,440 3,000,000
Proceeds from issuance of convertible subordinated debt ......... 1,390,461 1,956,600 --
Repayments on capital lease obligation .......................... 500,000 -- (11,460)
Principal repayments on note payable ............................ (16,544) (483,456) --
Net proceeds from the sale of redeemable convertible
preferred stock ............................................... 471,274 1,810,060 --
Proceeds from exercise of stock options ......................... -- -- 18,544
Proceeds from exercise of warrants .............................. -- -- 18,385
Proceeds from issuance of warrants .............................. 144,539 -- --
------------ ------------ ------------
Net cash provided by financing activities .................... 3,170,290 3,827,644 3,025,469
------------ ------------ ------------
Net Increase (Decrease) in Cash and Cash Equivalents ............. (100,555) 478,012 190,848
Cash and Cash Equivalents, beginning of year ..................... 228,529 127,974 605,986
------------ ------------ ------------
Cash and Cash Equivalents, end of year ........................... $ 127,974 $ 605,986 $ 796,834
============ ============ ============
Supplemental Disclosure of Noncash Financing Transactions:
Accretion of dividends on redeemable convertible
preferred stock ............................................... $ 279,308 $ 487,951 $ 926,526
============ ============ ============
Conversion of convertible subordinated debt and accrued
interest into redeemable convertible preferred stock .......... $ 3,161,850 $ 2,620,329 $ --
============ ============ ============
Equipment acquired under capital lease obligation ............... $ -- $ -- $ 23,620
============ ============ ============
Supplemental Disclosure of Cash Flow Information:
Cash paid during the year for interest .......................... $ 57,272 $ 331,019 $ 236,845
============ ============ ============
Cash paid during the year for taxes ............................. $ 2,400 $ 2,400 $ 36,850
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE>
VST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1999
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
VST Technologies, Inc. (the Company) was incorporated in Delaware to
develop, manufacture, distribute, market, sell and service peripheral computer
products for portable and desktop personal computers.
The Company is subject to the risks associated with emerging,
technology-oriented companies. Primary among these risks are competition from
substitute products and the need to successfully develop and market its current
and future products and, if it becomes necessary, to obtain additional
financing to fund operations. Management believes that the Company's current
cash position along with the availability under its line of credit and current
operating plan will be sufficient to fund operations for the next fiscal year.
On March 6, 2000, the Company was acquired by SmartDisk Corporation
(SmartDisk), a publicly held Company, for approximately $16.4 million in cash,
approximately 1.1 million shares of SmartDisk common stock and options to
acquire approximately 443,000 shares of SmartDisk common stock.
The accompanying financial statements reflect the application of the
accounting policies described below.
(A) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
remaining maturity of three months or less to be cash equivalents. At December
31, 1998 and 1999, the Company's cash equivalents consist entirely of money
market funds.
(B) INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market and consist of the following at December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
------------- -------------
<S> <C> <C>
Raw materials ............................... $1,344,782 $ 5,033,684
Work-in-process and finished goods .......... 1,300,749 5,765,584
---------- -----------
$2,645,531 $10,799,268
========== ===========
</TABLE>
(C) DEPRECIATION
The Company provides for depreciation by charges to operations using the
straight-line method based on the estimated useful lives of the related assets,
as follows:
<TABLE>
<CAPTION>
ASSET CLASSIFICATION ESTIMATED USEFUL LIFE
- --------------------------------------------- ----------------------
<S> <C>
Production equipment ..................... 18 months
Computer equipment and software .......... 3-5 years
Furniture and fixtures ................... 5 years
</TABLE>
In accordance with Statement of Financial Accounting Standards (SFAS) No.
121, ACCOUNTING FOR IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS
TO BE DISPOSED OF, the Company
F-31
<PAGE>
VST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
reviews its long-lived assets (which consist primarily of property and
equipment) for impairment as events and circumstances indicate the carrying
amount of an asset may not be recoverable. The Company evaluates the
realizability of its long-lived assets based on profitability and cash flow
expectations for the related asset. Management believes that, as of each of the
balance sheet dates presented, none of the Company's long-lived assets were
impaired.
(D) REVENUE RECOGNITION
The Company recognizes revenue upon product shipment, at which time
ownership of the product is transferred. In addition, the Company also reserves
for anticipated product returns and customer allowances at that time.
(E) RESEARCH AND DEVELOPMENT
Research and development costs are charged to operations as incurred.
(F) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(G) FINANCIAL INSTRUMENTS
The estimated fair market value of the Company's financial instruments,
which include cash and cash equivalents, accounts receivable and accounts
payable, approximates the carrying values of those instruments.
(H) CONCENTRATIONS OF CREDIT RISK
SFAS No. 105, DISCLOSURE ABOUT FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK AND FINANCIAL INSTRUMENTS WITH CONCENTRATIONS OF CREDIT
RISK, requires disclosure of any significant off-balance-sheet and credit risk
concentrations. Financial instruments that subject the Company to significant
concentrations of credit risk primarily consist of cash and cash equivalents
and accounts receivable. The Company maintains its cash and cash equivalents
balances with well capitalized financial institutions. To control accounts
receivable credit risk, the Company performs credit evaluations of its
customers and maintains allowances for potential credit losses. The Company has
not experienced any significant loss on any particular customer during 1998 or
1999.
(I) COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) includes net income (loss), as well as other
changes in stockholders' equity (deficit) except stockholder investments and
distributions. The Company's comprehensive income (loss) is equal to net income
(loss) for all periods presented.
F-32
<PAGE>
VST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(1) OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(J) STOCK-BASED COMPENSATION
The Company records stock-based compensation issued to employees using the
intrinsic value method, and stock-based compensation issued to nonemployees
using the fair value method. Stock-based compensation is recognized on options
issued to employees if the option exercise price is less than the market price
of the underlying stock on the date of grant.
(K) NET INCOME (LOSS) PER SHARE
The Company computes net income (loss) per share in accordance with the
provisions of SFAS No. 128, EARNINGS PER SHARE. Under the provisions of SFAS
No. 128, net income (loss) per share is measured at two levels: basic net
income (loss) per share and diluted net income (loss) per share. Basic net
income (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding during the period. Diluted
net income (loss) per is computed by dividing net income (loss) by the weighted
average number of dilutive common shares, options and warrants outstanding
during the period. Diluted weighted average shares reflects the dilutive
effect, if any, of common stock options and warrants based on the treasury
stock method. No common stock equivalents are considered dilutive in periods in
which a loss is reported because all such common equivalent shares are
antidilutive. The number of common stock equivalents that were excluded from
the calculation, as their effect would have been antidilutive, was 175,300,
208,764 and 86,446 in 1997, 1998 and 1999, respectively.
The calculations of basic and diluted weighted average shares outstanding
are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- ---------
<S> <C> <C> <C>
Basic weighted average shares outstanding ............ 87,799 87,799 91,803
Dilutive options and warrants ........................ -- -- 365,022
------ ------ -------
Diluted weighted average shares outstanding .......... 87,799 87,799 456,825
====== ====== =======
</TABLE>
(L) RECENTLY ISSUED ACCOUNTING PRONOUNCEMENT
In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES. SFAS No. 133
establishes accounting and reporting standards for derivative instruments and
hedging activities. SFAS No. 133, as amended by SFAS No. 137, will be effective
for the Company's financial reporting beginning in the first quarter of 2001.
SFAS No. 133 will require the Company to recognize all derivatives as either
assets or liabilities in the statement of financial position and measure those
instruments at fair value. The accounting for gains and losses from changes in
the fair value of a particular derivative will depend on the intended use of
the derivative. The Company does not expect the adoption of SFAS No. 133 to
have a material impact on the results of its operations or financial position.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
"Revenue Recognition." This bulletin, as amended, established guidelines for
revenue recognition and is effective for periods beginning after March 15,
2000. The Company does not expect that the adoption of the guidelines required
by SAB 101 will have a material impact on the financial statements.
F-33
<PAGE>
VST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(2) LINE OF CREDIT
During 1999, the Company entered into a new line of credit agreement (the
line) with a bank under which the Company may borrow up to $5,000,000 based
upon a borrowing base of 80% of eligible accounts receivable, as defined. The
line expires on June 30, 2000. Borrowings under the line are collateralized by
substantially all of the Company's assets and bear interest at the bank's prime
rate (8.50% at December 31, 1999) plus an incremental rate based on financial
performance. This incremental rate was 0.50% at December 31, 1999. The
agreement requires compliance with several financial covenants, with which the
Company was in compliance at December 31, 1999. As of December 31, 1999, there
was $4,500,000 outstanding under the line.
During 1999, the Company issued a warrant to a bank for the purchase of
6,348 shares of Series C redeemable convertible preferred stock (the Series C
preferred stock) (see Note 5(a)) at an exercise price of $8.10 per share. No
value has been ascribed to these warrants, as they have an immaterial effect on
the financial statements.
(3) CONVERTIBLE SUBORDINATED DEBT
The Company issued convertible demand notes payable (the 1997 notes) in
the amount of $1,535,000 during 1997. At December 31, 1997, $600,000 of these
notes were outstanding. In 1998, the Company issued an additional $2,556,600 of
such notes (the 1998 notes). In conjunction with the issuance of the 1998
notes, the outstanding 1997 notes were canceled and reissued as part of the
1998 notes. The 1998 notes were unsecured and bore interest at 12% per annum.
In connection with the issuance of the 1997 notes, the Company issued an
aggregate of 15,745 warrants, to which the Company allocated $144,539 of the
gross proceeds. The resulting original issuance discount was fully amortized in
1997.
In conjunction with the sale of the Series C preferred stock (see Note
5(a)), all principal plus accrued interest on the 1998 notes was converted into
292,633 shares of Series C preferred stock and the Company issued warrants to
purchase common stock at an exercise price of $0.10 (see Note 6(b)).
(4) INCOME TAXES
The Company provides for income taxes under the liability method in
accordance with SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Under the provisions
of SFAS No. 109, the Company recognizes a current tax liability or asset for
current taxes payable or refundable and a deferred tax liability or asset for
the estimated future effects of temporary differences between the carrying
value of assets and liabilities for financial reporting and tax reporting
purposes to the extent that they are realizable.
F-34
<PAGE>
VST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(4) INCOME TAXES--(CONTINUED)
The Components of the deferred tax assets are as follows:
<TABLE>
<CAPTION>
1998 1999
--------------- --------------
<S> <C> <C>
Net operating loss carryforwards ............ $ 1,792,000 $ --
Allowance for bad debts ..................... 121,000 193,000
Accrued liabilities ......................... 361,000 1,041,000
Reserve for inventory obsolescence .......... 413,000 383,000
Reserve for stock rotation rights ........... -- (332,000)
Depreciation ................................ 144,000 200,000
------------ ----------
Total net deferred tax assets ............. 2,831,000 1,485,000
Valuation allowance ......................... (2,831,000) --
------------ ----------
$ -- $1,485,000
============ ==========
</TABLE>
During 1999, the Company recorded a deferred tax asset of $1,485,000 in
the accompanying balance sheet, as it was determined that it was more likely
than not that the Company would be able to realize this asset.
At December 31, 1998, the Company recorded a full valuation allowance
against its deferred tax asset due to the uncertainty surrounding the timing of
the realization of these tax benefits. Realization of these tax benefits were
dependent on generating sufficient taxable income.
The reconciliation between the statutory federal income tax rate and the
Company's effective tax rate is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- --------
<S> <C> <C> <C>
Federal statutory rate ......................... (34)% (34)% 34%
State tax, net of federal tax benefit .......... (6) (6) 6
Change in valuation allowance .................. 40 40 (40)
--- --- ----
0 % 0 % 0 %
==== ==== ======
</TABLE>
(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK
During 1995, the Company issued 137,734 shares of Series A redeemable
convertible preferred stock (Series A preferred stock), $0.01 par value, at an
issuance price of $14.50 per share for net proceeds of approximately
$1,900,000. In 1997, the Company issued 76,246 and 109,264 shares of Series A
preferred stock and Series B redeemable preferred stock (Series B preferred
stock), respectively, pursuant to the conversion of $3,161,850 of convertible
subordinated debt and accrued interest. On May 6, 1997, the Company sold 25,642
shares of Series B preferred stock for net proceeds of $471,000. On December
23, 1998, the Company issued 553,744 shares of Series C preferred stock for net
cash proceeds of $1,810,000 and the conversion of $2,620,329 of convertible
subordinated debt and accrued interest. The rights and privileges of the Series
A, Series B and Series C preferred stock are as follows:
F-35
<PAGE>
VST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(5) REDEEMABLE CONVERTIBLE PREFERRED STOCK--(CONTINUED)
LIQUIDATION
In the event of liquidation, the Series A, Series B and Series C preferred
stockholders are entitled to $14.50, $19.50 and $8.10 per share plus accrued
and unpaid dividends (compounded at 8%, 8% and 10% of the original purchase
price), respectively, prior to any distribution to common stockholders. The
liquidation rights of the Series C preferred stockholders are senior to those
of both the Series A and Series B preferred stockholders.
VOTING
The preferred stockholders are entitled to voting rights equivalent to the
number of shares of common stock into which each preferred share can be
converted.
CONVERSION
Each class of preferred stock is convertible into common stock at a rate
of one share of common stock for each share of preferred stock, adjustable for
certain dilutive events. Each share of preferred stock will be automatically
converted into shares of common stock upon the closing of a public offering of
the Company's common stock, at a price per share of not less than $24.30 per
share (as adjusted for any stock dividend or stock distribution) and aggregate
gross proceeds of not less than $15,000,000.
RIGHT OF FIRST REFUSAL
The preferred stockholders have certain rights of first refusal that allow
them to participate ratably in any future issuance of stock to maintain their
original ownership percentage. This right terminates upon a public offering, as
defined.
DIVIDENDS
Cumulative dividends on preferred stock are paid out of available
earnings, as defined, if and when declared by the Board of Directors, at a rate
of 8%, 8% and 10% for Series A, Series B and Series C preferred stock,
respectively.
REDEMPTION
The Company may be required, upon an affirmative vote of the holders of at
least 50% of the then outstanding preferred shares, to redeem all of the
preferred stock in three equal installments, with the first installment on or
after December 1, 2003, and the second and third installments on the first and
second anniversary of such date, respectively. The redemption price of the
Series A, Series B and Series C preferred stock is $14.50, 19.50 and $8.10 per
share, respectively, plus an amount equal to an annual compounded rate of 8%,
8% and 10% of the original purchase price, respectively.
F-36
<PAGE>
VST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(6) STOCKHOLDERS' DEFICIT
(A) COMMON STOCK
The Company has authorized 2,813,708 shares of $0.01 par value common
stock. The Company has reserved 1,827,537 shares of common stock for the
conversion of the preferred stock and the issuance upon exercise of common
stock warrants and stock options.
(B) WARRANTS
The following table summarizes preferred stock warrant activity for the
three-year period ended December 31, 1999:
<TABLE>
<CAPTION>
NUMBER OF EXERCISE PRICE WEIGHTED
SHARES PER SHARE(#) AVERAGE PRICE(#)
----------- ---------------- -----------------
<S> <C> <C> <C>
Outstanding, December 31, 1996 ......... 31,712 $14.50-19.50 $16.12
Issued ................................ 23,437 19.50 19.50
------ ------------ ------
Outstanding, December 31, 1997 ......... 55,149 14.50-19.50 17.55
------ ------------ ------
Outstanding, December 31, 1998 ......... 55,149 14.50-19.50 17.55
Issued ................................ 6,348 8.10 8.10
Exercised ............................. (1,177) 14.50-19.50 15.38
------ ------------ ------
Outstanding, December 31, 1999 ......... 60,320 $ 8.10-19.50 $16.75
====== ============ ======
Exercisable, December 31, 1999 ......... 60,320 $ 8.10-19.50 $16.75
====== ============ ======
</TABLE>
The warrants may be exercised at any time after issuance and expire at
various dates through 2007. The warrants are subject to certain antidilution
provisions that allow the holders of these warrants to participate in property
and security dividends issued by the Company to common stockholders and to
participate in any common stock dividends or splits.
In addition to the preferred stock warrants granted above, in 1997, the
Company granted warrants for the purchase of 1,026 shares of common stock at an
exercise price of $19.50 per share and in 1998, the Company granted warrants to
purchase 138,436 shares of common stock, an exercise price of $0.10 per share,
in connection with the conversion of the convertible subordinated debt
described in Note 3 and the issuance of the Series C preferred stock (Note 5).
The warrants may be exercised at anytime after issuance and expire at various
dates through 2008. No value has been ascribed to these warrants, as they have
an immaterial effect on the financial statements.
(C) STOCK OPTION PLAN
Under the 1995 Stock Option Plan as amended (the Plan), the Company may
grant options to purchase up to 536,994 shares of common stock to be granted to
Company directors, officers, employees and consultants. Incentive stock options
may be granted under the Plan at a price not less than 100% of the fair market
value on the date of grant and expire at a maximum of 10 years from the date of
grant. Nonqualified stock options expire on dates determined in each optionee's
agreement, but they may be subject to earlier termination, as provided in the
Plan. The Plan terminates on July 5, 2005.
F-37
<PAGE>
VST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(6) STOCKHOLDERS' DEFICIT--(CONTINUED)
Information with respect to all stock option activity is as follows:
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE WEIGHTED AVERAGE
SHARES PER SHARE OPTIONS PRICE
----------- -------------- -----------------
<S> <C> <C> <C>
Outstanding, December 31, 1996 ......... 81,244 $1.45-1.60 $1.46
Granted ............................... 41,381 1.60-1.95 1.93
Expired ............................... (3,500) 1.45-1.95 1.58
------ ---------- -----
Outstanding, December 31, 1997 ......... 119,125 $1.45-1.95 $1.62
Granted ............................... 49,500 1.95 1.95
Canceled .............................. (15,010) 1.95 1.95
------- ---------- -----
Outstanding, December 31, 1998 ......... 153,615 1.45-1.95 1.69
Granted ............................... 358,464 .81-4.00 .96
Canceled .............................. (8,100) 1.45-2.43 2.34
Exercised ............................. (10,444) 1.45-1.95 1.78
------- ---------- -----
Outstanding, December 31, 1999 ......... 493,535 $ .81-4.00 $1.15
======= ========== =====
Exercisable, December 31, 1999 ......... 396,606 $ .81-1.95 $1.10
======= ========== =====
Exercisable, December 31, 1998 ......... 115,502 $1.45-1.95 $1.64
======= ========== =====
Exercisable, December 31, 1997 ......... 67,652 $1.45-1.95 $1.45
======= ========== =====
</TABLE>
The range of exercise prices for common stock options outstanding and
options exercisable at December 31, 1999 is as follows:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF REMAINING AVERAGE AVERAGE
EXERCISE OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
PRICES OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- --------------- ------------- ------------- ------------ ------------- ---------
<S> <C> <C> <C> <C> <C>
$0.81 326,264 5.89 $ 0.81 259,443 $0.81
1.45 72,100 4.10 1.45 79,016 1.45
1.60 3,500 6.75 1.60 2,625 1.60
1.95 66,571 8.30 1.95 55,522 1.95
2.43 23,950 9.42 2.43 - 2.43
4.00 1,150 9.63 4.00 - 4.00
- ------------ ------- ---- --------- ------- -----
$.81-4.00 493,535 6.14 $.81-4.00 396,606 $1.10
============ ======= ==== ========= ======= =====
</TABLE>
The Financial Accounting Standards Board issued SFAS No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION, which requires the measurement of the fair value
of stock-based compensation to be included in the statement of operations or
disclosed in the notes to the financial statements. The Company has determined
that it will continue to account for stock-based compensation for employees
under Accounting Principles Board Opinion No. 25 and elect the disclosure-only
alternative under
F-38
<PAGE>
VST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(6) STOCKHOLDERS' DEFICIT--(CONTINUED)
SFAS No. 123 for stock-based compensation awarded in 1998 and 1999 using the
Black-Scholes option pricing model prescribed by SFAS No. 123. The underlying
assumptions used are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------
1997 1998 1999
--------- --------- --------------
<S> <C> <C> <C>
Risk-free interest rate ........... 6.22% 4.65% 5.10-6.15%
Expected dividend yield ........... -- -- --
Expected lives (in years) ......... 7 7 7
Expected volatility ............... 65% 65% 65%
</TABLE>
During the years ended December 31, 1997, 1998 and 1999, the weighted
average value of option grants was $0.33, $1.25 and $0.30 per share,
respectively. The weighted average remaining contractual life of options
outstanding at December 31, 1997, 1998 and 1999 was 7.40, 7.21 and 6.14 years,
respectively.
The pro forma effect of SFAS No. 123 for the years ended December 31,
1997, 1998 and 1999 is as follows:
<TABLE>
<CAPTION>
1997 1998 1999
---------------- ---------------- -------------
<S> <C> <C> <C>
Net income (loss) .................... $ (3,652,058) $ (1,117,575) $6,212,340
Pro forma net income (loss) .......... $ (3,654,389) $ (1,196,147) $6,033,058
Pro forma net income (loss) per share-
Basic ............................... $ (41.62) $ (13.62) $ 65.72
Diluted ............................. $ (41.62) $ (13.62) $ 13.21
</TABLE>
(7) SIGNIFICANT CUSTOMERS
Three customers accounted for approximately 50%, 53% and 57% during 1997,
1998 and 1999, respectively, of the Company's revenue. As of December 31, 1998
and 1999, one and two customers, respectively, represented approximately 51%
and 56%, respectively, of the Company's accounts receivable balance.
(8) SIGNIFICANT VENDORS
During 1998 and 1999, the Company relied on another company to supply a
key component for the manufacture of some of the Company's peripheral products.
During 1997, there were no significant vendors.
(9) COMMITMENTS
The Company conducts its operations in leased facilities under an
operating lease agreement. The lease expires in April 2001 and future minimum
lease payments under this agreement are $435,505 for 2000. The Company recorded
approximately $162,010, $210,271 and $222,415 of rent expense in 1997, 1998 and
1999, respectively.
F-39
<PAGE>
VST TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
DECEMBER 31, 1999
(10) SEGMENT AND GEOGRAPHIC INFORMATION
The Company had adopted SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 requires certain financial and
supplementary information to be disclosed on an annual and interim basis for
each reportable segment of an enterprise. The Company has determined that it
only operates in one segment. Gross revenues by significant geographic region
are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
------------------------ ------------------------- -------------------------
<S> <C> <C> <C> <C> <C> <C>
North America ............. $6,763,436 78% $23,517,040 91% $58,354,476 92%
Europe .................... 326,780 4 2,097,522 8 3,664,183 6
Asia/Pacific Rim .......... 1,552,278 18 238,016 1 1,472,147 2
---------- -- ----------- -- ----------- --
$8,642,494 100% $25,852,578 100% $63,490,806 100%
========== === =========== === =========== ===
</TABLE>
(11) VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE,
BEGINNING OF CHARGED TO BALANCE,
ALLOWANCE FOR DOUBTFUL ACCOUNTS YEAR EXPENSE WRITE-OFFS END OF YEAR
- --------------------------------- -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
December 31, 1999 ............ $299,968 $180,000 $ -- $479,968
December 31, 1998 ............ 75,000 267,277 (42,309) 299,968
December 31, 1997 ............ 54,315 64,927 (44,242) 75,000
</TABLE>
<TABLE>
<CAPTION>
BALANCE,
BEGINNING OF CHARGED TO BALANCE,
RESERVE FOR PRICE PROTECTION YEAR EXPENSE WRITE-OFFS END OF YEAR
- ------------------------------ -------------- ------------ -------------- ------------
<S> <C> <C> <C> <C>
December 31, 1999 ......... $280,000 $ 520,000 $ (394,869) $405,131
December 31, 1998 ......... 35,000 1,086,317 (841,317) 280,000
December 31, 1997 ......... -- 35,000 -- 35,000
</TABLE>
<TABLE>
<CAPTION>
BALANCE,
BEGINNING OF CHARGED TO BALANCE,
RESERVE FOR STOCK ROTATION YEAR EXPENSE WRITE-OFFS END OF YEAR
- ------------------------------ -------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
December 31, 1999 ......... $400,000 $1,100,000 $ -- $1,500,000
December 31, 1998 ......... 310,000 647,641 (557,641) 400,000
December 31, 1997 ......... 116,414 341,540 (147,954) 310,000
</TABLE>
(12) SUBSEQUENT EVENTS
On February 23, 2000, the Company signed an agreement to acquire
substantially all of the intellectual property of a privately held company and
supplier of software for high-performance storage solutions, for approximately
$400,000 in cash and 41,100 shares of the Company's common stock.
F-40
<PAGE>
OUR PRIMARY PRODUCTS
<TABLE>
<S> <C> <C> <C>
FlashPath/trademark/ for FlashPath/trademark/ for Sony FlashPath/trademark/ for Smarty/trademark/ Smart
SmartMedia Memory Stick MultiMediaCard Card Reader
</TABLE>
<TABLE>
<S> <C> <C>
USB Tri-MediaReader FireWire Hard Drives FireWire RAID Array
for SmartMedia/trademark/, CompactFlash,
IBM MicroDrive and floppy disks
</TABLE>
<TABLE>
<S> <C> <C>
FlashTrax/trademark/ Digital Audio Player USB Hard Drives Removable Media Solutions
FireWire Zip and USB Floppy Drive
</TABLE>
[pictures of each of the above-listed products]
OUR PRIMARY CUSTOMERS AND PARTNERS
[Apple logo] [FujiFilm logo] Hitachi
[IBM logo] [Ingram Micro logo] JVC Olympus
[SanDisk logo] Sharp Sony
[Tech Data logo] Toshiba
[GRAPHIC OMITTED]
Simplifying The Digital Lifestyle/trademark/
<PAGE>
================================================================================
3,900,000 SHARES
[GRAPHIC OMITTED]
COMMON STOCK
-----------
PROSPECTUS
-----------
MERRILL LYNCH & CO.
CHASE H&Q
U.S. BANCORP PIPER JAFFRAY
, 2000
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by SmartDisk and the selling
Stockholders in connection with the sale of common stock being registered. All
amounts are estimates except the SEC registration fee and the NASD filing fees.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee ......... $ 35,263
NASD filing fee ............................................. 13,857
Nasdaq National Market listing fee .......................... 17,500
Printing expenses ........................................... 125,000
Accounting fees and expenses ................................ 100,000
Legal fees and expenses ..................................... 150,000
Blue Sky fees and expenses .................................. 10,000
Transfer Agent's fees and expenses .......................... 5,000
Miscellaneous ............................................... 43,380
--------
TOTAL ...................................................... $500,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law authorizes a court to
award or a corporation's board of Directors to grant indemnification to
directors and officers in terms sufficiently broad to permit such
indemnification under certain circumstances for liabilities (including
reimbursement for expenses incurred) arising under the Securities Act of 1933,
as amended (the "Securities Act"). Our bylaws provides for mandatory
indemnification of our directors and officers and permissible indemnification
of employees and other agents to the maximum extent permitted by the Delaware
General Corporation Law. Our certificate of incorporation provides that,
pursuant to Delaware law, our directors shall not be liable for monetary
damages for breach of the directors' fiduciary duty as directors to us and our
stockholders. This provision in the certificate of incorporation does not
eliminate the directors' fiduciary duty, and in appropriate circumstances
equitable remedies such as injunctive or other forms of non-monetary relief
will remain available under Delaware law. In addition, each director will
continue to be subject to liability for breach of the director's duty of
loyalty to us for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under Delaware law. The
provision also does not affect a director's responsibilities under any other
law, such as the federal securities laws or state or federal environmental
laws. In addition, we have entered into Indemnification Agreements with our
officers and directors, the form of which is attached as Exhibit 10.22 hereto
and incorporated herein by reference. The Indemnification Agreements provide
our officers and directors with further indemnification to the maximum extent
permitted by the Delaware General Corporation Law. Reference is made to Section
6(b) of the Purchase Agreement contained in Exhibit 1.1 hereto, indemnifying
our officers and directors against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On January 13, 1999, we sold 250,000 shares of common stock to Hitachi
Software Engineering Co., Ltd. for $1,100,000.
On April 1, 1999, we sold 50,000 shares of common stock to Toshiba
Corporation in exchange for a fully-paid license.
II-1
<PAGE>
On May 26, 1999, we sold 515,500 shares of common stock to the
stockholders of SmartDiskette Limited, an English corporation, in exchange for
all of the outstanding shares of capital stock of SmartDiskette Limited.
On June 30, 1999, we issued 37,500 shares of common stock to SanDisk
Corporation as partial consideration for the grant of a license to certain
intellectual property.
On July 1, 1999, we sold 312,500 shares of common stock to SCM
Microsystems, Inc. for $2,500,000. On that date, we also sold an aggregate of
87,500 shares of common stock to five investors, including two of our
directors, Messrs. Tomlinson and Bidzos, and First TZMM Investment Partnership
for $700,000, or $8.00 per share. First TZMM Investment Partnership is an
entity affiliated with Tomlinson Zisko Morosoli & Maser LLP. Mr. Tomlinson is a
partner of Tomlinson Zisko Morosoli & Maser LLP.
Between January 1, 1998 and April 30, 2000, we issued an aggregate of
846,469 shares of common stock to some of our employees, directors or
consultants. Such shares were issued upon exercise of stock options with
exercise prices ranging from $0.72 to $35.00 per share.
On March 6, 2000, we sold approximately 1,073,000 shares of common stock
to the stockholders of VST Technologies, Inc. as partial consideration for the
exchange of all of the outstanding capital stock of VST.
On April 21, 2000, we sold approximately 37,000 shares of common stock to
the stockholders of El Gato Software LLC as partial consideration for the
acquisition of substantially all of the intellectual property of El Gato.
On April 28, 2000, we sold approximately 125,000 shares of common stock to
the stockholders of Impleo Limited as partial consideration for the acquisition
of all of the capital stock of Impleo.
The sale of the above securities was deemed to be exempt from registration
under the Securities Act in reliance upon Section 4(2) of the Securities Act or
Rule 701 promulgated under Section 3(b) of the Securities Act as transactions
by an issuer not involving any public offering or transactions pursuant to
compensation benefit plans and contracts relating to compensation as provided
under such Rule 701. The recipients of securities in each such transaction
represented their intentions to acquire the securities for investment only and
not with a view to or for sale in connection with any distribution thereof, and
appropriate legends were affixed to the share certificates issued in such
transactions. All recipients had adequate access, through their relationships
with us, to information about us.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
A. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- -------------------------------------------------------------------------------
<S> <C>
1.1 Form of Purchase Agreement*
2.1 Agreement and Plan of Merger among SmartDisk, VST Acquisition Corp., Inc., VST
Technologies, Inc. and certain stockholders of VST Technologies, Inc. (2.0)(2)
3.1 Certificate of Incorporation (3.1)(1)
3.2 Bylaws (3.2)(1)
5.1 Opinion of Greenberg Traurig, P.A.*
10.1 1998 Employee Stock Option Plan (10.1)(1)
10.2 1998 Directors and Consultants Stock Option Plan (10.2)(1)
10.3 1999 Incentive Compensation Plan*
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- --------- --------------------------------------------------------------------------------------------
<S> <C>
10.4 1999 Employee Stock Purchase Plan (10.4)(1)
10.5 Employment Agreement with Michael S. Battaglia (10.5)(4)
10.6 Employment Agreement with Robert Protheroe (10.6)(1)
10.7 Employment Agreement with Quresh Sachee (10.7)(4)
10.8 Employment Agreement with Vincent Fedele*
10.9 Employment Agreement with James M. Giarrusso*
10.10 License Agreement dated May 26, 1998 between Toshiba Corporation and SmartDisk, as
amended (10.8)(1)
10.11 Operating Agreement dated May 28, 1998 between Fischer International System Corporation
and SmartDisk, as amended (10.9)(1)
10.12 License and Distribution Agreement dated May 28, 1998 between SmartDisk and Fischer
International Systems Corporation (10.10)(1)
10.13 Distribution Agreement dated May 28, 1998 between Fischer International Systems
Corporation and SmartDisk (10.11)(1)
10.14 Investors' Rights Agreement dated May 22, 1998 among SmartDisk and each of the investors
a party thereto (10.12)(1)
10.15 Amendment Number One to Investors' Rights Agreement dated July 1999 among SmartDisk
and each of the investors a party thereto (10.13)(3)
10.16 Management Registration Rights Agreement dated March 6, 2000 among SmartDisk and
certain former stockholders of VST Technologies, Inc.*
10.17 Non-Management Registration Rights Agreement dated March 6, 2000 among SmartDisk and
certain former stockholders of VST Technologies, Inc.*
10.18 Lease Agreement dated October 4, 1993 between Arnold Industrial Park and SmartDisk, by
assignment (10.13)(1)
10.19 Development and License Agreement dated June 30, 1999 between SmartDisk and Sony
Corporation (10.14)(1)/dagger/
10.20 Development and License Agreement dated December 1, 1999 between SmartDisk and Sony
Corporation (10.16)(3)
10.21 Cooperative Development Agreement dated June 30, 1999 between SmartDisk and SanDisk
Corporation (10.15)(1)/dagger/
10.22 Form of Indemnification Agreement between the Registrant and each of its directors and
executive officers (10.16) (1)
10.23 Joint Venture Agreement dated as of February 24, 1998 by and among Phoenix House
Investments, L.L.C., Toshiba Corporation and SmartDisk Corporation (10.17)(1)
10.24 Amendment No. 2 to License Agreement dated April 1, 1999 between Toshiba Corporation
and SmartDisk (10.20)(4)
10.25 Agreement for the exchange of the whole of the issued share capital of Impleo Limited dated
April 28, 2000 among SmartDisk and the stockholders of Impleo Limited
21.1 Subsidiaries of SmartDisk
23.1 Consent of Greenberg Traurig, P.A. (included in Exhibit 5.1)
23.2 Consent of Ernst & Young LLP
23.3 Consent of Arthur Andersen LLP
24.1 Power of Attorney (set forth on the signature page of this Registration Statement)
27.1 Financial Data Schedules (SEC use only)
</TABLE>
II-3
<PAGE>
- ----------------
(1) Incorporated by reference to the exhibit in the preceding parentheses as
filed with SmartDisk's Registration Statement on Form S-1 (Registration
No. 333-82793).
(2) Incorporated by reference to the exhibit in the preceding parentheses as
filed with SmartDisk's Report on Form 8-K (Event of March 6, 1999).
(3) Incorporated by reference to the exhibit in the preceding parentheses as
filed with SmartDisk's Annual Report on Form 10-K for the year ended
December 31, 1999 (File No. 000-27257).
(4) Incorporated by reference to the exhibit in the preceding parentheses as
filed with Amendment No. 1 to SmartDisk's Annual Report on Form 10-K/A for
the year ended December 31, 1999 (File No. 000-27257).
* Previously filed.
/dagger/ Certain information in these exhibits has been omitted pursuant to a
request for confidential treatment filed with the SEC.
ITEM 17. UNDERTAKINGS
We hereby undertake to provide to the underwriters at the closing
specified in the Underwriting Agreement, certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of ours
pursuant to the Delaware General Corporation Law, our Certificate of
Incorporation or our Bylaws, the Underwriting Agreement, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act,
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by us of expenses incurred or
paid by a director, officer, or controlling person of ours in the successful
defense of any action, suit or proceeding) is asserted by such director,
officer or controlling person in connection with the securities being
registered hereunder, we will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by us is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
We hereby undertake that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by us pursuant to Rule 424(b)(1) or (4)
or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering
thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, SmartDisk has
duly caused this Amendment No. 1 to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Naples, State of Florida, on this 9th day of May, 2000.
SMARTDISK CORPORATION
By: /s/ Michael S. Battaglia
-----------------------------
Michael S. Battaglia
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- -------------------------------------- ---------------------------------------------- ------------
<S> <C> <C>
Addison M. Fischer* Chairman and Director May 9, 2000
- --------------------------------------
Addison M. Fischer
/s/ Michael S. Battaglia President, Chief Executive Officer and May 9, 2000
- -------------------------------------- Director (Principal Executive Officer)
Michael S. Battaglia
Michael R. Mattingly* Chief Financial Officer (Principal Financial May 9, 2000
- -------------------------------------- and Accounting Officer)
Michael R. Mattingly
D. James Bidzos* Director May 9, 2000
- --------------------------------------
D. James Bidzos
Anthony A. Ibarguen* Director May 9, 2000
- --------------------------------------
Anthony A. Ibarguen
Shigeki Morita* Director May 9, 2000
- --------------------------------------
Shigeki Morita
Timothy Tomlinson* Director May 9, 2000
- --------------------------------------
Timothy Tomlinson
- -------------------------------------- Director
Joseph M. Tucci
Hatim Tyabji* Director May 9, 2000
- --------------------------------------
Hatim Tyabji
* By: /s/ Michael S. Battaglia
---------------------------------
Michael S. Battaglia
ATTORNEY-IN-FACT
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- -------- --------------------------------------------------------------------------------------------
<S> <C>
10.25 Agreement for the exchange of the whole of the issued share capital of Impleo Limited dated
April 28, 2000 among SmartDisk and the stockholders of Impleo Limited
21.1 Subsidiaries of SmartDisk
23.2 Consent of Ernst & Young LLP
23.3 Consent of Arthur Andersen LLP
</TABLE>
EXHIBIT 10.25
AGREEMENT
for the exchange of the whole of the issued share capital of Impleo Limited
(1) The persons listed in schedule 1
(2) SmartDisk Corporation
Dated April 28, 2000
OSBORNE CLARKE OWA
BRISTOL OFFICE
50 Queen Charlotte Street, Bristol BS1 4HE
Telephone 0117 917 3000 Facsimile 0117 917 3005
LONDON OFFICE
Hillgate House, 26 Old Bailey, London EC4M 7HW
Telephone 020 7809 1000 Facsimile 020 7809 1005
THAMES VALLEY OFFICE
Apex Plaza, Forbury Road, Reading RG1 1AX
Telephone 0118 925 2000 Facsimile 0118 925 0038
WEB SITE: www.osborneclarke.com
<PAGE>
CONTENTS
<TABLE>
<S> <C>
1. Definitions and interpretation...........................................................1
2. Exchange................................................................................10
3. Consideration...........................................................................10
4. Completion..............................................................................11
5. Registration Rights Applying to that part of the Consideration Stock
Allotted and Issued to Employee Shareholders and Non-Employee Shareholders..............14
6. Conditional Allotment and Issue (Employee Shareholders only)............................19
7. Release of guarantees...................................................................22
8. Post completion matters.................................................................22
9. Warranties..............................................................................22
10. Specific Indemnities...................................................................23
11. Covenant for Taxation..................................................................24
12. Purchaser's remedies...................................................................24
13. Limitations on liability...............................................................26
14. Conduct of Non-Tax Claims..............................................................29
15. General................................................................................30
16. Announcements..........................................................................32
17. Costs and expenses.....................................................................33
18. Notices................................................................................33
19. Governing law and jurisdiction.........................................................34
Schedule 1.................................................................................35
THE SHAREHOLDERS...........................................................................35
- ----------------
Schedule 2.................................................................................41
(Information concerning the Company).......................................................41
Schedule 3.................................................................................42
The Non-Tax Warranties.....................................................................42
1. CAPACITY................................................................................42
2. ARRANGEMENTS BETWEEN THE COMPANY AND SHAREHOLDER ASSOCIATES.............................42
3. OTHER INTERESTS OF ANY SHAREHOLDER ASSOCIATE............................................42
4. COMPANY.................................................................................42
5. SUBSIDIARIES............................................................................43
6. INSOLVENCY OF THE COMPANY...............................................................43
7. STATUTORY BOOKS AND DOCUMENTS FILED.....................................................44
8. ACCURACY AND ADEQUACY OF INFORMATION....................................................44
9. PREPARATION AND CONTENTS OF THE MANAGEMENT ACCOUNTS.....................................44
10. ACCOUNTING RECORDS.....................................................................45
11. EURO COMPLIANCE........................................................................45
12. EVENTS SINCE THE ACCOUNTS DATE.........................................................46
13. FINANCIAL COMMITMENTS AND BORROWINGS...................................................47
14. WORKING CAPITAL........................................................................48
15. INSURANCES.............................................................................48
16. CONTRACTS AND COMMITMENTS..............................................................49
17. TERMS OF TRADE.........................................................................50
18. PRODUCT LIABILITY......................................................................50
19. LICENCES AND CONSENTS..................................................................50
20. TRADING PARTNERS.......................................................................50
</TABLE>
<PAGE>
<TABLE>
<S> <C>
21. COMPETITION AND TRADE REGULATION LAW...................................................51
22. COMPLIANCE WITH LAW....................................................................52
23. LITIGATION AND DISPUTES................................................................52
24. OWNERSHIP AND CONDITION OF ASSETS......................................................53
25. STOCK..................................................................................53
26. CHARGES AND ENCUMBRANCES OVER ASSETS...................................................53
27. INTELLECTUAL PROPERTY..................................................................54
28. Data Protection Act....................................................................56
29. DIRECTORS AND EMPLOYEES................................................................56
30. INDUSTRIAL RELATIONS...................................................................58
31. PENSIONS...............................................................................59
32. TITLE..................................................................................59
33. ENCUMBRANCES...........................................................................60
34. PLANNING MATTERS.......................................................................60
35. STATUTORY OBLIGATIONS..................................................................60
36. ADVERSE ORDERS.........................................................................60
37. LEASEHOLD PROPERTIES...................................................................61
38. ENVIRONMENTAL MATTERS..................................................................61
Schedule 4.................................................................................62
1. The Property............................................................................62
Schedule 5.................................................................................63
Tax Schedule...............................................................................63
2. Covenant for Taxation...................................................................66
3. Covenant to Shareholders................................................................67
4. Tax Warranties..........................................................................68
5. Limitations on liability................................................................73
6. Repayment...............................................................................75
7. Over-provision and Reliefs..............................................................75
8. NIC and PAYE............................................................................76
9. Claims Procedure........................................................................78
Schedule 6.................................................................................80
The Products...............................................................................80
Schedule7..................................................................................81
The Management Accounts....................................................................81
Schedule 8.................................................................................82
The Employment Contract....................................................................82
Agreement..................................................................................83
</TABLE>
<PAGE>
THIS AGREEMENT is made the 28th day of April 2000
BETWEEN:
(1) THE PERSONS whose names and addresses are set out in part 1 of schedule
1 ("THE SHAREHOLDERS"); and
(2) SMARTDISK CORPORATION a corporation whose principal place of business
is at 3506 Mercantile Avenue, Naples, Florida 34104-3310 USA ("THE
PURCHASER").
BACKGROUND:
IT IS AGREED as follows:
1. DEFINITIONS AND INTERPRETATION
1.1 In this Agreement, including the schedules and appendices, unless the
context otherwise requires, the following words have the following
meanings:
"THE ACCOUNTS DATE" 31 March 2000;
"THE ACT" the Companies Act 1985 (as amended);
"THIS AGREEMENT" this Agreement (including any
schedule or annexure to it);
"AVERAGE CLOSING PRICE" US $30.3875 (thirty
point three eight seven five US
dollars) per share of the Purchasers
common stock;
"THE BOARD" in relation to the Company, its
board of directors;
"BUSINESS DAY" a day (other than a Saturday or a
Sunday) on which clearing banks are
open for business in the City of
London;
"CLAIM" a claim by the Purchaser against the
Shareholders under the Covenant for
Taxation or under the Warranties or
indemnities contained in this
Agreement and "NON-TAX CLAIM" means
any claim which is not a Tax Claim;
"THE COMPANY"
Impleo Limited, details of which
are set out in schedule 2;
"COMPLETION" the completion of the exchange of
the Shares for the Consideration
Funds and
1
<PAGE>
Consideration Stock under this
Agreement;
"COMPUTER PROGRAMS" all or any part of a set of
instructions whose purpose is to
cause a data processing machine to
perform certain functions or
operations whatever the form of the
program (whether in source code or
in human-readable form, or object
code or machine readable form, and
whether or not compiled or
assembled);
"CONDITIONAL ALLOTMENT DATES means each of 6
October 2000, 6 April 2001, 6
October 2001 and 6 April 2002 and
"Conditional Allotment Date" means
any one of them;
"THE CONSIDERATION" the consideration payable by the
Purchaser to the Shareholders for
the Shares under clause 3;
"CONSIDERATION FUNDS" means together: (i) $39,310.34
(thirty nine thousand three hundred
and ten dollars and thirty four
cents) payable by the Purchaser to
SCM Microsystems Ltd; and
(ii)(pound)101,702.31 (one hundred
and one thousand seven hundred and
two pounds and thirty one pence)
payable by the Purchaser to the
remaining Shareholders for the
Shares under clause 3;
"CONSIDERATION STOCK" new common stock par value US$0.001
per share of the Purchaser
calculated in accordance with
clause 3, 4, 5, 6 and 13 and
Schedule 1 of this Agreement and
which shall not in any event exceed
125,051 (one hundred twenty five
thousand fifty one) Shares of new
Common Stock which equates in value
to US$3,800,000 (three million
eight hundred thousand US Dollars)
calculated by reference to the
Average Closing Price;
"COPYRIGHT" all copyright arising under English
law (whether under the Copyright
Designs and Patents Act 1988 or
otherwise) in all original works,
Computer Programs (in whatever
form), customer lists, databases
2
<PAGE>
and any other work in which
copyright subsists, together with
all copyrights and/or rights of
like nature arising (whether by
operation of the registration or
otherwise) in any other part of the
world, and the right to apply for
the same and the benefit of any and
all licences in connection with the
foregoing;
"THE COVENANT FOR the covenant given by the
TAXATION" Shareholders under paragraph 2 of
schedule 5;
"DANGEROUS SUBSTANCE" any natural or artificial substance
(whether in the form of a solid,
liquid, gas or vapour) the
generation, transportation,
storage, treatment, use or disposal
of which (whether alone or in
combination with any other
substance) gives rise to a risk of
causing harm to human health,
comfort or safety or harm to any
other living organism or causing
damage to the Environment;
"DISCLOSED" fully and fairly disclosed to the
Purchaser expressly for the purposes
of this Agreement in the Disclosure
Letter and "fully and fairly" means
disclosed with sufficient
particularity to enable the
Purchaser to assess the full impact
on the Company of the matter
disclosed;
"THE DISCLOSURE LETTER" the letter of the same date as this
Agreement in the agreed form from
the Shareholders to the Purchaser,
together with any attachments,
disclosing matters that are
exceptions to the Warranties;
"DOCUMENTATION" all user manuals and other materials
which accompany any unit of Software
and all other technical, reference
and/or other manuals or
documentation, whether intended for
internal or external use in relation
to any Software;
"EMPLOYEE SHARES" that part of the Consideration
Stock held by the Employee
Shareholders following Completion;
"EMPLOYEE those Shareholders who are also an
SHAREHOLDERS" employee, director or consultant of
the
3
<PAGE>
Company and whose details are set
out in Part 2 of Schedule 1 to this
Agreement;;
"THE ENVIRONMENT" the environment as defined in
Section 1(2), Environmental
Protection Act 1990;
"ENVIRONMENTAL any permit, exemption, filing
CONSENT" requirement, licence or
registration from time to time
necessary or desirable under
Environmental Law;
"ENVIRONMENTAL LAW" any directive, treaty, code of
practice, circular, guidance note
and the like, in each case of any
jurisdiction, in force or enacted
relating or pertaining to a
material extent to the Environment,
any Dangerous Substance, human
health, comfort, safety or the
welfare of any other living
organism;
"ESCROW AGENT" a national bank organised
under the laws of the United Kingdom
or the United States of America to
be appointed by the Purchaser as
soon as reasonably practicable
following Completion;
"ESCROW AGREEMENT" the agreement in the agreed form
between (1) the Purchaser, (2) the
Shareholders and (3) the Escrow
Agent;
"GUARANTEE" any guarantee, suretyship,
indemnity, bonding liability or
similar contingent liability given
or undertaken by a person to secure
or support the obligations of any
third party;
"INTELLECTUAL PROPERTY" all Patents, Copyrights, Marks,
Know-How and Other IPR's;
"KNOW-HOW" all rights anywhere in the world of
the Company in and to all industrial
and commercial trade secrets and
confidential and secret research,
developments, design, inventions,
ideas, information, data, skills,
products, processes, drawing and
specifications;
"THE LEASES" any leases (including underleases)
under which the Properties are
held, particulars of which are set
out in schedule 4 and
4
<PAGE>
"LEASE" means any of them;
"MANAGEMENT the unaudited management accounts
ACCOUNTS" for the Company for the period from
15 November 1999 to the Accounts
Date and contained within Schedule
7 of this Agreement;
"MARKS" all trade marks, service marks and
logos whether registered in the UK
or elsewhere or unregistered
(including applications for
registration thereof) together with
all rights of like nature arising
(whether by operation of law,
registration or otherwise) out of
the same in any part of the world
and the rights to apply for the
same and the benefit of any and all
licences in connection with the
foregoing;
"NASDAQ" the NASDAQ National Market,
maintained by the NASDAQ Stock
Market, Inc.;
"NON-EMPLOYEE SHARES" that part of the Consideration
Stock held by the Non-Employee
Shareholders following Completion;
"NON-EMPLOYEE SHAREHOLDERS" the Shareholders set out in Part 1
of Schedule 1 to this Agreement not
being Employee Shareholders;
"NON-TAX WARRANTIES" the representations referred to in
clause 9 and set out in schedule 3;
"NOTICE" includes any notice, demand,
consent or other communication;
"ORDINARY SHARES" ordinary shares of 50p each in the
capital of the Company;
"OPTION AGREEMENTS" the option agreements dated 12
November 1999 between SCM
Microsystems Limited and each of
the remaining Shareholders and
Stuart Skinner;
"OTHER IPR'S" all designs (registered or
unregistered), utility models and
all other intellectual or
industrial property rights
(including
5
<PAGE>
without limitation as to
secrecy or confidence) arising
(whether by operation of law,
registration or otherwise) under
English law or in any other part of
the world to the extent that the
same are not otherwise included
within the definitions of
Copyright, Marks, Patents and Know
How and the right to apply for the
same and the benefit of any and all
licences in connection with the
foregoing;
"PATENTS" letters patent and the right to
apply for letters patent in any part
of the world and any similar rights
situated in any country; and the
benefit of any and all licences in
connection with the foregoing;
"PLANNING ACTS" the Town and Country Planning Act
1990, the Planning (Listed
Buildings and Conservation Areas)
Act 1990, the Planning (Hazardous
Substances) Act 1990, the Planning
(Consequential Provisions) Act
1990, the Planning and Compensation
Act 1991 and all other statutes
containing provisions relating to
town and country planning;
"THE POLICIES" all insurance policies maintained
by the Company on the date of this
Agreement and "POLICY" means any of
them;
"THE PRODUCTS" the products described in Schedule
6 and all versions thereof and in
each case including the Software
comprised therein and all related
packaging;
"THE PROPERTIES" the properties particulars of which
are set out in schedule 4 and "THE
PROPERTY" means any of them;
"SEC" the United States Securities and
Exchange Commission;
"SERVICE AGREEMENTS" the service agreements in the
agreed form between (the Company)
and each of Grant Morgan, and John
Boyne respectively;
"SHAREHOLDER ASSOCIATE" each of the Shareholders and any
persons connected with any of them
within the
6
<PAGE>
meaning of Section 839, ICTA;
"SHAREHOLDERS' SOLICITORS" Woodhouse Daughtrey of North Lodge,
Templewood Lane, Franham Common,
Bucks SL2 3HW;
"THE SHARES" the ordinary shares constituting
all the issued shares of the
Company at Completion, as set out
in schedule 1 and schedule 2 of
this Agreement;
"SOFTWARE" all or any of the Computer Programs
and Documentation forming part of
and all or any modification to any
Computer Programs supplied by the
Company as a stand alone product or
embedded in hardware and whether
supplied under a third party end
user licence or not;
"SUBSIDIARIES" any subsidiaries of the Company
within the meaning of Sections 736
and 736A, Companies Act 1985 and any
subsidiary undertakings within the
meaning of Sections 258 and 259,
Companies Act 1985 from time to
time, and "SUBSIDIARY" means
any of them;
"TAX WARRANTIES" the representations set out in
paragraph 4 of schedule 5 (Tax
Schedule) and each of them;
"TRADING DAY" a day on which stock in the
Purchaser can be traded on;
"SHAREHOLDER'S ASSOCIATE" each of the Shareholders and any
persons connected with any of them
within the meaning of Section 839,
ICTA;
"UNITED KINGDOM" OR "UK" the United Kingdom of Great Britain
and Northern Ireland;
"UNITED STATES" OR US" the United States of America;
"WARRANTIES" the Non-Tax Warranties and the Tax
Warranties, and "WARRANTY" means
any one of them;
"WORKING TIME the Working Time Regulations 1998
REGULATIOS" (SI No 1833);
"YEAR 2000 CONFORMITY" in connection or in relation to any
7
<PAGE>
software neither performance nor
functionality is affected by dates
prior to, during and after the Year
2000, in particular:
Rule 1: No value for current date will
cause any interruption in
operation;
Rule 2: Date-based functionality must
behave consistently for dates prior
to, during and after Year 2000;
Rule 3: In all interfaces and data storage,
the century in any date must be
specified either explicitly or by
unambiguous algorithms or
inferencing rules;
Rule 4: Year 2000 must be recognised as a
leap year (all as defined by the
British Standards Institution in
Document DISC PD2000-1).
1.2 Words defined in paragraph 1 of schedule 5 (Tax Schedule) shall bear
the same meaning in the entire Agreement.
1.3 In this Agreement, unless the context otherwise requires:
(a) words in the singular include the plural and vice versa and
words in one gender include any other gender;
(b) a reference to a statute or statutory provision includes:
(i) any subordinate legislation (as defined in Section
21(1), Interpretation Act 1978) made under it;
(ii) any repealed statute or statutory provision which it
re-enacts (with or without modification); and
(iii) any statute or statutory provision which modifies,
consolidates, re-enacts or supersedes it;
(c) a reference to:
(i) any party includes its successors in title and
permitted assigns;
(ii) a "PERSON" includes any individual, firm, body
corporate, association or partnership, government or
state (whether or not having a separate legal
personality);
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(iii) clauses and schedules are to clauses and schedules of
this Agreement and references to sub-clauses and
paragraphs are references to sub-clauses and
paragraphs of the clause or schedule in which they
appear;
(iv) any provision of this Agreement is to that provision
as amended in accordance with the terms of this
Agreement;
(v) any document being "IN THE AGREED FORM" means in a
form which has been agreed by the parties on or
before the date of this Agreement and for
identification purposes signed by them or on their
behalf by their solicitors;
(vi) "INDEMNIFY" and "INDEMNIFYING" any person against any
circumstance include, subject to the provisions of
clauses 10 and 13, indemnifying and keeping him
harmless from all actions, claims and proceedings
from time to time made against him and all loss or
damage and all payments, costs or expenses made or
incurred by that person as a consequence of or which
would not have arisen but for that circumstance; and
(d) except as set out in sub-clause 1.1, terms defined in the Act
have the meanings attributed to them by the Act;
(e) "STERLING" and the sign "(POUND)" mean pounds sterling in the
official currency of the United Kingdom and "DOLLAR" and the
sign "$" means US dollars in the official currency of the
United States;
(f) the table of contents and headings are for convenience only
and shall not affect the interpretation of this Agreement;
(g) general words shall not be given a restrictive meaning:
(i) if they are introduced by the word "other" by reason
of the fact that they are preceded by words
indicating a particular class of act, matter or
thing; or
(ii) by reason of the fact that they are followed by
particular examples intended to be embraced by those
general words;
(h) where any liability or obligation is undertaken by two or more
persons unless expressly stated, the liability of each of them
shall be joint and several; and
(i) where any statement is qualified by the expression
"SO FAR AS THE SHAREHOLDERS ARE AWARE" or "TO THE
BEST OF
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THE SHAREHOLDERS' KNOWLEDGE AND BELIEF" or
any similar expression it shall be deemed to include
an additional statement that it has been made after
due and careful enquiry by the Shareholders and in
the case of SCM Microsystems Limited such enquiry
shall only be made to Alan Jones, George Dundon,
Sharon Shelley, Janet Martin-Kerr, Colin Skilton and
Julie Davies.
2. EXCHANGE
2.1 Subject to the terms of this Agreement, the Shareholders shall transfer
to the Purchaser, with effect from Completion, the Shares with:
(a) full title guarantee (except for all charges and encumbrances
(whether monetary or not) and all other rights exercisable by
third parties which the Shareholders do not, and could not
reasonably be expected to, know about); and
(b) all rights attaching to or accruing to them (including all
dividends and distributions declared, paid or made on or after
that date).
2.2
(a) Each of the Shareholders waives all rights of pre-emption over
any of the Shares conferred on him or them, by the Articles of
Association of the Company or in any other way and undertakes
to take all steps necessary to waive any rights of pre-emption
over any of the Shares.
(b) George Dundon, Alan Jones and Grant Morgan in their capacity
as directors of the Company waive all rights of pre-emption
over any Shares conferred on the board of directors of the
Company.
2.3 The Purchaser shall not be obliged to complete the purchase unless the
sale and purchase of all the Shares is completed simultaneously.
3. CONSIDERATION
3.1 Subject to the provisions of this Agreement the consideration for the
sale and purchase of the Shares shall be satisfied by the Purchaser as
follows:
(a) the payment of $39,310.34 (thirty nine thousand three hundred
and ten dollars and thirty four cents) on Completion to SCM
Microsystems Limited representing part of the Consideration
Funds; and
(b) the payment of (pound)101,702.31 (one hundred and one thousand
seven hundred and two pounds and thirty one pence) on
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completion to the Shareholders' Solicitors as agent for the
Shareholders, representing part of the Consideration Funds;
and
(c) as to $1,834,493.38 (one million and eight hundred and thirty
four thousand four hundred and ninety three dollars and thirty
eight cents) by the allotment and issue to the Non-Employee
Shareholders of 60,370 (sixty thousand three hundred and
seventy) shares of Consideration Stock on Completion in the
proportions set out in Part 1 of Schedule 1 subject to the
provisions relating to the Retained Stock set out in Clause
13; and
(d) as to $393,092.70 (three hundred and ninety three thousand and
ninety two dollars and seventy cents) by the allotment and
issue to the Employee Shareholders of 12,936 (twelve thousand
nine hundred and thirty six) shares of Consideration Stock on
Completion in the proportions set out in Part 2 of Schedule 1;
and
(e) as to $1,572,370.80 (one million five hundred and seventy two
thousand three hundred and seventy dollars and eighty cents)
by the conditional allotment and issue to each of the Employee
Shareholders of up to 51,744 (fifty one thousand seven hundred
and forty four) shares of Consideration Stock in the
proportions and in the manner set out in Part 3 and Part 4 of
Schedule 1 upon the conditions set out in clauses 6, having
been satisfied and subject to the provision of Clause 13 ("the
Deferred Consideration").
3.2 The receipt of the Consideration Funds by SCM Microsystems Limited and
the Shareholders Solicitors shall be good receipt for the purposes of
the Purchaser and the Purchaser shall not be required to enquire as to
the division of that part of the Consideration Funds between the
Shareholders by the Shareholders Solicitors.
3.3 The Consideration Stock shall rank in all respects pari passu with the
common stock par value $0.001 per share in the capital of the Purchaser
in issue immediately prior to the allotment and issue of the
Consideration Stock.
4. COMPLETION
4.1 Completion shall take place at the offices of Osborne Clark OWA,
solicitors to the Purchaser, on the date of this Agreement
4.2 On Completion:
(a) the Shareholders shall deliver or shall procure the delivery
to the Purchaser:
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(i) stock transfer forms, duly completed and executed by
the registered holders or their lawful attorneys, in
favour of the Purchaser (or as it may direct) in
respect of the Shares together with the relevant
share certificates;
(ii) letters of non-crystallisation dated not earlier than
the second business day immediately preceding
Completion from the holders of any outstanding
floating charges given by the Company;
(iii) the certificate of incorporation, any certificates of
incorporation on change of name or re-registration,
the statutory books written up to date, share
certificate books, minute books, and the common seal
of the Company;
(iv) the original version of the licence to occupy the
property granted to the Company by SCM Microsystems
Ltd;
(v) all other papers and documents material to the
continuing operation of the business of the Company
which are in the possession of or under the control
of any of the Shareholders (to be delivered at the
Properties);
(vi) letters of resignation in the agreed form from George
Dundon, John Boyne and Alan Jones;
(vii) a statement of all overdraft and credit balances from
the Company's bankers and other lenders as at the
close of business on the day preceding Completion;
(viii) the Disclosure Letter;
(ix) a licence to occupy in an agreed form signed by the
Company, SCM Microsystems Ltd and SCM Microsystems
Group Ltd: and
(x) the documents listed in Schedule 9 to this Agreement.
(b) The Shareholders shall repay all monies then owing by them to
the Company whether due and payable or not and the Company
shall repay all monies owing by the Company to any of the
Shareholders save that any monies payable by the Company to
SCM Microsystems Limited under the terms of a business sale
agreement between the Company and SCM Microsystems Limited
dated 12 November 1999 shall not be payable by the Company at
Completion and shall not be payable by the Company until such
monies become due and payable under the terms of the said
agreement.
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(c) The Shareholders shall procure that as soon as reasonably
practicable following Completion and in any event no more than
7 days after Completion Grant Morgan & John Boyne enter into
the Service Agreements.
(d) The Shareholders shall procure that a board meeting of the
Company is held at which:
(i) the stock transfer forms referred to in sub-clauses
(a)(i) are approved and (subject to them being
appropriately stamped) registered in the Company's
books;
(ii) Daniel Reed and Mike Battaglia are appointed as
directors of the Company;
(iii) Alan Jones, George Dundon and John Boyne cease to be
officers of the Company with immediate effect;
(iv) the accounting reference date of the Company is
changed to 31 December;
(v) Green & Peters are appointed as auditors of the
Company;
(vi) new articles of association of the Company in an
agreed form are adopted by the Company ;
(vii) the mandates given by the Company to its bankers are
revoked or revised as the Purchaser may require; and
(viii) the execution and completion of the other documents
to be entered into by the Company under this
Agreement is approved.
(e) When the Shareholders have complied with the provisions of
sub-clauses (a)-(d) inclusive, the Purchaser shall: (i)
transfer by telegraphic transfer the Consideration Funds to
SCM Microsystems Ltd and to the Shareholders' Solicitor in the
proportions set out sub-Clause 3.1(a) and sub-Clause 3.1.(b);
(ii) subject to sub-clause 4.3 below procure the allotment
subject to the provisions of this Agreement and issue
of the Consideration Stock to the Shareholders in the
proportions set out in schedule 1;
4.3 If any of the requirements of sub-clause 4.2 are not complied with on
the date set for Completion under sub-clause 4.1, the Purchaser (in the
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case of the requirements of sub-clauses 4.2(a)-(d) inclusive) or the
Purchaser (in the case of the requirements of sub-clause 4.2(e)) may:
(a) defer Completion with respect to some or all of the Shares to
a date not more than 28 days after that date (in which case
the provisions of this sub-clause shall also apply to
Completion as so deferred); or
(b) proceed to Completion so far as practicable (including, at the
Purchaser's option, completion of the purchase of some only of
the Shares) but without prejudice to any other rights which it
or they may have under this Agreement; or
(c) rescind this Agreement by notice in writing.
4.4 Subject to the provisions of clause 13, the Shareholders undertake to
indemnify the Purchaser against any loss, expense or damage which it
may suffer as a result of any document delivered to it under this
clause being unauthorised, invalid or for any other reason ineffective.
4.5 The Purchaser and the Shareholders undertake to enter into the Escrow
Agreement as soon as reasonably practicable following Completion and
the Purchaser undertakes that when all of the Shareholders and the
Purchaser have entered into the Escrow Agreement to deliver
certificates in respect of the Retained Stock to the Escrow Agent to be
held in the Escrow Account;
5. REGISTRATION RIGHTS APPLYING TO THAT PART OF THE CONSIDERATION STOCK
ALLOTTED AND ISSUED TO EMPLOYEE SHAREHOLDERS AND NON-EMPLOYEE
SHAREHOLDERS.
5.1 Incidental (Piggyback) Registration.
(a) Subject to the limitations set forth in this Agreement, if the
Purchaser, at any time within one (1) year of the date hereof
proposes to file on its behalf and/or on behalf of any of its
security holders ("THE DEMANDING SECURITY HOLDERS") a
registration statement under the Securities Act of 1933 of the
US, as amended (the "Securities Act"), on any form (other than
a registration statement on US forms S-4 or S-8 or any
successor form for shares to be offered in a transaction of
the type referred to in Rule 145 under the Securities Act of
the US or to employees of the Purchaser pursuant to any
employee benefit plan, respectively) for the general
registration of shares to be sold for cash with respect to its
common stock or any other class of equity security (as defined
in Section 3(a)(11) of the Securities Exchange Act of 1934 of
the US) of the Purchaser, it will give written notice to the
Shareholders at least 15 days before the initial filing with
the US Securities and Exchange Commission of such registration
statement, which
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<PAGE>
notice shall set forth the intended method of disposition of
the shares proposed to be registered by the Purchaser. The
notice shall offer to include in such filing the aggregate
number of shares of Consideration Stock as have been properly
allocated and issued to the Shareholders pursuant to this
Agreement and as the Shareholders may request, subject,
however, to the provisions of this clause 5.1.
(b) Any of the Shareholders who desires to have up to 20% of his
or their Consideration Stock entitlement which have been
properly allotted and issued to him or them pursuant to this
Agreement registered under this clause 5, they shall advise
the Company in writing within 10 days after the date of
receipt of written notice from the Purchaser pursuant to
Clause 5.1(a), setting forth the amount of such Consideration
Stock for which registration is requested, not to exceed 20%
of the Consideration Stock properly allotted and issued to
such Shareholder under the terms of this Agreement (subject to
adjustment for stock splits, stock dividends and similar
reclassifications affecting the Common Stock). The Purchaser
shall thereupon include in such filing the number of shares
representing that part of Consideration Stock of each
Shareholder for which registration is so requested, subject to
the following provisions of this clause 5. In the event that
the proposed registration by the Purchaser is, in whole or in
part, an underwritten public offering of securities of the
Purchaser, the Purchaser shall not be required to include any
of the Consideration Stock as aforesaid in such underwriting
unless the Shareholders agree to accept the offering on the
same terms and conditions as the shares of common stock of the
Purchaser, if any, otherwise being sold through the
underwriters under such registration and provided further,
that:
(A) if the managing underwriter determines and advises the
Purchaser that the inclusion of all of the Consideration Stock
proposed to be included by the Shareholders in the
underwritten public offering and other issued and outstanding
shares of common stock of the Purchaser proposed to be
included therein by the persons other than the Shareholders,
the Purchaser and any shareholder who has exercised
registration rights with respect to such registration (the
"Other Shares") would jeopardise the success of the
Purchaser's offering, then
(i) the Purchaser shall be required to include in the
offering (in addition to the number of shares to be
sold by the Purchaser and any Demanding Security
Holder) only that number of shares of the
Consideration Stock that the managing underwriter
believes will not jeopardise the success of the
Purchaser's offering; and
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(ii) the number of shares of the Consideration Stock and
Other Shares included in such underwritten public
offering shall be reduced pro rata based upon the
number of shares of the Consideration Stock and Other
Shares requested by the holders thereof to be
registered in such underwritten public offering
subject to the provisions of this agreement and an
Investor's Rights Agreement between the Purchaser
(1), Phoenix House Investments (2),, Toshiba
Corporation (3) and Fisher International Systems
Corporation (4) (together the "PRIOR HOLDERS")
requiring that such reduction in Other Shares
included in such offering not reduce the amount of
Other Shares owned by the Prior Holders included in
the Offering below 30% of the total amount of
securities included in the offering; and
(B) in each case all of the Consideration Stock owned by
the Shareholders which are not included in the
underwritten public offering shall be subject to
customary underwriter "lock-up" arrangements and not
sold or otherwise transferred by the Shareholders for
a period, not to exceed ninety (90) calendar days,
which the managing underwriter reasonably determines
as necessary in order to effect the underwritten
public offering.
In the event the Purchaser chooses a registration form which
limits the size of the offering, either in terms of the number
of shares or dollar amount, the Purchaser shall not be
required to include in the offering (in addition to the number
of shares to be sold by the Purchaser and any demanding
security holder) any amount of the Consideration Stock which
would exceed such limits and the number of shares in the
Consideration Stock and Other Shares included in such
underwritten public offering shall be reduced pro rata based
upon the number of shares in the Consideration Stock and Other
Shares requested by the holders thereof to be registered in
such underwritten public offering.
5.2 UNDERWRITING DOCUMENTS AND OTHER LIMITATIONS.
(a) Notwithstanding any provision of this Agreement to
the contrary, a Shareholder may not include any
shares of the Consideration Stock in any underwritten
offering required or contemplated under this
Agreement unless the Shareholder promptly executes
and delivers such form of underwriting agreement,
custody agreement, power of attorney and other
agreements and instruments as the underwriters of
such offering may reasonably require in connection
with the preparation and consummation of such
offering.
(b) Notwithstanding any provision of this Agreement to
the contrary, in no event shall the Purchaser be
required to register
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the sale of any shares of the Consideration Stock
held by the Escrow Agent but the Purchaser shall
register those shares of the Consideration Stock that
are released by the Escrow Agent under the terms of
the Escrow Agreement and this Agreement.
5.3 FORM S-3 REGISTRATION.
Subject always to the terms and limitations set forth in this
Agreement, the Purchaser will file as promptly as possible after it is
eligible to do so (and in no event later than 5 November, 2000) a
registration statement on Form S-3 (the "Shelf Registration Statement")
covering 100% of the Shares comprising the Consideration Stock (less
any shares registered pursuant to said piggy back registration rights
set forth in clause 5.1 above) of the shares of the Consideration Stock
and thereafter shall use its best efforts to cause the Shelf
Registration Statement to be declared effective as soon as practicable
following such filing and to maintain such effectiveness until the one
year anniversary of the date hereof; provided, however, that the
Purchaser shall have the right to prohibit the sale of shares of the
Consideration Stock pursuant to the Shelf Registration Statement, upon
notice to the Shareholders (A) if in the opinion of counsel for the
Purchaser, the Purchaser would thereby be required to disclose
information not otherwise then required by law to be publicly
disclosed, provided that the Purchaser shall use its best efforts to
minimize the period of time in which it shall prohibit the sale of any
shares of its common stock pursuant to this clause (A), which shall in
no event exceed 45 days in any one-year period; or (B) during the
period starting with the date 10 days prior to the Purchaser's estimate
of the date of filing of, and ending on a date 90 days after the
effective date of, a registration in which the Shareholders are
entitled to participate in accordance with clause 5 hereof, or such
longer post-effective periods as may be reasonably required by the
underwriter or underwriters if such offering is underwritten.
Subject to the terms of this Agreement if the Purchaser is not eligible
to file an S-3 Registration Statement by November 5, 2000, the
Shareholders may require the Purchaser to file an S-1 Registration
Statement to register 100% of the Consideration Stock which has not
already been registered.
5.4 CERTAIN REGISTRATION PROCEDURES.
If the Purchaser is required by the provisions of this clause 5 to use
its best efforts to effect the registration of any Consideration Stock
under the Securities Act, the Purchaser will:
(a) prepare and file with the Securities and Exchange Commission
of the US (the "Commission") a registration statement with
respect to such Consideration Stock and such amendments and
supplements to such registration statement and the prospectus
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used in connection therewith as may be necessary to keep such
registration statement effective until the earliest of (i) the
completion of the distribution of the registered securities,
and (ii) the three (3)month anniversary of the effective date
of the registration statement and to comply with the
provisions of the Securities Act with respect to the sale or
other disposition of all securities covered by such
registration statement;
(b) furnish to any selling security holders such number of copies
of a summary prospectus or other prospectus, including a
preliminary prospectus, in conformity with the requirements of
the Securities Act, and such other documents, as such selling
security holders may reasonably request;
(c) use its best efforts to register or qualify the securities
covered by such registration statement under such other
securities or "blue sky" laws of such jurisdictions within the
United States and Puerto Rico as each Shareholder shall
reasonably request (provided, however, that the Purchaser
shall not be obligated to qualify as a foreign corporation to
do business under the laws of any jurisdiction in which it is
not then qualified or to file any general consent to service
or process or to qualify as a broker or dealer in securities),
and do such other reasonable acts and things as may be
required of it to enable the Shareholders to consummate the
disposition in such jurisdiction of the securities covered by
such registration statement;
(d) take such other actions as are reasonably required in order to
expedite or facilitate the disposition of such common stock;
and
(e) promptly notify in writing the Shareholders and each
underwriter (if any) of the happening of any event, during the
period of distribution, as a result of which the registration
statement includes an untrue statement of a material fact or
omits to state any material fact required to be stated therein
or necessary to make the statements therein not misleading in
light of the circumstances then existing (in which case, the
Purchaser shall promptly provide the Shareholders and/or
underwriters, as appropriate, with revised or supplemental
prospectuses and if so requested by the Purchaser in writing,
the Shareholders shall promptly take action to cease making
any offers of the Consideration Stock until receipt and
distribution of such revised or supplemental prospectuses).
5.5 CERTAIN LIMITATIONS ON REGISTRATION RIGHTS.
The Purchaser's obligations under Clause 5.1 with respect to each
Shareholder are also expressly conditioned upon such Shareholder
furnishing to the Purchaser in writing such information concerning such
Shareholder and such Shareholder's controlling persons and the
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terms of such Shareholder's proposed offering of Consideration Stock as
the Purchaser or the managing underwriter (if any) shall reasonably
request for inclusion in the applicable registration statement.
5.6 Expenses.
All expenses incurred in complying with this clause 5, including,
without limitation, all registration and filing fees (including all
expenses incident to filing with the National Association of Securities
Dealers, printing expenses, fees and disbursements of professional
adviser instructed by the Purchaser, expenses of any special audits
incident to or required by any such registration and expenses
(including English solicitors' or US attorneys' fees) of complying with
the securities or blue sky laws of any jurisdictions pursuant to this
clause 5, except to the extent required to be paid by participating
selling security holders by state securities or blue sky laws, shall be
paid by the Purchaser, except that the Purchaser shall not be liable
for any fees, discounts or commissions to any underwriter or any fees
or disbursements of counsel for Shareholders in respect of the
securities sold by Shareholders, which amounts shall be paid by the
Shareholders.
6. CONDITIONAL ALLOTMENT AND ISSUE (EMPLOYEE SHAREHOLDERS ONLY)
6.1 Subject to the provisions of sub-clause 6.2 and Clause 13, the
Purchaser shall allot and issue to each Employee Shareholder the
Deferred Consideration on each of the Conditional Allotment Dates in
the proportions and in the manner set out in Part 3 and Part 4 of
Schedule 1.
6.2 The obligations of the Purchaser to allot and issue the Deferred
Consideration referred to in sub-clause 6.1 shall, in the case of each
Employee Shareholder, be in all respects conditional upon:
(a) each Employee Shareholder having remained, throughout the
period prior to and including any Conditional Allotment Date,
a Service Provider to the Company. For the purpose of this
sub-clause an Employee Shareholder shall be deemed to be a
"Service Provider" to the Company for so long as such Employee
Shareholder serves as an employee of the Company or one or
more of the Company's holding or subsidiary corporations
PROVIDED THAT each Employee Shareholder shall not be prevented
from receiving Deferred Consideration under this sub-clause
6.2(a) by virtue only of:
(i) such Employee Shareholder's death while a Service
Provider,
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(ii) termination of such Employee Shareholder's employment
arrangement with the Company without "Cause" (as
defined below),
(iii) termination of such Employee Shareholder's employment
with the Company for "Just Cause" (as defined below),
or
(iv) such Employee Shareholder's receipt of disability
insurance payments pursuant to any plan or scheme
sponsored by the Company and if upon such plan's or
scheme's or in the absence of any such plan or
scheme, determination that the Employee Shareholder
cannot perform each of the material duties of the
Employee Shareholder's employment with the Company.
For the purposes hereof, "JUST CAUSE" means (a) the
requirement by the Company that the Employee
Shareholder perform duties which are contrary to or
constitute a material diminution of the Employee
Shareholder's position (including status, offices,
titles and reporting requirements), authority, duties
or responsibilities as contemplated by the Employee
Shareholder's contract of employment with the
Company, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad
faith and which is remedied by the Company promptly
after receipt of notice thereof given by the Employee
Shareholder; (b) failure by the Company to comply
with any material provision of such Employee
Shareholder's contract of employment with the
Company, excluding for this purpose an isolated,
insubstantial and inadvertent action not taken in bad
faith and which is remedied by the Company promptly
after receipt of notice thereof given by the Employee
Shareholder; or the requirement by the Company that
the Employee Shareholder be based at any office or
location which is located more than 50 miles from the
office of the Company at Ashville Park, Wokingham.
For purposes of this Agreement, the term "CAUSE"
shall mean (i) the failure or refusal of the Employee
Shareholder to perform the duties or render the
services reasonably assigned to him from time to time
by or under direction of the Managing Director of the
Company (except during reasonable vacation periods or
sick leave); (ii) gross negligence or willful
misconduct by the Employee Shareholder in the
performance of his duties as an employee of the
Company, (iii) the conviction of the Employee
Shareholder of a criminal offence; (iv) the material
breach by the Employee Shareholder of any of
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the provisions of his contract of employment with the
Company; (v) the breach by the Employee Shareholder
of his fiduciary duty or duty of trust to the
Company, including the commission by the Employee
Shareholder of an act of fraud or embezzlement
against the Company, (vi) use of illegal drugs, or
(vii) any other material breach by the Employee
Shareholder of any of the material terms or
provisions of this Agreement or any other agreement
between the Company and the Employee Shareholder
related to the Employee Shareholder's employment;
AND
(b) the total Deferred Consideration exceeding in
monetary value the cumulative aggregate amount of all
or any Claim or Claims made in accordance with the
provisions of clause 13 (the value of all or any
Claim or Claims shall be determined by reference to
the Purchaser's estimate of the amount involved)
("the Claim Threshold") on or before each of the
Conditional Allotment Dates so that where the total
Deferred Consideration does not exceed, in monetary
value, the Claim Threshold made on or before each of
the Conditional Allotment Dates the Purchaser shall
have no obligation to allot or issue any of the
Deferred Consideration. In the event that the total
Deferred Consideration does exceed, in monetary
value, the Claim Threshold, on or before each of the
Conditional Allotment Dates ("the Excess"), the
Purchaser shall allot and issue only that amount of
the Deferred Consideration which the Excess
represents in the form of Consideration Stock based
on the Average Closing Price.
The rights and remedies of the Purchaser in respect
of any breach of the Warranties or the Covenant for
Taxation or any indemnities contained in this
Agreement shall not be affected by the condition
contained in this sub-clause 6.2(b).
This condition shall be without prejudice to the
Purchaser's entitlement to set off the amount of any
Claim against any sum due from it to the Shareholders
under this Agreement or the Purchaser's entitlement
to set off or make offsets or deductions on account
of any Claim against any Retained Stock held in the
Escrow Account or against any future entitlement to
Deferred Consideration including all cancellation
rights of the Purchaser hereunder.
6.3 Upon the conditions set out in sub-clause 6.2(a) and 6.2(b) having been
satisfied, the Purchaser shall allot and issue to the Employee
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Shareholders the Deferred Consideration, or that part of the Deferred
Consideration to which they are entitled pursuant to sub-clause 6.2(b),
upon each of the Conditional Dates of Allotment in the proportions and
in the manner set out in Part 3 and Part 4 of Schedule 1.
7. RELEASE OF GUARANTEES
7.1 The Shareholders shall on Completion procure the release of the Company
from any Guarantee given by the Company in respect of any obligations
of any Shareholder or Shareholder Associate and shall indemnify the
Purchaser against all liability arising after Completion in respect of
it.
8. POST COMPLETION MATTERS
8.1 The Shareholders declare that for as long as they remain the registered
holders of the Shares after Completion they will:
(a) hold the Shares and the dividends and any other moneys paid or
distributed in respect of them after Completion and all rights
arising out of or in connection with them in trust for the
Purchaser;
(b) deal with the Shares and all such dividends, distributions and
rights as the Purchaser may direct for the period between
Completion and the day on which the Purchaser or its nominee
is entered in the register of members of the Company as the
holder of the Shares.
8.2 The Shareholders irrevocably appoint the Purchaser as their attorney
for the purpose of exercising any rights, privileges or duties
attaching to the Shares including receiving notices of and attending
and voting at all meetings of the members of the Company from
Completion to the day on which the Purchaser or its nominee is entered
in the register of members of the Company as the holder of the Shares.
8.3 For the purpose of clause 8.2, the Shareholders authorise:
(a) the Company to send copies of any notices in respect of their
share holdings to the Purchaser;
(b) the Purchaser to complete and return proxy cards, consents to
short notice and any other document required to be signed by
the Purchaser as a member.
9. WARRANTIES
9.1 Subject to the provisions of this clause 9 the Shareholders jointly and
severally warrant and represent to the Purchaser that, save as
Disclosed
22
<PAGE>
in the Disclosure Letter, each of the Warranties is true and
accurate in all respects and not misleading at the date of this
Agreement.
9.2 The Shareholders acknowledge that they give the Warranties with the
intention of inducing the Purchaser to enter into this Agreement and
that the Purchaser does so in reliance on the Warranties.
9.3 Each of the Warranties is a separate and independent Warranty and shall
not be limited by reference to any other Warranty or anything in this
Agreement.
9.4 SCM Microsystems Ltd does not warrant and represent that the Warranty
contained in paragraph 14 of Schedule 3 regarding the working capital
of the Company is true and accurate in all respects and not misleading
at the date of this Agreement.
10. SPECIFIC INDEMNITIES
10.1 The Shareholders shall pay to the Purchaser or at its discretion to the
Company an amount equal to all losses, claims, liabilities, damages,
actions, demands suffered and all accompanying costs and expenses
reasonably incurred by the Purchaser or the Company arising from any of
the following matters:
(a) the Purchaser or the Company infringing any third party
Intellectual Property in the Products or the Company not being
authorised to licence the Products to end-users;
(b) any claim howsoever arising which would not have arisen had
the Company enjoyed a lawful right to occupy part only of the
Property with the written consent of the owner of the freehold
of the Property ("THE BUILDING INDEMNITY") (but for the
avoidance of doubt the Purchaser or the Company shall not be
entitled to claim or recover monies in respect of the same
fact or facts from SCM Microsystems Limited under both the
Building Indemnity and also under the provisions of an
agreement dated on the same day as this Agreement and being
between the Company, SCM Microsystems Limited and SCM
Microsystems Group Limited;
(c) any claim howsoever arising resulting from the transfer of
those employees of the Company whose employment was
transferred from SCM Microsystems Limited to the Company under
the Transfer of Undertakings (Protection of Employment)
Regulations 1981, pursuant to a business sale agreement dated
12 November 1999 between SCM Microsystems Limited and the
Company and without prejudice to the generality of the
foregoing any claim howsoever arising which would not have
arisen had the said employees of the Company each signed a
contract of employment with the Company on 12 November
23
<PAGE>
1999 in the form annexed in schedule 8 of this Agreement ("THE
EMPLOYMENT INDEMNITY");
(d) any claim howsoever arising made by any third party or a
liquidator, receiver or trustee in bankruptcy against the
Purchaser or the Company in respect of the transfer of the
Datawise business from SCM Microsystems Ltd to the Company
pursuant to a Business Sale Agreement dated 12 November 1999
and the assignment of all intellectual property rights in the
Products and arising under the Insolvency Act 1986 ("THE
DATAWISE INDEMNITY");
(e) any stamp duty payable on the consideration passing in respect
of the transfer or assignment of all intellectual property
rights in the Products from SCM Microsystems Limited to the
Company;
(f) the Products not meeting Year 2000 Conformity;
(g) the Company failing to comply with the provisions of the Data
Protection Act;
(h) the Management Accounts not being true and accurate in all
material respects ("THE MANAGEMENT ACCOUNTS INDEMNITY"); and
For the avoidance of doubt no Disclosed matter shall affect the
indemnities contained in this clause.
10.2 Each undertaking contained in sub-clause 10.1 shall be construed as a
separate and independent undertaking and are considered by the parties
to be reasonable in all the circumstances.
11. COVENANT FOR TAXATION
11.1 The Shareholders covenant to the Purchaser in the terms of the Covenant
for Taxation as set out in schedule 5.
12. PURCHASER'S REMEDIES
12.1 Each of the Shareholders undertake to disclose in writing to the
Purchaser anything which is or may constitute a Claim or be
inconsistent with the contents of the Disclosure Letter directly it
comes to the notice of any of them either before, at the time of, or
after Completion.
12.2 The rights and remedies of the Purchaser in respect of any breach of
the Warranties or the Covenant for Taxation shall not be affected by
Completion or by any investigation made, or which could have been made,
by it or on its behalf into the affairs of the Company.
24
<PAGE>
12.3 If any Claim is made, no Shareholder shall make any claim against the
Company or any director or employee of the Company on whom he may have
relied before agreeing to any terms of this Agreement or authorising
any statement in the Disclosure Letter. This sub-clause shall not
preclude any Shareholder from claiming against any other Shareholder
under any right of contribution or indemnity to which he may be
entitled.
12.4 In the event of a Claim, without prejudice to the right of the
Purchaser to claim damages on any basis available to it or to any other
right or remedy available to it, subject to the provisions of Section
13.5 the Shareholders agree to pay on demand to the Purchaser a sum by
way of damages as agreed between the Shareholders and the Purchaser or,
in default of such agreement, as determined by order of a court of
competent jurisdiction which is the higher of:
(a) an amount sufficient to put the Company into the position
which would have existed if the Warranties had been true and
accurate or not misleading when given or repeated;
(b) an amount equal to the resulting diminution in value of the
Shares;
(c) the amount by which the assets of the Company are less, or
less valuable, or its liabilities greater, than the values at
which the same were included in the Management Accounts or (if
the Purchaser so elects) than they would have been if the
Warranty concerned had been true and accurate and not
misleading; and
(d) the amount by which the profitability of the Company is less,
or its losses greater, than would have been in the case if the
Warranty concerned had been true and accurate and not
misleading, calculated on the same basis as if such reduction
in profitability or increase in losses were suffered as the
result of an actionable wrong done to the Company.
12.5 This clause applies if at any time the Purchaser makes any Claim
against any Shareholder in circumstances where no disclosure has been
made in the Disclosure Letter and (notwithstanding the express
provisions of this Agreement) such Shareholder avoids or limits
liability as a result of a court of competent jurisdiction holding that
the Claim (or any part of it) should fail or the quantum recoverable
should be reduced because the Purchaser has or is deemed to have
knowledge of the matters which give rise to the breach of Warranty.
Subject to the provisions of Clause 13.5, the Shareholders covenant to
pay to the Purchaser on demand an amount equal to the amount which the
Purchaser would have been entitled to recover from the Shareholders but
for the Purchaser having or being deemed to have knowledge of the
matters giving rise to the breach of Warranty.
25
<PAGE>
12.6 Subject to the provisions of Clause 13.5 the Shareholders shall
indemnify the Purchaser against all costs (including legal costs on an
indemnity basis as defined in Rule 44.4(3) of the Civil Procedure Rules
1998), expenses or other liabilities which the Purchaser may reasonably
incur either before or after the commencement of any action in
connection with:
(a) the settlement of any Non-Tax Claim;
(b) any legal proceedings in respect of any Non-Tax Claim in which
judgement is given for the Purchaser; or
(c) the enforcement of any such settlement or judgement.
12.7 Any amount paid by the Shareholders to the Purchaser in respect of any
of the provisions of this Agreement shall be treated as paid to the
Purchaser by way of pro rata reduction in the Consideration.
13. LIMITATIONS ON LIABILITY
13.1 To provide a source of indemnification to the Purchaser pursuant to any
Claims, the Shareholders agree that
(a) certificates for 12,708(twelve thousand seven hundred and
eight) shares of Consideration Stock being 20% of the
aggregate of the value of the Consideration Stock and the
Consideration Funds issued to the Non-Employee Shareholders
pursuant to clause 3 ("THE RETAINED STOCK") shall be deposited
with the Escrow Agent in an escrow account ("THE ESCROW
ACCOUNT") pursuant to the Escrow Agreement following
Completion;
(b) for the avoidance of doubt, this sub-clause 13.1 shall not
affect the Purchaser's right to cancel all of the Deferred
Consideration outstanding from time to time in the event that
any Claim arises and which cancellation rights are provided
for in accordance with this Agreement;
(c) For the purpose of interpretation of this sub-clause 13.1 the
parties have assumed that in the case of sub-Clause
13.1(b)(ii) the Deferred Consideration being subject to a
conditional right of allotment was so allotted and issued and
in all cases by reference to the Average Closing Price. In the
case of the Employee Shareholders the Purchaser shall have the
right by way of set-off, deduction, off-set, cancellation or
otherwise for the period of one year following the date of
this Agreement to:
(i) irrevocably and unconditionally cancel any Deferred
Consideration allotted and issued to Employee
Shareholders pursuant to Clause 3 and 6; and/or
26
<PAGE>
(ii) irrevocably and unconditionally determine, cancel,
extinguish or determine any conditional right of
allotment of Deferred Consideration.
in either case to a total aggregate value of $413,840 (four
hundred and thirteen thousand eight hundred and forty dollars
("the Set-Off Amount").
13.2 The Retained Stock shall be held in the Escrow Account on such terms as
are set forth in the Escrow Agreement for a period of one year from the
date of Completion ("THE HOLD PERIOD"). Any dividends and distributions
with respect to such Retained Stock while held in the Escrow Account
shall also be retained in the Escrow Account until the expiration of
the Hold Period. Any offsets or deductions made from Retained Stock
held in the Escrow Account on account of any Claim shall be made on the
last business day of the Hold Period, or at such other time as set
forth in the Escrow Agreement and shall be based upon the Average
Closing Price. All Retained Stock subject to such offset or deduction
shall be cancelled by the Purchaser and the remaining Retained Stock
together with any dividends paid or distributions made with respect to
such Retained Stock shall be then delivered to the Shareholders in
accordance with their respective interests. For the avoidance of doubt,
no offset or reduction in the Retained Stock allocated to SCM
Microsystems Limited shall be made in respect of any Claim for which
SCM Microsystems Limited is not liable to any extent under this
Agreement.
13.3 Subject to the provisions of this clause 13, the cancellation by the
Purchaser of any Retained Stock contained in the Escrow Account or the
exercise of any cancellation or set-off rights in respect of the
Set-Off Amount shall not prejudice its right to recover any further sum
due to it for that or any other Claim not satisfied by the Escrow
Account or the Set-Off Amount.
13.4 The liability of the Shareholders under the Covenant for Taxation shall
be reduced if and to the extent that the loss shall have been recovered
under the Warranties (and vice versa).
13.5 In the absence of fraud, dishonesty or wilful non-disclosure on the
part of any of the Shareholders, their agents or advisors and subject
to the remaining provisions of this clause 13:
(a) the Purchaser shall not have any claim under the Warranties in
respect of any matter if, and to the extent that, it is fully
and fairly Disclosed;
(b) the Shareholders shall not be liable for any Claim or any
claim under any indemnity in this Agreement unless they have
27
<PAGE>
received written notice from the Purchaser giving reasonable
details of the Claim and, if practicable, the Purchaser's
estimate of the amount involved on or before the expiration of
one (1) year from Completion or, in the case of any claim or
Claim relating to Taxation, not later than six (6) years from
Completion;
(c) the aggregate liability of the Shareholders in respect of any
indemnity in this Agreement (for the avoidance of doubt
including, in the absence of fraud, the indemnity in clause
4.4) and the Non-Tax Warranties shall not exceed(pound)506,337
(five hundred and six thousand three hundred and thirty-seven
pounds) representing the value at Completion of the Retained
Stock and the Set-Off Amount and in relation to the Management
Accounts Indemnity no claim shall be made by the Purchaser if
the value of the claim is estimated by the Purchaser to be
less than(pound)15,000, but if the value of a claim made by
the Purchaser is estimated to exceed(pound)15,000 then the
Shareholders shall be liable for the whole of such claim and
not merely the excess;
(d) the aggregate liability of the Purchaser in respect of any
indemnity or liability in or under this Agreement shall not
exceed (pound)506,337 (five hundred and six thousand three
hundred and thirty seven pounds).
13.6 The limitations on liability contained in clause 13.5 shall not apply
to any Claims relating to fraud or the Tax Warranties or any Claim
under the Covenant for Taxation (together the "MAJOR CLAIMS") and for
the avoidance of doubt SCM Microsystems Limited shall be severally
liable and the remaining Shareholders shall be jointly and severally
liable for the Major Claims but in any event no such Shareholder shall
be liable for such Major Claims for an amount exceeding that part of
the maximum aggregate Consideration payableto the said Shareholder
under the terms of this Agreement assuming in the case of any Employee
Shareholder that they are fully entitled to the Deferred Consideration.
13.7 The limitations on liability contained in clause 13.5 shall not apply
to any Claims relating to the Employment Indemnity and for the
avoidance of doubt all of the Shareholders with the exception of SCM
Microsystems Limited (which shall not be liable to any extent in
relation to the Employment Indemnity) shall be jointly and severally
liable for any Claims under the Employment Indemnity but no such
Shareholder shall be liable for such Claim for an amount exceeding that
part of the maximum aggregate Consideration payable to the said
Shareholder under the terms of this Agreement assuming for the purpose
of this sub-clause 17.7. that in the case of any Employee Shareholder
that they are fully entitled to the Deferred Consideration.
28
<PAGE>
13.8 If the Shareholders make any payment to the Purchaser or the Company in
relation to any Non-Tax Claim and the Purchaser or the Company
subsequently receives from a third party any amount referable to, or
any benefit which would not have been received but for the
circumstances giving rise to, the subject matter of that Claim, the
Purchaser shall, once it or the Company has received such amount or
benefit, immediately repay or procure the repayment to the Shareholders
of either:
(a) the amount of such receipt (after deducting an amount equal to
the reasonable costs of the Purchaser or the Company incurred
in recovering such receipt and any Taxation payable on it); or
if lesser
(b) the amount paid by the Shareholders.
14. CONDUCT OF NON-TAX CLAIMS
14.1 The Purchaser shall notify the Shareholders in writing of:
(a) any claim made against it by a third party which may give rise
to a Non-Tax Claim; and
(b) any claim the Company is entitled to bring against a third
party which claim is based on circumstances which may give
rise to a Non-Tax Claim.
14.2 The Purchaser shall procure that the conduct, negotiation, settlement
or litigation of the claim by or against such third party is, so far as
is reasonably practicable, carried out in accordance with the wishes of
the Shareholders and at their cost subject to their giving timely
instructions to the Purchaser and providing reasonable security for any
costs and expenses which might be incurred by the Purchaser or the
Company.
14.3 Subject to the provisions of clause 13.5(b) the Purchaser shall not be
liable for any delay in giving any notice under sub-clause 14.1 and
shall not by reason of such delay be precluded from bringing any such
Non-Tax Claim against the Shareholders.
14.4 The Purchaser shall provide and shall procure that the Company provides
to the Shareholders and the Shareholders' professional advisers
reasonable access to premises and personnel and to any relevant assets,
documents and records within their power, possession or control for the
purpose of investigating any Non-Tax Claim and enabling the
Shareholders to take the action referred to in sub-clauses 14.2 and
shall allow the Shareholders and their advisers to take copies of any
relevant documents or records at their expense.
29
<PAGE>
15. GENERAL
15.1 ENTIRE AGREEMENT AND CONFLICTS
(a) This Agreement sets out the entire agreement and understanding
between the parties in respect of the subject matter of this
Agreement.
(b) The Purchaser acknowledges that it has entered into this
Agreement in reliance only upon the representations,
warranties and promises specifically contained or incorporated
in this Agreement and, save as expressly set out in this
Agreement, the Shareholders shall have no liability in respect
of any other representation, warranty or promise made prior to
the date of this Agreement unless it was made fraudulently.
15.2 CONTRACTS (RIGHTS OF THIRD PARTIES) ACT 1999
The Contracts (Rights of Third Parties) Act 1999 does not apply to this
Agreement.
15.3 ASSIGNMENT
(a) This Agreement shall be binding upon and enure for the benefit
of the successors in title of the parties but, except as set
out in sub-clause (b), shall not be assignable by any party
without the prior written consent of the other.
(b) The Purchaser may assign the benefit of this Agreement
(including, without limitation, the Warranties) to any member
of the same group of Companies as the Purchaser being a
successor in title or any subsequent purchaser of the Shares.
15.4 VARIATION
No purported variation of this Agreement shall be effective unless it
is in writing and signed by or on behalf of each of the parties.
15.5 EFFECT OF COMPLETION
Except to the extent already performed, all the provisions of this
Agreement shall, so far as they are capable of being performed or
observed, continue in full force and effect notwithstanding Completion.
15.6 INVALIDITY
To the extent that any provision of this Agreement is found by any
court or competent authority to be invalid, unlawful or unenforceable
in any jurisdiction, that provision shall be deemed not to be a part of
this Agreement, it shall not affect the enforceability of the remainder
of
30
<PAGE>
this Agreement nor shall it affect the validity, lawfulness or
enforceability of that provision in any other jurisdiction.
15.7 RELEASES AND WAIVERS
(a) The rights, powers and remedies conferred on the Purchaser by
this Agreement and remedies available to it are cumulative and
are additional to any right, power or remedy which it may have
under general law or otherwise.
(b) The Purchaser may, in whole or in part, release, compound,
compromise, waive or postpone, in its absolute discretion, any
liability owed to it or right granted to it in this Agreement
by any other party or parties without in any way prejudicing
or affecting its rights in respect of that or any other
liability or right not so released, compounded, compromised,
waived or postponed.
(c) No single or partial exercise, or failure or delay in
exercising any right, power or remedy by the Purchaser shall
constitute a waiver by it of, or impair or preclude any
further exercise of, that or any right, power or remedy
arising under this Agreement or otherwise.
15.8 FURTHER ASSURANCE
After Completion, each party shall execute such documents and take such
steps as the other party may reasonably require to fulfil the
provisions of and to give to each party the full benefit of this
Agreement.
15.9 COUNTERPARTS
(a) This Agreement may be executed in any number of counterparts
and by the parties on separate counterparts, but shall not be
effective until each party has executed at least one
counterpart.
(b) Each counterpart, when executed, shall be an original of this
Agreement and all counterparts shall together constitute one
instrument.
15.10 TERMINATION
Without prejudice to any remedy available to any party arising out of
any outstanding breach of this Agreement on the part of any other
party, if this Agreement is terminated in accordance with its terms,
the following shall occur:
(a) the restrictions contained in sub-clause 15.11
(Confidentiality) and clause 16 (Announcements) shall continue
to apply; and
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<PAGE>
(b) except as referred to in sub-clause (a), all obligations of
the Purchaser under this Agreement shall cease.
15.11 CONFIDENTIALITY
(a) Except as referred to in sub-clause (b), each party shall
treat as strictly confidential all information received or
obtained as a result of entering into or performing this
Agreement which relates to the provisions or subject matter of
this Agreement, to any other party or the negotiations
relating to this Agreement.
(b) Any party may disclose information which would otherwise be
confidential if and to the extent:
(i) it is required to do so by law or any securities
exchange or regulatory or governmental body to which
it is subject wherever situated;
(ii) it considers it necessary to disclose the information
to its professional advisers, auditors and bankers
provided that it does so on a confidential basis;
(iii) the information has come into the public domain
through no fault of that party; or
(iv) each party to whom it relates has given its consent
in writing.
15.12 SET-OFF
In addition to all rights and remedies that the Purchaser may have, the
Purchaser shall be entitled to set off the amount of any Claim against
any sum due from it to the Shareholders under this Agreement.or any
other agreement in the agreed form. This contractual right of set off
shall extend to the Purchaser the right to cancel all or any of the
Consideration Stock, the Retained Stock subject to the provisions of
Clause 13 or the Deferred Consideration and in the case of any such
Deferred Consideration not issued or allotted hereunder the right to
cancel or extinguish conditional rights of allotment.
16. ANNOUNCEMENTS
16.1 Except as referred to in sub-clause 16.2, no announcement concerning
the terms of this Agreement shall be made by or on behalf of any of the
parties without the prior written consent of the others, such consent
not to be unreasonably withheld or delayed.
16.2 Any announcement or circular required to be made or issued by any party
by law or under the regulations of the SEC or other regulatory body may
be made or issued by that party without consent if it has first sought
consent and given the other parties a reasonable opportunity to
32
<PAGE>
comment on the subject matter and form of the announcement or circular
(given the time scale within which it is required to be released or
despatched).
17. COSTS AND EXPENSES
17.1 The Purchaser shall contribute to the reasonable professional costs
incurred by the Company in the preparation, execution and
implementation of this Agreement up to a maximum aggregate of
(pound)50,000.
17.2 Except as set out in sub-clause 17.1, sub-clause 17.3 and sub-clause
15.10 (Termination) each party shall bear its own costs and expenses
incurred in the preparation, execution and implementation of this
Agreement.
17.3 The Purchaser shall pay all stamp and other transfer duties and
registration fees applicable to any document to which it is a party and
which arise as a result of or in consequence of this Agreement.
18. NOTICES
18.1 Any notice to a party under this Agreement shall be in writing signed
by or on behalf of the party giving it and shall, unless delivered to a
party personally, be left at, or sent by prepaid first class post,
prepaid recorded delivery or facsimile to the address of the party as
set out on page 1 and in schedule 1 of this Agreement or as otherwise
notified in writing from time to time.
18.2 Except as referred to in sub-clauses 18.3 and 18.4, a notice shall be
deemed to have been served:
(a) at the time of delivery if delivered personally:
(i) 48 hours after posting in the case of an address in
the United Kingdom and 96 hours after posting for any
other address;
(ii) 2 hours after transmission if served by facsimile on
a business day prior to 3pm or in any other case at
10 am on the business day after the date of despatch.
18.3 If the deemed time of service is not during normal business hours in
the country of receipt, the notice shall be deemed served at or, in the
case of faxes, two hours after the opening of business on the next
business day of that country.
18.4 The deemed service provisions set out in sub-clause 18.2 do not apply
to:
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<PAGE>
(a) a notice served by post, if there is a national or local
suspension, curtailment or disruption of postal services which
affects the collection of the notice or is such that the
notice cannot reasonably be expected to be delivered within 48
hours or 96 hours (as appropriate) after posting; and
(b) a notice served by facsimile, if, before the time at which the
notice would otherwise be deemed to have been served, the
receiving party informs the sending party that the notice has
been received in a form which is unclear in any material
respect, and, if it informs the sending party by telephone, it
also despatches a confirmatory facsimile within two hours.
18.5 In proving service it will be sufficient to prove:
(a) in the case of personal service, that it was handed to the
party or delivered to or left in an appropriate place for
receipt of letters at its address;
(b) in the case of a letter sent by post, that the letter was
properly addressed, stamped and posted;
(c) in the case of facsimile, that it was properly addressed and
despatched to the number of the party.
18.6 A party shall not attempt to prevent or delay the service on it of a
notice connected with this Agreement.
19. GOVERNING LAW AND JURISDICTION
19.1 This Agreement shall be governed by and construed in accordance with
English law.
19.2 Each of the parties irrevocably submits for all purposes in connection
with this Agreement to the non-exclusive jurisdiction of the courts of
England.
THIS AGREEMENT has been executed and delivered as a deed on the date appearing
at the head of page 1.
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<PAGE>
SCHEDULE 1
THE SHAREHOLDERS
PART 1
THE NON-EMPLOYEE SHAREHOLDERS
<TABLE>
<CAPTION>
NAME ADDRESS NO. OF SHARES IN THE CONSIDERATION STOCK ISSUED AT
COMPANY COMPLETION
<S> <C> <C> <C>
Dierdre Giese 13 Larch Avenue, 2,000
Wokingham
RG41 1EJ 2,156 shares
Deborah Norford Jones 943 Manor Way, Los 20,000
Altos, CA90424 USA 21,561 shares
Alan Jones 943 Manor Way, 9,200
Los Altos,
CA90424 USA 9,918
Derek Cook 5, Bird Mews, 1,000
Wokingham,
Berks RG40 1DZ 1,078 shares
George Dundon 35 Marsh Court, 1,000
Lychpit,
</TABLE>
35
<PAGE>
<TABLE>
<S> <C> <C> <C>
Basingstoke,
Hampshire RG24 8UY 1,078 shares
SCM Microsystems Limited Shuttle House, 22,800
Ashville Way,
Ashville Park,
Wokingham, Berks RG41 2PL 24,579 shares
--------------------------------------
TOTAL 60,370 shares
--------------------------------------
</TABLE>
PART 2
THE EMPLOYEE SHAREHOLDERS
<TABLE>
<CAPTION>
CONSIDERATION STOCK
NAME ADDRESS NO. OF SHARES ISSUED AT COMPLETION
<S> <C> <C> <C>
David Atkinson 4 Green Finch Close, 8,000 1,725 shares
Heathfield Park,
Crowthorne,
Berks RG45 6TZ
John Boyne 17 The Hatches, 6,000 1,294 shares
Frimley Green,
Camberley, Surrey
GU14 6HE
Anne Cowen 8 Ashbury Drive, 4,000 862 shares
Tilehurst, Reading,
Berks RG31 5LJ
Stephen Darragh 113 Juniper Birch 3,000 647 shares
Hill, Bracknell,
RG142 7ZF
Esther Flawn 36 Carnation Drive, 10,000 2,156shares
Winkfield Road RG42 7QT
Donna Kirby 35 Leyland Gardens, 2,000 431 shares
Shinfield, Reading,
Berks RG2 9AN
</TABLE>
36
<PAGE>
<TABLE>
<S> <C> <C> <C>
Grant Morgan 7 Coulsden Rise, 15,000 3,234 shares
Coulsden, Surrey
CR5 2SE
Tiel Holdstock 43 Gipsey Lane, 8,000 1,725 shares
Wokingham, Berks RG40 2BN
Carl Hayesmore 22 Hill Brow, 2,000 431 shares
Reading, Berks RG2 8JD
Christopher Higginson 2 Hazelbank, 2,000 431 shares
Finchampstead, Berks
RG40 4XD
--------------------------------------
TOTAL 12,936 shares
--------------------------------------
</TABLE>
37
<PAGE>
PART 3
EMPLOYEE SHAREHOLDERS
<TABLE>
<CAPTION>
CONDITIONAL ALLOTMENT DATE % OF DEFERRED CONSIDERATION PERCENTAGE
AVAILABLE FOR ALLOTMENT
CALCULATED PURSUANT TO
CLAUSE 6
<S> <C>
06/10/2000 30%
06/04/2001 16.7% As set out in Part 4 of
Schedule 1 Column 3
06/10/2001 16.7%
06/04/2002 16.6%
</TABLE>
38
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PART 4
THE PROPORTIONS OF CONSIDERATION STOCK FOR WHICH THE EMPLOYEE
SHAREHOLDERS HAVE THE CONDITIONAL RIGHT TO SUBSCRIBE
NAME ADDRESS PERCENTAGE OF DEFERRED
CONSIDERATION AVAILABLE TO EACH
EMPLOYEE SHAREHOLDER UPON EACH
CONDITIONAL ALLOTMENT
David Atkinson 4 Green Finch Close, 13.33
Heathfield Park,
Crowthorne, Berks
RG45 6TZ
John Boyne 17 The Hatches, 10
Frimley Green,
Camberley, Surrey
GU14 6HE
Anne Cowen 8 Ashbury Drive, 6.675
Tilehurst, Reading,
Berks RG31 5LJ
Stephen Darragh 113 Juniper Birch 5
Hill, Bracknell,
RG142 7ZF
Esther Flawn 36 Carnation Drive, 16.675
Winkfield Road RG42 7QT
Donna Kirby 35 Leyland Gardens, 3.33
Shinfield, Reading,
Berks RG2 9AN
Grant Morgan 7 Coulsden Rise, 25
Coulsden, Surrey CR5 2SE
Tiel Holdstock 43 Gipsey Lane, 13.33
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Wokingham, Berks RG40 2BN
Carl Hayesmore 22 Hill Brow, 3.33
Reading, Berks RG2 8JD
Christopher Higginson 2 Hazelbank, 3.33
Finchampstead,
Berks RG40 4XD
-----------------------------------------
TOTAL 100
-----------------------------------------
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SCHEDULE 2
(Information concerning the Company)
REGISTERED NUMBER 3786531
DATE OF INCORPORATION 10 June 1999
PLACE OF INCORPORATION Cardiff
ADDRESS OF REGISTERED OFFICE Woodhouse Daughtrey, North
Lodge, Templewood Lane,
Farnham Common, Slough,
Berkshire SL2 3HW
CLASS OF COMPANY Private
AUTHORISED SHARE CAPITAL (pound)5,000,000
ISSUED SHARE CAPITAL (pound)58,000
LOAN CAPITAL There is no loan capital
DIRECTORS
FULL NAME USUAL RESIDENTIAL ADDRESS NATIONALITY
Grant Morgan 7 Coulsdon Rise, British
Coulsdon, Surrey CR5 2SE
Alan Jones 943 Manor Way, Los Altos, British
CA90424 USA
George Dundon 35 March Court, Basingstoke, British
Hants RG26 8HY
SECRETARY
FULL NAME USUAL RESIDENTIAL ADDRESS
Brian Daughtrey
ACCOUNTING REFERENCE DATE 30 April
TAX RESIDENCE England and Wales
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SCHEDULE 3
The Non-Tax Warranties
THE SHAREHOLDERS
1. CAPACITY
1.1 Each Shareholder has the requisite power and authority to enter into
and perform this Agreement.
1.2 No Shareholder is bankrupt, has proposed a voluntary arrangement or has
made or proposed any arrangement or composition with his creditors or
any class of his creditors.
1.3 This Agreement constitutes and imposes valid legal and binding
obligations on each Shareholder fully enforceable in accordance with
its terms.
2. ARRANGEMENTS BETWEEN THE COMPANY AND SHAREHOLDER ASSOCIATES
There are no contracts, arrangements or liabilities, actual or
contingent, outstanding or remaining in whole or in part to be
performed between the Company and any Shareholder Associate.
3. OTHER INTERESTS OF ANY SHAREHOLDER ASSOCIATE
No Shareholder other than SCM Microsystems Limited has or intends to
acquire any interest, direct or indirect, in any business which has a
close trading relationship with or which competes or is likely to
compete with any business now carried on by the Company and, so far as
the Shareholders are aware, no Shareholder Associate has or intends to
do so.
SHARE CAPITAL
4. COMPANY
4.1 The Shares constitute the entire issued and allotted share capital of
the Company and are fully paid or credited as fully paid.
4.2 Apart from this Agreement, there is no agreement, arrangement or
commitment outstanding which calls for the allotment, issue or transfer
of, or accords to any person the right to call for the allotment, issue
or transfer of, any share or loan capital of the Company.
4.3 None of the Shares was, or represents assets which were, the subject of
a transfer at an undervalue, within the meaning of Sections 238 or 339,
Insolvency Act 1986, within the past 5 years.
4.4 The Company has not at any time:
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(a) reduced its share capital;
(b) redeemed any share capital;
(c) purchased any of its shares; or
(d) forfeited any of its shares.
5. SUBSIDIARIES
5.1 There are no Subsidiaries of the Company.
5.2 The Company does not have, and has never had, a participating interest
(as defined in Section 260 of the Act) in any undertaking nor has it
agreed to acquire such an interest.
5.3 The Company does not hold or is not liable on any share or relevant
security.
CORPORATE MATTERS
6. INSOLVENCY OF THE COMPANY
6.1 No order has been made, no resolution has been passed, no petition
presented, no meeting convened for the winding up of the Company or for
a provisional liquidator to be appointed in respect of the Company
6.2 No administration order has been made and no petition for one has been
presented in respect of the Company.
6.3 No receiver or administrative receiver has been appointed in respect of
the Company or any of its assets.
6.4 The Company is not insolvent, has failed or is unable to pay, or has no
reasonable prospect of being unable to pay, any of its debts as they
fall due, as those expressions are defined in Section 123, Insolvency
Act 1986.
6.5 No voluntary arrangement has been proposed under Section 1, Insolvency
Act 1986 in respect of the Company and the Company has not made or
proposed any arrangement or composition with its creditors or any class
of them.
6.6 No distress, execution or other process has been levied on the
Company's assets or action taken to repossess goods in the possession
of the Company.
6.7 No unsatisfied judgement is outstanding against the Company and no
demand has been served on the Company under Section 123(1)(a),
Insolvency Act 1986.
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6.8 No event analogous to any referred to in sub-paragraphs 6.1 to 6.7 has
occurred anywhere in the world.
7. STATUTORY BOOKS AND DOCUMENTS FILED
7.1 The statutory books, including all registers and minute books, of the
Company have been properly kept and contain an accurate and complete
record of the matters with which those books should deal.
7.2 All documents which should have been delivered by the Company to the
Registrar of Companies are complete and accurate and have been properly
so delivered.
7.3 A copy of the memorandum and articles of association of the Company is
contained in the Disclosure Letter and has embodied in it or annexed to
it a copy of each resolution as referred to in Section 380, Companies
Act 1985, and is accurate and complete in all respects.
7.4 Since the Accounts Date the members of the Company in general meeting,
or of any class of them, have not passed any resolution other than
resolutions relating to the ordinary business of annual general
meetings.
INFORMATION
8. ACCURACY AND ADEQUACY OF INFORMATION
8.1 The information contained in schedules 1, 2 and 4 to this Agreement is
accurate and complete.
8.2 The information contained in the Disclosure Letter and all written
information supplied to the Purchaser or its advisers by or on behalf
of the Shareholders or any of their advisers or by the Company is
complete and accurate and is not misleading because of any omission or
ambiguity or for any other reason and where the information is
expressed as an opinion, it is truly and honestly held and not given
casually, recklessly or without due regard for its accuracy.
8.3 So far as the Shareholders with the exception of SCM Microsystems Ltd
are aware, there is no fact or circumstance relating to the business
and affairs of the Company which, if Disclosed to the Purchaser or any
of its advisers, might reasonably be expected to influence the decision
of the Purchaser to purchase the Shares on the terms contained in this
Agreement and which has not been so Disclosed.
MANAGEMENT ACCOUNTS
9. PREPARATION AND CONTENTS OF THE MANAGEMENT ACCOUNTS
(a) The Management Accounts:
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(i) contain full provision or reserve for all liabilities
and for all capital and revenue commitments of the
Company as at the Accounts Date;
(ii) disclose all the assets of the Company as at the
Accounts Date and none of the values placed in the
Accounts on any of those assets was in excess of its
market value at the Accounts Date;
(iii) make full provision for bad and doubtful debts;
(iv) do not include any figure which is referable to the
value of an intangible asset; and
(v) make full provision for depreciation of the fixed
assets of the Company having regard to their original
cost and life.
10. ACCOUNTING RECORDS
10.1 The accounting records of the Company comply with the requirements of
Sections 221 and 222 of the Act, do not contain or reflect any material
inaccuracy or discrepancy and present and reflect in accordance with
generally accepted accounting principles and standards the financial
position of and all transactions entered into by the Company or to
which it has been a party.
10.2 All relevant financial books and records of the Company are in its
possession or otherwise under its direct control.
10.3 Where any of the records of the Company are kept on computer, the
Company:
(a) is the owner of all hardware and all software necessary to
enable it to use the records as they have been used in its
business to the date of this Agreement and to Completion;
(b) does not share any hardware or software relating to the
records with any person; and
(c) maintains adequate back up records and support in the event of
any fault or failure of such computer hardware and software.
11. EURO COMPLIANCE
11.1 The products, systems and services are "Euro Compliant" and are capable
of satisfying the legal requirements applicable to the common currency
adopted or to be adopted by the relevant participating member states of
the European Union and known as the "Euro" as set out in the European
Commission Regulation number 1103.97 ("THE REGULATION"). For the
purposes of this warranty "Euro Compliant"
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shall mean the ability of the systems to perform using the Euro and to
allow any currency recognised by the systems, including but not limited
to the Euro and all other currencies belonging to and adopted by full
member states of the European Union, to be converted to other
currencies, and in particular (but without limitation) to:
(a) perform all monetary functions in Euros;
(b) process multiple currencies and in particular the dual
currencies during the transition phase set out in the
Regulation of countries adopting the Euro;
(c) recognise the industry standard keyboard configurations or
key-strokes and screen layouts for the Euro symbol;
(d) correctly implement the conversion and rounding requirements
(including the triangulation rule) set out in the Regulation;
and
(e) interface with other Euro Compliant products.
11.2 Neither the Company nor the Shareholders have any knowledge that the
introduction of the Euro will or may cause any agreement, arrangement
or obligation to which the Company is a party to terminate or to be
capable of termination or will or may alter the terms of or excuse or
discharge performance of such an agreement.
12. EVENTS SINCE THE ACCOUNTS DATE
12.1 Since the Accounts Date there has been no material change in:
(a) the financial or trading position or prospects of the Company;
(b) the value or state of assets or amount or nature of
liabilities as compared with the position disclosed in the
Management Accounts.
12.2 The Company has since the Accounts Date carried on its business in the
ordinary course and without interruption, so as to maintain it as a
going concern and paid its creditors in the ordinary course and within
the credit periods agreed with such creditors.
12.3 Since the Accounts Date no supplier of the Company has ceased or
restricted supplies or threatened so to do, there has been no loss or
material curtailment of the business transacted by the Company with any
customer which at any time represented 10 per cent or more of the
turnover of the Company and the Shareholders are not aware of any
circumstances likely to give rise to any of the above.
12.4 Since the Accounts Date the Company has not:
(a) incurred or committed to incur:
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(i) material capital expenditure exceeding(pound)5,000;
or
(ii) any liability whether actual or contingent except for
full value or in the ordinary course of business;
(b) acquired or agreed to acquire:
(i) any asset for a consideration higher than its market
value at the time of acquisition or otherwise than in
the ordinary course of business; or
(ii) any business or substantial part of it or any share
or shares in a body corporate;
(c) disposed of or agreed to dispose of, any of the assets of the
Company, except in the ordinary course of business and for
full value;
(d) repaid wholly or in part any loan except upon the due date or
dates for repayment;
(e) issued or allotted share or loan capital, increased its
authorised share capital, purchased or redeemed any shares,
reduced or re-organised its share capital or agreed to do so;
or
(f) declared or paid any distribution of profit.
12.5 None of the debts included in the Management Accounts or any of the
debts subsequently arising have been the subject of factoring by the
Company and the Shareholders are not aware of any circumstances which
could result in any presently outstanding debt in excess of
(pound)1,000 not being paid in full.
FINANCIAL
13. FINANCIAL COMMITMENTS AND BORROWINGS
13.1 Complete and accurate details of all overdraft, loan and other
financial facilities available to the Company and the amounts
outstanding under them at the close of business on the day preceding
the date of this Agreement are set out in the Disclosure Letter and
none of the Shareholders or the Company has done anything, or omitted
to do anything, as a result of which the continuance of any of those
facilities might be affected or prejudiced.
13.2 The Company is not a party to, and has not agreed to enter into, any
lending, or purported lending, agreement or arrangement (other than
agreements to give credit in the ordinary course of its business).
13.3 The Company is not exceeding any borrowing limit imposed upon it by its
bankers, other lenders, its articles of association or otherwise nor
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has the Company entered into any commitment or arrangement which might
lead it so to do.
13.4 No overdraft or other financial facilities available to the Company are
dependent upon the guarantee of or security provided by any other
person.
13.5 No event has occurred or been alleged which is or, with the passing of
any time or the giving of any notice, certificate, declaration or
demand, would become an event of default under, or breach of, any of
the terms of any loan capital, borrowing, debenture or financial
facility of the Company or which would entitle any person to call for
repayment prior to normal maturity.
13.6 The Company is not, or has agreed to become, bound by any guarantee,
indemnity, surety or similar commitment.
13.7 The Company has no credit cards in issue in its own name or that of any
officer or employee of the Company or any person connected with any
officer or employee.
13.8 The Company has not received any grants, allowances, loans or financial
aid of any kind from any government departmental or other board, body,
agency or authority which may become liable to be refunded or repaid in
whole or in part.
13.9 The Company has not engaged in financing of a type which is not
required, or has not been, shown or reflected in the Management
Accounts.
14. WORKING CAPITAL
Having regard to existing bank and other facilities available to it,
the Company has sufficient working capital for the purposes of
continuing to carry on its business, in its present form and at its
present level of turnover, for the period of 12 months after
Completion.
15. INSURANCES
15.1 The Company maintains, and at all material times has maintained,
adequate insurance cover against all risks normally insured against by
companies carrying on a similar business, for the full replacement or
reinstatement value of its business and assets, and in particular has
maintained product liability, professional indemnity insurance and all
insurance required by statute and insured against loss of profits for a
period of not less than 6 months and for loss of rent for a period of
not less than 3 years.
15.2 The Policies are valid and enforceable and all premiums due have been
paid. There are no outstanding claims or circumstances likely to give
rise to a claim under the Policies or which would be required to be
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notified to the insurers and nothing has been done or omitted to be
done which has made or could make any Policy void or voidable or as a
result of which the renewal of any Policy might be refused or the
premiums due in respect of them may be liable to be increased.
15.3 There are no claims outstanding or threatened, or so far as the
Shareholders are aware, pending, against the Company which are not
fully covered by insurance.
TRADING AND CONTRACTS
16. CONTRACTS AND COMMITMENTS
16.1 All contracts, agreements, transactions, obligations, commitments,
understandings or arrangements requiring in relation to its discharge
any payment in excess of (pound)5,000 to which the Company is a party
are Disclosed in the Disclosure Letter.
16.2 The Company is not a party to any agreement, arrangement or commitment
which:
(a) has or is expected to have material consequences in terms of
expenditure or revenue;
(b) relates to matters outside the ordinary business of the
Company or was not entered into on arms' length terms;
(c) can be terminated in the event of any change in the underlying
ownership or control of the Company or would be materially
affected by such change;
(d) cannot readily be fulfilled or performed by it on time; or
(e) cannot be terminated, without giving rise to any liabilities
on the Company, by the Company giving 3 months' notice or
less.
16.3 The Company:
(a) has no outstanding bid, tender, sale or service proposal which
is material in relation to its business or which, if accepted,
would be likely to result in a loss;
(b) or shareholders are not aware of any actual, potential or
alleged breach, invalidity, grounds for termination, grounds
for rescission, grounds for avoidance or grounds for
repudiation of, any contract to which the Company is a party;
or
(c) has not granted any power of attorney or other such authority
(whether express or implied) which is still outstanding.
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17. TERMS OF TRADE
The Company has not given any guarantee or warranty (other than any
implied by law) or made any representation in respect of any product or
services sold or supplied by it nor has it accepted any liability to
service, maintain, repair or otherwise do or refrain from doing
anything in relation to such goods or services after they have been
sold or supplied by it except for those contained in its standard
conditions of trading, complete and accurate copies of which are
contained in the Disclosure Letter.
18. PRODUCT LIABILITY
So far as the Shareholders are aware the Company has not manufactured,
sold or provided any product or service which does not in every respect
comply with all applicable laws, regulations or standards or which is
defective or dangerous or not in accordance with any representation or
warranty, express or implied, given in respect of it.
19. LICENCES AND CONSENTS
19.1 Complete and accurate details of all licences, consents, permissions,
authorisations and approvals required by the Company for the carrying
on of its business are contained in the Disclosure Letter and all of
them have been obtained by the Company and are in full force and
effect.
19.2 So far as the Shareholders are aware, all reports, returns and
information required by law or as a condition of any licence, consent,
permission, authorisation or approval to be made or given to any person
or authority in connection with the business of the Company have been
made or given to the appropriate person or authority and there are no
circumstances which indicate that any licence, consent, permission,
authorisation or approval might not be renewed in whole or in part or
is likely to be revoked, suspended or cancelled or which may confer a
right of revocation, suspension or cancellation.
20. TRADING PARTNERS
20.1 The Company does not act or carry on business in partnership with any
other person or is a member of any corporate or unincorporated body,
undertaking or association.
20.2 The Company is not a party to any joint venture agreement or
arrangement or any agreement or arrangement under which it is to
participate with any other person in any business.
20.3 The Company is not a party to any agency, distributorship, licence or
management agreement or is a party to any contract or arrangement which
restricts its freedom to carry on its business in such manner as it
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may think fit in any part of the world.
20.4 The Company has no branch, agency, place of business or establishment
outside the United Kingdom.
21. COMPETITION AND TRADE REGULATION LAW
21.1 The Company is not and has not been a party to, is not, has not been
concerned in any agreement or arrangement, or is not conducting or has
not conducted itself, whether by omission or otherwise, in a manner
which:
(a) contravenes, is invalidated in whole or in part by or has
been, or should have been, registered under the Restrictive
Trade Practices Acts 1976 and 1977;
(b) contravenes the provisions of the Resale the Purchasers Act
1976, the Trade Description Acts 1968 and 1972, the Fair
Trading Act 1973 or any secondary legislation made under
either of those Acts;
(c) infringes Articles 81 or 82 of the EC Treaty or any regulation
or directive made under it or any other anti-trust or similar
legislation in any jurisdiction in which the Company has
assets or carries on or intends to carry on business or where
its activities may have any effect; or
(d) infringes Chapter 1 or Chapter 2 of the Competition Act 1998
or any secondary legislation made under it.
21.2 The Company has not:
(a) given an undertaking to, or is subject to, any order of or
investigation by, or has received any request for information
from;
(b) received, nor so far as the Shareholders are aware, is it
likely to receive any process, notice or communication, formal
or informal by or on behalf of;
(c) been or is a party to, or is or has been concerned in, any
agreement or arrangement in respect of which an application
for negative clearance and/or exemption has been made to
the Office of Fair Trading, the Competition Commission, the Secretary
of State, the European Commission or any other governmental or other
authority, department, board, body or agency of any country having
jurisdiction in anti-trust or similar matters in relation to its
business.
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22. COMPLIANCE WITH LAW
22.1 The Company has not committed or is liable for, and no claim has been
or, so far as the Shareholders are aware, will be made that the Company
has committed or is liable for, any criminal, illegal, unlawful or
unauthorised act or breach of any obligation or duty whether imposed by
or pursuant to statute, contract or otherwise.
22.2 The Company has not received notification that any investigation or
inquiry is being, or has been, conducted by, or received any request
for information from any governmental or other authority, department,
board, body or agency in respect of the affairs of the Company and, so
far as the Shareholders are aware, there are no circumstances which
would give rise to such investigation, inquiry or request.
22.3 None of the activities, contracts or rights of the Company is ultra
vires, unauthorised, invalid or unenforceable or in breach of any
contract or covenant and all documents in the enforcement of which the
Company may be interested are valid.
23. LITIGATION AND DISPUTES
23.1 Except for actions to recover any debt incurred in the ordinary course
of the business owed to the Company where each individual debt and its
costs outstanding amounts to less than (pound)1,000:
(a) The Company is not nor is any person for whose acts the
Company may be liable engaged in any litigation, arbitration,
administrative or criminal proceedings, whether as plaintiff,
defendant or otherwise;
(b) no litigation, arbitration, administrative or criminal
proceedings by or against the Company or any person for whose
acts the Company may be liable are threatened or expected and,
as far as the Shareholders are aware, none are pending; and
(c) there are no facts or circumstances likely to give rise to any
litigation, arbitration, administrative or criminal
proceedings against the Company or any person for whose acts
the Company may be liable.
23.2 The Company is not subject to any order or judgement given by any court
or governmental or other authority, department, board, body or agency
or has not been a party to any undertaking or assurance given to any
court or governmental or other authority, department, board, body or
agency which is still in force, nor are there any facts or
circumstances likely to give rise to the Company becoming subject to
such an order or judgement or to be a party to any such undertaking or
assurance.
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ASSETS
24. OWNERSHIP AND CONDITION OF ASSETS
24.1 Each of the assets included in the Management Accounts or acquired by
the Company since the Accounts Date (other than the Properties and
current assets subsequently disposed of or realised in the ordinary
course of business) is owned both legally and beneficially by the
Company free from any third party rights and, if capable of possession,
is in the possession of the Company.
24.2 Each item of plant and machinery, vehicle and office equipment used by
the Company is:
(a) in good repair and condition, regularly maintained and
certified safe and without risk to health when used;
(b) capable and will remain capable of doing the work for which it
was designed or purchased until the time when (on the basis of
depreciation adopted in the Management Accounts) it will have
been written down to a nil value;
(c) not surplus to requirements; and
(d) not expected to require replacement or additions within 6
months of Completion.
24.3 The Company has not acquired, or agreed to acquire, any asset on terms
that title to that asset does not pass until full payment is made or
all indebtedness incurred in connection with the acquisition is
discharged.
24.4 The assets owned by the Company, together with all assets held under
hire purchase, lease or rental agreements which are contained in the
Disclosure Letter, comprise all assets necessary for the continuation
of the business of the Company as it is currently carried on.
25. STOCK
At Completion, other than where provision has been made in the
Management Accounts, no more than 5% of the stocks of materials of the
Company is redundant, obsolete, obsolescent or defective.
26. CHARGES AND ENCUMBRANCES OVER ASSETS
26.1 No option, right to acquire, mortgage, charge, pledge, lien (other than
a lien arising by operation of law in the ordinary course of trading)
or other form of security or encumbrance or equity on, over or
affecting the shares or the whole or any part of the undertaking or
assets of the Company is outstanding and, apart from this Agreement,
there is no
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agreement or commitment to give or create any of them and no claim has
been made by any person to be entitled to any of them.
26.2 No floating charge created by the Company has crystallised and there
are no circumstances likely to cause such a floating charge to
crystallise.
26.3 The Company has not received notice from any person intimating that it
will enforce any security which it may hold over the assets of the
Company, and there are no circumstances likely to give rise to such a
notice.
26.4 All charges in favour of the Company have, if required, been registered
in accordance with the provisions of the Companies Act 1985, Part XII.
27. INTELLECTUAL PROPERTY
27.1 The Company is the sole legal owner with full title guarantee of the
Intellectual Property used in connection with its business and has
absolute unencumbered title to such Intellectual Property and such
Intellectual Property is not subject to any outstanding rights of any
third party nor does the Intellectual Property infringe any third
party's Intellectual Property rights or rights in know how of any
nature whatsoever or to any option or agreement for licence or purchase
in favour of any person nor do any circumstances exist whereby any
person may claim entitlement to such Intellectual Property in
competition with the Company and without prejudice to the generality of
the foregoing no employee of the Company is entitled to any award or
compensation in respect thereof whether under the Patents Act 1977 or
otherwise.
27.2 All Marks and Patents (if any) used by the Company in the course of its
business are registered in the name of the Company as proprietor.
27.3 As regards all Marks owned by the Company, the Company has paid all
renewal and other fees or expenses which may be necessary to ensure the
continuance in force of the registrations of the said Marks.
27.4 All Know-How used by the Company in connection with its business is its
sole property and the Company has neither disclosed to nor licensed any
third party to use such Know-How.
27.5 None of the operations of the Company infringe any industrial property
rights or intellectual property rights of any third party and the
Company is not liable to make any payment of any royalty or fee in
respect of the same.
27.6 The Company does not use on its letterheads, business cards, circulars,
advertisements, brochures, sales literature or vehicles or otherwise
carry on business under a name other than its corporate name.
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27.7 None of the Intellectual Property used by the Company in its business
has been assigned or is being used, claimed, opposed or attacked by any
person nor so far as the Shareholders are aware are the Company's
rights thereto being infringed.
27.8 The Company has not entered into any agreement which restricts the
disclosure or use by the Company of any Know-how or technical
information or other Intellectual Property and there has not been any
infringement by any third party of any of the rights in confidential
information or other Intellectual Property held by the Company.
27.9 The Company owns all Intellectual Property with full title guarantee.
27.10 The Intellectual Property is free from encumbrances and /or any third
party interests.
27.11 The Company has quiet enjoyment of all Intellectual Property at the
date hereof.
27.12 No part of any of the Intellectual Property has except in the ordinary
course of business been licensed, transferred, assigned, charged or
otherwise encumbered or dealt with.
27.13 There is no third party Software licensed to the Company which the
Company needs for its business.
27.14 No part of any of the Software is manufactured, supplied or licensed by
the Company under any licence, consent or permission from any third
party.
27.15 In respect of any part of any Intellectual Property written, developed
or originated by an employee or director of the Company:
(a) all such Intellectual Property was written, developed or
originated by such employee in the course of his employment by
the Company; and
(b) the contract of employment between the Company and such
employee provides for the Company to own all rights in and to
such Software; and
(c) if sub-paragraphs 28.15(a) and (b) do not both apply, such
employee has expressly assigned as beneficial owner to the
Company all Intellectual Property.
27.16 None of the processes employed, or products or services dealt in, by
the Company infringes any rights of any third party relating to
intellectual property nor makes the Company liable to pay a fee or
royalty and no claims have been made, threatened or so far as the
Shareholders are aware are pending, in relation to any Intellectual
Property against the Company.
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28. DATA PROTECTION ACT
28.1 The Company has complied in all respects with the provisions of the
Data Protection Act 1984 (as amended) and the Data Protection Act 1998
("DPA") and the principles contained in the DPA.
28.2 Except as registered under the DPA, the Company has not held or
processed any personal data or is exempt from registering under the DPA
under one of the exemptions contained in the DPA.
28.3 Insofar as personal data are subject to registration:
(a) the Company has at all times maintained full and accurate
registration under the DPA and has operated wholly within the
terms of such registrations;
(b) all personal data are accurate and up to date;
(c) personal data have not been used by the Company for an
unspecified or unlawful purpose nor has there been any
disclosure thereof outside the terms of the Company's
registration.
28.4 The Company has not been served with any notice under the DPA nor are
there any circumstances which might give rise to the Company being
served with such a notice in the future
EMPLOYMENT
29. DIRECTORS AND EMPLOYEES
29.1 Complete and accurate details of the terms and conditions of employment
of all employees of the Company, including the date of commencement of
their continuous period of employment and any arrangements or
assurances (whether or not legally binding) in relation to their
employment, are contained in the Disclosure Letter.
29.2 The Company has maintained up-to-date, adequate and suitable records
regarding the service and terms and conditions of employment of each of
its employees.
29.3 The Company has maintained up-to-date adequate and suitable records for
the purposes of the Working Time Regulations and has complied with all
other obligations to its workers (as "workers" is defined in Regulation
2 of the Working Time Regulations) and there are no claims capable of
arising or pending or threatened by any officer or employee or former
officer or employee or the Health and Safety Executive or any local
authority Environmental Health Department or any trade union or
employee representative related to the Working Time Regulations.
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29.4 The Company is not a party to any consultancy agreement, any agreement
for management services or any contract of services.
29.5 Since the Accounts Date there has been:
(a) no material alteration in the terms of employment or any
material change in the number of employees employed by the
Company; or
(b) no material increase in any fees, remuneration or benefits
paid or payable to any officer or employee of the Company, nor
are any negotiations for any such increase current.
29.6 No officer or employee of the Company is remunerated on a
profit-sharing, bonus or commission basis.
29.7 Other than salary for the current month and accrued holiday pay, no
amount is owing to any present or former officer or employee of the
Company.
29.8 There is no share option or share incentive scheme in operation by or
in relation to the Company for any of its officers or employees nor is
the introduction of such a scheme been proposed.
29.9 The Company has at all relevant times complied with all its obligations
under statute and otherwise concerning the health and safety at work of
its employees and there are no claims capable of arising or pending or
threatened by any employee or third party in respect of any accident or
injury which are not fully covered by insurance.
29.10 Save as provided for or taken into account in the Management Accounts:
(a) no claim or liability to make any payment of any kind to any
person who is or has been an officer or employee has been
received or incurred by the Company whether under the
Employment Rights Act 1996, Sex Discrimination Act 1975, the
Race Relations Act 1976 and the Disability Discrimination Act
1995 or otherwise; and
(b) no gratuitous payment of a material amount has been made or
promised by the Company in connection with the actual or
proposed termination or suspension of employment or variation
of any contract of employment of any present or former officer
or employee.
29.11 No officer or employee of the Company has given notice or is under
notice of dismissal nor are there any service contracts between the
Company and its officers or employees which cannot be terminated by the
Company by 12 weeks notice or less without giving rise to a claim
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for damages or compensation (other than a statutory redundancy
payment).
29.12 The Company has not, in contravention of the Act:
(a) entered into any arrangement involving the acquisition of
non-cash assets from or disposal to;
(b) granted any loan or quasi-loan to or entered into any
guarantee or credit transaction with; or
(c) provided any security in connection with any loan, quasi-loan
or credit transaction to or with
any director or person connected with a director within the meaning of
the Act.
30. INDUSTRIAL RELATIONS
30.1 The Company is not a party to any contract, agreement or arrangement
with any trade union or other body or organisation representing any of
its employees.
30.2 The Company has in relation to its officers and employees and former
officers and employees complied with all conditions of service, customs
and practices and, where relevant, all collective agreements,
recognition agreements workforce agreements and relevant agreements for
the time being.
30.3 Within the last 12 months, the Company has not:
(a) given notice of any redundancies to the Secretary of State,
started consultations with any appropriate representatives or
failed to comply with any obligation under the provisions of
Chapter II Trade Union and Labour Relations (consolidation)
Act 1992;
(b) been a party to any relevant transfer as defined in the
Transfer of Undertakings (Protection of Employment)
Regulations 1981 or has failed to comply with any duty to
inform and consult any appropriate representative under the
Regulations.
30.4 No dispute has arisen between the Company and a material number or
category of its employees nor are there any present circumstances known
to the Shareholders which are likely to give rise to any such dispute.
30.5 No training schemes, arrangements or proposals exist nor have there
been any such schemes, arrangements or proposals in the past in respect
of which a levy may become payable by the Company under the Industrial
Training Act 1982.
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31. PENSIONS
31.1 Except as disclosed in the Disclosure Letter, the Company does not have
any plans, schemes or arrangements in relation to death, disability or
retirement of its employees or any of them.
31.2 In relation to each plan, scheme or arrangement disclosed in the
Disclosure Letter:
(a) complete and accurate details:
(i) of it (including, where appropriate, copies of all
trust deeds and rules together with copies of all
amending deeds and resolution and the latest
actuarial reports);
and
(ii) of the basis on which the Company makes, or is liable
to make, contributions to it
are contained in the Disclosure Letter.
(b) all contributions which are payable by the Company in respect
of any such plans, schemes or arrangements referred to above
and all contributions due from the employees of the Company as
members of such plans, schemes or arrangements have been duly
made and the Company has fulfilled all its obligations under
each of them.
PROPERTIES.
32. TITLE
32.1 The Property comprises all the properties presently owned, occupied,
held, controlled or otherwise used by the Company.
32.2 The Company occupies the Property under a licence to occupy contained
in a Business Sale Agreement dated 12 November 1999 between SCM
Microsystems Ltd (1) and Impleo Limited (2), the original of which is
in the possession of the Company.
32.3 So far as the Shareholders are aware, no person is in adverse
possession of any Property or has acquired or is acquiring any rights
or overriding interests (as defined by Section 70, Land Registration
Act 1925) adversely affecting any Property.
32.4 So far as the Shareholders are aware the Company has not had occasion
to make any claim or complaint in relation to any neighbouring property
or its use or occupation and there are no disputes, claims, actions,
demands or complaints in respect of any Property which are ongoing nor
are any disputes, claims, actions,
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demands or complaints anticipated and no notices materially affecting
any Property have been given or received and not complied with.
33. ENCUMBRANCES
33.1 So far as the Shareholders are aware the Property is not subject to any
restrictive covenant, reservation, stipulation, easement, profits a
prendre, wayleave, licence, grant, restriction, overriding interest,
agreement for sale, estate contract, option, right of pre-emption or
other similar agreement or right vested in third parties.
33.2 Where sub-paragraphs 33.1 has been Disclosed against in the Disclosure
Letter, the obligations and liabilities imposed and arising under the
Disclosed matter have been fully observed and performed and any
payments in respect of it which are due and payable have been duly
paid.
34. PLANNING MATTERS
34.1 The use of each Property is a lawful and permitted use for the purposes
of the Planning Acts.
34.2 So far as the Shareholders are aware, building regulation consents have
been obtained with respect to all development, alterations and
improvements to the Property.
34.3 So far as the Shareholders are aware, all claims and liabilities under
the Planning Acts or any other legislation have been discharged and no
claim or liability, actual or contingent, is outstanding.
35. STATUTORY OBLIGATIONS
35.1 So far as the Shareholders are aware, the Company has complied with and
is continuing to comply with all applicable statutory and by-law
requirements with respect to the Property, and in particular with the
requirements as to fire precautions under the Fire Precautions Act 1971
and under the Public Health Acts, the Offices, Shops and Railway
Premises Act 1963, the Health and Safety at Work Act 1974, the
Factories Act 1961 and the Shops Acts 1950 to 1956.
36. ADVERSE ORDERS
36.1 So far as the Shareholders are aware, there are no compulsory purchase
notices, orders or resolutions affecting the Property and there are no
circumstances likely to lead to any being made.
36.2 So far as the Shareholders are aware, there are no closing, demolition
or clearance orders, enforcement notices or stop notices affecting the
Property and there are no circumstances likely to lead to any being
made.
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37. LEASEHOLD PROPERTIES
37.1 The Company has not in the past been the tenant of or guarantor of any
leasehold premises not listed in schedule 4 in respect of which any
obligations or liabilities could still accrue to the Company.
ENVIRONMENT
38. ENVIRONMENTAL MATTERS
38.1 In relation to its business, the Company holds and has since its
incorporation always held all Environmental Consents.
38.2 Complete and accurate details of all Environmental Consents held by the
Company are contained in the Disclosure Letter and are valid and
subsisting.
38.3 The Company has not received any notification that any Environmental
Consent it holds is or is likely to be modified, restricted or
withdrawn and no works or other upgrading or investment are or will be
necessary to secure compliance with or to maintain any such
Environmental Consent.
38.4 The Company has not breached the terms, conditions or provisions of any
Environmental Consent.
38.5 The Company has not received any notification or informal indication
that further Environmental Consents will be required under
Environmental Law in order for it to continue its present business.
38.6 The Company (and each of its officers, employees and agents in the
course of its business) has complied with all applicable Environmental
Laws and has never received any notification under Environmental Law
requiring it to take or omit to take any action.
38.7 The Company has not been threatened with any investigation or enquiry
by any organisation, or received any complaint, in connection with the
Environment.
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SCHEDULE 4
1. THE PROPERTY
ADDRESS OF PROPERTY DATE AND PARTIES TO THE TERM
CURRENT RENTAL RENT REVIEWS
LEASE OF THE PROPERTY
Unit 200, Ashville Park, Ashville Way, Clement Properties Limited 18 years
Molly Millars Lane, Wokingham (1) and Shuttle Technology
Group Limited (2) dated 8
September 1998
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SCHEDULE 5
Tax Schedule
Definitions and interpretation
1.1 In this Schedule, unless the context otherwise requires, the following
words have the following meanings:
"CLAIM FOR TAXATION" any notice, demand, assessment, letter
or other document issued or action taken
by any Tax Authority or any person
(including the Company) indicating that
any person is or may be placed or sought
to be placed under either a Liability to
Taxation or a claim for Taxation to
which paragraph 3 may apply;
"ICTA" the Income and Corporation Taxes Act
1988;
"LIABILITY TO TAXATION" (a) any liability to make a
payment of or in respect of
Taxation regardless of whether
such Taxation is chargeable or
attributable directly or
primarily to the Company or to
any other person;
(b) the loss of any Relief which
would (were it not for the
loss) have been available to
the Company and which has been
treated as an asset in
preparing the Accounts or
taken into account in
computing (and so reducing) or
obviating any provision for
deferred taxation which
appears in the Accounts (or
which, but for the
availability or presumed
availability of such Relief
prior to its loss, would have
appeared in the Accounts);
(c) the setting off against any
liability to Taxation or
against Profits earned,
accrued or received on or
before Completion of any
Relief which arises in respect
of any period after Completion
or in
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respect of any Transaction
effected on or after
Completion in
circumstances where, but
for the setting off, the
Company would have had a
liability to Taxation in
respect of which the
Purchaser (ignoring any
limitations on liability
contained herein) would
have been able to make a
claim against the
Shareholders under the
Covenant for Taxation; and
(d) any liability to make a
payment by way of indemnity or
damages, or any other payment
pursuant to a contract or
arrangement, in each case
arising out of or in
connection with Taxation
and references to a Liability to
Taxation shall include the
settlement of a Claim for Taxation;
"PROFITS" income, profits and gains, the value of
any supply and any other consideration,
value or receipt used or charged for
Taxation purposes and references to
"PROFITS EARNED, ACCRUED OR received"
include Profits deemed to have been
earned, accrued or received for Taxation
purposes;
"PURCHASER'S RELIEF" a Relief falling within the
definition of Liability to Taxation;
"RELIEF" any relief, loss, allowance, exemption,
set-off, deduction or credit in
computing or against Profits or Taxation
or any right to repayment of Taxation
and references to the "LOSS OF ANY
Relief" include the loss, reduction,
counteraction, disallowance, setting-off
against Profits, crediting against a
liability to make an actual payment of
Taxation or failure to obtain a Relief
and "LOSE" and "LOST" shall be construed
accordingly;
"TAXATION" all forms of taxation and statutory,
governmental, supra governmental, state,
provincial, local governmental or
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municipal impositions, duties,
contributions and levies (including
withholdings and deductions), whether of
the United Kingdom or elsewhere in the
world, whenever imposed and however
arising and all penalties, fines,
charges, costs and interest, together
with the cost of removing any charge or
other encumbrance, relating thereto and
"TAX" shall be construed accordingly;
"TAX AUTHORITY" any taxing or other
authority, body or official competent to
administer, impose or collect any
Taxation;
"TAX CLAIM" a claim by the Purchaser against
the Shareholders under the Covenant for
Taxation or that any of the Taxation
Warranties is untrue or inaccurate in
any respect or is misleading or, as the
case may be, a claim by the Shareholders
against the Purchaser under the covenant
in paragraph 3;
"TCGA" the Taxation of Chargeable Gains Act
1992;
"TMA" the Taxes Management Act 1970;
"TRANSACTION" any transaction, deed, act, event,
omission, payment or receipt of whatever
nature and whether actual or deemed for
Tax purposes and references to "ANY
TRANSACTION EFFECTED ON OR BEFORE
COMPLETION" include the combined result
of two or more Transactions, the first
of which shall have taken place or
commenced (or be deemed to have taken
place or commenced) on or before
Completion;
"VATA" the Value Added Tax Act 1994; and
"SHAREHOLDERS ASSOCIATE" any Shareholder and any other person
with whom such Shareholder is either
associated (within the meaning of
section 417 ICTA) or connected (within
the meaning of Section 839 ICTA).
1.2 In this Schedule:
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(a) a reference to any law shall include any statute, law,
regulation, notice, directive or similar provision relating to
Taxation, whether of the United Kingdom or elsewhere; and
(b) references to the VATA shall include all law relating to value
added tax in the United Kingdom and any value added, turnover,
sales, purchase or similar tax of any other jurisdiction and
references to value added tax shall be construed accordingly.
2. COVENANT FOR TAXATION
2.1 Subject to Section 13.6 the Shareholders jointly and severally shall
pay to the Purchaser an amount equal to any Liability to Taxation of
the Company, save as fully provided for in the Management Accounts:
(a) arising directly or indirectly from any Transaction effected
on or before Completion;
(b) in respect of, or by reference to, any Profits earned, accrued
or received on or before Completion;
(c) which would not have arisen but for the failure by any person
who is or has been a Shareholders Associate to discharge a
Liability to Taxation which falls upon such Shareholders
Associate:
(i) arising directly or indirectly from any Transaction
effected or deemed to have been effected at any time
by such Shareholders Associate; or
(ii) in respect of any Profits earned, accrued or received
at any time by such Shareholders Associate; or
(d) arising directly or indirectly from the transfer of the Shares
by the Shareholders to the Purchaser or the allotment and
issuance to the Shareholders by the Purchaser of the
Consideration Stock either on Completion or at any time
thereafter (but for the avoidance of doubt any liability of
the Shareholders pursuant to this sub-clause 2.1 (d) of this
schedule 5 shall not include a liability to pay stamp duty on
the stock transfer forms executed by the Shareholders pursuant
to clause 4.2 of this Agreement)
together with all costs and expenses reasonably and properly incurred
by the Purchaser or the Company in connection with any such Liability
to Taxation or Claim for Taxation or in bringing any claim or defending
any action under the provisions of this Schedule.
2.2 Where the Shareholders become liable to make any payment under the
Covenant for Taxation, the due date for the making of that payment
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shall be:
(a) in a case that involves an actual payment of Taxation by the
Company, the date that is the last date on which the Company
is liable to pay to the appropriate Tax Authority the Taxation
in question in order to avoid incurring a liability to
interest or penalties or, if later, five days following a
written demand from the Purchaser;
(b) in the case of the loss of any Relief, the date falling five
days following the date when the Shareholders have been
notified by the Purchaser that the auditors for the time being
of the Company have certified, at the request of the
Purchaser, that the Shareholders have a liability for a
determinable amount in respect of the loss of such Relief
under the Covenant for Taxation; or
(c) in any other case, the date falling five days following the
date on which the Shareholders receive a written demand for
such amount from the Purchaser.
2.3 In a case of a loss of any Relief, the amount that is to be treated
under the Covenant for Taxation as a Liability to Taxation shall:
(a) be the amount of that Relief, if the Relief that was the
subject of the loss was either a deduction from or offset
against Taxation or a right to a repayment of Taxation;
(b) be the amount of Taxation which has been saved in consequence
of the setting off where the Relief that was the subject of
the loss was a deduction from or offset against gross Profits,
and the Relief was the subject of a setting off; and
(c) in any other case where the Relief that was the subject of the
loss was a deduction from or offset against gross Profits, be
the amount of Taxation which would, on the basis of the rates
of Taxation current at the date of the loss, have been saved
but for the loss.
2.4 If, in respect of or in connection with any Claim, or otherwise in
connection with any payment made under this Agreement, any amount
payable to the Purchaser by the Shareholders is subject to Taxation,
the amount to be paid to the Purchaser by the Shareholders shall be
such amount as will ensure that the net amount received by the
Purchaser after such Taxation has been taken into account is equal to
the full amount which would be payable to the Purchaser had the amount
not been subject to Taxation.
3. COVENANT TO SHAREHOLDERS
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3.1 The Purchaser hereby covenants with the Shareholders to pay to the
Shareholders an amount equal to any Taxation which is assessed on the
Shareholders or on any Shareholders Associate pursuant to either
section 767A or section 767AA, ICTA by reason of Taxation assessed on
or primarily or directly attributable to the Purchaser or the Company
for any accounting period remaining unpaid provided that this covenant
shall not apply to any Taxation in respect of which the Purchaser is
entitled to bring a Tax Claim against the Shareholders or would have
been so entitled but for paragraphs 5 (Limitations), 6 (Repayment) and
7 (Over-provision and Reliefs) below or clause o of the Agreement
(Limitations).
3.2 The Shareholders hereby covenant that they shall make no claim under
paragraph 3.1 above to the extent that they have recovered the Taxation
in question under section 767B(2), ICTA and that to the extent that it
recovers any amount under paragraph 3.1 they shall not seek to recover
payment under section 767B(2).
3.3 The provisions of paragraphs 2.2 (date of payment), 2.4 (grossing up),
6 (repayment) and 9 (Claims Procedure) shall apply to this covenant as
if references to the "PURCHASER" were to the "SHAREHOLDERS" (and vice
versa), references to the "THE COMPANY" were also to the "SHAREHOLDERS"
and references to "COVENANT FOR TAXATION" were to the "COVENANT UNDER
PARAGRAPH 3".
4. TAX WARRANTIES
EVENTS SINCE THE ACCOUNTS DATE
4.1 Since the Accounts Date:
(a) no transaction has occurred, either in circumstances where the
consideration actually received or receivable (if any) was
less than the consideration which could be deemed to have been
received for Tax purposes or which will give rise to a
Liability to Taxation on the Company calculated by reference
to deemed as opposed to actual Profits;
(b) no transaction has occurred which will result in the Company
becoming liable to pay or bear a Liability to Taxation
directly or primarily chargeable against or attributable to
another person
(c) no disposal has taken place or other event occurred which
will, or may have, the effect of crystallising a Liability to
Taxation which would have been included in the provision for
deferred taxation contained in the Accounts if such disposal
or other event had been planned or predicted at the Accounts
Date;
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(d) the Company has not been a party to any transaction for which
any Tax clearance provided for by statute has been, or could
have been, obtained; and
(e) no accounting period or period of account by reference to
which Taxation is measured of the Company has ended within the
meaning of Section 12, ICTA (basis of, and periods for,
assessment).
STAMP DUTY
4.2 All documents which are required to be stamped or in respect of which
any form of Taxation is due and which are in the possession of the
Company, or by virtue of which the Company has any right, have been
duly and sufficiently stamped or the Taxation on such documents has
been paid and no such document has been executed and retained outside
the United Kingdom in circumstances in which a liability to stamp duty
would arise if such document were to be brought into the United
Kingdom.
RECORDS AND COMPLIANCE
4.3 The Company has duly complied with all requirements imposed on it by
law and in particular:
(a) the Company has paid all Taxation for which it is liable and
made all withholdings and deductions in respect, or on
account, of any Taxation from any payments made by it which it
is obliged or entitled to make and has paid to the appropriate
Tax Authority all amounts so withheld or deducted;
(b) the Company will not be liable to pay any Tax the due date for
payment of which will arise in the 30 days following
Completion;
(c) the Company has properly prepared and punctually submitted all
notices, returns and applications for clearances or consents
required for Tax purposes and provided complete and accurate
information to any Tax Authority and all such notices,
returns, applications and information remain complete and
accurate and in compiling the same the Company has not taken
the benefit of any doubt, such that the relevant Tax Authority
may discover information of which it was not reasonably aware
and thereby make an enquiry into or dispute the Tax affairs of
the Company;
(d) the Company has kept and maintained complete and accurate
records, invoices and other documents and information of
whatever nature appropriate or requisite for Tax purposes and
has sufficient such records, invoices and other documents and
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information relating to past events to calculate its liability
to Taxation or the relief from Taxation which would arise on
any disposal or on the realisation of any assets owned at
Completion;
(e) there are no disputes, unsettled or outstanding assessments or
appeals in respect of Taxation and the Company has not within
the last six years been subject to any enquiry, investigation
or other dispute with any Tax Authority and there are no
circumstances which may give rise to such an enquiry or
dispute;
(f) the Company has not within the last six years been liable or
will in respect of any Transaction occurring on or before
Completion become liable to pay any interest, penalty, fine or
sum of a similar nature in respect of Taxation nor, in
relation to value added tax, has received any penalty
liability notice, surcharge liability notice or other written
notice or warning under the VATA; and
(g) the Company has duly submitted all claims and elections which
have been assumed to have been made for the purposes of the
Accounts.
4.4 The Company has at all times been resident for Tax purposes in the
jurisdiction identified as the Tax Residence in Schedule 2 and the
Company has not during the past six years paid and is not liable to pay
Tax in any other jurisdiction.
4.5 The Company has not within the last six years received any audit, visit
or inspection from any Tax Authority and no such audit, visit or
inspection to take place on or after Completion has been arranged or
requested.
4.6 The amount of Tax chargeable on the Company or subject to withholding
or deduction by the Company during any accounting period ending on or
within the last six years has not to any material extent depended on
any concession, agreement, dispensation or other formal or informal
arrangement with any Tax Authority.
4.7 The Company is not liable to pay corporation tax by instalments
pursuant to Section 59E, TMA, or any regulations made thereunder.
VAT
4.8 The Company:
(a) is registered for the purpose of, and has complied in all
respects with, the VATA and is not subject to any conditions
imposed or agreed with any Tax Authority; and
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(b) is not, and has not within the last three years been a member
of a group for value added tax purposes under Section 43, VATA
(groups of companies).
4.9 All supplies made by the Company are taxable supplies, and all input
tax for which the Company has claimed credit has been paid by the
Company, in respect of supplies made to it relating to goods or
services used or to be used for the purpose of the business of the
Company.
4.10 The Company has not made, nor will prior to Completion make, any
election to waive exemption under paragraph 2, Schedule 10, VATA
(election to waive exemption).
4.11 The Disclosure Letter contains full details of all assets owned by the
Company to which the provisions of Part XV, Value Added Tax Regulations
1995 (the Capital Goods Scheme) may apply, including the date of
acquisition, the cost of the asset, the amount of the input tax for
which credit has been claimed and the adjustment period relating to
that asset.
CUSTOMS DUTIES
4.12 The Company has made all necessary returns in relation to the
collection and payment of customs duties, excise duties and other Taxes
having an equivalent effect and has provided to any relevant Tax
Authority all necessary information, returns and documentation and paid
all amounts due in relation to the same and within the prescribed time
limits.
4.13 Details of all bonds, recognisance and guarantees given to any relevant
Tax Authority by or in relation to the Company are set out in the
Disclosure Letter.
BALANCE SHEET VALUES
4.14 No Liability to Taxation will arise or be incurred on a disposal by the
Company of any of its assets for:
(a) in the case of each asset owned at the Accounts Date, a
consideration equal to the value attributed to that asset in
preparing the Management Accounts; and
(b) in the case of each asset acquired since the Accounts Date, a
consideration equal to the consideration given for the
acquisition.
4.15 The Company has not at any time in respect of any asset owned at the
date hereof made, nor will prior to Completion make, any claim under
Sections 152 to 158 (inclusive), TCGA (replacement of business assets)
and there is no proposal or plan to make any such claim either in the
claims and elections assumed to have been made for the
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purposes of the Management Accounts or otherwise.
CLOSE COMPANY
4.16 The Company is not, nor has it at any time within the last six years
been, either a close company within the meaning of Section 414, ICTA
(close companies) or a close investment holding company for the
purposes of Section 13A, ICTA (close investment-holding companies).
4.17 The Company has not at any time made any loan or advance or payment or
given any consideration or effected any transaction falling within
Sections 419 to 422 (inclusive), ICTA (loans to participators etc).
GROUP TRANSACTIONS
4.18 Within the last six years the Company has not been a member of a group
of companies within the meaning of Section 170 TCGA (groups of
companies).
DEDUCTIBLE EXPENSES.
4.19 The Company has not since the Accounts Date made or provided and is not
under any obligation currently or for the future to make any payment of
an income or revenue nature which, or to provide a benefit the cost of
which, will be prevented from being deductible for Tax purposes,
whether as a deduction in computing the profits of a trade or as an
expense of management or as a charge on income.
4.20 The accounting treatment adopted by the Company in its accounts in
relation to any loan relationship as defined in Section 81, Finance Act
1996 (meaning of "LOANS RELATIONSHIPS" etc.) will be treated as an
authorised accounting method for the purposes of Section 85, Finance
Act 1996 (authorised accounting methods).
4.21 The Company has not been a party to a loan relationship treated as
being for an unallowable purpose within the meaning of Paragraph 13
Schedule 9, Finance Act 1996 (loan relationships for unallowable
purposes).
DIVIDENDS AND DISTRIBUTIONS
4.22 The Company has not at any time purchased, repaid or redeemed or agreed
to purchase, repay or redeem its share capital, or capitalised or
agreed to capitalise in the form of redeemable shares or debentures any
profits or reserves, or otherwise issued any share capital or other
security as paid up otherwise than by the receipt of new consideration
within the meaning of Section 254, ICTA (interpretation of Part VI).
4.23 The Company has not at any time been a party to or otherwise involved
in any transaction to which Sections 213 to 218 (inclusive), ICTA
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(exempt distributions etc.) applied.
INHERITANCE TAX AND GIFTS
4.24 No circumstances exist under which any power within Section 212,
Inheritance Tax Act 1984 (powers to raise tax) could be exercised in
relation to, and there is no Inland Revenue charge (within the meaning
of Section 237, Inheritance Tax Act 1984 (imposition of charge))
attaching to, or which may attach to any shares or securities in or
over any assets of the Company.
4.25 The Company is not liable and there are no circumstances in existence
as a result of which it may become liable to be assessed to Tax as
donor or donee of any gift or transfer or transferee of value.
ANTI-AVOIDANCE
4.26 The Company has not:
(a) entered into, or been party to, any scheme or arrangement
designed for the purpose of avoiding Taxation, such that a
Liability to Taxation may arise after Completion as a result
of or in consequence of such a scheme or arrangement; or
(b) acquired or disposed of any asset, or entered into any
Transaction whatsoever, otherwise than by way of a bargain at
arms length.
5. LIMITATIONS ON LIABILITY
5.1 The liability of the Shareholders under the Covenant for Taxation shall
be reduced if and to the extent that the Liability to Taxation shall
have been recovered under the Warranties or under any other part of the
Covenant for Taxation (and vice versa).
5.2 The Shareholders shall not be liable to the Purchaser for a Tax Claim
in respect of any Liability to Taxation:
(a) to the extent that provision or reserve in respect of that
Liability to Taxation was included in the Accounts;
(b) to the extent that the Liability to Taxation arises or is
increased as a result only of:
(i) any increase in rates of Taxation;
(ii) any change in law or in the published practice
thereof;
(iii) any change in the bases upon which the accounts of
the Company are prepared or any change in accounting
practice or principles except in either case in order
to
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comply with generally accepted accounting principles;
or
(iv) any change in the date to which the Company makes up
its accounts,
made in any such case after Completion with retrospective
effect; or
(c) which arises under sub-paragraphs (a) to (d) of paragraph 2 of
this Schedule to the extent that the Purchaser falls to be
indemnified for the Liability to Taxation pursuant to
paragraph 8 of this Schedule.
5.3 The Shareholders shall not be liable to the Purchaser under the
Covenant for Taxation in respect of a Liability to Taxation:
(a) to the extent that such Liability to Taxation is upon income,
profits or gains which were actually earned, accrued or
received by the Company since the Accounts Date in the
ordinary and normal course of the business of the Company;
(b) to the extent that there is available to the Company to
relieve or mitigate such Liability to Taxation any Relief
which is not a Purchaser's Relief;
(c) to the extent that such Liability to Taxation would not have
arisen but for a voluntary act or omission carried out or
effected by the Company at any time after Completion, other
than any act or omission carried out or effected:
(i) under a legally binding commitment created on or
before Completion;
(ii) in order to comply with any law or in order to comply
with generally accepted accounting principles;
(iii) in the ordinary and normal course of the business
carried on by the Company; or
(iv) at the request of or with the consent of the
Shareholders;
(d) to the extent that such Liability to Taxation would not have
arisen or would have been reduced but for a failure or
omission on the part of the Company or the Purchaser after
Completion to make any claim or election, the making or
claiming of which was taken into account in computing the
provision or reserve for Taxation in the Management Accounts
but only to the extent that the relevant claim or election was
identified in a disclosure specifically made against the Tax
Warranty in paragraph 4.3(g) of this schedule.
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5.4 SCM Microsystems Limited shall not be liable for any Tax Claim to the
extent that such liability is a liability to PAYE or National
Insurance.
6. REPAYMENT
If the Shareholders shall make any payment to the Purchaser in relation
to any Tax Claim and the Purchaser or the Company subsequently receives
from any Tax Authority or any person any amount referable to the
subject matter of that Tax Claim, the Purchaser shall, once it or the
Company has received such amount, repay (after deducting the costs and
expenses of the Purchaser incurred in recovering such amount and any
Taxation payable on it or on any interest) to the Shareholders either:
(a) a sum equal to such amount; or
(b) if lesser a sum equal to the Tax Claim paid by the
Shareholders to the Purchaser,
together with any interest paid to the Purchaser or the Company in
respect of such sum.
7. OVER-PROVISION AND RELIEFS
7.1 If the auditors for the time being of the Company shall certify (at the
request and expense of the Shareholders) that any provision for
Taxation in the Management Accounts (excluding any provision for
deferred taxation) has proved to be an over-provision, then the amount
of such over-provision shall be dealt with in accordance with paragraph
7.3 below.
7.2 If the auditors for the time being of the Company shall certify (at the
request and expense of the Shareholders) that any Liability to Taxation
which has resulted in a payment having been made or becoming due from
the Shareholders under the Covenant for Taxation will give rise to a
Relief for the Company (other than a Purchaser's Relief) which would
not otherwise have arisen, then as and when such Relief reduces a
liability to make an actual payment of Tax (other than a liability for
which the Purchaser would be entitled to bring a Tax Claim), the amount
of that reduction shall be dealt with in accordance with paragraph 7.3
below.
7.3 Where it is provided under paragraphs 7.1 or 7.2 that any amount ("THE
RELEVANT AMOUNT") is to be dealt with in accordance with this
sub-clause:
(a) the relevant amount shall first be set-off against any payment
then due from the Shareholders under the Covenant for
Taxation;
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<PAGE>
(b) to the extent that there is an excess, a refund shall be made
to the Shareholders of any previous payment made by the
Shareholders under the Covenant for Taxation (to the extent
not previously refunded under this paragraph 7) up to the
amount of such excess; and
(c) to the extent that the excess referred to in paragraph 7.3(b)
above is not exhausted under that paragraph, the remainder of
the excess shall be carried forward and set off against any
future payment or payments which become due from the
Shareholders under the Covenant for Taxation.
7.4 Where any certification referred to in paragraphs 7.1 or 7.2 has been
made, the Shareholders or the Purchaser or the Company may request the
auditors to review such certification in the light of all relevant
circumstances, including any facts which have become known only since
such certification, and to certify whether such certification remains
correct or whether the certified amount should be amended.
7.5 If the auditors certify under paragraph 7.4 that an amount previously
certified should be amended, that amended amount shall be substituted
for the purposes of paragraph 7.3 as the relevant amount in respect of
the certification in question in place of the amount originally
certified, and such adjusting payment (if any) as may be required shall
be made as soon as practicable by the Shareholders or (as the case may
be) to the Shareholders to give effect to the revised certification.
8. NIC AND PAYE
8.1 The Shareholders agree that as between themselves, the Company and the
Purchaser, neither the Company nor the Purchaser shall be liable for
any income tax or Primary Class 1 National Insurance Contributions to
which any Shareholder may be subject by reason of the right to receive,
acquisition, holding, variation in terms, release of restrictions or
disposal of the Shares or the Consideration Stock (in this paragraph
together referred to as "the Shares") and, without limitation, any
event relevant for the purposes of section 203FB, ICTA with respect to
the Shares.
8.2 Each Shareholder shall severally indemnify the Company and the
Purchaser to the extent that either of them is or may be liable to pay
or account for any Tax in respect of:
(a) any PAYE income tax liability which arises under Chapter V of
Part V of ICTA and the PAYE regulations referred to therein,
as each may be amended from time to time; and
(b) any Primary Class 1 National Insurance Contributions which may
be payable by the Company or the Purchaser under the
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modified PAYE system as it applies under Schedule 1 of the
Social Security (Contributions) Regulations 1979
(together in this paragraph referred to as "the PAYE liability") and
which in each case becomes due by reason of the right to receive,
acquisition, holding, variation in terms, release of restrictions or
disposal of any Shares by such Shareholder or any event relevant for
the purposes of section 203FB, ICTA with respect to the Shares.
8.3 The Company shall notify each Shareholder of the amount which, on the
basis of the best estimate that can reasonably be made, is the amount
of income likely to be chargeable to the PAYE liability.
8.4 Subject to sub-paragraph 8.6 below:
(a) Each Shareholder appoints the Purchaser as its agent for the
sale of such number of Shares as may be required to be sold to
satisfy the PAYE liability and, after satisfying the same, the
Purchaser shall remit any balance of Shares remaining to the
Shareholder.
(b) In order to enable the Purchaser to effect the sale envisaged
in this clause each Shareholder agrees that he will, within 14
days of a demand by the Purchaser:
(i) deposit with the Purchaser share certificates which
the Shareholder has a good right to deposit and
transfer, free from any option, lien, charge or
encumbrance in sufficient quantities to enable the
Purchaser to satisfy the PAYE liability;
(ii) at the same time, submit to the Purchaser such other
documents as the Purchaser may require (duly executed
and signed by the Shareholder) to enable the
Purchaser to sell the Shares.
(c) Where the share certificates have not yet been issued, the
Shareholder agrees that the Purchaser may retain sufficient
Shares with a view to selling them to cover any contingent
PAYE liability.
8.5 The Purchaser will hold any dividends paid on the Shares between the
time that it notifies the Shareholder of the PAYE liability and the
actual sale for the account of the Shareholder and may add the same to
the proceeds of sale referred to in sub-paragraph 8.4 above.
8.6 Each Shareholder and the Purchaser may, at the complete discretion of
the Purchaser, agree alternative arrangements for the Shareholder to
satisfy the PAYE liability, including but not limited to a loan
arrangement on terms to be agreed between the Shareholder and the
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<PAGE>
Purchaser. The provisions of this paragraph shall be without prejudice
to any rights that the Purchaser may have to cancel shares pursuant to
the Agreement.
9. CLAIMS PROCEDURE
9.1 Upon the Purchaser becoming aware of a Claim for Taxation which may
result in a Tax Claim (which for the purposes of this paragraph 9 shall
include any claim in respect of the indemnity contained in paragraph 8
above) the Purchaser shall give written notice of that Claim for
Taxation to the Shareholders or, as the case may be, shall procure that
the Company forthwith give written notice of that Claim for Taxation to
the Shareholders, and the Purchaser shall, subject always to the terms
of this paragraph 9, the Shareholders agreeing to indemnify and secure
the Purchaser and/or the Company to its reasonable satisfaction against
all losses, costs, damages and expenses, including interest on overdue
Tax, which may be incurred, further procure that the Company take such
action and give such information and assistance in connection with the
affairs of the Company as the Shareholders may reasonably and promptly
by written notice request to avoid, resist, appeal or compromise the
Claim for Taxation.
9.2 The Purchaser shall not be obliged to procure that the Company appeals
against any tax assessment if, the Shareholders having been given
written notice of the receipt of that Claim for Taxation in accordance
with paragraph 9.1 above, the Company has not within 21 days (or, if
there is a statutory time limit of not more than 30 days, within 14
days) thereafter received instructions in writing from the
Shareholders, in accordance with the preceding provisions of this
paragraph 9, to make that appeal.
9.3 The Purchaser shall procure that the Shareholders are promptly provided
with copies of any correspondence from the Tax Authority, copies of any
correspondence from the Purchaser to the Tax Authority prior to its
submission to the Tax Authority, and shall be given a reasonable
opportunity to comment thereon prior to submission and account shall be
taken of its reasonable comments.
9.4 The Purchaser shall not be obliged to procure that the Company take any
action under paragraph 9.1 above which involves contesting any matter
with any Tax Authority (excluding the authority or body demanding the
Tax in question) or any court or tribunal unless the Shareholders
furnishes the Company with the written opinion of leading tax counsel
to the effect that the appeal in question will, on the balance of
probabilities, succeed. Such tax counsel shall be instructed by the
Shareholders at the Shareholders expense but the Shareholders shall
promptly provide the Purchaser with a copy of such instructions and
give the Purchaser or its representative a reasonable opportunity to
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<PAGE>
attend any conference with Counsel.
9.5 The Purchaser shall not be required to take any action or procure that
the Company take any action under this paragraph 9 if it reasonably
determines that such action would have an adverse effect on the amount
of tax payable by the Purchaser or the Company in respect of a period
after Completion.
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SCHEDULE 6
THE PRODUCTS
<PAGE>
SCHEDULE7
THE MANAGEMENT ACCOUNTS
<PAGE>
SCHEDULE 8
THE EMPLOYMENT CONTRACT
<PAGE>
SCHEDULE 9
(DOCUMENTS)
1. The signed Service Agreements of each of the employees of the Company.
2. A contract relating to the purchase of shares in the Company held by Mr
Skinner signed by Mr Skinner and the Company, and a special resolution
of the Company dated prior to the date of the contract approving the
purchase.
3. A letter regarding the Company's bank overdraft signed by SmartDisk
Corp. and SCM Microsystems Limited "(SCM").
4. Form 403a signed by a director of SCM.
5. A quote for insurance for the Company relating to its occupation of the
Property and acknowledging the Company's current legal position as
occupier of the property under a licence not authorised by the tenant's
lease.
6. The deed of waiver of its options over the Shares signed by the
Director and the Secretary of SCM.
7. The licence to occupy the Property executed by SCM.
8. The deed regarding transfers of domain names executed by SCM.
9. A written resolution of the Company adopting new articles of
association.
10. Board minutes of SCM appointing a company secretary to replace Brian
Haughtrey.
11. Board minutes of SCM approving the transaction, this Agreement and all
related documents to be executed by SCM and authorising the Director
and Secretary of SCM to execute those documents on SCM's behalf.
12. Letters of resignation of John Boyne, George Dundon and Alan Jones as
directors of the Company.
13. Replies to request for information and supplemental request for
information signed by Grant Morgan.
14. Minutes of a board meeting of the Company in the form set out in the
Agreement.
<PAGE>
15. Powers of Attorney appointing Grant Morgan as attorney for:
David Atkinson;
John Boyne;
Anne Cowan;
Stephen Darragh;
Esther Flawn;
Deirdre Giese;
Donna Kirby;
Tiel Holdstock;
Carl Hayesmore;
Christopher Higginson;
Derek Cook; and
George Dundon.
16. Forms 288b signed by George Dundon, Alan Jones and John Boyne.
17. Bank statement for both accounts of the Company (no.s 4095447 and
11308971) dated the working day immediately prior to completion.
18. Stock transfer forms signed by:
David Atkinson;
John Boyne;
Anne Cowan;
Stephen Darragh;
Esther Flawn;
Deirdre Giese;
Donna Kirby;
Tiel Holdstock;
Carl Hayesmore;
Christopher Higginson;
<PAGE>
Derek Cook;
George Dundon;
Alan Jones;
Deborah Norford-Jones;
SCM Microsystems Ltd; and
Grant Morgan.
19. Share certificates from:
David Atkinson;
John Boyne;
Anne Cowan;
Stephen Darragh;
Esther Flawn;
Deirdre Giese;
Donna Kirby;
Tiel Holdstock;
Carl Hayesmore;
Christopher Higginson;
Derek Cook;
George Dundon;
Alan Jones;
Deborah Norford-Jones;
SCM Microsystems Ltd; and
Grant Morgan.
20. The tax deed of covenant in the agreed form executed by the
Shareholders.
<PAGE>
<TABLE>
<S> <C>
EXECUTED (but not delivered until dated) as a DEED by David Atkinson )
acting through his lawfully appointed attorney Grant Morgan ) /s/ Grant Morgan
pursuant to a power of attorney dated 4 April 2000 )
EXECUTED (but not delivered until dated) as a DEED by John Boyne )
acting through his lawfully appointed attorney Grant Morgan ) /s/ Grant Morgan
pursuant to a power of attorney dated 4 April 2000 )
EXECUTED (but not delivered until dated) as a DEED by ANNE COWAN )
acting through her lawfully appointed attorney Grant Morgan ) /s/ Grant Morgan
pursuant to a power of attorney dated 4 April 2000 )
EXECUTED (but not delivered until dated) as a DEED by STEPHEN DARRAGH )
acting through his lawfully appointed attorney Grant Morgan ) /s/ Grant Morgan
pursuant to a power of attorney dated 4 April 2000 )
EXECUTED (but not delivered until dated) as a DEED by ESTHER FLAWN )
acting through her lawfully appointed attorney Grant Morgan ) /s/ Grant Morgan
pursuant to a power of attorney dated 4 April 2000 )
EXECUTED (but not delivered until dated) as a DEED by DIERDRE GIESE )
acting through her lawfully appointed attorney Grant Morgan ) /s/ Grant Morgan
pursuant to a power of attorney dated 4 April 2000 )
EXECUTED (but not delivered until dated) as a DEED by DONNA KIRBY )
acting through her lawfully appointed attorney Grant Morgan ) /s/ Grant Morgan
pursuant to a power of attorney dated 4 April 2000 )
</TABLE>
<PAGE>
<TABLE>
<S> <C>
EXECUTED (but not delivered until dated) as a DEED by )
DEBORAH NORFORD JONES )
acting through her lawfully appointed attorney Grant Morgan ) /s/ Grant Morgan
pursuant to a power of attorney dated 4 April 2000: )
EXECUTED (but not delivered until dated) as a DEED by TIEL HOLDSTOCK )
acting through his lawfully appointed attorney Grant Morgan ) /s/ Grant Morgan
pursuant to a power of attorney dated 4 April 2000 )
EXECUTED (but not delivered until dated) as a DEED by CARL HAYESMORE )
acting through his lawfully appointed attorney Grant Morgan ) /s/ Grant Morgan
pursuant to a power of attorney dated 4 April 2000 )
EXECUTED (but not delivered until dated) as a DEED by )
CHRISTOPHER HIGGINSON acting through his lawfully appointed attorney ) /s/ Grant Morgan
Grant Morgan pursuant to a power of attorney dated 4 April 2000 )
EXECUTED (but not delivered until dated) as a DEED by DEREK COOK )
acting through his lawfully appointed attorney Grant Morgan ) /s/ Grant Morgan
pursuant to a power of attorney dated 4 April 2000 )
EXECUTED (but not delivered until dated) as a DEED by GEORGE DUNDON )
acting through his lawfully appointed attorney Grant Morgan ) /s/ Grant Morgan
pursuant to a power of attorney dated 4 April 2000 )
</TABLE>
<PAGE>
<TABLE>
<S> <C>
EXECUTED (but not delivered until dated) as a DEED by ALAN JONES )
acting through his lawfully appointed attorney Grant Morgan ) /s/ Grant Morgan
pursuant to a power of attorney dated 4 April 2000 )
EXECUTED (but not delivered until dated) as a DEED by )
GRANT MORGAN ) /s/ Grant Morgan
in the presence of: )
</TABLE>
SIGNATURE OF WITNESS: /s/ Paul Curren
NAME: Paul Curren
ADDRESS: 26 Old Bailey
London G64N
OCCUPATION: Solicitor
EXECUTED as a DEED (but not )
delivered until the date )
appearing at the head of )
page 1) by SCM MICROSYSTEMS LIMITED ) /s/ Robert Schneider
acting by its director Robert Schneider )
and its secretary Jayne Stancomb: ) /s/ Jayne Stancomb
Director
Secretary
EXECUTED as a DEED (but not )
delivered until the date )
appearing at the head of )
page 1) by SMARTDISK )
CORPORATION )
acting by: ) /s/ Michael S. Battaglia
Officer Chief Executive Officer and
President
EXHIBIT 21.1
SMARTDISK CORPORATION
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OF JURISDICTION PERCENTAGE
SUBSIDIARY OF INCORPORATION OF OWNERSHIP
- -------------------------------------------------------- ----------------------- -------------
<S> <C> <C>
Impleo Limited ......................................... England 100%
SmartDisk International, Inc. .......................... Delaware 100%
SmartDiskette Limited .................................. United Kingdom 100%
SmartDiskette GmbH ..................................... Germany 100%
SmartDisk (Cayman) Ltd. ................................ Cayman Islands 100%
SmartDisk Personal Storage Systems Corporation ......... Delaware 100%
VST International Limited .............................. Barbados 100%
</TABLE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the reference to our firm under the caption "Experts" and to
the use of our report dated January 21, 2000, except for Note 15 as to which
the date is March 6, 2000, in Amendment No. 1 to the Registration Statement
(Form S-1--No. 333-35300) and related Prospectus of SmartDisk Corporation for
the registration of 3,900,000 shares of its common stock.
/s/ Ernst & Young LLP
Miami, Florida
May 8, 2000
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report (and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Boston, Massachusetts
May 8, 2000
